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 February 28, 1998
[ ] 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 (I.R.S. Employer
incorporation or organization) Identification No.)
434 Olds Station Road, Wenatchee, Washington 98801
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (509) 667-9600
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 April 6, 1998, there were
14,395,580 shares outstanding of the Company's Common Stock, par value $.001 per
share.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets - February 28, 1998 and May 31, 1997
Consolidated Statements of Income - Third Quarters and Nine Months Ended
February 28, 1998 and 1997
Consolidated Statements of Cash Flow - Third Quarters and Nine Months Ended
February 28, 1998 and 1997
Management's Statement and Notes to Unaudited Consolidated Financial Statements
2
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FORM 10-QSB
FEBRUARY 28, 1998 AND MAY 31, 1997
February 28, May 31,
1998 1997
ASSETS (Unaudited) (Audited)
- --------------------------------------------------------------- ------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 4,324,000 $ 3,048,000
Certificate of Deposit 1,000,000
Accounts Receivable 7,681,000 5,455,000
Inventory 11,686,000 9,082,000
Current Portion of Note Receivable from Related Party 55,000
Prepaid Expense and Other 222,000 299,000
Deferred Income Taxes 480,000
------------ ------------
Total Current Assets 24,393,000 18,939,000
------------ ------------
PROPERTY AND EQUIPMENT, NET 18,179,000 13,190,000
------------ ------------
OTHER ASSETS
Investment in Securities 836,000
Note Receivable from Related Party, net of current portion 125,000
Note Receivables, net of current portion 4,878,000
Costs in Excess of Net Book Value of Acquired Subsidiaries 2,893,000 2,071,000
Patents, net 1,254,000 1,331,000
Deferred Income Taxes 128,000
Other Assets 624,000 96,000
Total Other Assets 10,613,000 3,623,000
------------ ------------
TOTAL ASSETS $ 53,185,000 $ 35,752,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------
CURRENT LIABILITIES
Accounts Payable $ 4,213,000 $ 3,736,000
Accrued Liabilities 2,004,000 1,116,000
Current Portion of Long-Term Debt 770,000 959,000
Current Portion of Capital Lease Obligations 37,000 38,000
------------ ------------
Total Current Liabilities 7,024,000 5,849,000
------------ ------------
LONG-TERM LIABILITIES
Convertible Notes 1,946,000
Long-Term Debt, net of Current Portion 7,916,000 3,138,000
Capital Leases, net of Current Portion 81,000 98,000
Deferred Income Taxes 592,000
Deferred Rent and Other 389,000 456,000
------------ ------------
Total Long-Term Liabilities 10,332,000 4,284,000
------------ ------------
Total Liabilities 17,356,000 10,133,000
------------ ------------
STOCKHOLDERS' EQUITY
Convertible Preferred Stock 74,000 4,481,000
Common Stock 37,744,000 26,019,000
Accumulated Deficit (1,989,000) (4,881,000)
------------ ------------
Total Stockholders' Equity 35,829,000 25,619,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 53,185,000 $ 35,752,000
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FORM 10-QSB
THIRD QUARTERS AND NINE MONTHS ENDED FEBRUARY 28, 1998 AND 1997
Quarters Ended Nine Months Ended
------------------------------ ------------------------------
February 28, February 28, February 28, February 28,
1998 1997 1998 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $ 12,783,000 $ 8,093,000 $ 36,987,000 $ 23,854,000
COST OF SALES 9,137,000 6,467,000 26,964,000 18,350,000
------------- ------------- ------------- -------------
GROSS PROFIT 3,646,000 1,626,000 10,023,000 5,504,000
OPERATING EXPENSES 2,368,000 1,258,000 6,568,000 4,277,000
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS 1,278,000 368,000 3,455,000 1,227,000
------------- ------------- ------------- -------------
OTHER INCOME AND EXPENSE
Interest Income 55,000 23,000 101,000 62,000
Interest Expense (197,000) (107,000) (526,000) (386,000)
Other (1,012,000) (34,000) (997,000) 46,000
------------- ------------- ------------- -------------
(1,154,000) (118,000) (1,422,000) (278,000)
------------- ------------- ------------- -------------
NET INCOME FROM BEFORE FEDERAL 124,000 250,000 2,033,000 949,000
INCOME TAX
PROVISION FOR FEDERAL INCOME TAXES (72,000) (6,000) (341,000) (21,000)
DEFERRED FEDERAL INCOME TAX BONUS 1,200,000 1,200,000
------------- ------------- ------------- -------------
NET INCOME FOR THE PERIOD $ 1,252,000 $ 244,000 $ 2,892,000 $ 928,000
============= ============= ============= =============
EARNINGS PER SHARE OF COMMON STOCK:
Basic $ 0.10 $ 0.03 $ 0.25 $ 0.10
Diluted $ 0.09 $ 0.03 $ 0.23 $ 0.10
WEIGHTED AVERAGE SHARES OUTSTANDING
DURING THE PERIOD
Basic 12,422,000 9,743,000 11,704,000 9,364,000
Diluted 13,441,000 9,743,000 12,370,000 9,364,000
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FORM 10-QSB
THIRD QUARTERS AND NINE MONTHS ENDED FEBRUARY 28, 1998 AND 1997
Quarters Ended Nine Months Ended
------------------------------ ------------------------------
February 28, February 28, February 28, February 28,
1998 1997 1998 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net cash from operating activities (384,000) $ 204,000 $ 1,119,000 $ (352,000)
------------- ------------- ------------- -------------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,642,000) (648,000) (5,812,000) (1,644,000)
Purchase of Balo Precision Parts (2,250,000) (2,250,000)
Reduction in notes receivable 88,000 17,000 125,000 51,000
Proceeds from certificate of deposit 1,000,000
Purchase of investments in securities (837,000)
Increase in notes receivable (5,808,000)
Other Changes, net 230,000 19,000 230,000 (36,000)
------------- ------------- ------------- -------------
Net cash from investing activities (3,574,000) (612,000) (13,352,000) (1,629,000)
------------- ------------- ------------- -------------
CASH FLOW FROM FINANCING ACTIVITIES
Payments on note payable (2,288,000)
Payments on notes payable to stockholders (150,000)
Payments on long-term debt and capital leases (561,000) (191,000) (1,561,000) (984,000)
Proceeds from long-term debt 315,000 543,000 6,135,000 543,000
Reduction in stock subscriptions receivable 1,030,000
Net change in bank line of credit (452,000) (750,000)
Sale of units 7,031,000
Payment of unit issuance costs (8,000) (1,340,000)
Sale of common stock 2,358,000
Increase in common stock issue costs (18,000) (135,000)
Sale of convertible notes 5,800,000
Increase in convertible notes issuance costs (58,000) (433,000)
Sale of preferred stock 5,000,000 5,000,000
Increase in preferred stock issuance costs (90,000) (473,000) (93,000) (473,000)
Conversion of purchase warrants 569,000 1,309,000
Other changes, net 133,000 (44,000) 129,000 (10,000)
------------- ------------- ------------- -------------
Net cash from financing activities (162,000) 4,827,000 13,509,000 7,609,000
------------- ------------- ------------- -------------
NET CHANGE IN CASH (4,120,000) 4,419,000 1,276,000 5,628,000
Cash, beginning of period 8,444,000 1,934,000 3,048,000 725,000
------------- ------------- ------------- -------------
Cash, end of period 4,324,000 $ 6,353,000 4,324,000 $ 6,353,000
============= ============= ============= =============
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES Acquisition of
subsidiaries involved the following:
Fair value of assets acquired other than cash
Liabilities assumed
------------- ------------- ------------- -------------
Total non-cash financing activities
============= ============= ============= =============
Seller financed purchase of equipment $ 428,000
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
5
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
MANAGEMENT'S STATEMENT AND NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-QSB
FEBRUARY 28, 1998
Note 1: 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 February
28, 1998 and May 31, 1997, the consolidated results of operations for the
quarters and nine-month periods ended February 28, 1998 and 1997, and the
consolidated statements of cash flow for the quarters and nine-month periods
ended February 28, 1998 and 1997. 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 quarters and nine-month periods ended February
28, 1998 and 1997 are not necessarily indicative of the results to be expected
or anticipated for the full fiscal
year.
Note 2: Notes Receivable - Information Technology Group
As of April 6, 1998, the Company held outstanding notes, in the approximate
aggregate principal amount of $4,219,000, from Orca Technologies, Inc., its
subsidiary Televar, Inc., and MONITRx, Inc., and had guaranteed a $1,300,000
bank line of credit and a $372,000 equipment lease to Orca. Those notes and
guarantees were made in connection with the Company's abandoned proposal to form
an information technology group. In February 1998, Orca assumed the MONITRx
notes, and on April 6, 1998, the Company entered into an agreement with Orca to
convert the $4,219,000 owed under the combined Orca, Televar and assumed MONITRx
notes into shares of Orca common stock at $2.00 per share. Closing of this
transaction is expected to occur in April 1998.
As of April 6, 1998, the Company also held defaulted notes in the aggregate
principal amount of $1,630,000 from Brigadoon.com, Inc., another past candidate
for the information technology group. On February 17, 1998, the Company filed a
lawsuit against Brigadoon to recover the amount owed, and, on March 20, 1998,
the Company participated in filing an involuntary
6
<PAGE>
bankruptcy petition against Brigadoon. However, in the restructure agreement
with Orca, the Company agreed to sell the Brigadoon notes and all related
interests of the Company in Brigadoon to Orca in exchange for a five-year
promissory note from Orca in the amount of $950,000. In third quarter 1998, the
Company posted a nonrecurring charge to earnings of $1,038,000 million to
reflect the discounted sale of the Brigadoon notes to Orca, and the
restructuring of the Orca debt.
Note 3: Income Taxes
The Company has tax loss carryforwards associated with certain subsidiaries due
to historical unprofitable operations, which can be used to offset future income
and the associated federal income taxes. The Company has previously reserved
against realization of the future income tax benefits due to previous
uncertainties of continued profitable operations. During the third quarter, the
Company re-evaluated its estimates of the certainty of future profitable
operations and recorded a deferred income tax benefit of $1,200,000,
representing the federal income tax effect of realizing the benefits of the tax
loss carryforwards.
Note 4: Credit Facility
On May 29, 1997, the Company executed a commitment letter with a commercial bank
for a credit facility consisting of (a) a revolving working capital line of
credit of up to $3,500,000 that extends from June 1997 to September 1998 (the
"Line of Credit"), (b) a seven-year capital equipment acquisition credit
facility of up to $2,000,000 (the "Equipment Line"), and (c) a 10-year term loan
of approximately $700,000, or approximately 80% of the cost of the recent
addition to the Pacific Coast building (the "Construction Loan"). The Company
has executed the documents for the Line of Credit and the Construction Loan, but
has not yet elected to close the Equipment Line. As of April 6, 1998, the Line
of Credit had no outstanding balance and the Company had not yet requested
funding of the Construction Loan.
Note 5: Convertible Note Offering
In August 1997, the Company closed a private offering of $5,800,000, before
expenses, in convertible promissory notes (the "Convertible Notes") to two
accredited investors. The Company intends to use the proceeds of this offering
primarily in connection with proposed and future acquisitions. The Company
subsequently filed a Form S-3 Registration Statement, which was declared
effective on December 31, 1997, registering for resale up to 1,720,690 shares of
Common Stock issuable upon conversion of the Convertible Notes. As of April 6,
1998, all of the Convertible Notes had been converted into 1,405,018 shares of
Common Stock. Neither the registration of the underlying Common Stock, the
conversion of the Convertible Notes, nor the sale by the holders of the
underlying Common Stock after conversion generated any cash to the Company.
7
<PAGE>
Note 6: Fall 1997 Common Stock and Promissory Note Offering
In November 1997, the Company closed a private offering of $6,087,545, before
expenses, in Common Stock and promissory notes to three accredited investors.
The Company subsequently filed a Form S-3 Registration Statement, which was
declared effective on December 29, 1997, registering for resale the 524,000
shares of Common Stock sold in that offering. Neither the registration of those
shares nor the sale of those shares by their holders will generate any cash to
the Company.
Note 7: Registered Public Offering of Common Stock and Warrants to
Purchase Common Stock
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 were used primarily to
pay off short-term debt and certain interest and fees associated with such debt,
to provide working capital for operations, and to purchase capital equipment. As
of April 6, 1998, none of the publicly-traded Warrants had been exercised. The
Company intends to use the proceeds from the exercise of the Warrants, if any,
primarily in connection with proposed and future acquisitions.
Note 8: Unregistered Warrants
The Registration Statements discussed in Notes 5 and 6 also covered the resale
of a total of 1,062,500 shares of Common Stock issuable upon the exercise of
certain unregistered warrants, and the Company subsequently issued additional
unregistered warrants to purchase 1,290,000 shares of Common Stock in
consideration for a financial consulting and services agreement (collectively,
the "Unregistered Warrants"). As of April 6, 1998, Unregistered Warrants to
purchase 741,800 shares of Common Stock had been exercised, generating
$3,383,453 in proceeds to the Company. If all the unexercised Unregistered
Warrants were exercised, the Company would receive up to $7,229,000 from the
exercise. The Company has used, and intends to use, the proceeds from the
exercise of Unregistered Warrants primarily in connection with proposed and
future acquisitions.
Note 9: Computations of Earnings per Share
During the quarter ended February 28, 1998, the Company adopted Statement of
Financial Accounting Standards No. 128 - "Earnings Per Share" (SFAS 128). In
accordance with SFAS 128 basic earnings per share is computed using the weighted
average number of common shares outstanding. Diluted earnings per share is
computed using the weighted average number of common shares plus dilutive common
share equivalents outstanding during the period using the treasury stock method.
Adoption of SFAS 128 did not materially impact prior periods presented.
8
<PAGE>
Note 10: Electronic Specialty Corporation
On April 13, 1998, the Company's wholly-owned subsidiary, ESC Acquisition Corp.,
closed the purchase of substantially all of the assets, and assumed certain
liabilities, of Electronic Specialty Corporation and its subsidiary Displays &
Technologies, Inc. In consideration for the purchase, the Company paid the
sellers $2 million in cash and 923,304 shares of the Company's unregistered
common stock, at the closing of the acquisition. Subsequent to the closing, ESC
Acquisition Corp. changed its name to Electronic Specialty Corporation.
Electronic Specialty Corporation is located in Vancouver, Washington.
9
<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 nine-month period ended February 28, 1998 were
derived from its seven operating subsidiaries, which, during the reporting
period, were divided into two operational and marketing groups. The Company's
Aerospace Group during the reporting period consisted of Cashmere Manufacturing
Co., Inc. ("Cashmere"), which manufactures high quality machined aluminum parts
and components, Seismic Safety Products, Inc. ("Seismic"), which operates, and
where results of operations have been consolidated, as a division of Cashmere in
marketing seismic safety gas shutoff valves manufactured by Cashmere, and Morel
Industries, Inc. ("Morel"), which manufactures precision cast aluminum parts and
assemblies. The Company's Electronics Group during the reporting period
consisted of Pacific Coast Technologies, Inc. ("Pacific Coast"), which
manufactures and sells hermetically sealed electrical connectors and instrument
packages, Ceramic Devices, Inc. ("Ceramic Devices"), which manufactures
specialized ceramic capacitors, filters and feedthroughs, Northwest Technical
Industries, Inc. ("NTI"), which manufactures explosively bonded dissimilar
metals, and Balo Precision Parts, Inc. ("Balo"), which manufactures hermetic
packaging components for microelectronics and specialized Swiss screw machine
parts.
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. In February 1998, the Company acquired
Balo, as part of the Electronics Group. The Company also acquired NTI as part of
its Electronics Group in April 1997. The Company's net sales for the nine-month
period ended February 28, 1997 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
10
<PAGE>
of the changes in the Company's results of operations between the third quarter
of fiscal 1997 and the third quarter of fiscal 1998 are attributable to the
addition of Balo and NTI.
Most recently, on April 13, 1998, the Company acquired Electronic Specialty
Corporation ("ESC") and its wholly-owned subsidiary, Displays & Technologies,
Inc. ("D&T") as part of the Company's newly-formed Advanced Products Group. ESC
develops and markets high reliability, military specification, electro-
mechanical devices for military and satellite applications. D&T develops and
markets ruggedized, optically enhanced flat panel displays and optic filters for
military, defense and commercial applications. ESC and D&T are located in
Vancouver, Washington.
Results of Operations
Quarter Ended February 28, 1998
Net sales for the quarter ended February 28, 1998 were $12,783,000, compared to
net sales of $8,093,000 for the quarter ended February 28 1997, an increase of
$4,690,000. In the Aerospace Group, Cashmere's net sales increased by
$2,862,000, or 119.3%, and Morel's net sales increased by $220,000, or 7.3%,
between the two periods, in Cashmere's case in part due to increased production
capabilities and, in both cases as a result of increased orders in the
commercial aircraft market. Within the Electronics Group, Pacific Coast's net
sales increased by $489,000, or 22.4%, and Ceramic Devices' net sales increased
by $361,000, or 72.3%, between the two periods, in both cases primarily as a
result of increased order backlog and production throughput increases. NTI
contributed net sales of $450,000 for the quarter ended February 28, 1998. Balo,
which was acquired in February 1998, contributed net sales of $308,000 for the
same quarter.
Gross profit for the quarter ended February 28, 1998 was $3,646,000, compared to
gross profit of $1,626,000 for the quarter ended February 28, 1997, an increase
of $2,020,000. The Company's gross profit percentage increased from 20.0% in
1997 to 28.5% in 1998. In the Aerospace Group, Cashmere's gross profit increased
by $1,455,000, or 951.0%, between the two periods, primarily related to
Cashmere's increase in net sales. Morel's gross profit increased by $33,000, or
9.3%, primarily related to Morel's increase in net sales and efficiencies gained
through the addition of capital assets in the production facility. In the
Electronics Group, Pacific Coast's gross profit decreased by $44,000, or 4.6%,
and Ceramic Devices' gross profit increased by $237,000 or 148.4%, primarily due
to Ceramic Devices' significant activity in the satellite market. NTI
contributed gross profit of $220,000 for the quarter ended February 28, 1998,
and Balo contributed gross profit of $119,000.
Operating expenses for the quarter ended February 28, 1998 were $2,368,000,
compared to $1,258,000 for the quarter ended February 28, 1997, an increase of
$1,110,000. In the Aerospace Group, Cashmere's operating expenses increased by
$217,000, or 58.6%, and Morel's operating expenses increased by $231,000, or
83.1%. In the Electronics Group, Pacific Coast's operating expenses increased by
$22,000, or 4.2%, and Ceramic Devices' operating expenses increased by $62,000,
or 53.5%, between the two periods, primarily as a result of its significant
increase in net sales. NTI's operating expenses for the quarter were $182,000,
and Balo's operating expenses were $64,000. Interest expense for the quarter
ended February 28, 1998 was $197,000, compared to $107,000 for the quarter ended
February 28, 1997, an increase of $90,000, or 84.9%, primarily related to the
addition of financing for additional capital, equipment and facilities between
the comparable periods.
Net income for the quarter ended February 28, 1998 was $1,252,000, or $.09
income per share, which represents an improvement over net income of $244,000,
or $.03 income per share, for the quarter ended February 28, 1997.
11
<PAGE>
Nine Months Ended February 28, 1998
Net sales for the nine months ended February 28, 1998 were $36,987,000, compared
to net sales of $23,854,000, for the nine months ended February 28, 1997, an
increase of $13,133,000. In the Aerospace Group, Cashmere's net sales increased
by $7,307,000, or 105.1%, and Morel's net sales increased by $1,975,000, or
22.3%, between the two periods, in both cases primarily as the result of
increased orders in the commercial aircraft market. Within the Electronics
Group, Pacific Coast's net sales increased by $709,000, or 10.8%, and Ceramic
Devices' net sales increased by $1,287,000, or 89.2%, between the two periods,
in both cases primarily as the result of increased order backlog and production
throughput increases. NTI contributed net sales of $1,547,000 for the nine-month
period ended February 28, 1998, and Balo contributed net sales of $308,000 for
the same period.
Gross profit for the nine months ended February 28, 1998 was $10,023,000,
compared to $5,504,000 for the nine months ended February 28, 1997, an increase
of $4,519,000. The Company's gross profit percentage increased to 27.1% in 1998
from 23.1% in 1997. In the Aerospace Group, Cashmere's gross profit increased by
$2,221,000, or 168.5%, between the two periods, primarily related to its
increase in net sales. Morel's gross profit increased by $487,000 or 43.5%,
between the two periods, primarily related to the increase in net sales and
efficiencies gained through the addition of capital assets in Morel's production
facility. Within the Electronics Group, Pacific Coast's gross profit decreased
by $164,000, or 6.0%, between the two periods. Ceramic Devices' gross profit
increased by $967,000, or 289.5%, between the two periods, primarily due to
significant activity in the satellite market. NTI contributed gross profit of
$839,000 for the nine-month period ended February 28, 1998, and Balo contributed
gross profit of $119,000 for the same period.
Operating expenses for the nine months ended February 28, 1998 were $6,568,000,
compared to $4,277,000 for the nine months ended February 28, 1997, an increase
of $2,291,000. In the Aerospace Group, Cashmere's operating expenses increased
by $651,000, or 67.9%, and Morel's operating expenses increased by $680,000, or
84.5%. In the Electronics Group, Pacific Coast's operating expenses increased by
$729,000, or 73.6%, and Ceramic Devices' operating expenses increased by
$284,000, or 123.5%, primarily as a result of their significant increase in net
sales. NTI's operating expenses for the nine months were $538,000, and Balo's
operating expenses were $114,000. Interest expense for the period was $526,000,
compared to $386,000 in the same period last year, an increase of $140,000, or
36.3%, primarily related to the addition of capital equipment and its associated
debt in this period and interest accruing on the Convertible Notes issued in the
Company's August 1997 Convertible Note Offering.
Net income for the nine months ended February 28, 1998 was $2,892,000, or $.25
income per share, which represents an improvement over net income of $928,000,
or $.10 income per share, for the nine months ended February 28, 1997.
12
<PAGE>
Liquidity and Capital Resources
Overview
At February 28, 1998, total current assets were $24,393,000 and total
current liabilities were $7,024,000, resulting in net working capital of
$1,7369,000, and a current ratio of 3.47 to 1.00. 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 3.24 to
1.00.
Bank Credit Facility
On May 29, 1997, the Company executed a commitment letter with a commercial
bank for a credit facility consisting of (a) a revolving working capital line of
credit of up to $3,500,000 that extends from June 1997 to September 1998 (the
"Line of Credit"), (b) a seven-year capital equipment acquisition credit
facility of up to $2,000,000 (the "Equipment Line"), and (c) a 10- year term
loan of approximately $700,000, or approximately 80% of the cost of the recent
addition to the Pacific Coast building (the "Construction Loan"). The Company
has executed the documents for the Line of Credit and the Construction Loan, but
has not yet elected to close the Equipment Line. As of April 6, 1998, the Line
of Credit had no outstanding balance and the Company had not yet requested
funding of the Construction Loan.
Securities Issuances
Series A Convertible Preferred Stock
Effective on 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 April 6, 1998, 49,175 shares of Preferred
Stock had been converted into 1,470,954 shares of Common Stock, and 825 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 has
generated or will generate any cash to the Company.
Convertible Note Offering
In August 1997, the Company closed an offering of $5,800,000, before
expenses, in convertible debt to two 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 ("Rule 506"). The Company intends to
use, or has used, the proceeds of the Convertible Note offering primarily in
connection with proposed and future acquisitions. The Company subsequently filed
a Form S-3 Registration Statement, which was declared effective on December 31,
1997, registering for resale up to 1,720,690 shares of Common Stock issuable
upon conversion of the Convertible Notes. As of April 6, 1998, all of the
Convertible Notes had been
13
<PAGE>
converted into 1,405,018 shares of Common Stock. Neither the conversion of the
Convertible Notes, the registration, nor the sale by the holders of the
underlying Common Stock generated any cash to the Company.
Fall 1997 Common Stock and Promissory Note Offering
In November 1997, the Company closed an offering of $6,087,545, before
expenses, in Common Stock and promissory notes to three accredited investors, in
a transaction exempt from registration under Rule 506. The Company subsequently
filed a Form S-3 Registration Statement, which was declared effective on
December 29, 1997, registering for resale the 524,000 shares of Common Stock
sold in the offering. The sale by the holders of the Common Stock sold in this
offering will not generate any cash to the Company.
The Registration Statement also covered resale of 537,500 shares of Common
Stock issuable upon the exercise of certain unregistered warrants (the "Private
Warrants"). The Company will not receive any cash proceeds as the result of the
registration or the resale of those shares. If all of the Private Warrants were
exercised, the Company would receive up to $2,369,063 from the exercise. As of
April 6, 1998, Private Warrants to purchase 440,000 shares of Common Stock had
been exercised, generating $1,982,063 in proceeds to the Company. The Company
intends to use, or has used, the proceeds from the November 1997 offering and
from the exercise, if any, of the Private Warrants, primarily in connection with
proposed and future acquisitions.
Post-Effective Amendment No. 1 to Form SB-2 Registration Statement
In November 1997, the Company filed Post-Effective Amendment No. 1 to the
Form SB-2 Registration Statement filed in connection with the Company's July
1996 public offering. The Post-Effective Amendment, which was declared effective
as of November 6, 1997, covered (a) issuance of the 2,250,000 shares of Common
Stock underlying warrants registered by the Company in its July 1996 public
offering (the "Public Warrants"), (b) resale of 450,000 shares of Common Stock
underlying warrants issued to the underwriters of the July 1996 public offering
(the "Underwriters' Warrants"), and (c) resale of 300,000 shares of Common Stock
underlying a warrant issued to UTCO Associates, Ltd. in connection with bridge
financing prior to the July 1996 public offering (the "UTCO Warrant").
The net proceeds to the Company under the Post-Effective Amendment are
estimated to be approximately $13,885,000, assuming exercise of all of the
Public Warrants, the Underwriters' Warrants and the UTCO Warrant. At April 6,
1998, 256,800 shares had been issued upon exercise of a portion of the UTCO
Warrant, generating $1,232,640 in exercise proceeds, and 45,000 of the
Underwriters' Warrants had been exercised, generating $168,750 in proceeds to
the Company. At April 6, 1998, none of the Public Warrants had been exercised.
If and to the extent that the Company receives additional proceeds from the
exercise of the Public Warrants, the Underwriters' Warrants and the UTCO
Warrant, the Company has used or currently intends to use these proceeds to
acquire additional processing and manufacturing equipment, to fund certain
facilities expansion, to fund potential acquisitions, and to increase working
capital. The Company
14
<PAGE>
will not receive any of the proceeds from the sale of the Common Stock or Public
Warrants registered for resale by the holders of the Underwriters' Warrants or
the UTCO Warrant.
Liviakis Warrants
On February 3, 1998, the Company entered into a Consulting Agreement with
Liviakis Financial Communications, Inc., for the provision of public relations
services to the Company. As consideration for Liviakis entering into the
agreement, the Company issued to Liviakis and one of its principals unregistered
warrants to purchase 1,290,000 shares of the Company's common stock (the
"Liviakis Warrants"). If all of the Liviakis Warrants were exercised, the
Company would receive up to $5,959,800 from the exercise. As of April 6, 1998,
no Liviakis Warrants had been exercised. The Company intends to use the proceeds
from the exercise of the Liviakis Warrants, if any, primarily in connection with
proposed and future acquisitions.
Information Technology Group
Proposed Formation and Acquisitions
In December 1997, the Company announced that it had terminated its proposal
to form an information technology group, and had terminated the nonbinding
letters of intent to acquire six companies for inclusion in that group (the "ITG
companies"). These companies were: Orca Technologies, Inc. (formerly known as
Jungle Street, Inc.) ("Orca"), MONITRx, Inc. ("MONITRx"), Quantum Interlink
Internet, Inc. ("Quantum"), Digital Network Associates, Inc. ("DNA"),
Brigadoon.com, Inc. ("Brigadoon"), and Market Visibility, Inc. ("Market
Visibility"). Each of the proposed acquisitions was subject to the completion of
satisfactory due diligence investigations and to certain other conditions. The
Company also entered into operations consulting and expense reimbursement
agreements ("operations agreements") with Brigadoon, Orca and Market Visibility.
After completing due diligence investigations, the Company terminated its
nonbinding letters of intent and operations agreement with Market Visibility on
October 28, 1997, with Brigadoon on November 14, 1997, and with Orca on November
25, 1997. On November 25, 1997, the Company also terminated its nonbinding
letters of intent with Quantum, MONITRx and DNA.
Bridge Loans
In connection with its proposed acquisition of the ITG companies, the
Company loaned funds to Brigadoon, Orca, and MONITRx, and guaranteed a
$1,300,000 bank line of credit and a $372,000 equipment lease for Orca. As
partial consideration for its loans, Brigadoon issued a common stock purchase
warrant to the Company that entitles the Company to purchase 12.5% of
Brigadoon's fully diluted common stock (the "Brigadoon Warrant").
Orca and MONITRx. In February 1998, Orca acquired MONITRx and DNA. In
connection with Orca's acquisition of MONITRx, Orca assumed the Company's loans
made to MONITRx under its letter of intent, and issued a renewal note to the
Company, in the initial principal amount of $1,337,120, which represented the
then-outstanding principal and unpaid interest due on the assumed loans.
15
<PAGE>
Brigadoon. By November 15, 1997, the Company had demanded repayment of all
of its loans to Brigadoon, in the aggregate principal amount of $1,630,000. The
Company agreed to forbear from instituting legal action against Brigadoon if it
made specified payments to the Company. However, Brigadoon defaulted under that
agreement. Brigadoon's failure to repay its loans when due triggered a reduced
exercise price under the Brigadoon Warrant of $500,000. On February 17, 1998,
the Company filed a lawsuit against Brigadoon to recover the amount owed, and,
on March 20, 1998, the Company participated in filing an involuntary bankruptcy
petition against Brigadoon.
Restructuring Agreement
On April 6, 1998, the Company entered into an agreement with Orca to
convert the $4,219,000 owed under the combined Orca, Televar and assumed MONITRx
notes into shares of Orca common stock at $2.00 per share (the "Restructuring
Agreement"), immediately following Orca's completion of its pending private
offering of common stock. In the Restructuring Agreement, Orca agreed to grant
the Company demand registration rights for those shares and, in the event of an
underwritten public offering, piggyback registration rights, which will be
effective after the earliest of: (a) the closing of Orca's third round of
financing, and (b) the first anniversary of the closing of the Restructuring
Agreement. In addition, the Company agreed to continue guaranteeing Orca's
credit facility and equipment lease, and Orca agreed to time limitations on the
guaranties.
In the Restructuring Agreement, Orca also agreed to purchase the Brigadoon
notes and all related interests of the Company in Brigadoon, including the
Brigadoon Warrant and the Company's interest in the lawsuit and bankruptcy
action, for $950,000. Orca will pay that purchase price with a five-year
promissory note (the "Brigadoon Note") to the Company , which will accrue
interest at 8% per annum. Under that note, Orca will pay interest only for the
first year, and will make fully-amortizing monthly payments of principal plus
interest for the final four years of the note term. In the third quarter of
1998, the Company posted a nonrecurring charge o earnings of $1,038,000 million
to reflect the discounted sale of the original Brigadoon notes to Orca and the
restructuring of the Orca debt.
Closing of the transactions contemplated under the Restructuring Agreement
is scheduled to occur in April 1998.
Certain Relationships
Roger Vallo and Donald Cotton, who were directors of the Company until
January 1998, are directors and shareholders, and Mr. Vallo is CEO, of Orca. 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 Orca and were directors of Orca until
June 1997. Allen Dahl, a director of the Company, is a shareholder, but not a
director, of Orca. Messrs. Vallo, Cotton, Gerde, Wright, and Dahl have each
incurred potential indemnification obligations to previous management personnel
of Orca and Televar.
As of February 28, 1998, the Company also owned 179,600 shares of Orca's
outstanding common stock, which the Company believes represented approximately
5% of Orca's outstanding common stock as of that date. After closing of the
Restructuring Agreement, the Company will
16
<PAGE>
anticipates that it will own approximately 19% of Orca's outstanding common
stock. The Company also subleases approximately 95% of the square footage of its
Bothell, Washington office space to Orca, and Orca is current in its obligation
to pay an equivalent percentage of the lease payment for that space.
Risk Factor
There is no assurance that the Company will be able to close the
transactions contemplated by the Restructuring Agreement, or that it will be
able to recover any or all of the amounts currently owed to it by Orca, Televar
and Brigadoon, with or without the restructuring. There is also no assurance
that any shares of Orca common stock will ultimately have significant value for
the Company. Although Orca's common stock is traded over the counter on the
Nasdaq system, the trading volume of the stock has been historically low.
Because of the low trading volume, and because the Company expects to hold
approximately 19% of Orca's outstanding common stock after the closing of the
transactions contemplated in the Restructuring Agreement, it is not likely that
the Company will be able to sell significant blocks of Orca common stock. The
failure of the Restructuring Agreement to close, the inability of the Company to
collect on the Brigadoon Note, or the failure of Orca's common stock to achieve
and maintain a higher price and trading volume, could prevent the Company from
recovering its investment in the information technology companies and could
ultimately affect the Company's financial condition.
Acquisitions
Balo Precision Parts, Inc.
On February 9, 1998, the Company's wholly-owned subsidiary, Balo
Acquisition Corp., closed the purchase of substantially all of the assets, and
assumed certain liabilities, of Balo Precision Parts. In consideration for the
purchase, the Company paid the sellers $2.25 million in cash at the closing of
the acquisition. Subsequent to the closing, Balo Acquisition Corp. changed its
name to Balo Precision Parts, Inc. Balo is located in Butler, New Jersey.
Electronic Specialty Corporation and Displays & Technologies, Inc.
On April 13, 1998, the Company's wholly-owned subsidiary, ESC Acquisition
Corp., closed the purchase of substantially all of the assets, and assumed
certain liabilities, of ESC & D&T, in a transaction which was effective for tax
purposes as of February 28, 1998. In consideration for the purchase, the Company
paid the sellers $2 million in cash and 923,304 shares of the Company's
unregistered common stock, at the closing of the acquisition. Subsequent to the
closing, ESC Acquisition Corp. changed its name to Electronic Specialty
Corporation. Electronic Specialty Corporation is located in Vancouver,
Washington.
Assimilation of Acquisitions
The Company's recent acquisitions have placed, and any future acquisitions
will place, a significant strain on its management, financial and other
resources. Past and future acquisitions may subject the Company to many risks,
including risks relating to integrating and managing the operations and
personnel of acquired companies, and maintaining and implementing uniform
standards, controls, procedures and policies. The success of future acquisitions
will depend, in part, upon the Company's ability to assess and manage the risks
typically associated with acquisitions, including the risks of assessing the
value, strengths, and weaknesses of acquisition candidates or new products,
possible diversion of management attention from the Company's existing
businesses, reduction of cash, disruption of product development cycles,
dilution of earnings per share, or other factors. A failure to achieve or
sustain the anticipated benefits of any acquisition could result in that
acquisition having a detrimental effect on the Company's results of operations,
cash flow and financial condition.
17
<PAGE>
Material Purchase Obligations
As of April 6, 1998, the Company had no pending material purchase orders.
Additions and replacements of plant and equipment are generally funded through
working capital, trade-in credits for the replaced equipment, capital leases or
long-term notes from affiliates of the equipment vendors, or loans from
financing institutions, which are secured by the equipment being acquired.
Facilities Expansion
Pacific Coast Building Expansion
During the first half of fiscal 1998, the Company completed an addition to
the building that houses Pacific Coast and Ceramic Devices. The addition
consists of approximately 12,000 square feet of production space, and had a cost
of approximately $900,000. The Company's primary bank has committed to finance
approximately 80% of the costs of the addition.
Headquarters Building
The Company has acquired certain property adjacent to its existing
Wenatchee facilities and has begun construction of an office building to house
the Company's executive, administrative and accounting personnel. The project is
expected to be complete by summer 1998. 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 offering
of Preferred Stock, its August 1997 Convertible Note offering, its November 1997
common stock and promissory note offering, together with its credit facility
with Key Bank of Washington and funds generated by operations, will be
sufficient to meet the Company's currently budgeted working capital requirements
for at least the next 12 months. However, the Company intends to seek other
equity or debt financing, or both, 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 funds
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.
18
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources - Securities Issuances -
Series A Convertible Preferred Stock," "- Convertible Note Offering," "- Fall
1997 Common Stock and Promissory Note Offering," and "- Liviakis Warrants,"
which are incorporated into this Item 2 by this reference.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources - Acquisitions - Balo
Precision Parts, Inc.,"and "- Electronic Specialty Corporation and Display and
Technologies, Inc.," which are incorporated into this Item 5 by this reference.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits.
The following are filed as exhibits to this Quarterly Report:
Exhibit
Number Document
------- --------
4.1 Common Stock Purchase Warrant, dated February 10, 1998, from the
Company to Liviakis Financial Communications, Inc.
4.2 Common Stock Purchase Warrant, dated February 10, 1998, from the
Company to Robert Prag.
10.1 Consulting Agreement, dated February 3, 1998, between Liviakis
Financial Communications, Inc. and the Company.
19
<PAGE>
10.2 Debt Restructuring Agreement, dated April 6, 1998, between
Pacific Aerospace & Electronics, Inc., Orca Technologies, Inc.,
Televar, Inc. and MONITRx, Inc.
10.3 Promissory Note, dated March 18, 1998, from Pacific Aerospace &
Electronics, Inc. to KeyBank National Association.
10.4 Security Agreement, dated March 18, 1998, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association.
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 February 28,
1998:
On December 2, 1997, the Company reported that it had announced
termination of its proposal to form an information technology group, and
that, in October 1997 and November 1997, it had terminated non-binding
letters of intent to acquire six companies in connection with the
formation of the group.
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: April 13, 1998 /s/ DONALD A. WRIGHT
-----------------------------------------
Donald A. Wright
President, Chief Executive Officer, and
Chairman of the Board
(Principal Executive Officer)
Date: April 13, 1998 /s/ NICK A. GERDE
-----------------------------------------
Nick A. Gerde
Vice President Finance, Chief Financial
Officer and Treasurer (Principal Financial
and Accounting Officer)
20
<PAGE>
EXHIBIT INDEX
Exhibit
Number Document
------- --------
4.1 Common Stock Purchase Warrant, dated February 10, 1998, from the
Company to Liviakis Financial Communications, Inc.
4.2 Common Stock Purchase Warrant, dated February 10, 1998, from the
Company to Robert Prag.
10.1 Consulting Agreement, dated February 3, 1998, between Liviakis
Financial Communications, Inc. and the Company.
10.2 Debt Restructuring Agreement, dated April 6, 1998, between
Pacific Aerospace & Electronics, Inc., Orca Technologies, Inc.,
Televar, Inc. and MONITRx, Inc.
10.3 Promissory Note, dated March 18, 1998, from Pacific Aerospace &
Electronics, Inc. to KeyBank National Association.
10.4 Security Agreement, dated March 18, 1998, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association.
27. Financial Data Schedule.
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN AND WILL NOT BE, AS OF THE TIME OF ISSUANCE, REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY COMPARABLE STATE LAW, AND MAY NOT BE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER
SUCH ACT. THIS WARRANT AND SUCH SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE
WITH THE CONDITIONS SPECIFIED IN THIS WARRANT.
PACIFIC AEROSPACE & ELECTRONICS, INC.
COMMON STOCK PURCHASE WARRANT
Expiring February 10, 2002
Date: February 10, 1998
Pacific Aerospace & Electronics, Inc., a Washington corporation (the
"Company"), for value received, hereby certifies that Liviakis Financial
Communications, Inc. of 2420 "K" Street, Suite 220, Sacramento, CA 95816, or its
assigns, is entitled to purchase from the Company 967,500 duly authorized shares
(subject to adjustment pursuant to Section 2 below) of the Company's common
stock (the "Warrant Stock"), at a purchase price of $4.62 per share (the
"Exercise Price"), all subject to the terms, conditions, and possible
adjustments set forth below.
1. Exercise of Warrant.
1.1 Exercise Period. The holder of this Warrant may exercise it, in whole
or in part, at any time after May 15, 1998, until 5:00 p.m., Pacific Standard
time, on February 10, 2002, at which time the right to exercise this Warrant
shall expire (the "Expiration Date").
1.2 Warrant Stock Exercisable; Payment. This Warrant may be exercised in
increments of no less than 10,000 shares of Warrant Stock at any one time.
However, if the total number of shares of Warrant Stock remaining is less than
10,000, then the holder may exercise this Warrant for the number of remaining
shares of Warrant Stock.
1.3 Manner of Exercise; Exercise Payment. The holder of this Warrant may
exercise it during normal business hours on any business day by delivering to
the Company (a) a completed Subscription Agreement, at the address set forth in
a subscription agreement in the form attached as Exhibit A (the "Subscription
Agreement") which indicates the number of shares of Warrant Stock being
purchased in such exercise (the "Exercised Shares"), (b) the original Warrant,
and (c) the Exercise Price associated with the number of the Exercised Shares
(the "Exercise Payment"), in cash or by certified or official bank check payable
to the order of the Company. The Exercise Payment shall be determined by
multiplying (i) the number of Exercised Shares, by (ii) the Exercise Price.
1
<PAGE>
1.4 When Exercise Effective. Each exercise of this Warrant shall be deemed
to have been effected immediately prior to the close of business on the business
day on which the holder has complied with the requirements of Section 1.3 (the
"Exercise Date"). At such time, the person or persons in whose name or names any
certificate or certificates for shares of Warrant Stock shall be issued upon
such exercise shall be entitled to receive the number of duly authorized,
validly issued, fully paid and nonassessable shares of Warrant Stock as is
indicated in such Subscription Agreement. The holder shall be deemed for all
corporate purposes to have become the holder of record of such shares on the
Exercise Date.
1.5 Delivery of Stock Certificates. Within five business days after the
Exercise Date, the Company, at its expense, will cause to be issued in the name
of and delivered to the holder hereof, or to the person or entity such holder
may direct (after payment by such holder of any applicable transfer taxes), a
certificate or certificates for the number of duly authorized, validly issued,
fully paid and nonassessable shares of Warrant Stock to which the holder or its
designee shall be entitled upon such exercise.
1.6 Partial Exercise.
1.6.1 Fractional Shares. In the event of any partial exercise of this
Warrant, the Company will not issue certificates for any fractional shares of
the Warrant Stock to which the holder otherwise may be entitled, and the Company
shall not be obligated to refund an amount of cash comprising the market value
of any fractional share of Warrant Stock for which the Company will not issue a
certificate.
1.6.2 Replacement Warrant. In the event of any partial exercise of
this Warrant, upon tender of this Warrant to the Company, the Company shall
issue a new Warrant containing the same terms and conditions as this Warrant but
calling on the face thereof for the number of shares of Warrant Stock equal to
the number of shares called for on the face of this Warrant minus the number of
shares of Warrant Stock issued upon the partial exercise of this Warrant.
2. Adjustment of Warrant Stock Issuable Upon Exercise. If the Company at any
time or from time to time after the date of this Warrant, but before expiration,
effects a split or subdivision of the outstanding shares of its then outstanding
common stock into a greater number of shares of common stock, or if the Company
effects a reverse split of the outstanding shares of its common stock into a
lesser number of shares of common stock (by reclassification or otherwise than
by payment of a dividend in common stock), then, and in each such case, the
number of shares called for on the face of this Warrant (or the face of any
replacement Warrant issued upon partial exercise) shall be adjusted
proportionally, and the exercise price with respect to such adjusted number of
shares also shall be adjusted proportionally.
2
<PAGE>
3. Restrictions on Transfer.
3.1 Restrictive Legends.
3.1.1 Replacement Warrants. Each replacement Warrant issued upon
partial exercise or the transfer of any Warrant shall contain a legend in
substantially the following form:
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT.
THIS WARRANT AND SUCH SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE
WITH THE CONDITIONS SPECIFIED IN THIS WARRANT.
3.1.2 Unregistered Warrant Stock. Until such time as the resale of the
Warrant Stock may be registered under Section 6, each certificate for Warrant
Stock issued upon the exercise of any Warrant, and each certificate issued upon
the transfer of any such Warrant Stock, shall be stamped or otherwise imprinted
with a legend in substantially the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES
LAWS OF ANY STATE. THESE SECURITIES MAY NOT BE OFFERED, SOLD, OR
TRANSFERRED IN THE ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION, UNDER THE SECURITIES ACT OF 1933 AND
APPROPRIATE STATE SECURITIES LAWS. FURTHERMORE, NO OFFER, SALE, OR
TRANSFER, IS TO TAKE PLACE UNLESS THE COMPANY RECEIVES AN OPINION OF
COUNSEL, AT SHAREHOLDER'S EXPENSE, AND SATISFACTORY TO IT, THAT AN
EXEMPTION FROM REGISTRATION IS AVAILABLE.
3.1.3 Warrant Stock Registered for Resale. Until such time as any
Warrant Stock registered for resale under Section 6 is sold to a third party in
compliance with applicable securities laws, each certificate for the Warrant
Stock issued upon the exercise of any Warrant, and each certificate issued upon
the transfer of any such Warrant Stock, shall be stamped or otherwise imprinted
with a legend in substantially the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN REGISTERED FOR
RESALE PURSUANT TO A REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT") AND MAY BE TRANSFERRED WITHOUT RESTRICTION ONLY UPON:
(A) (1) CONFIRMATION FROM THE COMPANY THAT THE REGISTRATION STATEMENT IS
EFFECTIVE AS OF THE DATE OF TRANSFER, AND
(2) CONFIRMATION FROM THE HOLDER HEREOF OF COMPLIANCE WITH THE
PROSPECTUS DELIVERY REQUIREMENTS OF THE ACT OR THE RULES
PROMULGATED THEREUNDER; OR
(B) RECEIPT OF AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT REGISTRATION AND/OR PROSPECTUS DELIVERY IS NOT REQUIRED.
3
<PAGE>
The Company shall have no obligation to remove the above legend from a
certificate representing Warrant Stock registered for resale unless the
Company's has received written confirmation, in a form acceptable to the
Company, that either condition (A) or condition (B) in the above legend has been
met.
3.2 Notice of Proposed Transfer. Prior to the transfer of any shares of
Warrant Stock, and during any period during which such shares of Warrant Stock
are not registered by the Company under an effective registration statement
filed pursuant to the Securities Act of 1933, as amended (the "Securities Act"),
the holder thereof shall give written notice to the Company, which notice shall
(a) state such holder's intention to transfer such restricted shares and to
comply in all other respects with the transfer requirements of this Warrant; (b)
describe the circumstances of the proposed transfer in sufficient detail to
enable counsel to render the opinions referred to below; and (c) designate
counsel for the holder giving such notice. The holder giving such notice shall
submit a copy thereof to the counsel designated in such notice and the Company
will promptly submit a copy thereof to its counsel. The following provisions
shall then apply:
3.2.1 If (a) in the opinion of counsel for the holder designated in
the notice the proposed transfer may be effected without registration of such
shares of Warrant Stock under the Securities Act and any applicable state
securities laws, and (b) counsel for the Company shall not have rendered an
opinion within 15 days after receipt by the Company of the notice required by
Section 3.2 that registration is required, the holder shall thereupon be
entitled to transfer such shares of Warrant Stock in accordance with the terms
of the notice delivered by such holder to the Company. Each Warrant or
certificate, if any, issued upon or in connection with such transfer shall bear
the appropriate restrictive legend set forth in Section 3.1, unless in the
opinion of each such counsel the legend is no longer required to insure
compliance with the Securities Act.
3.2.2 If in the opinion of either or both of such counsel the proposed
transfer may not legally be effected without registration of the shares of
Warrant Stock under the Securities Act or applicable state securities laws, the
Company will promptly so notify the holder thereof and the holder shall not be
entitled to transfer the shares of Warrant Stock until receipt of a further
notice from the holder under Section 3.2.1 above and opinions as to
transferability, or until registration of such shares of Warrant Stock under the
Securities Act or applicable state law has become effective (provided that the
Company has no obligation to register Warrant Stock other than pursuant to
Section 6 below).
4. Reservation of Shares. The Company will at all times reserve and keep
available, solely for issuance and delivery upon the exercise of the Warrants,
the number of shares of Warrant Stock that would be issuable upon the exercise
of all Warrants at the time outstanding. All such shares shall be duly
authorized and, when issued upon such exercise, shall be validly issued, fully
paid and nonassessable.
5. Ownership, Transfer and Substitution of Warrants.
5.1 Ownership of Warrants. The Company may treat the person in whose name
any Warrant is registered on the Company's records as the owner and holder
thereof for all purposes,
4
<PAGE>
notwithstanding any notice to the contrary. Nevertheless, when a Warrant is
properly assigned in blank, the holder thereof may exercise the Warrant without
first having a new Warrant issued.
5.2 Transfer and Exchange of Warrants. Upon the surrender of any Warrant,
properly endorsed, for registration of transfer or exchange at the principal
office of the Company, the Company will execute and (after payment by the holder
of any applicable transfer taxes) deliver to any person specified by the holder
of the Warrant a new Warrant or Warrants of like tenor.
5.3 Replacement of Warrants. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of any
Warrant and, in the case of any loss, theft or destruction of any Warrant, upon
delivery of indemnity reasonably satisfactory to the Company in form and amount
or, in the case of mutilation, upon surrender of the Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
6. Registration Rights.
6.1 Piggy-Back Registration Rights.
6.1.1 Scope. If the Company shall determine to register any of its
common stock either for its own account or the account of a security holder or
holders prior to November 30, 1998, other than a registration relating solely to
(i) employee benefit plans, or (ii) registration on any registration form that
does not permit secondary sales, the Company will:
(a) promptly give written notice of the proposed registration to
the holder of this Warrant or any Warrant Stock issued or issuable upon the
exercise of this Warrant; and
(b) with respect to any Warrant Stock that has not been held for
a one-year period, include in such registration (and any related
qualification or other compliance filing under applicable blue sky laws),
and in any underwriting involved therein, all or any portion of the Warrant
Stock then issued or issuable upon exercise of this Warrant as specified in
a written request made by such holders within 30 days after receipt of the
written notice from the Company described in Section 6.1.1.
6.1.2 Underwritten Offerings.
(a) Participation in Underwriting. If the registration of which
the Company gives notice is for a registered public offering involving an
underwriting, the Company shall so advise the holders as part of the
written notice described in Section 6.1.1(a). In such event, the holders'
rights to registration pursuant to this Section 6 shall be conditioned upon
participation in the underwriting and the inclusion of stock in the
underwriting to the extent provided herein. Holders and the Company (and
any other security holders proposing to distribute their securities through
the underwriting) shall enter into an underwriting agreement in customary
form with the representatives of the underwriter or underwriters selected
for such underwriting by the Company.
5
<PAGE>
(b) Limitation on Registration Rights. Notwithstanding any other
provisions of this Section 6.1, if the representatives of the underwriter
or underwriters determine in good faith that marketing factors make it
advisable to impose a limitation on the number of secondary shares to be
included in the registration, the number of such secondary shares, if any,
that may be included in the registration and underwriting on behalf of such
holders, and any other security holders proposing to distribute their
securities of the Company through such underwriting shall be allocated in
proportion, as nearly as practicable, to the respective amounts of
securities that they had requested to be included in such registration at
the time of filing the registration statement. If such holders disapprove
of the terms of any such underwriting, they may elect to withdraw therefrom
by written notice to the Company and the representatives of the underwriter
or underwriters.
(c) Moratorium on Sales. If representatives of the underwriter or
underwriters in a registered public offering of shares by the Company
exclude any of the Warrant Stock from the offering under Section 6.1.2(b),
then the holder of those shares shall not exercise this Warrant or offer or
sell any of the Warrant Stock for the earlier of (i) a period ending 180
days following the effective date of such registered public offering, or
(ii) the date that the underwriter agrees that an offering or sale of the
Warrant Stock by the holder may proceed.
6.2 Form S-3 Registration. If the Company does not anticipate commencing a
registration in which the holder of this Warrant may participate under Section
6.1.1 by November 30, 1998, then the Company agrees to use its best efforts to
file with the U.S. Securities and Exchange Commission, by November 30, 1998, a
Form S-3 registration statement which registers the holder's resale of the
Warrant Stock to third parties. The holder agrees to provide the Company, in a
timely manner, any information required to be provided by the holder in
connection with the filing of that registration statement. The Company agrees to
keep the registration statement effective only until the earlier of (a) the date
as of which the holder of this Warrant may sell all of the Warrant Stock without
restriction pursuant to Rule 144 under the Securities Act, and (b) the date on
which the holder has exercised and sold all of the Warrant Stock.
6.3 Prospectus Delivery Requirements. The holder of Warrant Stock
registered under this Section 6 shall comply with all applicable prospectus
delivery requirements, if any, required by the Securities Act and shall provide
confirmation of such deliver to the Company.
7. No Rights or Liabilities as Stockholder. Nothing herein shall give or shall
be construed to give the holder of this Warrant any of the rights of a
shareholder of the Company, including without limitation the right to vote on
matters requiring the vote of shareholders, the right to receive any dividend
declared and payable to the holders of common stock, or the right to a pro-rata
distribution upon the Company's dissolution.
6
<PAGE>
8. Notices. All notices and other communications provided for herein shall be
delivered or mailed by first class mail, postage prepaid, addressed (a) if to
the holders of any Warrant, to the registered address of the holder as set forth
in the register kept at the principal office of the Company, or (b) if to the
Company, to: Sheryl A. Symonds, Vice President Administration & General Counsel,
Creekside Building, 24000 - 35th Ave S.E., Suite 200, Bothell, WA 98021, or to
the address of such other principal office of the Company as the Company shall
have furnished to each holder of any Warrants in writing; provided that the
exercise of any Warrants shall be effective only in the manner provided in
Section 1.
9. Miscellaneous. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Warrant shall be governed by the laws of the State of Washington.
The headings of this Warrant are inserted for convenience only and shall not be
deemed to constitute a part hereof.
PACIFIC AEROSPACE & ELECTRONICS, INC.
By: DONALD A. WRIGHT
-------------------------------------
Donald A. Wright, President
7
<PAGE>
Exhibit A
NOTICE OF EXERCISE AND SUBSCRIPTION
To: Pacific Aerospace & Electronics, Inc.
c/o Vice President Administration & General Counsel
Creekside Building
24000 - 35th Ave S.E., Suite 200
Bothell, WA 98021
Exercise. The undersigned hereby irrevocably exercises its right to
purchase, and subscribes for, ___________ shares of the Common Stock, $.001 par
value per share, of Pacific Aerospace & Electronics, Inc., a Washington
corporation, at $4.62 per share, pursuant to and in accordance with the terms
and conditions of a Common Stock Purchase Warrant dated February 3, 1998 (the
"Warrant").
Deliveries. The undersigned is delivering the following items to the
Company. The undersigned acknowledges that the Company shall have no obligation
to issue the Warrant Stock subscribed for herein until the Company has received
all of these items.
o Original Notice of Exercise and Subscription signed by the holder of the
Warrant.
o Original Warrant.
o Certified or cashier's check in the amount of $_________ as payment for the
Warrant Stock being exercised.
o Confirmation of Sale and Prospectus Delivery (if legend removal is
requested; see below).
o Any other documents that the Company may reasonably require in connection
with such exercise
Certificate. The undersigned requests that a certificate for such shares be
issued in the name of ________________________ and be delivered to the following
address:
------------------------------
------------------------------
Legend. The undersigned acknowledges that if the Warrant Stock has not been
registered, or has been registered only for resale to third parties, then the
requested certificate will bear a legend as to the restrictions or conditions on
resale of the Warrant Shares as set forth in Section 3.1 of the Warrant. The
undersigned acknowledges that the Company shall have no obligation to issue an
unlegended certificate unless (a) the issuance of the Warrant Stock has been
registered, or (b) if resale of the Warrant Stock has been registered on a Form
S-3 registration statement, the Company has received written confirmation, in a
form acceptable to the Company, of (i) the contemporaneous sale of the Warrant
Stock to a third party, and (ii) delivery of the required prospectus to the
purchaser of the Warrant Stock.
Date:--------------------- Name:------------------------------------
Signature---------------------------
Title (if applicable)---------------
Address:
------------------------------------
------------------------------------
Taxpayer ID #:----------------------
8
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN AND WILL NOT BE, AS OF THE TIME OF ISSUANCE, REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY COMPARABLE STATE LAW, AND MAY NOT BE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER
SUCH ACT. THIS WARRANT AND SUCH SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE
WITH THE CONDITIONS SPECIFIED IN THIS WARRANT.
PACIFIC AEROSPACE & ELECTRONICS, INC.
COMMON STOCK PURCHASE WARRANT
Expiring February 10, 2002
Date: February 10, 1998
Pacific Aerospace & Electronics, Inc., a Washington corporation (the
"Company"), for value received, hereby certifies that Robert B. Prag of 2420 "K"
Street, Suite 220, Sacramento, CA 95816, or its assigns, is entitled to purchase
from the Company 322,500 duly authorized shares (subject to adjustment pursuant
to Section 2 below) of the Company's common stock (the "Warrant Stock"), at a
purchase price of $4.62 per share (the "Exercise Price"), all subject to the
terms, conditions, and possible adjustments set forth below.
1. Exercise of Warrant.
1.1 Exercise Period. The holder of this Warrant may exercise it, in whole
or in part, at any time after May 15, 1998 until 5:00 p.m., Pacific Standard
time, on February 10, 2002, at which time the right to exercise this Warrant
shall expire (the "Expiration Date").
1.2 Warrant Stock Exercisable; Payment. This Warrant may be exercised in
increments of no less than 10,000 shares of Warrant Stock at any one time.
However, if the total number of shares of Warrant Stock remaining is less than
10,000, then the holder may exercise this Warrant for the number of remaining
shares of Warrant Stock.
1.3 Manner of Exercise; Exercise Payment. The holder of this Warrant may
exercise it during normal business hours on any business day by delivering to
the Company (a) a completed Subscription Agreement, at the address set forth in
a subscription agreement in the form attached as Exhibit A (the "Subscription
Agreement") which indicates the number of shares of Warrant Stock being
purchased in such exercise (the "Exercised Shares"), (b) the original Warrant,
and (c) the Exercise Price associated with the number of the Exercised Shares
(the "Exercise Payment"), in cash or by certified or official bank check payable
to the order of the Company. The Exercise Payment shall be determined by
multiplying (i) the number of Exercised Shares, by (ii) the Exercise Price.
1
<PAGE>
1.4 When Exercise Effective. Each exercise of this Warrant shall be deemed
to have been effected immediately prior to the close of business on the business
day on which the holder has complied with the requirements of Section 1.3 (the
"Exercise Date"). At such time, the person or persons in whose name or names any
certificate or certificates for shares of Warrant Stock shall be issued upon
such exercise shall be entitled to receive the number of duly authorized,
validly issued, fully paid and nonassessable shares of Warrant Stock as is
indicated in such Subscription Agreement. The holder shall be deemed for all
corporate purposes to have become the holder of record of such shares on the
Exercise Date.
1.5 Delivery of Stock Certificates. Within five business days after the
Exercise Date,, the Company, at its expense, will cause to be issued in the name
of and delivered to the holder hereof, or to the person or entity such holder
may direct (after payment by such holder of any applicable transfer taxes), a
certificate or certificates for the number of duly authorized, validly issued,
fully paid and nonassessable shares of Warrant Stock to which the holder or its
designee shall be entitled upon such exercise.
1.6 Partial Exercise.
1.6.1 Fractional Shares. In the event of any partial exercise of this
Warrant, the Company will not issue certificates for any fractional shares of
the Warrant Stock to which the holder otherwise may be entitled, and the Company
shall not be obligated to refund an amount of cash comprising the market value
of any fractional share of Warrant Stock for which the Company will not issue a
certificate.
1.6.2 Replacement Warrant. In the event of any partial exercise of
this Warrant, upon tender of this Warrant to the Company, the Company shall
issue a new Warrant containing the same terms and conditions as this Warrant but
calling on the face thereof for the number of shares of Warrant Stock equal to
the number of shares called for on the face of this Warrant minus the number of
shares of Warrant Stock issued upon the partial exercise of this Warrant.
2. Adjustment of Warrant Stock Issuable Upon Exercise. If the Company at any
time or from time to time after the date of this Warrant, but before expiration,
effects a split or subdivision of the outstanding shares of its then outstanding
common stock into a greater number of shares of common stock, or if the Company
effects a reverse split of the outstanding shares of its common stock into a
lesser number of shares of common stock (by reclassification or otherwise than
by payment of a dividend in common stock), then, and in each such case, the
number of shares called for on the face of this Warrant (or the face of any
replacement Warrant issued upon partial exercise) shall be adjusted
proportionally, and the exercise price with respect to such adjusted number of
shares also shall be adjusted proportionally.
3. Restrictions on Transfer.
3.1 Restrictive Legends.
2
<PAGE>
3.1.1 Replacement Warrants. Each replacement Warrant issued upon
partial exercise or the transfer of any Warrant shall contain a legend in
substantially the following form:
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE
SECURITIES LAWS OF ANY STATE AND MAY NOT BE TRANSFERRED IN THE ABSENCE OF
SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT. THIS WARRANT
AND SUCH SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE CONDITIONS
SPECIFIED IN THIS WARRANT.
3.1.2 Unregistered Warrant Stock. Until such time as the resale of the
Warrant Stock may be registered under Section 6, each certificate for Warrant
Stock issued upon the exercise of any Warrant, and each certificate issued upon
the transfer of any such Warrant Stock, shall be stamped or otherwise imprinted
with a legend in substantially the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY
STATE. THESE SECURITIES MAY NOT BE OFFERED, SOLD, OR TRANSFERRED IN THE
ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF AN EXEMPTION FROM
REGISTRATION, UNDER THE SECURITIES ACT OF 1933 AND APPROPRIATE STATE
SECURITIES LAWS. FURTHERMORE, NO OFFER, SALE, OR TRANSFER, IS TO TAKE PLACE
UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL, AT SHAREHOLDER'S
EXPENSE, AND SATISFACTORY TO IT, THAT AN EXEMPTION FROM REGISTRATION IS
AVAILABLE.
3.1.3 Warrant Stock Registered for Resale. Until such time as any
Warrant Stock registered for resale under Section 6 is sold to a third party in
compliance with applicable securities laws, each certificate for the Warrant
Stock issued upon the exercise of any Warrant, and each certificate issued upon
the transfer of any such Warrant Stock, shall be stamped or otherwise imprinted
with a legend in substantially the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN REGISTERED FOR RESALE
PURSUANT TO A REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND MAY
BE TRANSFERRED WITHOUT RESTRICTION ONLY UPON:
(A) (1) CONFIRMATION FROM THE COMPANY THAT THE REGISTRATION STATEMENT IS
EFFECTIVE AS OF THE DATE OF TRANSFER, AND
(2) CONFIRMATION FROM THE HOLDER HEREOF OF COMPLIANCE WITH THE
PROSPECTUS DELIVERY REQUIREMENTS OF THE ACT OR THE RULES
PROMULGATED THEREUNDER; OR
(B) RECEIPT OF AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT REGISTRATION AND/OR PROSPECTUS DELIVERY IS NOT REQUIRED.
The Company shall have no obligation to remove the above legend from a
certificate representing Warrant Stock registered for resale unless the
Company's has received written confirmation, in a form acceptable to the
Company, that either condition (A) or condition (B) in the above legend has been
met.
3
<PAGE>
3.2 Notice of Proposed Transfer. Prior to the transfer of any shares of
Warrant Stock, and during any period during which such shares of Warrant Stock
are not registered by the Company under an effective registration statement
filed pursuant to the Securities Act of 1933, as amended (the "Securities Act"),
the holder thereof shall give written notice to the Company, which notice shall
(a) state such holder's intention to transfer such restricted shares and to
comply in all other respects with the transfer requirements of this Warrant; (b)
describe the circumstances of the proposed transfer in sufficient detail to
enable counsel to render the opinions referred to below; and (c) designate
counsel for the holder giving such notice. The holder giving such notice shall
submit a copy thereof to the counsel designated in such notice and the Company
will promptly submit a copy thereof to its counsel. The following provisions
shall then apply:
3.2.1 If (a) in the opinion of counsel for the holder designated in
the notice the proposed transfer may be effected without registration of such
shares of Warrant Stock under the Securities Act and any applicable state
securities laws, and (b) counsel for the Company shall not have rendered an
opinion within 15 days after receipt by the Company of the notice required by
Section 3.2 that registration is required, the holder shall thereupon be
entitled to transfer such shares of Warrant Stock in accordance with the terms
of the notice delivered by such holder to the Company. Each Warrant or
certificate, if any, issued upon or in connection with such transfer shall bear
the appropriate restrictive legend set forth in Section 3.1, unless in the
opinion of each such counsel the legend is no longer required to insure
compliance with the Securities Act.
3.2.2 If in the opinion of either or both of such counsel the proposed
transfer may not legally be effected without registration of the shares of
Warrant Stock under the Securities Act or applicable state securities laws, the
Company will promptly so notify the holder thereof and the holder shall not be
entitled to transfer the shares of Warrant Stock until receipt of a further
notice from the holder under Section 3.2.1 above and opinions as to
transferability, or until registration of such shares of Warrant Stock under the
Securities Act or applicable state law has become effective (provided that the
Company has no obligation to register Warrant Stock other than pursuant to
Section 6 below).
4. Reservation of Shares. The Company will at all times reserve and keep
available, solely for issuance and delivery upon the exercise of the Warrants,
the number of shares of Warrant Stock that would be issuable upon the exercise
of all Warrants at the time outstanding. All such shares shall be duly
authorized and, when issued upon such exercise, shall be validly issued, fully
paid and nonassessable.
5. Ownership, Transfer and Substitution of Warrants.
5.1 Ownership of Warrants. The Company may treat the person in whose name
any Warrant is registered on the Company's records as the owner and holder
thereof for all purposes, notwithstanding any notice to the contrary.
Nevertheless, when a Warrant is properly assigned in blank, the holder thereof
may exercise the Warrant without first having a new Warrant issued.
5.2 Transfer and Exchange of Warrants. Upon the surrender of any Warrant,
properly endorsed, for registration of transfer or exchange at the principal
office of the Company, the
4
<PAGE>
Company will execute and (after payment by the holder of any applicable transfer
taxes) deliver to any person specified by the holder of the Warrant a new
Warrant or Warrants of like tenor.
5.3 Replacement of Warrants. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of any
Warrant and, in the case of any loss, theft or destruction of any Warrant, upon
delivery of indemnity reasonably satisfactory to the Company in form and amount
or, in the case of mutilation, upon surrender of the Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
6. Registration Rights.
6.1 Piggy-Back Registration Rights.
6.1.1 Scope. If the Company shall determine to register any of its
common stock either for its own account or the account of a security holder or
holders prior to November 30, 1998, other than a registration relating solely to
(i) employee benefit plans, or (ii) registration on any registration form that
does not permit secondary sales, the Company will:
(a) promptly give written notice of the proposed registration to
the holder of this Warrant or any Warrant Stock issued or issuable upon the
exercise of this Warrant; and
(b) with respect to any Warrant Stock that has not been held for
a one- year period, include in such registration (and any related qualification
or other compliance filing under applicable blue sky laws), and in any
underwriting involved therein, all or any portion of the Warrant Stock then
issued or issuable upon exercise of this Warrant as specified in a written
request made by such holders within 30 days after receipt of the written notice
from the Company described in Section 6.1.1.
6.1.2 Underwritten Offerings.
(a) Participation in Underwriting. If the registration of which
the Company gives notice is for a registered public offering involving an
underwriting, the Company shall so advise the holders as part of the written
notice described in Section 6.1.1. In such event, the holders' rights to
registration pursuant to this Section 6 shall be conditioned upon participation
in the underwriting and the inclusion of stock in the underwriting to the extent
provided herein. Holders and the Company (and any other security holders
proposing to distribute their securities through the underwriting) shall enter
into an underwriting agreement in customary form with the representatives of the
underwriter or underwriters selected for such underwriting by the Company.
(b) Limitation on Registration Rights. Notwithstanding any other
provisions of this Section 6.1, if the representatives of the underwriter or
underwriters determine in good faith that marketing factors make it advisable to
impose a limitation on the number of secondary shares to be included in the
registration, the number of such secondary shares, if any, that may be included
in the registration and underwriting on behalf of such holders, and any other
5
<PAGE>
security holders proposing to distribute their securities of the Company through
such underwriting shall be allocated in proportion, as nearly as practicable, to
the respective amounts of securities that they had requested to be included in
such registration at the time of filing the registration statement. If such
holders disapprove of the terms of any such underwriting, they may elect to
withdraw therefrom by written notice to the Company and the representatives of
the underwriter or underwriters.
(c) Moratorium on Sales. If representatives of the underwriter or
underwriters in a registered public offering of shares by the Company exclude
any of the Warrant Stock from the offering under Section 6.1.2(b), then the
holder of those shares shall not exercise this Warrant or offer or sell any of
the Warrant Stock for the earlier of (i) a period ending 180 days following the
effective date of such registered public offering, or (ii) the date that the
underwriter agrees that an offering or sale of the Warrant Stock by the holder
may proceed.
6.2 Form S-3 Registration. If the Company does not anticipate
commencing a registration in which the holder of this Warrant may participate
under Section 6.1.1 by November 30, 1998, then the Company agrees to use its
best efforts to file with the U.S. Securities and Exchange Commission, by
November 30, 1998, a Form S-3 registration statement which registers the
holder's resale of the Warrant Stock to third parties. The holder agrees to
provide the Company, in a timely manner, any information required to be provided
by the holder in connection with the filing of that registration statement. The
Company agrees to keep the registration statement effective only until the
earlier of (a) the date as of which the holder of this Warrant may sell all of
the Warrant Stock without restriction pursuant to Rule 144 under the Securities
Act, and (b) the date on which the holder has exercised and sold all of the
Warrant Stock.
6.3 Prospectus Delivery Requirements. The holder of Warrant Stock
registered under this Section 6 shall comply with all applicable prospectus
delivery requirements, if any, required by the Securities Act and shall provide
confirmation of such deliver to the Company.
7. No Rights or Liabilities as Stockholder. Nothing herein shall give or shall
be construed to give the holder of this Warrant any of the rights of a
shareholder of the Company, including without limitation the right to vote on
matters requiring the vote of shareholders, the right to receive any dividend
declared and payable to the holders of common stock, or the right to a pro-rata
distribution upon the Company's dissolution.
8. Notices. All notices and other communications provided for herein shall be
delivered or mailed by first class mail, postage prepaid, addressed (a) if to
the holders of any Warrant, to the registered address of the holder as set forth
in the register kept at the principal office of the Company, or (b) if to the
Company, to: Sheryl A. Symonds, Vice President Administration & General Counsel,
Creekside Building, 24000 - 35th Ave S.E., Suite 200, Bothell, WA 98021, or to
the address of such other principal office of the Company as the Company shall
have furnished to each holder of any Warrants in writing; provided that the
exercise of any Warrants shall be effective only in the manner provided in
Section 1.
6
<PAGE>
9. Miscellaneous. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Warrant shall be governed by the laws of the State of Washington.
The headings of this Warrant are inserted for convenience only and shall not be
deemed to constitute a part hereof.
PACIFIC AEROSPACE & ELECTRONICS, INC.
By: DONALD A. WRIGHT
-------------------------------------
Donald A. Wright, President
7
<PAGE>
Exhibit A
NOTICE OF EXERCISE AND SUBSCRIPTION
To: Pacific Aerospace & Electronics, Inc.
c/o Vice President Administration & General Counsel
Creekside Building
24000 - 35th Ave S.E., Suite 200
Bothell, WA 98021
Exercise. The undersigned hereby irrevocably exercises its right to
purchase subscribes for ___________ shares of the Common Stock, $.001 par value
per share, of Pacific Aerospace & Electronics, Inc., a Washington corporation,
at $4.62 per share, pursuant to and in accordance with the terms and conditions
of a Common Stock Purchase Warrant dated February 3, 1998 (the "Warrant").
Deliveries. The undersigned is delivering the following items to the
Company. The undersigned acknowledges that the Company shall have no obligation
to issue the Warrant Stock subscribed for herein until the Company has received
all of these items.
o Original Notice of Exercise and Subscription signed by the holder of the
Warrant.
o Original Warrant.
o Certified or cashier's check in the amount of $_________ as payment for the
Warrant Stock being exercised.
o Confirmation of Sale and Prospectus Delivery (if legend removal is
requested; see below).
o Any other documents that the Company may reasonably require in connection
with such exercise
Certificate. The undersigned requests that a certificate for such shares be
issued in the name of ______________________ and be delivered to the following
address:
------------------------------
------------------------------
Legend. The undersigned acknowledges that if the Warrant Stock has not been
registered, or has been registered only for resale to third parties, then the
requested certificate will bear a legend as to the restrictions or conditions on
resale of the Warrant Shares as set forth in Section 3.1 of the Warrant. The
undersigned acknowledges that the Company shall have no obligation to issue an
unlegended certificate unless (a) the issuance of the Warrant Stock has been
registered on a Form S-3 registration statement or (b) if resale, of the Warrant
Stock has been registered, the Company's has received written confirmation, in a
form acceptable to the Company, of (i) the contemporaneous sale of the Warrant
Stock to a third party, and (ii) delivery of the required prospectus to the
purchaser of the Warrant Stock.
Date:-------------------- Name:------------------------------------
Signature---------------------------
Title (if applicable)---------------
Address:
------------------------------------
------------------------------------
Taxpayer ID #:----------------------
8
CONSULTING AGREEMENT
This Consulting Agreement (the "Agreement"), effective as of February 3,
1998, is entered into by and between PACIFIC AEROSPACE & ELECTRONICS, INC., a
Washington corporation (herein referred to as the "Company") and LIVIAKIS
FINANCIAL COMMUNICATIONS, INC., a California corporation (herein referred to as
the "Consultant").
RECITALS
WHEREAS, Company is a publicly held corporation with its common stock
traded through the NASDAQ National Market System; and
WHEREAS, Consultant has experience in the area of corporate finance,
investor communications and financial and investor public relations; and
WHEREAS, Company desires to engage the services of Consultant to assist and
consult with the Company in matters concerning corporate finance and to
represent the Company in investors' communications and public relations with
existing shareholders, brokers, dealers and other investment professionals as to
the Company's current and proposed activities;
NOW THEREFORE, in consideration of the promises and the mutual covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. Term of Consultancy. Company hereby agrees to retain the Consultant to
act in a consulting capacity to the Company, and the Consultant hereby agrees to
provide services to the Company commencing immediately and ending on February 3,
1999. The Company shall have an option to extend the term for an additional year
without additional consideration.
2. Duties of Consultant. The Consultant agrees that it will generally
provide the following specified consulting services through its officers and
employees during the term specified in Section 1:
a. Advise and assist the Company in developing and implementing
appropriate plans and materials for presenting the Company and its business
plans, strategy and personnel to the financial community, establishing an image
for the Company in the financial community, and creating the foundation for
subsequent financial public relations efforts;
b. Introduce the Company to the financial community;
c. With the cooperation of the Company, maintain an awareness during
the term of this Agreement of the Company's plans, strategy and personnel, as
they may evolve during such
1
<PAGE>
period, and advise and assist the Company in communicating appropriate
information regarding such plans, strategy and personnel to the financial
community;
d. Assist and advise the Company with respect to its (i) stockholder
and investor relations, (ii) relations with brokers, dealers, analysts and other
investment professionals, and (iii) financial public relations generally;
e. Perform the functions generally assigned to investor/stockholder
relations and public relations departments in major corporations, including
responding to telephone and written inquiries (which may be referred to the
Consultant by the Company); preparing press releases for the Company with the
Company's involvement and approval or reviewing press releases, reports and
other communications with or to shareholders, the investment community and the
general public; advising with respect to the timing, form, distribution and
other matters related to such releases, reports and communications; and
consulting with respect to corporate symbols, logos, names, the presentation of
such symbols, logos and names, and other matters relating to corporate image;
f. Upon the Company's approval, disseminate information regarding the
Company to shareholders, brokers, dealers, other investment community
professionals and the general investing public;
g. Upon the Company's approval, conduct meetings, in person or by
telephone, with brokers, dealers, analysts and other investment professionals to
advise them of the Company's plans, goals and activities, and assist the Company
in preparing for press conferences and other forums involving the media,
investment professionals and the general investment public;
h. At the Company's request, review business plans, strategies,
mission statements, budgets, proposed transactions and other plans for the
purpose of advising the Company of the investment community implications
thereof; and
i. Otherwise perform as the Company's financial relations and public
relations consultant.
3. Allocation of Time and Energies. The Consultant hereby promises to
perform and discharge well and faithfully the responsibilities which may be
assigned to the Consultant from time to time by the officers and duly authorized
representatives of the Company in connection with the conduct of its financial
and investor public relations and communications activities, so long as such
activities are in compliance with applicable securities laws and regulations.
Consultant shall diligently and thoroughly provide the consulting services
required hereunder. Although no specific hours-per-day requirement will be
required, Consultant and the Company agree that Consultant will perform the
duties set forth hereinabove in a diligent and professional manner. The parties
acknowledge and agree that a disproportionately large amount of the effort to be
expended and the costs to be incurred by the Consultant and the benefits to be
received by the Company are expected to occur upon and shortly after, and in any
event, within two months of the effectiveness of this
2
<PAGE>
Agreement. It is explicitly understood that Consultant's performance of its
duties hereunder will in no way be measured by the price of the Company's common
stock, nor the trading volume of the Company's common stock. It is also
understood that the Company is entering into this Agreement with Liviakis
Financial Communications, Inc. ("LFC"), a corporation and not any individual
member of LFC, and with such, Consultant will not be deemed to have breached
this Agreement if any member, officer or director of LFC leaves the firm or dies
or becomes physically unable to perform any meaningful activities during the
term of the Agreement, provided the Consultant otherwise performs its
obligations under this Agreement.
4. Remuneration. As full and complete compensation for services described
in this Agreement, the Company shall compensate Consultant as follows:
4.1 For undertaking this engagement and for other good and valuable
consideration, the Company agrees to issue and deliver to the Consultant a
"Commencement Bonus" payable in the form of Warrants to purchase 1,290,000
shares of the Company's common stock (the "Warrants"). The form and content of
the Warrant agreement is attached hereto and referenced as "Exhibit A." Among
other things, the Warrants will contain the following terms and conditions:
a. the Warrants will be exercisable at a price of Four Dollars
and Sixty-Two Cents ($4.62) per share;
b. the term of the Warrants will expire on February 10, 2002;
c. the Warrants will contain no call and/or redemption
provisions;
d. the Warrants will contain (i) "piggyback registration rights"
such that the shares of common stock issuable upon the exercise of the
Warrants may be included in the next appropriate registration, if any,
filed by the Company before November 30, 1998, subject to certain
conditions, and (ii) if no registration in which the Consultants are
permitted to participate is anticipated to occur by November 30, 1998, the
Company's agreement to use its best efforts to file a Form S-3 registration
statement by November 30, 1998 registering for resale the shares of common
stock issuable upon the exercise of the Warrants. All registration costs
shall be borne solely by the Company; and
e. the Warrants shall be exercisable after May 15, 1998.
This Commencement Bonus shall be issued to the Consultant promptly
following execution of this Agreement and the shares issuable upon exercise of
the Warrants shall, when issued and delivered to Consultant, be fully paid and
non-assessable. The Company understands and agrees that Consultant has foregone
significant opportunities to accept this engagement and that the
3
<PAGE>
Company derives substantial benefit from the execution of this Agreement and the
ability to announce its relationship with Consultant. The Warrants to purchase
1,290,000 shares of the Company's common stock issued as a Commencement Bonus,
therefore, constitute payment for Consultant's agreement to represent the
Company and are a nonrefundable, non-apportionable, and non-ratable retainer;
such Warrants are not a prepayment for future services. If the Company decides
to terminate this Agreement prior to February 3, 1999 for any reason whatsoever,
it is agreed and understood that Consultant will not be requested or demanded by
the Company to return any of the Warrants paid to it hereunder. Warrants to
purchase 967,5000 shares pursuant to this Agreement shall be evidenced by a
Warrant agreement or agreements issued in the name of Liviakis Financial
Communications, Inc. and Warrants to purchase 322,500 shares pursuant to this
Agreement shall be evidenced by a Warrant agreement or agreements issued in the
name of Robert B. Prag ("Prag").
4.2 Consultant and Prag (hereinafter referred to as "Consultants")
acknowledge that the shares of common stock to be issued pursuant to the
Warrants (collectively, the "Shares") have not been registered under the
Securities Act of 1933, as amended (the "Act"), and accordingly are "restricted
securities" within the meaning of Rule 144 of the Act. As such, the Shares may
not be resold or transferred unless the Company has received an opinion of
counsel reasonably satisfactory to the Company that such resale or transfer is
exempt from the registration requirements of the Act.
4.3 In connection with the acquisition of the Warrants and the shares
issuable upon exercise of the Warrants, the Consultant and Mr. Prag (together,
"Consultants") represent and warrant to the Company as follows:
(a) Consultants acknowledge that the Consultants have been
afforded the opportunity to ask questions of and receive answers from duly
authorized officers or other representatives of the Company concerning an
investment in the Warrants and the underlying Shares, and any additional
information which the Consultants have requested.
(b) Consultants' investment in restricted securities is
reasonable in relation to the Consultants' net worth, which is in excess of
ten (10) times the Consultants' cost basis in the Warrants. Consultants
have had experience in investments in restricted and publicly traded
securities, and Consultants have had experience in investments in
speculative securities and other investments which involve the risk of loss
of investment. Consultants acknowledge that an investment in the Warrants
is speculative and involves the risk of loss. Consultants have the
requisite knowledge to assess the relative merits and risks of this
investment without the necessity of relying upon other advisors, and
Consultants can afford the risk of loss of their entire investment in the
Warrants. Consultants are (i) accredited investors, as that term is defined
in Regulation D promulgated under the Act, and (ii) purchasers as described
in Section 25102(f)(2) of the California Corporate Securities Law of 1968,
as amended.
4
<PAGE>
(c) Consultants are acquiring the Warrants for the Consultants'
own account for long-term investment and not with a view toward resale or
distribution thereof except in accordance with applicable securities laws.
5. Financing "Finder's Fee". It is understood that in the event Consultant
introduces Company, or its nominees, to a lender or equity purchaser, not
already having a preexisting relationship with the Company, with whom Company,
or its nominees, ultimately finances or causes the completion of such financing,
Company agrees to compensate Consultant for such services with a "finder's fee"
in the amount of 2.5% of total gross funding provided by such lender or equity
purchaser, such fee to be payable in cash. Such fee will be in addition to any
fees payable by Company to any other intermediary, if any, which shall be per
separate agreements negotiated between Company and such other intermediary. It
is also understood that in the event Consultant introduces Company, or its
nominees, to an acquisition candidate, either directly or indirectly through
another intermediary, not already having a preexisting relationship with the
Company, with whom Company, or its nominees, ultimately acquires or causes the
completion of such acquisition, Company agrees to compensate Consultant for such
services with a "finder's fees" in the amount of 2% of total gross consideration
provided by such acquisition, such fee to be payable in cash. This will be in
addition to any fees payable by Company to any other intermediary, if any, which
shall be per separate agreements negotiated between Company and such other
intermediary. It is specifically understood that Consultant is not nor does it
hold itself out to be a Broker/Dealer, but is rather merely a "Finder" in
reference to the Company procuring financing sources and acquisition candidates.
The obligation contained in this Section 5 will expire one year after the
termination of this Agreement.
5.1 It is further understood that Company, and not Consultant, is
responsible to perform any and all due diligence on such lender, equity
purchaser or acquisition candidate introduced to it by Consultant under this
Agreement, prior to Company receiving funds or closing on any acquisition.
However, Consultant will not introduce any parties to Company about which
Consultant has any prior knowledge of questionable, unethical or illicit
activities.
5.2 Company agrees that said compensation to Consultant shall be paid
in full at the time said financing or acquisition is closed. Moreover, said
compensation will be a condition precedent to the closing of such financing or
acquisition and Company shall execute any and all documents necessary to effect
said compensation.
5.3 As further consideration to Consultant, Company, or its nominees,
agrees to pay with respect to any financing or acquisition candidate provided
directly or indirectly to the Company by any lender or equity purchaser covered
by this Section 5, during the period of one year from the date of this
Agreement, a fee to Consultant equal to that outlined in Section 5 herein.
5.4 Consultant will notify Company of introductions it makes for
potential sources of financing or acquisitions in a timely manner (within
approximately 3 days of introduction) via facsimile memo. If Company has a
preexisting relationship with such nominee and believes such
5
<PAGE>
party should be excluded from this Agreement, then Company will notify
Consultant immediately of such circumstance via facsimile memo.
6. Expenses. Consultant agrees to pay for all its expenses (phone, mailing,
labor, etc.), other than extraordinary items (travel required by/or specifically
requested by the Company, luncheons or dinners for large groups of investment
professionals, mass faxing to a sizable percentage of the Company's
constituents, investor conference calls, print advisements in publications,
etc.) approved by the Company prior to its incurring an obligation for
reimbursement.
7. Indemnification. The Company warrants and represents that all oral
communications, written documents or materials furnished to Consultant by the
Company with respect to financial affairs, operations, profitability and
strategic planning of the Company are accurate in all material respects and
Consultant will protect, indemnify and hold harmless Consultant against any
claims or litigation including any damages, liability, cost and reasonable
attorney's fees as incurred with respect thereto ("Damages") resulting from
Consultant's communication or dissemination of any said information, documents
or materials not designated by the Company to the Consultant as "confidential"
or "Company private," excluding any such claims or litigation resulting from
Consultant's communication or dissemination of information not provided or
authorized by the Company. Consultant will indemnify and hold harmless the
Company, its officers, directors, employees, agents and affiliates against any
Damages resulting from Consultant's gross negligence or willful misconduct, or
from Consultant's dissemination of information that the Company has advised
Consultant is not accurate or is materially misleading.
8. Representations. Consultant represents that it is not required to
maintain any licenses any registrations under federal or any state regulations
necessary to perform the services set forth herein. Consultant acknowledges
that, to the best of its knowledge, the performance of the services set forth
under this Agreement will not violate any rule or provision of any regulatory
agency having jurisdiction over Consultant. Consultant acknowledges that, to the
best of its knowledge, Consultant and its officers and directors are not the
subject of any investigation, claim, decree or judgment involving any violation
of the SEC or securities laws. Consultant further acknowledges that it is not a
securities Broker/Dealer or a registered investment advisor. Company
acknowledges that, to the best of its knowledge, that it has not violated any
rule or provision of any regulatory agency having jurisdiction over the Company
that would have a material adverse effect on the Company. Company acknowledges
that, to the best of its knowledge, Company is not the subject of any
investigation, claim, decree or judgment involving any violation of the SEC or
securities laws.
9. Legal Representation. The Company acknowledges that it has been
represented by independent legal counsel in the preparation of this Agreement.
Consultant represents that they have consulted with independent legal counsel
and/or tax, financial and business advisors, to the extent the Consultant deemed
necessary.
10. Status as Independent Contractor. Consultant's engagement pursuant to
this Agreement shall be as an independent contractor, and not as an employee,
officer or other agent of
6
<PAGE>
the Company. Neither party to this Agreement shall represent or hold itself out
to be the employer or employee of the other. Consultant further acknowledges the
consideration provided hereinabove is a gross amount of consideration and that
the Company will not withhold from such consideration any amounts as to income
taxes, social security payments or any other payroll taxes. All such income
taxes and other such payment shall be made or provided for by Consultant and the
Company shall have no responsibility or duties regarding such matters. Neither
the Company or the Consultant possess the authority to bind each other in any
agreements without the express written consent of the entity to be bound.
11. Attorneys' Fees. If any legal action or any arbitration or other
proceeding is brought for the enforcement or interpretation of this Agreement,
or because of an alleged dispute, breach, default or misrepresentation in
connection with or related to this Agreement, the successful or prevailing party
shall be entitled to recover reasonable attorneys' fees and other costs in
connection with that action or proceeding, in addition to any other relief to
which it or they may be entitled, including those incurred on appeal or in
bankruptcy proceedings.
12. Waiver. The waiver by either party of a breach of any provision of this
Agreement by the other party shall not operate or be construed as a waiver of
any subsequent breach by such other party.
13. Notices. All notices, requests, and other communications hereunder
shall be deemed to be duly given if hand delivered, sent by courier, sent via
confirmed facsimile transmission, or sent by U.S. mail, postage prepaid,
addressed to the other party at the address as set forth herein below:
To the Company: Pacific Aerospace & Electronics, Inc.
Mr. Don A. Wright, President & CEO
434 Olds Station Road
Wenatchee, WA 98801
Fax: (509) 667-9696
To the Consultant: Liviakis Financial Communications, Inc.
John M. Liviakis, President
2420 K Street, Suite 220
Sacramento, CA 95816
Fax: (916) 448-6089
It is understood that either party may change the address to which notices
for it shall be addressed by providing notice of such change to the other party
in the manner set forth in this paragraph.
14. Choice of Law, Jurisdiction and Venue. This Agreement shall be governed
by, construed and enforced in accordance with the laws of the State of
California. The parties agree that
7
<PAGE>
Sacramento County, California, will be the venue of any dispute and will have
jurisdiction over all parties.
15. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the alleged breach thereof, or relating to Consultant's
activities or remuneration under this Agreement, shall be settled by binding
arbitration in California, in accordance with the applicable rules of the
American Arbitration Association, and judgment on the award rendered by the
arbitrator(s) shall be binding on the parties and may be entered in any court
having jurisdiction thereof. The provisions of Title 9 of Part 3 of the
California Code of Civil Procedure, including section 1283.05, and successor
statutes, permitting expanded discovery proceedings shall be applicable to all
disputes that are arbitrated under this paragraph.
16. Complete Agreement. This Agreement contains the entire agreement of the
parties relating to the subject matter hereof. This Agreement and its terms may
not be changed orally but only by an agreement in writing signed by the party
against whom enforcement of any waiver, change, modification, extension or
discharge is sought.
AGREED TO:
"Company" PACIFIC AEROSPACE & ELECTRONICS , INC.
Date: February 3, 1998 By: DON A. WRIGHT
-------------------- -------------------------------------
Don A. Wright, President & CEO
"Consultants" LIVIAKIS FINANCIAL COMMUNICATIONS, INC.
Date: February 3, 1998 By: JOHN M. LIVIAKIS ROBERT B. PRAG
-------------------- ---------------- ------------------
John M. Liviakis Robert B. Prag
President Sr. Vice President
8
Exhibit 10.2
DEBT RESTRUCTURING AGREEMENT
THIS AGREEMENT is made as of April 6, 1998, between PACIFIC AEROSPACE &
ELECTRONICS, INC. ("PA&E") and ORCA TECHNOLOGIES, INC. ("Orca") and its wholly
owned subsidiaries, TELEVAR, INC. ("Televar") and MONITRx, INC. ("MONITRx").
A. PA&E has previously loaned certain amounts to Orca, Televar, and MONITRx
(the "Orca Loans"). The Orca Loans are evidenced by a series of demand
promissory notes and secured by certain assets of Orca and its subsidiaries.
PA&E has not yet demanded repayment of the Orca Loans. PA&E has also incurred
certain guarantee obligations on behalf of Orca.
B. PA&E has also loaned certain amounts to Brigadoon.com, Inc.
("Brigadoon"), in the original principal amount of $1,630,000, pursuant to
demand promissory notes secured by certain assets of Brigadoon (the "Brigadoon
Loans"). PA&E has demanded repayment of the Brigadoon Loans, and Brigadoon has
defaulted in its obligations. PA&E has filed a lawsuit in King County Superior
Court against Brigadoon, and PA&E and Orca are parties to an involuntary
bankruptcy action filed against Brigadoon. Orca is currently negotiating with
Brigadoon to acquire Brigadoon's assets.
C. PA&E and Orca have agreed to restructure the Orca Loans and guarantees
and to provide for the purchase by Orca of PA&E's interest in the Brigadoon
Loans, on the terms and conditions set forth in this agreement.
For valuable consideration, the receipt and sufficiency of which are
acknowledged, the parties agree as follows:
1. Purchase of Brigadoon Loans. PA&E agrees to sell to Orca, and Orca
agrees to purchase from PA&E, all of PA&E's interest in the Brigadoon Loans,
together with all of PA&E's interest in the security for the Brigadoon Loans,
any legal actions filed by PA&E with respect to the Brigadoon Loans, and PA&E's
warrant to purchase Brigadoon common stock. In consideration for the purchase,
Orca, Televar, and MONITRx agree to execute and deliver to PA&E at closing a
promissory note (the "Brigadoon Note") in a form to be prepared by PA&E, in the
original principal amount of $950,000. The Brigadoon Note will bear interest at
8% per annum and will be payable over a five-year period from the date of the
note, which will be March 1, 1998, in monthly payments of accrued interest only
for the first twelve months and then payable for the final four years in monthly
payments of principal and accrued interest, amortized over four years.
2. Orca Loans. PA&E agrees to cancel, at closing, all of the outstanding
Orca Loans and to release all security that it holds for the Orca Loans in
exchange for 2,109,709 shares of common stock of Orca (the "Orca Shares"). For
purposes of
1
<PAGE>
calculating the number of shares of Orca common stock to be issued to PA&E at
closing, the Orca Shares were valued at $2.00 per share. Orca represents and
warrants that the Orca Shares,combined with the 179,600 shares of Orca common
stock already owned by PA&E, will not exceed 19.9% of the issued and outstanding
common stock of Orca at the closing date.
3. Registration Rights. Orca agrees to grant registration rights to PA&E
with respect to the Orca Shares and to execute at closing a registration rights
agreement to be prepared by PA&E providing for demand registration rights and,
in the event of an underwritten public offering, piggyback registration rights,
which will be effective after the earliest of: (a) the closing of Orca's third
round of financing (the "Financing"), and (b) the first anniversary of the
closing of the transactions contemplated in this agreement. For purposes of
determining when the Financing has occurred, Orca's first round of financing
shall be deemed to have occurred prior to the date of this agreement and may
include up to an additional $1 million under the same terms and conditions. Any
amount that Orca subsequently raises in a private placement or public offering
of equity or debt (other than commercial or trade debt) will be deemed to be
another round of financing.
4. Guarantees of Orca Debt. PA&E agrees to guarantee the following Orca
debt, on the conditions described below:
a. Key Bank Guarantee. PA&E will continue to guarantee the existing
loan from Key Bank (the "Key Bank Loan") to Orca for 18 months from the closing
date; provided that Orca uses its best efforts to obtain Key Bank's agreement by
closing to reduce PA&E's liability under the guarantee to no more than $950,000.
If Orca has not obtained such agreement by closing, Orca will continue to use
its best efforts to obtain such agreement after closing. Orca, Televar and
MONITRx agree to indemnify and hold PA&E harmless against any payments it makes
as a guarantor on the Key Bank Loan and any other costs and expenses (including
reasonable attorneys' fees and expenses) related to any such payments.
b. Equipment Guarantee. PA&E will continue to guarantee Orca's
obligation with respect to certain equipment acquired from Network Computing
Architects, Inc., which Orca is financing through an equipment lease with
Comdisco, Inc., up to a maximum of $373,421.00 (the "Comdisco Guarantee"). Orca
and PA&E agree to terminate PA&E's obligation under the Comdisco Guarantee no
later than the closing date of the Financing, and Orca acknowledges that this
may require it to purchase the equipment out of the proceeds of the Financing or
to make other arrangements for financing the equipment. Orca, Televar and
MONITRx agree to indemnify and hold PA&E harmless against any payments it makes
as a guarantor on the Comdisco Guarantee and any other costs and expenses
(including reasonable attorneys' fees and expenses) related to any such
payments.
5. Covenant. PA&E and Orca will each use their best efforts to obtain
approval of this agreement and the transactions described herein from their
respective Board of Directors by April 9, 1998.
2
<PAGE>
6. Closing. The closing of the transactions described in this agreement
will occur as soon as practicable after execution of this agreement, but no
later than April 17, 1998. At the closing, each party will execute and deliver
any instruments, certificates, and agreements required to effect the foregoing
transactions, in form reasonably acceptable to the parties and their counsel.
7. Entire Agreement; Modifications. This agreement supersedes and replaces
all prior agreements of the parties with respect to the restructuring of the
Orca Loans or the purchase of the Brigadoon Loans. This agreement may not be
modified by any oral agreements, either express or implied, and all
modifications must be in writing and signed by the parties hereto.
8. Counterparts. This agreement may be executed in counterparts, and when
so executed shall constitute one agreement.
PACIFIC AEROSPACE & ELECTRONICS, INC.
By: /s/ DONALD A. WRIGHT
-------------------------------------
Donald A. Wright, President
ORCA TECHNOLOGIES, INC.
By /s/ ROGER VALLO
-------------------------------------
Its President
---------------------------------
TELEVAR, INC.
By /s/ DOUGLAS EBSTYNE
--------------------------------------
Its President
----------------------------------
MONITRx, INC.
By /s/ NORMAN PLUMMER
--------------------------------------
Its President
----------------------------------
3
Exhibit 10.3
PROMISSORY NOTE
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
----------- ---------- ---------- -------- ----- ---------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$712,086.00 03-18-1998 03-18-2008 9001 805 E 357577 JCT02
-----------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this
document to any particular loan or item.
-----------------------------------------------------------------------------------------------------
Borrower: PACIFIC AEROSPACE & ELECTRONICS, INC. LENDER: KEYBANK NATIONAL ASSOCIATION
434 OLDS STATION ROAD WEN/ML COMMERCIAL BANKING CENTER
WENATCHEE, WA 98801 102 SOUTH WENATCHEE AVENUE
P.O. BOX 1301 WA-31-35-0163
WENATCHEE, WA 98807
======================================================================================================
Principal Amount: $712,086.00 Initial Rate: 8.50% Date of Note: March 18, 1998
</TABLE>
PROMISE TO PAY. PACIFIC AEROSPACE & ELECTRONICS, INC. ("Borrower") promises to
pay to KEYBANK NATIONAL ASSOCIATION ("Lender"), or order, in lawful money of the
United States of America, the principal amount of Seven Hundred Twelve Thousand
Eighty Six & 00/100 Dollars ($712,086.00), together with interest in the unpaid
principal balance from March 18, 1998, until paid in full.
PAYMENT. Subject to any payment changes resulting from changes in the Index,
Borrower will pay this loan in 119 regular payments of $7,065.72 each and one
irregular last payment estimated at $350,406.25. Borrower's first payment is due
April 18, 1998, and all subsequent payments are due on the same day of each
month after that. Borrower's final payment due March 18, 2008, will be for all
principal and all accrued interest not yet paid. Payments include principal and
interest. Interest on this Note is computed on a 365/360 simple interest basis;
that is, by applying the ratio of the annual interest rate over a year of 360
days, times the outstanding principal balance, times the actual number of days
the principal balance is outstanding. Borrower will pay Lender at Lender's
address shown above or at such other place as Lender may designate in writing.
Unless otherwise agreed or required by applicable law, payments will be applied
first to accrued unpaid interest, then to principal, and any remaining amount to
any unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an index which is the Prime Rate announced by
Lender (the "Index"). The interest rate will change automatically and
correspondingly on the date of each announced change on the Index by Lender. The
Index is not necessarily the lowest rate charged by Lender on its loans and is
set by Lender in its sole discretion. If the Index becomes unavailable during
the term of this loan, the Lender may designate a substitute index after
notifying Borrower. Lender will tell Borrower the current index rate upon
Borrower's request. Borrower understands that Lender may make loans based on
other rates as well. The interest rate change will not occur more often than
each day that the Index changes. The Index currently is 8.500% per annum. The
interest rate to be applied to the unpaid principal balance of this Note will be
at a rate equal to the Index, resulting in an initial rate of 8.500% per annum.
NOTICE: Under no circumstances will the interest rate on this Note be more than
the maximum rate allowed by applicable law. Whenever increases occur in the
interest rate, Lender, at its option, may do one or more of the following: (a)
increase Borrower's payments to ensure Borrower's loan will pay off by its
original final maturity date, (b) increase Borrower's payments to cover accruing
interest, (c) increase the number of Borrower's payments, and (d) continue
Borrower's payments at the same amount and increase Borrower's final payment.
PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance charges
are earned fully as of the date of the loan and will not be subject to refund
upon early payment (whether voluntary or as a result of default), except as
otherwise required by law. Except for the foregoing, Borrower may pay without
penalty all or a portion of the amount owed earlier than it is due. Early
payments will not, unless agreed to by Lender in writing, relieve Borrower or
Borrower's obligation to continue to make payments under the payment schedule.
Rather, they will reduce the principal balance due and may result in Borrower
making fewer payments.
<PAGE>
03-18-1998 PROMISSORY NOTE Page 2
Loan No 9001 (Continued)
================================================================================
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment or $10.00, whichever is greater.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note. (c) Any representation or statement made or
furnished to Lender by Borrower or on Borrower's behalf is false or misleading
in any material respect either now or at the time made or furnished. (d)
Borrower becomes insolvent, a receiver is appointed for any part of Borrower's
property, Borrower makes an assignment for the benefit of creditors, or any
proceeding is commended either by Borrower or against Borrower under any
bankruptcy or insolvency laws. (e) Any creditor tries to take any of Borrower's
property on or in which Lender has a lien or security interest. This includes a
garnishment of any of Borrower's accounts with Lender. (f) Any guarantor dies or
any of the other events described in this default section occurs with respect to
any guarantor of this Note. (g) A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of payment or performance
of the Indebtedness is impaired. If any default, other than a default in
payment, is curable and if Borrower has not been given a notice of a breach of
the same provision of this Note within the preceding twelve (12) months, it may
be cured (and no event of default will have occurred) if Borrower, after
receiving written notice from Lender demanding cure of such default: (a) cures
the default within fifteen (15) days; or (b) if the cure requires more than
fifteen (15) days, immediately initiates steps which Lender deems in Lender's
sole discretion to be sufficient to cure the default and thereafter continues
and completes all reasonable and necessary steps sufficient to produce
compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on this Note to 5.000
percentage points over the Index while the default remains uncured. The interest
rate will not exceed the maximum rate permitted by applicable law. Lender may
hire or pay someone else to help collect this Note if Borrower does not pay.
Borrower also will pay Lender that amount. This includes, subject to any limits
under applicable law, Lender's attorneys' fees and Lender's legal expenses
whether or not there is a lawsuit, including attorneys' fees and legal expenses
for bankruptcy proceedings (including efforts to modify or vacate any automatic
stay or injunction), appeals, and any anticipated post-judgment collection
services. If not prohibited by applicable law, Borrower also will pay any court
costs, in addition to all other sums provided by law. This Note has been
delivered to Lender and accepted by Lender in the State of Washington. If there
is a lawsuit, Borrower agrees upon Lender's request to submit to the
jurisdiction of the courts of King or Pierce County, State of Washington. Lender
and Borrower hereby waive the right to any jury trial in any action, proceeding,
or counterclaim brought by either Lender or Borrower against the other. This
Note shall be governed by and construed in accordance with the laws of the State
of Washington.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $10.00 if Borrower
makes a payment on Borrower's loan and the check or preauthorized charge with
which Borrower pays is later dishonored.
LIBOR ADDENDUM TO PROMISSORY NOTE. THE TERMS IN THE LIBOR ADDENDUM ATTACHED TO
THIS NOTE ARE INCORPORATED HEREIN.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest and notice of dishonor. Upon any charge
in the terms of this Note, and unless otherwise expressly stated in writing, no
party who signs this Note, whether as maker, guarantor, accommodation maker or
endorser, shall be released from liability. All such parties agree that Lender
may renew or extend (repeatedly and for any length of time) this loan, or
release any party or guarantor or collateral; or impair, fail to realize upon or
perfect Lender's security interest in the collateral; and take any other action
deemed necessary by Lender without the consent of or notice to anyone. All such
parties also agree that Lender may modify this loan without the consent of or
notice to anyone other than the party with whom the modification is made.
<PAGE>
03-18-1998 PROMISSORY NOTE Page 3
Loan No 9001 (Continued)
================================================================================
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
- --------------------------------------------------------------------------------
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR
FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
- --------------------------------------------------------------------------------
BORROWER:
PACIFIC AEROSPACE & ELECTRONICS, INC.
By: /s/ DONALD A. WRIGHT
-----------------------------------
DONALD A. WRIGHT, CEO & PRESIDENT
Exhibit 10.4
COMMERCIAL SECURITY AGREEMENT
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
----------- ---------- ---------- -------- ----- ---------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$712,086.00 03-18-1998 03-18-2008 9001 805 E 357577 JCT02
-----------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this
document to any particular loan or item.
-----------------------------------------------------------------------------------------------------
Borrower: PACIFIC AEROSPACE & ELECTRONICS, INC. LENDER: KEYBANK NATIONAL ASSOCIATION
434 OLDS STATION ROAD WEN/ML COMMERCIAL BANKING CENTER
WENATCHEE, WA 98801 102 SOUTH WENATCHEE AVENUE
P.O. BOX 1301 WA-31-35-0163
WENATCHEE, WA 98807
Grantor: PACIFIC COAST TECHNOLOGIES, INC.
</TABLE>
================================================================================
THIS COMMERCIAL SECURITY AGREEMENT is entered into among PACIFIC AEROSPACE &
ELECTRONICS, INC. (referred to below as "Borrower"); PACIFIC COAST TECHNOLOGIES,
INC. (referred to below as "Grantor"); and KEYBANK NATIONAL ASSOCIATION
(referred to below as "Lender"). For valuable consideration, Grantor grants to
Lender a security interest in the Collateral to secure the Indebtedness and
agrees that Lender shall have the rights stated in this Agreement with respect
to the Collateral, in addition to all other rights which Lender may have by law.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollars amounts shall mean amounts in lawful money of the United States of
America.
Agreement. The word "Agreement" means this Commercial Security Agreement,
as this Commercial Security Agreement may be amended or modified from time
to time, together with all exhibits and schedules attached to this
Commercial Security Agreement from time to time.
Borrower. The word "Borrower" means each and every person or entity signing
the Note, including without limitation PACIFIC AEROSPACE & ELECTRONICS,
INC.
Collateral. The word "Collateral" means the following described property of
Grantor, whether now owned or hereafter acquired, whether now existing or
hereafter arising, and wherever located:
All fixtures, together with the following specifically described
property: ADDITION TO BUILDING SEVEN (7)
In addition, the word "Collateral" includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:
(a) All attachments, accessions, accessories, tools, parts, supplies,
increases, and additions to and all replacements of and
substitutions for any property described above.
(b) All products and produce of any of the property described in this
Collateral section.
(c) All accounts, general intangibles, instruments, rents, monies,
payments, and all other rights, arising out of a sale, lease, or
other disposition of any of the property described in this
Collateral section.
-1-
<PAGE>
03-18-1998 COMMERCIAL SECURITY AGREEMENT Page 2
Loan No 9001 (Continued)
================================================================================
(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property
described in this Collateral section.
(e) All records and data relating to any of the property described in
this Collateral section, whether in the form of a writing,
photograph, microfilm, microfiche, or electronic media, together
with all of Grantor's right, title, and interest in and to all
computer software required to utilize, create, maintain, and
process any such records or data on electronic media.
Fixtures are and will be located on the following described real estate:
IN THE COUNTY OF CHELAN, STATE OF WASHINGTON, THAT PORTION OF THE
NORTHEAST QUARTER OF THE NORTHEAST QUARTER OF SECTION 28, TOWNSHIP 23
NORTH RANGE 20, E.W.M. CHELAN COUNTY WASHINGTON FURTHER DESCRIBED AS
FOLLOWS:
COMMENCING AT THE NORTHEAST CORNER OF SECTION 28; THENCE SOUTH
0(degree)35'04" EAST 616.14 FEET ALONG THE EAST LINE OF SECTION 28;
THENCE SOUTH 89(degree)24'56" WEST 30.00 FEET TO THE POINT OF
BEGINNING; THENCE SOUTH 0(degree)35'14" EAST 281.23 FEET; THENCE
179.41 FEET ALONG A 120.00 FOOT RADIUS CURVE TO THE RIGHT, WITH A
CENTRAL ANGLE OF 85(degree)39'42"; THENCE SOUTH 85(degree)04'02" WEST
88.03 FEET; THENCE 54.17 FEET ALONG A 940.00 FOOT RADIUS CURVE TO THE
LEFT WITH A CENTRAL ANGLE OF 3(degree)18'31"; THENCE NORTH
0(degree)01'30" EAST 531.08 FEET; THENCE SOUTH 89(degree)24'56" WEST
57.60 FEET; THENCE 181.13 FEET ALONG AN 830 FOOT RADIUS CURVE TO THE
LEFT WITH A CHORD BEARING NORTH 29(degree)28'17" EAST 180.77 FEET;
THENCE NORTH 23(degree)13'11" EAST 97.48 FEET; THENCE 43.46 FEET ALONG
A 27.00 FOOT RADIUS CURVE WITH A CHORD BEARING NORTH 69(degree)19'59"
EAST 38.92 FEET; THENCE SOUTH 64(degree)29'15" EAST 110.52 FEET;
THENCE 77.23 FEET ALONG A 69.33 RADIUS CURVE TO THE RIGHT WITH A CHORD
BEARING SOUTH 32(degree)30'27" EAST 73.30 FEET; THENCE SOUTH
0(degree)35'41" EAST 226.12 FEET TO THE TRUE POINT OF BEGINNING.
INCLUDING BUT NOT LIMITED TO GRANTORS INTEREST IN THAT CERTAIN LEASE
DATED FEBRUARY 1, 1993, AND LAST AMENDED JUNE 14, 1997, WITH GRANTOR
AS TENANT. PORT OF CHELAN COUNTY AS LANDLORD.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "Events of Default."
Grantor. The word "Grantor" means PACIFIC COAST TECHNOLOGIES, INC. Any
Grantor who signs this Agreement, but does not sign the Note, is signing
this Agreement only to grant a security interest in Grantor's interest in
the Collateral to Lender and is not personally liable under the Note except
as otherwise provided by contract or law (e.g., personal liability under a
guaranty or as a surety).
Guarantor. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with the Indebtedness.
Indebtedness. The word "Indebtedness" means the indebtedness evidenced by
the Note, including all principal and interest, together with all other
indebtedness and costs and expenses for which Grantor or Borrower is
responsible under this Agreement or under any of the Related Documents.
-2-
<PAGE>
03-18-1998 COMMERCIAL SECURITY AGREEMENT Page 3
Loan No 9001 (Continued)
================================================================================
Lender. The word "Lender" means KEYBANK NATIONAL ASSOCIATION, its
successors and assigns.
Note. The word "Note" means the note or credit agreement dated March 18,
1998, in the principal amount of $712,086.00 from Borrower to Lender,
together with all renewals of, extensions of, modifications of,
refinancings of, consolidations of and substitutions for the note or credit
agreement.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
BORROWER'S WAIVERS AND RESPONSIBILITIES. Except as otherwise required under this
Agreement or by applicable law, (a) Borrower agrees that Lender need not tell
Borrower about any action or inaction Lender takes in connection with this
Agreement; (b) Borrower assumes the responsibility for being and keeping
informed about the Collateral; and (c) Borrower waives any defenses that may
arise because of any action or inaction of Lender, including without limitation
any failure of Lender to realize upon the Collateral or any delay by Lender in
realizing upon the Collateral; and Borrower agrees to remain liable under the
Note no matter what action Lender takes or fails to take under this Agreement.
GRANTOR'S REPRESENTATIONS AND WARRANTIES. Grantor warrants that: (a) this
Agreement is executed at Borrower's request and not at the request of Lender;
(b) Grantor has the full right, power and authority to enter into this Agreement
and to pledge the Collateral to Lender; (c) Grantor has established adequate
means of obtaining from Borrower on a continuing basis information about
Borrower's financial condition; and (d) Lender has made no representation to
Grantor about Borrower or Borrower's creditworthiness.
GRANTOR'S WAIVERS. Grantor waives all requirements of presentment, protest,
demand, and notice of dishonor or non-payment to Grantor, Borrower, or any other
party to the Indebtedness or the Collateral. Lender may do any of the following
with respect to any obligation of any Borrower, without first obtaining the
consent of Grantor: (a) grant any extension of time for any payment, (b) grant
any renewal, (c) permit any modification of payment terms or other terms, or (d)
exchange or release any Collateral or other security. No such act or failure to
act shall affect Lender's rights against Grantor or the Collateral.
If now or hereafter (a) Borrower shall be or become insolvent, and (b) the
Indebtedness shall not at all times until paid be fully secured by collateral
pledged by Borrower, Grantor hereby forever waives and relinquishes in favor of
Lender and Borrower, and their respective successors, any claim or right to
payment Grantor may now have or hereafter have or acquire against Borrower, by
subrogation or otherwise, so that at no time shall Grantor be or become a
"creditor" of Borrower within the meaning of 11 U.S.C. section 547(b), or any
successor provision of the Federal bankruptcy laws.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
Perfection of Security Interest. Grantor agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's security interest in the Collateral. Upon
request of Lender, Grantor will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Grantor will note
Lender's interest upon any and all chattel paper if not delivered to Lender
for possession by Lender. Grantor hereby appoints Lender as its irrevocable
attorney-in-fact for the purpose of executing any documents necessary to
perfect or to continue the security interest granted in this Agreement.
Lender may at any time, and without further authorization from Grantor,
file a carbon, photographic or other reproduction of any financing
statement or of this Agreement for use as a financing statement. Grantor
will reimburse Lender for all expenses for the perfection and the
continuation of the perfection of Lender's security interest in the
Collateral. Grantor promptly will notify Lender before any change in
Grantor's name including any change to the assumed business names of
Grantor.
-3-
<PAGE>
03-18-1998 COMMERCIAL SECURITY AGREEMENT Page 4
Loan No 9001 (Continued)
================================================================================
No Violation. The execution and delivery of this Agreement will not violate
any law or agreement governing Grantor or to which Grantor is a party, and
its articles or agreements relating to entity incorporation, organization
or existence do not prohibit any term or condition of this Agreement.
Enforceability of Collateral. To the extent the Collateral consists of
accounts, chattel paper, or general intangibles, the Collateral is
enforceable in accordance with its terms, is genuine, and complies with
applicable laws concerning form, content and manner of preparation and
execution, and all persons appearing to be obligated on the Collateral have
authority and capacity to contract and are in fact obligated as they appear
to be on the Collateral.
Removal of Collateral. Grantor shall keep the Collateral (or to the extent
the Collateral consists of intangible property such as accounts, the
records concerning the Collateral) at Grantor's address shown above, or at
such other locations as are acceptable to Lender. Some or all of the
Collateral may be located at the real property described above. Except in
the ordinary course of its business, including the sales of inventory,
Grantor shall not remove the Collateral from its existing locations without
the prior written consent of Lender. To the extent that the Collateral
consists of vehicles, or other titled property, Grantor shall not take or
permit any action which would require application for certificates of title
for the vehicles outside the State of Washington, without the prior written
consent of Lender.
Transactions Involving Collateral. Except for inventory sold or accounts
collected or other actions taken in the ordinary course of Grantor's
business, Grantor shall not sell, offer to sell, or otherwise transfer or
dispose of the Collateral. Grantor shall not pledge, mortgage, encumber or
otherwise permit the Collateral to be subject to any lien, security
interest, encumbrance, or charge, other than the security interest provided
for in this Agreement, without the prior written consent of Lender. This
includes security interests even if junior in right to the security
interests granted under this Agreement. Unless waived by Lender, all
proceeds from any disposition of the Collateral (for whatever reason) shall
be held in trust for Lender and shall not be commingled with any other
funds; provided however, this requirement shall not constitute consent by
Lender to any sale or other disposition. Upon receipt, Grantor shall
immediately deliver any such proceeds to Lender.
Title. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement. No financing statement
governing any of the Collateral is on file in any public office other than
those which reflect the security interest created by this Agreement or to
which Lender has specifically consented. Grantor shall defend Lender's
rights in the Collateral against the claims and demands of all other
persons.
Maintenance and Inspection of Collateral. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not commit
or permit damage to or destruction of the Collateral or any part of the
Collateral. Lender and its designated representatives and agents shall have
the right at all reasonable times to examine, inspect, and audit the
Collateral wherever located. Grantor shall immediately notify Lender of all
cases involving the return, rejection, repossession, loss or damage of or
to any Collateral; of any request for credit or adjustment or of any other
dispute arising with respect to the Collateral; and generally of all
happenings and events affecting the Collateral or the value or the amount
of the Collateral.
Taxes, Assessments and Liens. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon the
Agreement, upon any promissory note or notes evidencing the Indebtedness,
or upon any of the other Related Documents. Grantor may withhold any such
payment or may elect to contest any lien if Grantor is in good faith
conducting an appropriate proceeding to contest the obligation to pay and
so long as Lender's interest in the Collateral is not jeopardized in
Lender's sole opinion. If the Collateral is subjected to a lien which is
not discharged within fifteen (15) days, Grantor shall deposit with Lender
cash, a sufficient corporate surety bond or other security satisfactory to
Lender in an amount adequate to provide for the discharge of the lien plus
any interest, costs, attorneys'
-4-
<PAGE>
03-18-1998 COMMERCIAL SECURITY AGREEMENT Page 5
Loan No 9001 (Continued)
================================================================================
fees or other charges that could accrue as a result of foreclosure or sale
of the Collateral. In any contest Grantor shall defend itself and Lender
and shall satisfy any final adverse judgment before enforcement against the
Collateral. Grantor shall name Lender as an additional obligee under any
surety bond furnished in the contest proceedings.
Compliance With Governmental Requirements. Grantor shall comply promptly in
all material respects with all laws, ordinances, rules and regulations of
all governmental authorities, now or hereafter in effect, applicable to the
ownership, production, disposition, or use of the Collateral. Grantor may
contest in good faith any such law, ordinance or regulation and withhold
compliance during any proceeding, including appropriate appeals, so long as
Lender's interest in the Collateral, in Lender's opinion, is not
jeopardized.
Hazardous Substances. Grantor represents and warrants that, except as
disclosed to Lender, the Collateral never has been, and never will be so
long as this Agreement remains a lien on the Collateral, used for the
generation, manufacture, storage, transportation, treatment, disposal,
release or threatened release of any hazardous waste or substance, as those
terms are defined in the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section
9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act
of 1986, Publ. L. No. 99-499 ("SARA"), the Hazardous Materials
Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other
applicable state or Federal laws, rules, or regulations adopted pursuant to
any of the foregoing. The terms "hazardous waste" and "hazardous substance"
shall also include, without limitation, petroleum and petroleum by-products
or any fraction thereof and asbestos. The representations and warranties
contained herein are based on Grantor's due diligence in investigating the
Collateral for hazardous wastes and substances. Grantor hereby (a) releases
and waives any future claims against Lender for indemnity or contribution
in the event Grantor becomes liable for cleanup or other costs under any
such laws, and (b) agrees to indemnify and hold harmless Lender against,
any and all claims and losses resulting from a breach of this provision of
this Agreement. This obligation to indemnify shall survive the payment of
the Indebtedness and the satisfaction of this Agreement. (Any such
disclosure appears on the Environmental Addendum attached hereto and
incorporated herein by this reference and if there is no such addendum or
the addendum is marked "not applicable," then there has been no such
disclosure.)
Maintenance of Casualty Insurance. Grantor shall procure and maintain all
risks insurance, including without limitation fire, theft and liability
coverage together with such other insurance as Lender may require with
respect to the Collateral, in form, amounts, coverages and basis reasonably
acceptable to Lender and issued by a company or companies reasonably
acceptable to Lender. Grantor, upon request of Lender, will deliver to
Lender from time to time the policies or certificates of insurance in form
satisfactory to Lender, including stipulations that coverages will not be
cancelled or diminished without at least ten (10) days' prior written
notice to Lender and not including any disclaimer of the insurer's
liability for failure to give such a notice. Each insurance policy also
shall include an endorsement providing that coverage in favor of Lender
will not be impaired in any way by any act, omission or default of Grantor
or any other person. In connection with all policies covering assets in
which Lender holds or is offered a security interest, Grantor will provide
with such loss payable or other endorsements as Lender may require. If
Grantor at any time fails to obtain or maintain any insurance as required
under this Agreement, Lender may (but shall not be obligated to) obtain
such insurance as Lender deems appropriate, including if it so chooses
"single interest insurance," which will cover only Lender's interest in the
Collateral.
Application of Insurance Proceeds. Grantor shall promptly notify Lender of
any material loss or damage to the Collateral. Lender may make proof of
loss if Grantor fails to do so within fifteen (15) days of the casualty.
All proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral. If Lender
consents to repair or replacement of the damaged or destroyed Collateral,
Lender shall, upon satisfactory proof of expenditure, pay or reimburse
Grantor from the proceeds for the reasonable cost of repair or restoration.
If Lender does not consent to repair or replacement of the Collateral,
Lender shall retain a sufficient
-5-
<PAGE>
03-18-1998 COMMERCIAL SECURITY AGREEMENT Page 6
Loan No 9001 (Continued)
================================================================================
amount of the proceeds to pay all of the Indebtedness, and shall pay the
balance to Grantor. Any proceeds which have not been disbursed within six
(6) amount of the proceeds to pay all of the Indebtedness, and shall pay
the balance to Grantor. Any proceeds which have not been disbursed within
six (6) months after their receipt and which Grantor has not committed to
the repair or restoration of the Collateral shall be used to prepay the
Indebtedness.
Insurance Reserves. Lender may require Grantor to maintain with Lender
reserves for payment of insurance premiums, which reserves shall be created
by monthly payments from Grantor of a sum estimated by Lender to be
sufficient to produce, at least fifteen (15) days before the premium due
date, amounts at least equal to the insurance premiums to be paid. If
fifteen (15) days before payment is due, the reserve funds are
insufficient, Grantor shall upon demand pay any deficiency to Lender. The
reserve funds shall be held by Lender as a general deposit and shall
constitute a non-interest-bearing account which Lender may satisfy by
payment of the insurance premiums required to be paid by Grantor as they
become due. Lender does not hold the reserve funds in trust for Grantor,
and Lender is not the agent of Grantor for payment of the insurance
premiums required to be paid by Grantor. The responsibility for the payment
of premiums shall remain Grantor's sole responsibility.
Insurance Reports. Grantor, upon request of Lender, shall furnish to Lender
reports on each existing policy of insurance showing such information as
Lender may reasonably request including the following: (a) the name of the
insurer; (b) the risks insured; (c) the amount of the policy; (d) the
property insured; (e) the then current value on the basis of which
insurance has been obtained and the manner of determining that value; and
(f) the expiration date of the policy. In addition, Grantor shall upon
request by Lender (however not more often than annually) have an
independent appraiser satisfactory to Lender determine, as applicable, the
cash value or replacement cost of the Collateral.
GRANTOR'S RIGHT TO POSSESSION. Until default, Grantor may have possession of the
tangible personal property and beneficial use of all the Collateral and may use
it in any lawful manner not inconsistent with this Agreement or the Related
Documents, provided that Grantor's right to possession and beneficial use shall
not apply to any Collateral where possession of the Collateral by Lender is
required by law to perfect Lender's security interest in such Collateral. If
Lender at any time has possession of any Collateral, whether before or after an
Event of Default, Lender shall be deemed to have exercised reasonable care in
the custody and preservation of the Collateral if Lender takes such action for
that purpose as Grantor shall request or as Lender, in Lender's sole discretion,
shall deem appropriate under the circumstances, but failure to honor any request
by Grantor shall not of itself be deemed to be a failure to exercise reasonable
care. Lender shall not be required to take any steps necessary to preserve any
rights in the Collateral against prior parties, nor to protect, preserve or
maintain any security interest given to secure the Indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required, to be
discharged or paid by Grantor under this Agreement, including without limitation
all taxes, liens, security interests, encumbrances, and other claims, at any
time levied or placed on the Collateral. Lender also may (but shall not be
obligated to) pay all costs for insuring, maintaining and preserving the
Collateral. All such expenditures incurred or paid by Lender for such purposes
will then bear interest at the rate charged under the Note from the date
incurred or paid by Lender to the date of repayment by Grantor. All such
expenses shall become a part of the Indebtedness and, at Lender's option, will
(a) be payable on demand, (b) be added to the balance of the Note and
apportioned among and be payable with any installment payments to becomes due
during either (i) the term of any applicable insurance policy or (ii) the
remaining term of the Note, or (c) be treated as a balloon payment which will be
due and payable at the Note's maturity. This Agreement also will secure payment
of these amounts. Such right shall be in addition to all other rights and
remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness. Failure of Borrower to make any payment when due
on the Indebtedness.
-6-
<PAGE>
03-18-1998 COMMERCIAL SECURITY AGREEMENT Page 7
Loan No 9001 (Continued)
================================================================================
Other Defaults. Failure of Grantor or Borrower to comply with or to perform
any other terms, obligation, covenant or condition contained in this
Agreement or in any of the Related Documents or failure of Borrower to
comply with or to perform any term, obligation, covenant or condition
contained in any other agreement between Lender and Borrower.
Default in Favor of Third Parties. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective
obligations under this Agreement or any of the Related Documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor or Borrower under this
Agreement, the Note or the Related Documents is false or misleading in any
material respect, either now or at the time made or furnished.
Defective Collateralization. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any collateral
documents to create a valid and perfected security interest or lien) at any
time and for any reason.
Insolvency. The dissolution or termination of Grantor or Borrower's
existence as a going business, the insolvency of Grantor or Borrower, the
appointment of a receiver for any part of Grantor or Borrower's property,
any assignment for the benefit of creditors, any type of creditor workout,
or the commencement of any proceeding under any bankruptcy or insolvency
laws by or against Grantor or Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or Borrower or
by any governmental agency against the Collateral or any other collateral
securing the Indebtedness. This includes a garnishment of any of Grantor or
Borrower's deposit accounts with Lender. However, this Event of Default
shall not apply if there is a good faith dispute by Grantor or Borrower as
to the validity or reasonableness of the claim which is the basis of the
creditor or forfeiture proceeding and if Grantor or Borrower gives Lender
written notice of the creditor or forfeiture proceeding and deposits with
Lender monies or a surety bond for the creditors or forfeiture proceeding,
in an amount determined by Lender, in its sole discretion, as being an
adequate reserve or bond for the dispute.
Events Affecting Guarantor. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or such Guarantor dies or
becomes incompetent. Lender, at its option, may, but shall not be required
to, permit the Guarantor's estate to assume unconditionally the obligations
arising under the guaranty in a manner satisfactory to Lender, and, in
doing so, cure the Event of Default.
Adverse Change. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
Right to Cure. If any default, other than a Default on Indebtedness, is
curable and if Grantor or Borrower has not been given a prior notice of a
breach of the same provision of this Agreement, it may be cured (and no
Event of Default will have occurred) if Grantor or Borrower, after Lender
sends written notice demanding cure of such default, (a) cures the default
within fifteen (15) days; or (b) if the cure requires more than fifteen
(15) days, immediately initiates steps which Lender deems in Lender's sole
discretion to be sufficient to cure the default and thereafter continues
and completes all reasonable and necessary steps sufficient to produce
compliance as soon as reasonably practical.
-7-
<PAGE>
03-18-1998 COMMERCIAL SECURITY AGREEMENT Page 8
Loan No 9001 (Continued)
================================================================================
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the Washington Uniform Commercial Code. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:
Accelerate Indebtedness. Lender may declare the entire Indebtedness,
including any prepayment penalty which Borrower would be required to pay,
immediately due and payable, without notice.
Assemble Collateral. Lender may require Grantor to deliver to Lender all or
any portion of the Collateral and any and all certificates of title and
other documents relating to the Collateral. Lender may require Grantor to
assemble the Collateral and make it available to Lender at a place to be
designated by Lender. Lender also shall have full power to enter upon the
property of Grantor to take possession of and remove the Collateral. If the
Collateral contains other goods not covered by this Agreement at the time
of repossession, Grantor agrees Lender may take such other goods, provided
that Lender makes reasonable efforts to return them to Grantor after
repossession.
Sell the Collateral. Lender shall have full power to sell, lease, transfer,
or otherwise deal with the Collateral or proceeds thereof in its own name
or that of Grantor. Lender may sell the Collateral at public auction or
private sale. Unless the Collateral threatens to decline speedily in value
or is of a type customarily sold on a recognized market, Lender will give
Grantor reasonable notice of the time after which any private sale or any
other intended disposition of the Collateral is to be made. The
requirements of reasonable notice shall be met if such notice is given at
least ten (10) days before the time of the sale or disposition. All
expenses relating to the disposition of the Collateral, including without
limitation the expenses of retaking, holding, insuring, preparing for sale
and selling the Collateral, shall become a part of the Indebtedness secured
by this Agreement and shall be payable on demand, with interest at the Note
rate from date of expenditure until repaid.
Appoint Receiver. To the extent permitted by applicable law, Lender shall
have the following rights and remedies regarding the appointment of a
receiver: (a) Lender may have a receiver appointed as a matter of right;
(b) the receiver may be an employee of Lender and may serve without bond;
and (c) all fees of the receiver and his or her attorney shall become part
of the Indebtedness secured by this Agreement and shall be payable on
demand, with interest at the Note rate from date of expenditure until
repaid.
Collect Revenues, Apply Accounts. Lender, either itself or through a
receiver, may collect the payments, rents, income, and revenues from the
Collateral. Lender may at any time in its discretion transfer any
Collateral into its own name or that of its nominee and receive the
payments, rents, income, and revenues therefrom and hold the same as
security for the Indebtedness or apply it to payment of the Indebtedness in
such order of preference as Lender may determine. Insofar as the Collateral
consists of accounts, general intangibles, insurance policies, instruments,
chattel paper, choses in action, or similar property, Lender may demand,
collect, receipt for, settle, compromise, adjust sue for, foreclose, or
realize on the Collateral as Lender may determine, whether or not
Indebtedness or Collateral is then due. For these purposes, Lender may, on
behalf of and in the name of Grantor, receive, open and dispose of mail
addressed to Grantor, change any address to which mail and payments are to
be sent; and endorse notes, checks, draft, money orders, documents of
title, instruments and items pertaining to payment, shipment, or storage of
any Collateral. To facilitate collection, Lender may notify account debtors
and obligors on any Collateral to make payments directly to Lender.
Obtain Deficiency. If Lender chooses to sell any or all of the Collateral,
Lender may obtain a judgment against Borrower for any deficiency remaining
on the Indebtedness due to Lender after application of all amounts received
from the exercise of the rights provided in this Agreement. Borrower shall
be liable for a deficiency even if the transaction described in this
subsection is a sale of accounts or chattel paper.
-8-
<PAGE>
03-18-1998 COMMERCIAL SECURITY AGREEMENT Page 9
Loan No 9001 (Continued)
================================================================================
Other Rights and Remedies. Lender shall have all the rights and remedies of
a secured creditor under the provisions of the Uniform Commercial Code, as
may be amended from time to time. In addition, Lender shall have and may
exercise any or all other rights and remedies it may have available at law,
in equity, or otherwise.
Cumulative Remedies. All of Lender's rights and remedies, whether evidenced
by this Agreement or the Related Documents or by any other writing, shall
be cumulative and may be exercised singularly or concurrently. Election by
Lender to pursue any remedy shall not exclude pursuit of any other remedy,
and an election to make expenditures or to take action to perform an
obligation of Grantor or Borrower under this Agreement, after Grantor or
Borrower's failure to perform, shall not affect Lender's right to declare a
default and to exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire and final understanding and agreements of the
parties as to the matters set forth in this Agreement. No alteration of or
amendment to this Agreement shall be effective unless given in writing and
signed by the party or parties sought to be charged or bound by the
alteration or amendment.
Applicable Law. This Agreement has been delivered to Lender and accepted by
Lender in the State of Washington. If there is a lawsuit, Grantor and
Borrower agree upon Lender's request to submit to the jurisdiction of the
courts of King or Pierce County, the State of Washington. Lender, Grantor
and Borrower hereby waive the right to any jury trial in any action,
proceeding, or counterclaim brought by either Lender, Grantor or Borrower
against the other. This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington.
Attorneys' Fees; Expenses. Grantor and Borrower agree to pay upon demand
all of Lender's costs and expenses, including attorneys' fees and Lender's
legal expenses, incurred in connection with the enforcement of this
Agreement. Lender may pay someone else to help enforce this Agreement, and
Grantor and Borrower shall pay the costs and expenses of such enforcement.
Costs and expenses include Lender's attorneys' fees and legal expenses
whether or not there is a lawsuit, including attorneys' fees and legal
expenses for bankruptcy proceedings (and including efforts to modify or
vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. Grantor and Borrower also shall pay all
court costs and such additional fees as may be directed by the court.
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
Multiple Parties; Corporate Authority. All obligations of Grantor and
Borrower under this Agreement shall be joint and several, and all
references to Borrower shall mean each and every Borrower, and all
references to Grantor shall mean each and every Grantor. This means that
each of the persons signing below is responsible for all obligations in
this Agreement.
Notices. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile (unless otherwise required
by law), and shall be effective when actually delivered or when deposited
with a nationally recognized overnight courier or deposited in the United
States mail, first class, postage prepaid, addressed to the party to whom
the notice is to be given at the address shown above. Any party may change
its address for notices under this Agreement by giving formal written
notice to the other parties, specifying that the purpose of the notice is
to change the party's address. To the extent permitted by applicable law,
if there is more than one Grantor or Borrower, notice to any Grantor or
Borrower will constitute notice to all Grantor and Borrowers. For notice
purposes, Grantor and Borrower will keep Lender informed at all times of
Grantor and Borrower's current address(es).
-9-
<PAGE>
03-18-1998 COMMERCIAL SECURITY AGREEMENT Page 10
Loan No 9001 (Continued)
================================================================================
Power of Attorney. Grantor hereby appoints Lender as its true and lawful
attorney-in-fact, irrevocably, with full power of substitution to do the
following: (a) to demand, collect, receive, receipt for, sue and recover
all sums of money or other property which may now or hereafter become due,
owing or payable from the Collateral; (b) to execute, sign and endorse any
and all claims, instruments, receipts, checks, draft or warrants issued in
payment for the Collateral; (c) to settle or compromise any and all claims
arising under the Collateral, and, in the place and stead of Grantor, to
execute and deliver its release and settlement for the claim; and (d) to
file any claim or claims or to take any action or institute or take part in
any proceedings, either in its own name or in the name of Grantor, or
otherwise, which in the discretion of Lender may seem to be necessary or
advisable. This power is given as security for the Indebtedness, and the
authority hereby conferred is and shall be irrevocable and shall remain in
full force and effect until renounced by Lender.
Preference Payments. Any monies Lender pays because of an asserted
preference claim in Borrower's bankruptcy will become a part of the
Indebtedness and, at Lender's option, shall be payable by Borrower as
provided above in the "EXPENDITURES BY LENDER" paragraph.
Severability. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstances, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
Successor Interests. Subject to the limitations set forth above on transfer
of the Collateral, this Agreement shall be binding upon and inure to the
benefit of the parties, their successors and assigns.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Grantor, shall constitute a waiver of
any of Lender's rights or of any of Grantor's obligations as to any future
transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance shall not
constitute continuing consent to subsequent instances where such consent is
required and in all cases such consent may be granted or withheld in the
sole discretion of Lender.
Waiver of Co-obligor's Rights. If more than one person is obligated for the
Indebtedness, Borrower irrevocably waives, disclaims and relinquishes all
claims against such other person which Borrower has or would otherwise have
by virtue of payment of the Indebtedness or any part thereof, specifically
including but not limited to all rights of indemnity, contribution or
exoneration.
-10-
<PAGE>
03-18-1998 COMMERCIAL SECURITY AGREEMENT Page 11
Loan No 9001 (Continued)
================================================================================
BORROWER AND GRANTOR ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF THIS
COMMERCIAL SECURITY AGREEMENT, AND BORROWER AND GRANTOR AGREE TO ITS TERMS, THIS
AGREEMENT IS DATED MARCH 18, 1998.
BORROWER:
PACIFIC AEROSPACE & ELECTRONICS, INC.
By: /s/ DONALD A. WRIGHT
-----------------------------------
DONALD A. WRIGHT, CEO & PRESIDENT
GRANTOR:
PACIFIC COAST TECHNOLOGIES, INC.
By:
-----------------------------------
AUTHORIZED OFFICER,
-11-
<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 nine-month period ended February 28, 1998, and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> FEB-28-1998
<CASH> 4,324,000
<SECURITIES> 0
<RECEIVABLES> 7,740,000
<ALLOWANCES> 60,000
<INVENTORY> 11,686,000
<CURRENT-ASSETS> 24,393,000
<PP&E> 22,654,000
<DEPRECIATION> 4,475,000
<TOTAL-ASSETS> 53,185,000
<CURRENT-LIABILITIES> 7,024,000
<BONDS> 9,940,000
0
74,000
<COMMON> 37,744,000
<OTHER-SE> (1,989,000)
<TOTAL-LIABILITY-AND-EQUITY> 53,185,000
<SALES> 36,987,000
<TOTAL-REVENUES> 36,987,000
<CGS> 26,964,000
<TOTAL-COSTS> 33,532,000
<OTHER-EXPENSES> 997,000
<LOSS-PROVISION> 250,000
<INTEREST-EXPENSE> 526,000
<INCOME-PRETAX> 2,033,000
<INCOME-TAX> (859,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,892,000
<EPS-PRIMARY> .10
<EPS-DILUTED> .09
</TABLE>
