SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 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 registrant as specified in its charter)
Washington 91-1744587
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
430 Olds Station Road, Wenatchee, Washington 98801
(Address of Principal Executive Offices; Zip Code)
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 Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes__X__ No_____
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
stock, as of the latest practicable date: As of October 8, 1998, there were
15,986,323 shares outstanding of the Company's Common Stock, par value $.001 per
share.
<PAGE>
PART I - FINANCIAL INFORMATION
---------------------
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets - August 31, 1998 and May 31, 1998
Consolidated Statements of Operations - First Quarters Ended August 31, 1998 and
1997
Consolidated Statements of Cash Flow - First Quarters Ended August 31, 1998 and
1997
Management's Statement and Notes to Unaudited Consolidated Financial Statements
- - First Quarter Ended August 31, 1998
2
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FORM 10-Q
August 31, 1998 and May 31, 1998
<TABLE>
<CAPTION>
August 31, May 31,
1998 1998
(Unaudited) (Audited)
------------- -------------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS
Cash $ 18,998,000 $ 11,461,000
Accounts receivable 21,364,000 9,375,000
Inventories 28,611,000 16,184,000
Deferred income taxes 522,000 386,000
Prepaid expenses and other 1,275,000 272,000
------------ ------------
Total current assets 70,770,000 37,678,000
------------ ------------
PROPERTY AND EQUIPMENT, NET OF DEPRECIATION 46,149,000 26,335,000
------------ ------------
OTHER ASSETS
Note receivable, net -- 700,000
Investment, net 2,719,000 4,579,000
Costs in excess of net book value
of acquired subsidiaries, net 43,761,000 6,515,000
Patents, net 1,203,000 1,229,000
Deferred income taxes 1,155,000 222,000
Deferred financing costs, net 5,271,000 856,000
Other assets 437,000 466,000
------------ ------------
Total other assets 54,546,000 14,567,000
------------ ------------
TOTAL ASSETS $171,465,000 $ 78,580,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 13,776,000 $ 6,748,000
Accrued liabilities 7,895,000 2,587,000
Current portion - long-term debt 1,199,000 1,027,000
Current portion - capital lease obligations 311,000 206,000
Line of credit 903,000 1,511,000
------------ ------------
Total current liabilities 24,084,000 12,079,000
------------ ------------
LONG-TERM LIABILITIES
Long-term debt, net of current portion 83,683,000 9,059,000
Capital leases, net of current portion 1,860,000 941,000
Deferred rent and other 338,000 359,000
------------ ------------
Total long-term liabilities 85,881,000 10,359,000
------------ ------------
TOTAL LIABILITIES 109,965,000 22,438,000
------------ ------------
SHAREHOLDERS' EQUITY
Convertible preferred stock -- --
Common stock 16,000 15,000
Additional paid-in capital 66,030,000 57,830,000
Accumulated other comprehensive income (loss) 1,131,000 (436,000)
Accumulated deficit (5,677,000) (1,267,000)
------------ ------------
Total shareholders' equity 61,500,000 56,142,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $171,465,000 $ 78,580,000
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
3
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FORM 10-Q
First Quarters Ended August 31, 1998 and 1997
<TABLE>
<CAPTION>
Quarters Ended
--------------
August 31, August 31,
1998 1997
Unaudited Unaudited
------------- -------------
<S> <C> <C>
NET SALES $ 19,178,000 $ 11,776,000
COST OF SALES 14,504,000 8,793,000
------------ ------------
GROSS PROFIT 4,674,000 2,983,000
OPERATING EXPENSES 3,776,000 2,007,000
------------ ------------
INCOME FROM OPERATIONS 898,000 976,000
------------ ------------
OTHER INCOME AND EXPENSE
Interest income 226,000 19,000
Interest expense (1,069,000) (130,000)
Other (6,721,000) 8,000
------------ ------------
(7,564,000) (103,000)
NET INCOME (LOSS) BEFORE FEDERAL INCOME TAX (6,666,000) 873,000
PROVISION FOR FEDERAL INCOME TAXES(BENEFIT) 2,255,000 (62,000)
------------ ------------
NET INCOME (LOSS) $ (4,411,000) $ 811,000
============ ============
NET INCOME (LOSS) PER SHARE:
BASIC $ (0.29) $ 0.07
DILUTED $ (0.29) $ 0.07
SHARES USED IN COMPUTATION OF NET INCOME
(LOSS) PER SHARE:
BASIC 15,421,375 11,718,000
DILUTED 15,421,375 11,718,000
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FORM 10-Q
FIRST QUARTERS ENDED AUGUST 31, 1998 AND 1997
<TABLE>
<CAPTION>
Quarters Ended
--------------
August 31, August 31,
1998 1997
Unaudited Unaudited
------------- -------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net cash from operating activities $ 1,001,000 $ 1,612,000
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,635,000) (2,700,000)
Reduction in notes receivable -- 17,000
Acquisition of subsidiaries (29,012,000) --
Purchase of goodwill (40,080,000) --
Proceeds from certificate of deposit -- 1,000,000
Purchase of short-term investments -- (836,000)
Increase in notes receivable -- (3,692,000)
----------- -----------
Net cash from investing activities (70,727,000) (6,211,000)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line of credit (608,000) --
Proceeds from long-term debt, net of
financing costs 71,363,000 1,191,000
Payments on long-term debt and capital leases (374,000) (570,000)
Sale of preferred stock, net of issuance costs 6,792,000 --
Sale of convertible debentures,
net of issuance costs -- 5,439,000
Other changes, net -- (32,000)
----------- -----------
Net cash from financing activities 77,173,000 6,028,000
----------- -----------
NET CHANGE IN CASH 7,447,000 1,429,000
CASH AT BEGINNING OF PERIOD 11,461,000 3,048,000
EFFECT OF EXCHANGE RATES ON CASH 90,000 --
----------- -----------
CASH AT END OF PERIOD $18,998,000 $ 4,477,000
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Property, plant and equipment
included in accounts payable $ 500,000 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
MANAGEMENT'S STATEMENT AND
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-Q
First Quarter Ended August 31, 1998
Management's Statement
- ----------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with Form 10-Q instructions and, in the opinion of management,
contain all adjustments necessary to present fairly the Company's consolidated
financial position as of August 31, 1998 and May 31, 1998, the consolidated
results of operations for the quarters ended August 31, 1998 and 1997, and the
consolidated statements of cash flow for the quarters ended August 31, 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, 1998 and 1997.
The results of operations for the quarters ended August 31, 1998 and 1997 are
not necessarily indicative of the results to be expected or anticipated for the
full fiscal year.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Note 1: Comprehensive Income
--------------------
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
(Statement 130), which establishes standards for reporting and disclosure of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. Statement 130 is
effective for fiscal years beginning after December 15, 1997 and requires
reclassification of financial statements for earlier periods to be provided for
comparative purposes. The Company has not determined the manner in which it will
present the information required by Statement 130 in its annual financial
statements for the year ending May 31, 1999. The Company's total comprehensive
income (loss) for the quarters ended August 31, 1998 and 1997 was ($2,844,000),
and $811,000, respectively. Components of comprehensive income are as follows:
<TABLE>
<CAPTION>
Quarters Ended
--------------
August 31, 1998 August 31, 1997
--------------- ---------------
<S> <C> <C>
Net income (loss) ($ 4,411,000) $ 811,000
Other comprehensive income (expense)
Foreign currency translation 1,714,000 -
Income tax expense (583,000) -
Adjustment for unrealized loss on investment 436,000 -
------------ -----------
Total other comprehensive income 1,567,000 -
------------ -----------
Comprehensive income (loss) ($ 2,844,000) $ 811,000
============ ===========
</TABLE>
6
<PAGE>
Note 2: Computations of Earnings per Share
----------------------------------
The Company has adopted SFAS No. 128, Earnings Per Share (Statement 128). In
accordance with Statement 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. Due to the net loss during the period ended August 31, 1998, the same
number of shares were used to compute both basic and diluted earnings per share.
Note 3: Aeromet Acquisition
-------------------
On July 30, 1998, the Company's wholly-owned subsidiary, Pacific Aerospace &
Electronics (UK) Limited, closed the purchase of Aeromet International plc
("Aeromet") pursuant to a Share Acquisition Agreement. In consideration for the
purchase, the Company paid the sellers 42 million pounds sterling (or
approximately $69 million) in cash. Aeromet is located in the United Kingdom.
At the purchase date, the total purchase price of Aeromet including capitalized
costs of the acquisition was $72.7 million, including $32.6 million in net
assets (current assets of $30.6 million; property plant and equipment of $18.1
million; current liabilities of $14.5 million; long term liabilities of $1.7
million) and resultant goodwill of $40.1 million. Accounting policies at Aeromet
have been conformed to generally accepted accounting principles consistent with
the Company. Goodwill is being amortized over 40 years. Step-up in the valuation
of property, plant and equipment to fair market value is being amortized over
the estimated useful lives of the assets, generally 7 to 10 years. For balance
sheet purposes, the Company has translated UK valuations to US dollars for
Aeromet using the translation at the balance sheet date. For income statement
purposes, revenues and expenses have been reported at average transaction rates
for the period being reported. Income tax rates have been estimated at the
prevailing rates in the UK. The Company has also filed a Form 8-K with
corresponding disclosures on August 14, 1998.
The Company has included accounts of Aeromet in the consolidated financial
statements at August 31, 1998. See "Significant Events During Quarter - Aeromet
Acquisition" in Management's Discussion and Analysis of Financial Condition and
Results of Operations for additional information.
Note 4: Inventories
-----------
Components of inventories are as follows:
<TABLE>
<CAPTION>
August 31, May 31,
1998 1998
------------ ------------
<S> <C> <C>
Raw materials $ 9,478,000 $ 5,789,000
Work in progress 13,275,000 5,683,000
Finished goods 5,856,000 4,712,000
------------ ------------
Total $ 28,611,000 $ 16,184,000
============ ============
</TABLE>
Note 5: Investment
----------
At August 31, 1998, the Company's investment in the common stock of a public
company, determined in accordance with Statement of Financial Accounting
Standards No. 115, is shown net of a reserve for additional loss exposure
related to the Company's guarantee of certain debt of the public company and
other related matters.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Preliminary Note Regarding Forward-Looking Statements
- -----------------------------------------------------
This report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and is subject to the safe harbor created by those sections.
Actual results could differ materially from those projected in the
forward-looking statements set forth in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Overview
- --------
The Company has been an active consolidator of companies, and its results
of operations have been substantially affected by acquisitions. These
acquisitions, as well as internal growth in the Company's existing and acquired
businesses, have resulted in substantial increases in net sales. The Company's
operating expenses and margins and other expenses also have been affected by
certain expenses directly associated with the acquisitions and related capital
raising transactions. The Company has experienced substantial increases in all
other expense categories as a result of the increases in its operations. A
portion of these expenses is attributable to the assimilation of acquired
operations into the Company's existing businesses.
In July 1998, the Company acquired Aeromet International plc ("Aeromet"), a
British limited company and a then wholly-owned subsidiary of Charles Baynes plc
(the "Aeromet Acquisition"). Aeromet is a manufacturer of magnesium and aluminum
precision sand and investment castings, and of titanium and aluminum formed
sheet products, with five locations in England. The Aeromet Acquisition will
have a significant effect on the Company's future operations and on comparisons
of income, expense and balance sheet items in periods after fiscal 1998. The
Company's financial results for the first quarter of fiscal 1999 include only
one month of operations of Aeromet. See "Significant Events During
Quarter - Aeromet Acquisition."
Substantially all of the Company's revenues are generated by sales to
customers in the commercial aerospace, defense, electronics and transportation
industries, with commercial aerospace and defense industry sales being the most
significant. The electronics and aerospace industries are cyclical in nature and
subject to changes based on general economic conditions and commercial airline
industry, defense and government spending.
The Company's operations are focused in developing, manufacturing and
marketing high performance electronics and metal components and assemblies. The
Company's electronics products are characterized by relatively low volumes and
high margins. In comparison, volumes have historically been higher and margins
lower for the Company's metals products. The Company believes that margins will
remain higher for electronic products than for its metals products. Assembled
products incorporating both electronics and metal parts are expected to generate
margins closer to electronics product margins. As a result of margin
differences, changes in product mix among its electronics, assembled and metals
products can be expected to affect overall margins for the Company.
The Company's sales are not subject to significant seasonal fluctuations.
However, production and resulting sales are subject to the number of working
days in any given period. Results for various periods may vary materially due to
the number of working days available in any period.
Results of Operations
- ---------------------
Quarter Ended August 31, 1998 Compared to Quarter Ended August 31, 1997
Net Sales. Net sales increased by $7.4 million, or 62.9%, to $19.2 million
for the quarter ended August 31, 1998, from $11.8 million for the quarter ended
August 31, 1997. This increase included increases in both its aerospace industry
group net sales (an $5.6 million increase) and its electronics industry group
net sales (a $1.8 million increase). The increase in the Company's net sales to
the aerospace industry was attributable to (a) increases in production at Boeing
which increased its demand for the Company's precision cast and machined
products, and (b) the inclusion of one month of Aeromet sales. The increase in
the Company's net sales to the electronics industry
8
<PAGE>
was primarily attributable to the acquisition in February 1998 of Balo
Precision Parts, Inc. ("Balo") and the acquisition effective as of March 1998 of
Electronic Specialty Corporation ("ESC"). Net sales by Balo, ESC and Aeromet for
the first quarter of fiscal 1999 were $779,000, $1,113,000, and $4,463,000,
respectively.
Gross Profit. Gross profit increased by $1.7 million, or 56.7%, to $4.7
million for the quarter ended August 31, 1998, from $3.0 million for the quarter
ended August 31, 1997. As a percentage of net sales, gross profit decreased to
24.4% for the quarter ended August 31, 1998, from 25.3% for the quarter ended
August 31, 1997. This decrease was primarily attributable to the acquisitions of
ESC and Aeromet, which have comparatively lower average gross profit margins.
Without ESC and Aeromet, gross profit as a percentage of net sales would have
increased to 30.4% for the quarter ended August 31, 1998, primarily because of
improved efficiencies from the development of manufacturing processes and
in-house production capabilities that had previously been purchased from outside
vendors and because of capital investments in equipment and production
capabilities. Gross profit (loss) attributable to Balo, ESC and Aeromet for the
first quarter of fiscal 1999 was $86,000, $(259,000) and $797,000, respectively.
Operating Expenses. Operating expenses increased by $1.8 million, or 88.1%,
to $3.8 million for the quarter ended August 31, 1998, from $2.0 million for the
quarter ended August 31, 1997. This increase was partially due to costs related
to the Balo, ESC and Aeromet acquisitions and increased levels of operations in
the first quarter of 1999. As a percentage of net sales, operating expenses
increased 2.6%, to 19.7% for the quarter ended August 31, 1998, from 17.1% for
the quarter ended August 31, 1997. This increase is primarily attributable to
the electronics industry group and the acquisitions of Balo and ESC. The
increase in operating expenses as a percentage of net sales was partially offset
by the acquisition of Aeromet, which had lower than average operating expenses
in relation to net sales, in the first quarter of fiscal 1999. Operating
expenses attributable to Balo, ESC and Aeromet for the first quarter of fiscal
1999 were $400,000, $287,000 and $473,000, respectively.
Interest Expense. Interest expense increased by $939,000, or 722.3%, to
$1,069,000 for the quarter ended August 31, 1998, from $130,000 for the quarter
ended August 31, 1997. This increase was primarily due to (a) the debt incurred
by the Company to finance the Aeromet Acquisition, (b) the Company's financing
of capital equipment purchases, and (c) the debt incurred to finance the
expansion of the Company's Wenatchee facilities. Interest expense attributable
to Balo, ESC and Aeromet (exclusive of interest related to the acquisition
financing) for the first quarter of fiscal 1999 was $0, $45,000 and $0,
respectively.
Other Income (Expense). Other income (expense) represents non-recurring and
non-operational income and expense for the period. Other income decreased
$6,729,000 to an other expense of $6,721,000 for the quarter ended August 31,
1998, from other income of $8,000 for the quarter ended August 31, 1997. This
decrease in other income was principally due to: (a) a $3,581,000 write-down in
connection with ESC, and (b) a $3,103,000 write-down of the Company's investment
in Orca Technologies, Inc. See "Significant Events During Quarter - Electronic
Specialty Corporation, and - Orca Technologies, Inc.," below. Other income
(expense) attributable to Balo, ESC (exclusive of the write-down discussed
above), and Aeromet for the first quarter of fiscal 1999 was $69,000, $11,000
and $0, respectively.
Net Income (Loss). Net income decreased $5,222,000 or 643.9% to a net loss
of $4,411,000 for the quarter ended August 31, 1998, from net income of $811,000
for the quarter ended August 31, 1997, primarily as a result of unexpected
Aeromet Acquisition cost increases and the ESC and Orca write-downs. Before the
ESC and Orca write-downs, the Company's net income for the first quarter of
fiscal 1999 would have decreased $810,000 or 99.9% to $1,000 in the first
quarter of 1999, from $811,000 for the first quarter of fiscal 1998, primarily
as a result of the losses at Balo and ESC for the quarter. Pre-tax net income
(loss) attributable to Balo, ESC and Aeromet for the first quarter of fiscal
1999 was $(254,000), $(642,000) and $264,000, respectively. Aeromet pre-tax net
income includes amortization of goodwill, but does not include interest expense
associated with the acquisition indebtedness.
Liquidity and Capital Resources
- -------------------------------
Financing Activities. Cash generated from financing activities increased by
$71.2 million, to $77.2 million at August 31, 1998, from $6.0 million at August
31, 1997. During the first quarter of fiscal 1999, the Company completed two
financing transactions, including the long-term debt offering of $75 million to
finance the Aeromet Acquisition and the completion of the Company's offering of
Series B Convertible Preferred Stock and related Warrants. See "Significant
Events During Quarter - Aeromet Acquisition, and - Completion of Series B
Convertible Preferred Stock Offering." Cash generated
9
<PAGE>
by these financing transactions was offset by payments on long-term debt and
capital leases of $0.4 million during the quarter and costs of issuance and
financing.
The Company's primary banking relationships include a revolving line of
credit up to $6.3 million for the Company's U.S. operations, a revolving line of
credit up to approximately $7.5 million (4.5 million pounds sterling) for
Aeromet's operations, a term loan of approximately $700,000 for building
improvements, and a term loan of $1.2 million for the construction of the
Company's headquarters building.
Capital Expenditures. The Company made capital expenditures of $2.1 million
during the first quarter of fiscal 1999. This amount is higher than normal due
to (a) $.6 million for the construction of its Wenatchee headquarters building,
and (b) $1.5 million related primarily to purchases of machinery and equipment.
In August 1998, the Company completed and occupied its headquarter building,
which consists of approximately 22,400 square feet of office space to house the
Company's executive, administrative and accounting personnel. The total cost of
this project was approximately $3.5 million. The Company has entered into a term
loan with its primary senior lender for approximately $1.2 million of the
building costs. The Company is currently negotiating the purchase of the Balo
facility for approximately $1.1 million and closing is expected to occur in
November 1998. In connection with the Aeromet Acquisition, the Company entered
into an Option Agreement with Charles Baynes plc, which grants the Company a
one-year option to purchase three of the facilities currently leased by Aeromet.
As of August 31, 1998, the Company had no material commitments outstanding for
purchases of additional capital assets.
Working Capital. The Company's working capital, as of August 31, 1998 and
May 31, 1998 was $46.7 million and $25.6 million, respectively. The increase in
working capital at August 31, 1998 over May 31, 1998 was primarily the result of
the Aeromet acquisition and the associated financing, and the sale of the Series
B Convertible Preferred Stock. See "Significant Events During Quarter - Aeromet
Acquisition, and - Completion of Series B Convertible Preferred Stock
Offering."
Future Capital Requirements. The Company believes that the net proceeds
from a note offering that closed July 30, 1998 (see "Significant Events During
Quarter - Aeromet Acquisition Note Offering"), and from the release of funds
escrowed in connection with the Company's offering of Series B Convertible
Preferred Stock (see "Significant Events During Quarter - Completion of Series B
Convertible Preferred Stock Offering"), plus cash from operations, will be
sufficient to meet the Company's cash requirements and to fund budgeted capital
expenditures for fiscal 1999.
Significant Events During Quarter
- ---------------------------------
Aeromet Acquisition
Acquisition Transaction. On July 30, 1998, Pacific Aerospace & Electronics
(UK) Limited ("PA&E-UK"), a company organized under the laws of the United
Kingdom and an indirect wholly-owned subsidiary of the Company, purchased all of
Aeromet's issued and outstanding capital stock. The Aeromet Acquisition was made
pursuant to a Share Acquisition Agreement dated July 1, 1998, between Charles
Baynes plc, Westpark Limited (an affiliate of Charles Baynes plc), PA&E-UK and
the Company. In consideration for PA&E-UK's acquisition of all of Aeromet's
issued and outstanding capital stock (the "Shares"), the Company delivered to
Westpark Limited (pound)42 million (or approximately $69 million) in cash. The
purchase price for the Shares was determined in arms-length negotiations between
Charles Baynes plc and the Company.
Note Offering. The Company funded the Aeromet Acquisition from the net
proceeds of an offering by the Company of 11 1/4% Senior Subordinated Notes due
2005 (the "Notes"). Subject to the terms and conditions of a Purchase Agreement
(the "Purchase Agreement"), dated July 23, 1998, between the Company, the
Company's United States subsidiaries (the "Subsidiaries"), and Friedman,
Billings, Ramsey & Co., Inc. and BancBoston Securities Inc. (collectively the
"Initial Purchasers"), the Initial Purchasers agreed to purchase, and the
Company agreed to sell, Notes in the aggregate principal amount of $75 million.
The Notes were issued pursuant to an Indenture, dated July 30, 1998 (the
"Indenture") between the Company, the Subsidiaries and IBJ Schroder Bank & Trust
Company, as trustee. The Notes (a) are senior subordinated, unsecured, general
obligations of the Company, (b) will mature on August 1, 2005, unless previously
redeemed pursuant to the Indenture, and (c) are jointly and severally guaranteed
on a senior subordinated basis by each of the Subsidiaries.
In connection with the Purchase Agreement, the Company and the Subsidiaries
entered into a registration rights agreement with the Initial Purchasers,
pursuant to which the Company agreed to
10
<PAGE>
file with the Securities and Exchange Commission either (i) an exchange offer
registration statement relating to the exchange of the Notes for fully
registered notes with identical terms as the Notes (the "Exchange Notes") or
(ii) a shelf registration statement pursuant to Rule 415 under the Securities
Act, for resale of the Notes and of the Exchange Notes that cannot be resold
without delivery of a prospectus. The Company further agreed to use its
reasonable best efforts to cause such registration statements to be declared
effective.
Completion of Series B Convertible Preferred Stock Offering
Upon the closing of the Aeromet Acquisition in July 1998, the Company
completed its offering of Series B Convertible Preferred Stock ("Series B
Preferred") and related Warrants by issuing to the existing holders (a) an
additional 70,000 shares of Series B Preferred, and (b) additional warrants to
purchase 97,221 shares of Common Stock, in exchange for a purchase price of
$7,000,000 which had been held in escrow pending completion of the Aeromet
Acquisition. When combined with the first closing of the Series B Preferred
offering in May 1998, the Company issued a total of 170,000 Shares of Series B
Preferred and warrants to purchase 236,109 shares of Common Stock, for a total
purchase price of $1.7 million.
Electronic Specialty Corporation
On April 13, 1998, the Company's subsidiary, ESC Acquisition Corp.,
acquired substantially all of the assets of Electronic Specialty Corporation
(the "Seller"), and assumed certain of the Seller's liabilities. At the closing,
ESC Acquisition Corp. changed its name to Electronic Specialty Corporation
("ESC"). The Company engaged the Seller's president to be president of ESC after
the closing. In June 1998, the Company terminated ESC's president. The Company
subsequently became aware of certain differences between ESC's actual financial
condition and the financial condition represented by the Seller in the closing
documents. These differences included a significantly lower backlog and order
flow and significantly higher operating losses than represented. As a result,
the Company laid off approximately 30% of ESC's workforce later in June 1998. A
new general manager appointed by the Company in August has reassessed the
business opportunities, including cash flow and revenue forecasts, which are
significantly lower than previously forecasted. Based upon this analysis, the
Company is investigating new product line opportunities and evaluating the
feasibility of continuing older product lines. Due to significantly lower future
expectations of revenues and profits, the Company has written off its goodwill
in ESC in the amount of $3,581,000, at August 31, 1998.
Orca Technologies, Inc.
At October 8, 1998, the Company held 2,289,309 shares of Orca's common
stock (the "Orca Shares"), which, to the Company's knowledge, constituted
approximately 14.82% of Orca's issued and outstanding common stock. The Company
acquired 179,600 of the Orca Shares in a market transaction, and the other
2,109,709 of the Orca Shares pursuant to an April 1998 restructuring agreement
between Orca and the Company. In the restructuring agreement, the Company (a)
canceled certain loans owed it by Orca in exchange for the 2,109,709 shares of
Orca's Common Stock, (b) agreed to continue guaranteeing Orca's credit facility
of $1.3 million and an equipment lease of $373,000, and (c) accepted a $950,000
promissory note from Orca (the "Orca Note") as payment for certain third-party
notes then owned by the Company. The Company also sublet approximately 95% of
the square footage of its Bothell, Washington office space to Orca for an
equivalent amount of the lease payment.
The Company originally valued the Orca Shares on its balance sheet at
$5,014,000. Due to decreases in the trading price of Orca's common stock on the
Nasdaq SmallCap Market, the Company recorded unrealized losses on the Orca
Shares, included in shareholders' equity, of $436,000 as of May 31, 1998. On
August 31, 1998, the Company recorded a charge of approximately $2.3 million to
reduce the value of its investment in Orca Common Stock to $2.7 million, due to
an other-than- temporary decrease in the traded market price and value of Orca
common stock, certain guaranties by the Company of Orca liabilities, and poorer
than expected operating results and cash flows which arose in August and in
subsequent months. The Company had also reserved $250,000 of the Orca Note in
the fourth quarter of fiscal 1998, and during August, the Company reserved the
remaining balance of $700,000. As of October 12, 1998, Orca was three months
past due on the interest payments due on the Orca Note and on its lease payments
to the Company. The Company has demanded full payment of the past due amounts
from Orca. The Company is also currently negotiating for the release of its
guaranty of Orca's equipment lease.
11
<PAGE>
Roger Vallo and Donald Cotton, who were directors of the Company until
January 1998, are directors, and Mr. Vallo is CEO, of Orca. 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, were
directors of Orca until June 1997 and shareholders of Orca until May 1998, and
personally guaranteed or indemnified certain obligations of Orca. In May 1998,
Mr. Wright and Mr. Gerde sold their shares in private transactions. Dr. Allen
Dahl, a director of the Company, continues to be a shareholder of Orca but has
never been an officer or director of Orca.
Issuance of Common Stock to Liviakis
In February 1998, the Company entered into a financial services agreement
with Liviakis Financial Communications, Inc. ("Liviakis") to provide financial
and public relations services to the Company. In connection with that consulting
agreement, the Company issued to Liviakis and Robert B. Prag, one of its
principals, warrants to purchase an aggregate of 1,290,000 shares of Common
Stock for $4.62 per share. In August 1998, the Company, Liviakis and Mr. Prag
entered into an agreement in which (a) a finder's fee claim by Liviakis against
the Company was resolved in exchange for the Company's issuance of an aggregate
of 590,000 shares of Common Stock to Liviakis and Mr. Prag under the exemption
from registration provided in Section 4(2) of the Securities Act, and (b)
Liviakis and Mr. Prag transferred the warrants previously issued to them to the
Company for cancellation. No commissions were paid in connection with issuance
of the shares to Liviakis and Mr. Prag.
Year 2000
- ---------
The Company (including Aeromet) is developing and carrying out a
comprehensive strategy for updating its information management and manufacturing
systems for Year 2000 ("Y2K") compliance. The Company's information technology
("IT") systems include customized and standard software purchased from outside
vendors. All software has been identified and is being assessed to determine the
extent of renovations required in order to be Y2K compliant. The Company
believes that all software will be made Y2K compliant before the end of the
Company's current fiscal year through vendor-provided updates or replacement
with other Y2K compliant hardware and software. The Company is in the process of
identifying significant non-IT systems which may be impacted by the Y2K problem,
including those relating to production, processing and communication equipment
and is in the process of determining through inquiries of equipment suppliers,
as well as testing of such equipment, the extent of renovations required, if
any. The Company believes its Y2K assessment will be completed before the end of
the Company's current fiscal year, and that renovation, validation and
implementation will be completed early in the next fiscal year.
The Company is in the process of identifying third parties with which it
has a significant relationship that, in the event of a Y2K failure, could have a
material impact on the Company's financial position or operating results. The
third parties include energy and utility suppliers, creditors, material and
product suppliers, communication vendors and the Company's significant
customers. These relationships, especially those associated with certain
suppliers and customers, are material to the Company and a Y2K failure by one or
more of these parties could result in a material adverse effect on the Company's
operating results and financial position. The Company is making inquiries of
these third parties to assess their Y2K readiness. The Company expects that this
process will continue throughout the current and subsequent fiscal year.
The Company expects that costs to address Y2K issues will total
approximately $250,000, of which approximately $125,000 will be spent in fiscal
1999, with the remainder being spent during fiscal 2000. Costs include salary
and fringe benefits for personnel, hardware and software costs, and consulting
and travel expenses associated, directly or indirectly, with addressing Y2K
issues. Y2K issues have received a high priority within the Company and, as a
result, certain other IT projects have been delayed. While such non-Y2K projects
are expected to enhance operational efficiencies and improve the quality of
information available to management, the delay of such projects is not expected
to have a material adverse impact on the Company's operations. Worst case Y2K
scenarios could be as insignificant as a minor interruption in production or
shipping resulting from unanticipated problems encountered in the IT systems of
the Company or any of the significant third parties with whom the Company does
business. The pervasiveness of the Y2K issue makes it likely that previously
unidentified issues will require remediation during the normal course of
business. In such a case, the Company anticipates that transactions could be
processed manually while IT and other systems are repaired and that such
interruptions would have a minor effect on the Company's operations. On the
other hand, a worst case Y2K scenario could be as catastrophic as an extended
loss of utility service
12
<PAGE>
resulting from interruptions at the point of power generation, long-line
transmission, or local distribution to the Company's production facilities. Such
an interruption could result in an inability to provide products to the
Company's customers, resulting in a material adverse effect on the Company's
operating results and financial position.
New Accounting Pronouncements
- -----------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
disclosure of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. SFAS No. 130,
which is effective for fiscal years beginning after December 15, 1997, requires
restatement of financial statements for earlier periods to be provided for
comparative purposes. The Company anticipates that implementing the provisions
of SFAS No. 130 will not have a significant impact on the Company's existing
disclosures. The Company has not determined the manner in which it will present
the information required by SFAS No. 130 in its annual financial statements.
In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years must be restated. The
Company anticipates that implementing the provisions of SFAS No. 131 will not
have a significant impact on the Company's existing disclosures. The Company has
not determined the manner in which it will present the information required by
SFAS No. 131 in its annual financial statements.
13
<PAGE>
PART II
OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
-----------------
From time to time the Company is involved in legal proceedings relating to
claims arising out of operations in the normal course of business. The Company
is not aware of any material legal proceedings pending or threatened against the
Company or any of its properties.
Item 2. Changes in Securities
---------------------
(a) None.
(b) Dividend Payment Restrictions
In connection with the issuance of its 11 1/4% Senior Subordinated Notes
due 2005, the Company entered into an Indenture that limits the Company's
ability to pay dividends, repurchase its equity securities, make certain other
kinds of restricted payments, and incur certain indebtedness. The Company has
never declared or paid cash dividends on the Common Stock. The Company currently
anticipates that it will retain all future earnings to fund the operation of its
business and does not anticipate paying dividends on the Common Stock in the
foreseeable future.
(c) Completion of Series B Convertible Preferred Stock Offering
In May 1998, the Company conducted a private offering of its Series B
Convertible Preferred Stock (the "Series B Preferred") and warrants to purchase
shares of the Company's Common Stock (the "Related Warrants"), to a limited
number of accredited investors, pursuant to Rule 506 under Regulation D of the
Securities Act (the "Series B Offering"). A portion of the Series B Offering was
closed in May 1998. At that closing (a) the Company issued 100,000 shares of its
Series B Preferred, and Related Warrants to purchase 138,888 shares of Common
Stock, for $10.0 million in gross proceeds, and (b) the investors deposited $7.0
million into escrow against the purchase of additional shares of Series B
Preferred and Related Warrants, with delivery conditioned upon consummation of
the Aeromet Acquisition. The Company paid an aggregate of $850,000 in
commissions in connection with the Series B Offering.
The escrowed portion of the Series B Offering was closed in August 1998. At
that closing, the Company issued, in exchange for delivery of the escrowed $7
million, (i) an additional 70,000 shares of Series B Preferred, and (ii) Related
Warrants to purchase an additional 97,221 shares of Common Stock.
The holders of the Related Warrants may exercise those warrants after May
1999 for $7.20 per share of Common Stock.
The Common Stock issuable upon conversion of the Series B Preferred and
upon exercise of the Related Warrants (the "Underlying Shares") is subject to a
registration rights agreement that requires the Company to file a registration
statement covering those shares by November 1998, and to use its best efforts to
make that registration statement effective by January 1999. The registration
rights agreement also grants certain piggyback registration rights with regard
to the Underlying Shares.
The conversion price of the Series B Preferred is $7.20 per share until
February 1999. After February 1999, the conversion price of the Series B
Preferred will be equal to the lower of (a) $7.20 per share, or (b) the average
of the three lowest closing bid prices per share of the Common Stock over the 22
trading days before conversion, but not less than a floor price (the "Floor
Price"), which is currently $5.67, except in certain limited circumstances. No
holder of Series B Preferred is entitled to voluntarily convert Series B
Preferred that would cause the holder to own more than 9.9% of the Company's
total outstanding Common Stock at any one time. Any Series B Preferred
outstanding on May 2003 will automatically convert into Common Stock at the
then-applicable conversion price.
14
<PAGE>
Upon conversion of a share of Series B Preferred, the holder will receive
the number of Underlying Shares equal to $100 divided by the then-applicable
conversion price of the Series B Preferred. Underlying Shares issued upon such
conversion may not be sold until February 1999. At that time, the Underlying
Shares may be sold upon the effectiveness of a registration statement, or under
any applicable exemption from registration. However, up to $7,000,000 worth of
the Underlying Shares may be converted from Series B Preferred and sold at any
time, if those Underlying Shares are included in an effective piggyback
registration. After the sale of any Underlying Shares in a piggyback
registration, if any, the Floor Price would be recomputed to an amount that
would allow the maximum number of Underlying Shares to be issued, without
shareholder approval, upon conversion of the remaining unconverted shares of
Series B Preferred.
If the average closing bid price of the Common Stock remains below the
Floor Price for any 30 consecutive trading days, and a conversion of the Series
B Preferred is requested or required, then the Company must elect to do one of
the following: (A) redeem any shares of Series B Preferred which would result
upon conversion in the issuance of more than 3,000,000 Underlying Shares (the
maximum issuable without shareholder approval), or (B) obtain any shareholder
approval necessary under its Nasdaq maintenance requirements to allow the
conversion to occur.
The Company may redeem the Series B Preferred at a redemption price of $115
per share upon 20-days notice to the holder if the holder does not elect to
convert within 15 days of receiving a redemption notice. The Company must either
redeem any Series B Preferred that it is not permitted to convert without
shareholder approval under Nasdaq requirements or obtain shareholder approval
for such conversion. If the Company's senior lender requires, any redemption
price, or other cash payments due to the holders, shall be converted into
promissory notes in favor of the holder until conversion or redemption is
allowed to occur.
Issuance of Common Stock to Liviakis
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Significant Events During Quarter - Issuance of Common
Stock to Liviakis," which is incorporated into this Item 2 by reference.
Item 3. Defaults upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matter was submitted to a vote of security holders during the quarter
covered by this report.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits.
The following documents are filed as exhibits to this Quarterly Report:
Exhibit
Number Document
- ------- --------
2.1 Share Acquisition Agreement, dated July 1, 1998, by and between
Charles Baynes plc, Westpark Limited, Pacific Aerospace & Electronics
(UK) Limited, and Pacific Aerospace & Electronics, Inc.(1)
3.1 Articles of Incorporation of Pacific Aerospace & Electronics, Inc.(2)
3.2 Amendment to Articles of Incorporation containing Designation of
Rights and Preferences of Series A Preferred, as corrected. (3)
15
<PAGE>
3.3 Amendment to Articles of Incorporation containing Designation of
Rights and Preferences of Series B Preferred. (4)
3.4 Bylaws of Pacific Aerospace & Electronics, Inc.(2)
4.1 Form of specimen certificate for the Series B Preferred.(4)
4.2 Form of Common Stock Purchase Warrant issued to holders of the Series
B Preferred.(4)
4.3 Securities Purchase Agreement, dated May 15, 1998, between Pacific
Aerospace & Electronics, Inc. and the purchasers of the Company's
Series B Preferred.(4)
4.4 Registration Rights Agreement, dated May 15, 1998 between Pacific
Aerospace & Electronics, Inc. and the holders of the Series B
Preferred.(4)
4.5 Purchase Agreement, dated as of July 23, 1998, between Pacific
Aerospace & Electronics, Inc., Balo Precision Parts, Inc., Cashmere
Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty
Corporation, Morel Industries, Inc., Northwest Technical Industries,
Inc., Pacific Coast Technologies, Inc., Seismic Safety Products,
Inc., PA&E International, Inc. and Friedman, Billings, Ramsey & Co.,
Inc. and BancBoston Securities Inc.(1)
4.6 Indenture dated as of July 30, 1998, between Pacific Aerospace &
Electronics, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing
Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation,
Morel Industries, Inc., Northwest Technical Industries, Inc., Pacific
Coast Technologies, Inc., Seismic Safety Products, Inc., PA&E
International, Inc. and IBJ Schroder Bank & Trust Company.(1)
4.7 Form of Global Note of Pacific Aerospace & Electronics, Inc.(1)
4.8 Registration Rights Agreement, dated as of July 30, 1998, between
Pacific Aerospace & Electronics, Inc., Balo Precision Parts, Inc.,
Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic
Specialty Corporation, Morel Industries, Inc., Northwest Technical
Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety
Products, Inc., PA&E International, Inc. and Friedman, Billings,
Ramsey & Co., Inc. and BancBoston Securities Inc.(1)
10.1 Placement Agreement, dated March 25, 1998, as amended May 15, 1998,
between Pacific Aerospace & Electronics, Inc. and Lysys Ltd.(4)
10.2 Loan Agreement, dated September 22, 1998, between Pacific Aerospace &
Electronics, Inc. and KeyBank National Association. (5)
10.3 Promissory Note, dated September 22, 1998, from Pacific Aerospace &
Electronics, Inc. to KeyBank National Association.(5)
10.4 Security Agreement, dated September 22, 1998, between Pacific
Aerospace & Electronics, Inc. and KeyBank National Association.(5)
10.5 Promissory Note, dated September 30, 1998, from Pacific Aerospace &
Electronics, Inc. to KeyBank National Association.(5)
10.6 Deed of Trust, dated September 30, 1998, between Pacific Aerospace &
Electronics, Inc., KeyBank National Association and Land Title
Company, Chelan-Douglas County, Inc.(5)
10.7 Agreement, dated as of August 27, 1998, between Pacific Aerospace &
Electronics, Inc., Liviakis Financial Communications, Inc. and Robert
B. Prag.(4)
27. Financial Data Schedule. (5)
- -----------
(1) Incorporated by reference to the Company's Current Report on Form 8-K
filed on August 14, 1998.
(2) Incorporated by reference to the Company's Current Report on Form 8-K
filed on December 12, 1996.
16
<PAGE>
(3) Incorporated by reference to the Company's Current Report on Form 8-K
filed on March 12, 1997.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K
filed on August 28, 1998.
(5) Filed with this report.
b. Reports on Form 8-K.
The Company filed with the Commission the following Current Reports on Form 8-K
during the quarter ended August 31, 1998:
(i) A Current Report on Form 8-K, dated July 10, 1998 reporting the
Company's acquisition of ESC, effective as of March 1998, and an
amendment on Form 8-K/A, dated August 26, 1998, filing the
consolidated financial statements of ESC and its subsidiary for (1)
the two years ended March 31, 1997 and March 31, 1996, and (2) the
nine-month periods ended December 31, 1997 and December 31, 1996; and
(ii) A Current Report on Form 8-K, dated August 14, 1998, reporting the
Aeromet Acquisition, together with (1) the audited financial
statements of Aeromet for the two years ended December 31, 1997 and
December 31, 1996, and (2) the unaudited pro forma financial data of
the Company for the year ended May 31, 1998, as if the Aeromet
Acquisition had occurred on June 1, 1997.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PACIFIC AEROSPACE & ELECTRONICS, INC.
DONALD A. WRIGHT
Date: October 13, 1998 -------------------------------------
Donald A. Wright
President, Chief Executive Officer, and
Chairman of the Board
(Principal Executive Officer)
NICK A. GERDE
Date: October 13, 1998 -------------------------------------
Nick A. Gerde
Vice President Finance, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
The following documents are filed as exhibits to this Quarterly Report:
Exhibit
Number Document
- ------- --------
2.1 Share Acquisition Agreement, dated July 1, 1998, by and between
Charles Baynes plc, Westpark Limited, Pacific Aerospace & Electronics
(UK) Limited, and Pacific Aerospace & Electronics, Inc.(1)
3.1 Articles of Incorporation of Pacific Aerospace & Electronics, Inc.(2)
3.2 Amendment to Articles of Incorporation containing Designation of
Rights and Preferences of Series A Preferred, as corrected. (3)
3.3 Amendment to Articles of Incorporation containing Designation of
Rights and Preferences of Series B Preferred. (4)
3.4 Bylaws of Pacific Aerospace & Electronics, Inc.(2)
4.1 Form of specimen certificate for the Series B Preferred.(4)
4.2 Form of Common Stock Purchase Warrant issued to holders of the Series
B Preferred.(4)
4.3 Securities Purchase Agreement, dated May 15, 1998, between Pacific
Aerospace & Electronics, Inc. and the purchasers of the Company's
Series B Preferred.(4)
4.4 Registration Rights Agreement, dated May 15, 1998 between Pacific
Aerospace & Electronics, Inc. and the holders of the Series B
Preferred.(4)
4.5 Purchase Agreement, dated as of July 23, 1998, between Pacific
Aerospace & Electronics, Inc., Balo Precision Parts, Inc., Cashmere
Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty
Corporation, Morel Industries, Inc., Northwest Technical Industries,
Inc., Pacific Coast Technologies, Inc., Seismic Safety Products,
Inc., PA&E International, Inc. and Friedman, Billings, Ramsey & Co.,
Inc. and BancBoston Securities Inc.(1)
4.6 Indenture dated as of July 30, 1998, between Pacific Aerospace &
Electronics, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing
Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation,
Morel Industries, Inc., Northwest Technical Industries, Inc., Pacific
Coast Technologies, Inc., Seismic Safety Products, Inc., PA&E
International, Inc. and IBJ Schroder Bank & Trust Company.(1)
4.7 Form of Global Note of Pacific Aerospace & Electronics, Inc.(1)
4.8 Registration Rights Agreement, dated as of July 30, 1998, between
Pacific Aerospace & Electronics, Inc., Balo Precision Parts, Inc.,
Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic
Specialty Corporation, Morel Industries, Inc., Northwest Technical
Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety
Products, Inc., PA&E International, Inc. and Friedman, Billings,
Ramsey & Co., Inc. and BancBoston Securities Inc.(1)
10.1 Placement Agreement, dated March 25, 1998, as amended May 15, 1998,
between Pacific Aerospace & Electronics, Inc. and Lysys Ltd.(4)
10.2 Loan Agreement, dated September 22, 1998, between Pacific Aerospace &
Electronics, Inc. and KeyBank National Association. (5)
10.3 Promissory Note, dated September 22, 1998, from Pacific Aerospace &
Electronics, Inc. to KeyBank National Association.(5)
10.4 Security Agreement, dated September 22, 1998, between Pacific
Aerospace & Electronics, Inc. and KeyBank National Association.(5)
19
<PAGE>
10.5 Promissory Note, dated September 30, 1998, from Pacific Aerospace &
Electronics, Inc. to KeyBank National Association.(5)
10.6 Deed of Trust, dated September 30, 1998, between Pacific Aerospace &
Electronics, Inc., KeyBank National Association and Land Title
Company, Chelan-Douglas County, Inc.(5)
10.7 Agreement, dated as of August 27, 1998, between Pacific Aerospace &
Electronics, Inc., Liviakis Financial Communications, Inc. and Robert
B. Prag.(4)
27. Financial Data Schedule. (5)
- -----------
(1) Incorporated by reference to the Company's Current Report on Form 8-K
filed on August 14, 1998.
(2) Incorporated by reference to the Company's Current Report on Form 8-K
filed on December 12, 1996.
(3) Incorporated by reference to the Company's Current Report on Form 8-K
filed on March 12, 1997.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K
filed on August 28, 1998.
(5) Filed with this report.
20
LOAN AGREEMENT
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
- ------------- ---------- ---------- ---------- ---- ---------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$6,300,000.00 09-22-1998 09-05-1999 3000009903 403 302 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
430 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
====================================================================================================================
</TABLE>
THIS LOAN AGREEMENT between PACIFIC AEROSPACE & ELECTRONICS, INC. ("Borrower")
and KEYBANK NATIONAL ASSOCIATION ("Lender") is made and executed on the
following terms and conditions. Borrower has received prior commercial loans
from Lender or has applied to Lender for a commercial loan or loans and other
financial accommodations, including those which may be described on any exhibit
or schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations from
Lender to Borrower, are referred to in this Agreement individually as the "Loan"
and collectively as the "Loans." Borrower understands and agrees that: (a) in
granting, renewing, or extending any Loan, Lender is relying upon Borrower's
representations, warranties, and agreements, as set forth in this Agreement; (b)
the granting, renewing, or extending of any Loan by Lender at all times shall be
subject to Lender's sole judgment and discretion; and (c) all such Loans shall
be and shall remain subject to the following terms and conditions of this
Agreement.
TERM. This Agreement shall be effective as of September 22, 1998, and shall
continue thereafter until all indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
Agreement. The word "Agreement" means this Loan Agreement, as this Loan
Agreement may be amended or modified from time to time, together with all
exhibits and schedules attached to this Loan Agreement from time to time.
Account. The word "Account" means a trade account, account receivable, or
other right to payment for goods sold or services rendered owing to
Borrower (or to a third party grantor acceptable to Lender).
Account Debtor. The words "Account Debtor" mean the person or entity
obligated upon an Account.
Advance. The word "Advance" means a disbursement of Loan funds under this
Agreement.
Borrower. The word "Borrower" means PACIFIC AEROSPACE & ELECTRONICS, INC.
The word "Borrower" also includes, as applicable, all subsidiaries and
affiliates of Borrower as provided below in the paragraph titled
"Subsidiaries and Affiliates."
Borrowing Base. The words "Borrowing Base" mean, as determined by Lender
from time to time, the lesser of (a) $6,300,000.00; or (b) 80.000% of the
aggregate amount of Eligible Accounts.
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
Collateral. The word "Collateral" means and includes without limitation all
property and assets granted as collateral security for the Loan, whether
real or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a security
interest, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien, charge, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise. The
word "Collateral" includes without limitation all collateral described
below in the section titled "COLLATERAL."
Eligible Accounts.The words "Eligible Accounts" mean, at any time, all of
Borrower's Accounts which contain selling terms and conditions acceptable
to Lender. The net amount of any Eligible Account against which Borrower
may borrow shall exclude all returns, discounts, credits, and offsets of
any nature. Unless otherwise agreed to by Lender in writing, Eligible
Accounts do not include:
(a) Accounts with respect to which the Account Debtor is an officer,
an employee or agent of Borrower.
(b) Accounts with respect to which the Account Debtor is a subsidiary
of, or affiliated with or related to Borrower or its shareholders,
officers, or directors.
(c) Accounts with respect to which goods are placed on consignment,
guaranteed sale, or other terms by reason of which the payment by the
Account Debtor may be conditional.
(d) Accounts with respect to which the Account Debtor is not a
resident of the United States, except to the extent such Accounts are
supported by insurance, bonds or other assurances satisfactory to
Lender.
(e) Accounts with respect to which Borrower is or may become liable to
the Account Debtor for goods sold or services rendered by the Account
Debtor to Borrower.
<PAGE>
09-22-1998 LOAN AGREEMENT Page 2
Loan No 3000009903 (Continued)
================================================================================
(f) Accounts which are subject to dispute, counterclaim, or setoff.
(g) Accounts with respect to which the goods have not been shipped or
delivered, or the services have not been rendered, to the Account
Debtor.
(h) Accounts with respect to which Lender, in its sole discretion,
deems the creditworthiness or financial condition of the Account
Debtor to be unsatisfactory.
(i) Accounts of any Account Debtor who has filed or has had filed
against it a petition in bankruptcy or an application for relief under
any provision of any state or federal bankruptcy, insolvency, or
debtor-in-relief acts; or who has had appointed a trustee, custodian,
or receiver for the assets of such Account Debtor; or who has made an
assignment for the benefit of creditors or has become insolvent or
fails generally to pay its debts (including its payrolls) as such
debts become due.
(j) Accounts with respect to which the Account Debtor is in the United
States government or any department or agency of the United States.
(k) Accounts which have not been paid in full within 90 days from the
invoice date. The entire balance of any Account of any single Account
debtor will be ineligible whenever the portion of the Account which
has not been paid within 90 days from the invoice date is in excess of
50.000% of the total amount outstanding on the Account.
(l) The entire balance of any Account of any single Account Debtor
whenever any portion of the Account has not been paid within the grace
period specified above; Accounts which are subject to retainage.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
Expiration Date. The words "Expiration Date" mean the date of termination
of Lender's commitment to lend under this Agreement.
Grantor. The word "Grantor" means and includes without limitation each and
all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all Borrowers
granting such a Security Interest.
Guarantor. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with the Indebtedness.
Indebtedness. The word "Indebtedness" means and includes without limitation
all Loans, together with all other obligations, debts and liabilities of
Borrower to Lender, or any one or more of them, as well as all claims by
Lender against Borrower, or any one or more of them, whether now or
hereafter existing, voluntary or involuntary, due or not due, absolute or
contingent, liquidated or unliquidated; whether Borrower may be liable
individually or jointly with others; whether Borrower may be obligated as a
guarantor, surety, or otherwise; whether recovery upon such indebtedness
may be or hereafter may become barred by any statute of limitations; and
whether such indebtedness may be or hereafter may become otherwise
unenforceable.
Lender. The word "Lender" means KEYBANK NATIONAL ASSOCIATION, its
successors and assigns.
Line of Credit. The words "Line of Credit" mean the credit facility
described in the Section titled "LINE OF CREDIT" below.
Loan. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this
Agreement from time to time.
Note. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note
or notes therefor.
Permitted Liens. The words "Permitted Liens" mean: (a) liens and security
interests securing indebtedness owed by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either not yet due or being
contested in good faith; (c) liens of materialmen, mechanics, warehousemen,
or carriers, or other like liens arising in the ordinary course of business
and securing obligations which are not yet delinquent; (d) purchase money
liens or purchase money security interests upon or in any property acquired
or held by Borrower in the ordinary course of business to secure
indebtedness outstanding on the date of this Agreement or permitted to be
incurred under the paragraph of this Agreement titled "Indebtedness and
Liens"; (e) liens and security interests which, as of the date of this
Agreement, have been disclosed to and approved by the Lender in writing;
and (f) those liens and security interests which in the aggregate
constitute an immaterial and insignificant monetary amount with respect to
the net value of Borrower's assets.
Related Documents. The words "Related Documents" mean and 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.
Security Agreement. The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
In/terest.
Security Interest.The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention
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09-22-1998 LOAN AGREEMENT Page 3
Loan No 3000009903 (Continued)
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contract, lease or consignment intended as a security device, or any other
security or lien interest whatsoever, whether created by law, contract, or
otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time
from the date of this Agreement to the Expiration Date, provided the aggregate
amount of such Advances outstanding at any time does not exceed the Borrowing
Base. Within the foregoing limits, Borrower may borrow, partially or wholly
prepay, and reborrow under this Agreement as follows:
Conditions Precedent to Each AdvancLender's obligation to make any Advance
to or for the account of Borrower under this Agreement is subject to the
following conditions precedent, with all documents, instruments, opinions,
reports, and other items required under this Agreement to be in form and
substance satisfactory to Lender:
(a) Lender shall have received evidence that this Agreement and all
Related Documents have been duly authorized, executed, and delivered
by Borrower to Lender.
(b) Lender shall have received such opinions of counsel, supplemental
opinions, and documents as Lender may request.
(c) The security interests in the Collateral shall have been duly
authorized, created, and perfected with first lien priority and shall
be in full force and effect.
(d) All guaranties required by Lender for the Line of Credit shall
have been executed by each Guarantor, delivered to Lender, and be in
full force and effect.
(e) Lender, at its option and for its sole benefit, shall have
conducted an audit of Borrower's Accounts, books, records, and
operations, and Lender shall be satisfied as to their condition.
(f) Borrower shall have paid to Lender all fees, costs, and expenses
specified in this Agreement and the Related Documents as are then due
and payable.
(g) There shall not exist at the time of any Advance a condition which
would constitute an Event of Default under this Agreement, and
Borrower shall have delivered to Lender the compliance certificate
called for in the paragraph below titled "Compliance Certificate."
Making Loan Advances. Advances under the Line of Credit may be requested
either orally or in writing by authorized persons. Lender may, but need
not, require that all oral requests be confirmed in writing. Each Advance
shall be conclusively deemed to have been made at the request of and for
the benefit of Borrower (a) when credited to any deposit account of
Borrower maintained with Lender or (b) when advanced in accordance with the
instructions of an authorized person. Lender, at its option, may set a
cutoff time, after which all requests for Advances will be treated as
having been requested on the next succeeding Business Day.
Mandatory Loan Repayments. If at any time the aggregate principal amount of
the outstanding Advances shall exceed the applicable Borrowing Base,
Borrower, immediately upon written or oral notice from Lender, shall pay to
Lender an amount equal to the difference between the outstanding principal
balance of the Advances and the Borrowing Base. On the Expiration Date,
Borrower shall pay to Lender in full the aggregate unpaid principal amount
of all Advances then outstanding and all accrued unpaid interest, together
with all other applicable fees, costs and charges, if any, not yet paid.
Loan Account. Lender shall maintain on its books a record of account in
which Lender shall make entries for each Advance and such other debits and
credits as shall be appropriate in connection with the credit facility.
Lender shall provide Borrower with periodic statements of Borrower's
account, which statements shall be considered to be correct and
conclusively binding on Borrower unless Borrower notifies Lender to the
contrary within thirty (30) days after Borrower's receipt of any such
statement which Borrower deems to be incorrect.
COLLATERAL. To secure payment of the Line of Credit and performance of all other
Loans, obligations and duties owed by Borrower to Lender, Borrower (and others,
if required) shall grant to Lender Security Interests in such property and
assets as Lender may require (the "Collateral"), including without limitation
Borrower's present and future Accounts and general intangibles. Lender's
Security Interests in the Collateral shall be continuing liens and shall include
the proceeds and products of the Collateral, including without limitation the
proceeds of any insurance. With respect to the Collateral, Borrower agrees and
represents and warrants to Lender:
Perfection of Security Interests. Borrower agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's Security Interests in the Collateral. Upon
request of Lender, Borrower will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Borrower will note
Lender's interest upon any and all chattel paper if not delivered to Lender
for possession by Lender. Contemporaneous with the execution of this
Agreement, Borrower will execute one or more UCC financing statements and
any similar statements as may be required by applicable law, and will file
such financing statements and all such similar statements in the
appropriate location or locations. Borrower hereby appoints Lender as its
irrevocable attorney-in-fact for the purpose of executing any documents
necessary to perfect or to continue any Security Interest. Lender may at
any time, and without further authorization from Borrower, file a carbon,
photograph, facsimile, or other reproduction of any financing statement for
use as a financing statement. Borrower will reimburse Lender for all
expenses for the perfection, termination, and the continuation of the
perfection of Lender's security interest in the Collateral. Borrower
promptly will notify Lender of any change in Borrower's name including any
change to the assumed business names of Borrower. Borrower also promptly
will notify Lender of any change in Borrower's Social Security Number or
Employer Identification Number. Borrower further agrees to notify Lender in
writing prior to any change in address or location of Borrower's principal
governance office or should Borrower merge or consolidate with any other
entity.
Collateral RecordsBorrower does now, and at all times hereafter shall, keep
correct and accurate records of the Collateral, all of which records shall
be available to Lender or Lender's representative upon demand for
inspection and copying at any reasonable time. With respect to the
Accounts, Borrower agrees
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09-22-1998 LOAN AGREEMENT Page 4
Loan No 3000009903 (Continued)
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to keep and maintain such records as Lender may require, including without
limitation information concerning Eligible Accounts and Account balances
and agings.
Collateral Schedules. Concurrently with the execution and delivery of this
Agreement, Borrower shall execute and deliver to Lender a schedule of
Accounts and Eligible Accounts, in form and substance satisfactory to the
Lender. Thereafter and at such frequency as Lender shall require, Borrower
shall execute and deliver to Lender such supplemental schedules of Eligible
Accounts and such other matters and information relating to Borrower's
Accounts as Lender may request.
Representations and Warranties Concerning Accounts. With respect to the
Accounts, Borrower represents and warrants to Lender: (a) Each Account
represented by Borrower to be an Eligible Account for purposes of this
Agreement conforms to the requirements of the definition of an Eligible
Account; (b) All Account information listed on schedules delivered to
Lender will be true and correct, subject to immaterial variance; and (c)
Lender, its assigns, or agents shall have the right at any time and at
Borrower's expense to inspect, examine, and audit Borrower's records and to
confirm with Account Debtors the accuracy of such Accounts.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
Organization. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the state of Borrower's
incorporation and is validly existing and in good standing in all states in
which Borrower is doing business. Borrower has the full power and authority
to own its properties and to transact the businesses in which it is
presently engaged or presently proposes to engage. Borrower also is duly
qualified as a foreign corporation and is in good standing in all states in
which the failure to so qualify would have a material adverse effect on its
business or financial condition.
Authorization. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not
conflict with, result in a violation of, or constitute a default under (a)
any provision of its articles of incorporation or organization, or bylaws,
or any agreement or other instrument binding upon Borrower or (b) any law,
governmental regulation, court decree, or order applicable to Borrower.
Financial Information. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material contingent
obligations except as disclosed in such financial statements.
Legal Effect. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
Properties. Except for Permitted Liens, Borrower owns and has good title to
all of Borrower's properties free and clear of all Security Interests, and
has not executed any security documents or financing statements relating to
such properties. All of Borrower's properties are titled in Borrower's
legal name, and Borrower has not used, or filed a financing statement under
any other name for at least the last five years. Borrower discloses and
Lender acknowledges that PCT Holdings, Inc., has filed financing statements
within the last five years.
Hazardous Substances. The terms "hazardous waste", "hazardous substance,"
"disposal," "release," and "threatened releases," as used in this
Agreement, shall have the same meanings as set forth in the "CERCLA,
"SARA," the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801,
et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section
6901, et seq., or other applicable state or Federal laws, rules, or
regulations adopted pursuant to any of the foregoing. Except as disclosed
to and acknowledged by Lender in writing (note: 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), Borrower
represents and warrants that: (a) During the period of Borrower's ownership
of the properties, there has been no use, generation, manufacture, storage,
treatment, disposal, release or threatened release of any hazardous waste
or substance by any person on, under, about or from any of the properties.
(b) Borrower has no knowledge of, or reason to believe that there has been
(i) any use, generation, manufacture, storage, treatment, disposal,
release, or threatened release of any hazardous waste or substance on,
under, about or from the properties by any prior owners or occupants of any
of the properties, or (ii) any actual or threatened litigation or claims of
any kind by any person relating to such matters. (c) Neither Borrower nor
any tenant, contractor, agent or other authorized user of any of the
properties shall use, generate, manufacture, store, treat, dispose of, or
release any hazardous waste or substance on, under, about or from any of
the properties; and any such activity shall be conducted in compliance with
all applicable federal, state, and local laws, regulations, and ordinances,
including without limitation those laws, regulations and ordinances
described above. Borrower authorizes Lender and its agents to enter upon
the properties to make such inspections and tests as Lender may deem
appropriate to determine compliance of the properties with this section of
the Agreement. Any inspections or tests made by Lender shall be at
Borrower's expense and for Lender's purposes only and shall not be
construed to create any responsibility or liability on the part of Lender
to Borrower or to any other person. The representations and warranties
contained herein are based on Borrower's due diligence in investigating the
properties for hazardous waste and hazardous substances. Borrower hereby
(a) releases and waives any future claims against Lender for indemnity or
contribution in the event Borrower becomes liable for cleanup or other
costs under any such laws, and (b) agrees to indemnify and hold harmless
Lender against any and all claims, losses, liabilities, damages, penalties,
and expenses which Lender may directly or indirectly sustain or suffer
resulting from a breach of this section of the Agreement or as a
consequence of any use, generation, manufacture, storage, disposal, release
or threatened release of a hazardous waste or substance on the properties.
The provisions of this section of the Agreement, including the obligation
to indemnify, shall survive the payment of the Indebtedness and the
termination or expiration of this Agreement and shall not be affected by
Lender's acquisition of any interest in any of the properties, whether by
foreclosure or otherwise.
Litigation and Claims. No material litigation, claim, investigation,
administrative proceeding or similar action (including those for unpaid
taxes) against Borrower is pending or threatened, and no other event has
occurred which may materially adversely affect Borrower's financial
condition or properties, other than litigation, claims, or other events, if
any, that have been disclosed to and acknowledged by Lender in writing.
Taxes. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes,
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09-22-1998 LOAN AGREEMENT Page 5
Loan No 3000009903 (Continued)
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assessments and other governmental charges have been paid in full, except
those presently being or to be contested by Borrower in good faith in the
ordinary course of business and for which adequate reserves have been
provided.
Lien Priority. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or
affecting any of the Collateral directly or indirectly securing repayment
of Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lender's Security Interests and rights in and to such
Collateral.
Binding Effect. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.
Commercial Purposes. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
Employee Benefit Plans. Each employee benefit plan as to which Borrower may
have any liability complies in all material respects with all applicable
requirements of law and regulations, and (i) no Reportable Event nor
Prohibited Transaction (as defined in ERISA) has occurred with respect to
any such plan, (ii) Borrower has not withdrawn from any such plan or
initiated steps to do so, (iii) no steps have been taken to terminate any
such plan, and (iv) there are no unfunded liabilities other than those
previously disclosed to Lender in writing.
Location of Borrower's Offices and Records. Borrower's place of business,
or Borrower's chief executive office, if Borrower has more than one place
of business, is located at 430 OLDS STATION RD, WENATCHEE, WA 98801. Unless
Borrower has designated otherwise in writing this location is also the
office or offices where Borrower keeps its records concerning the
Collateral.
Year 2000. Borrower warrants and represents that all software utilized in
the conduct of Borrower's business will have appropriate capabilities and
compatibility for operation to handle calendar dates falling on or after
January 1, 2000, and all information pertaining to such calendar dates, in
the same manner and with the same functionality as the software does
respecting calendar dates falling on or before December 31, 1999. Further,
Borrower warrants and represents that the data-related user interface
functions, data-fields, and data-related program instructions and functions
of the software include the indication of the century.
Information. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be true and accurate in every material respect on the date as of which such
information is dated or certified; and none of such information is or will
be incomplete by omitting to state any material fact necessary to make such
information not misleading.
Survival of Representations and Warranties. Borrower understands and agrees
that Lender, without independent investigation, is relying upon the above
representations and warranties in extending Loan Advances to Borrower.
Borrower further agrees that the foregoing representations and warranties
shall be continuing in nature and shall remain in full force and effect
until such time as Borrower's indebtedness shall be paid in full, or until
this Agreement shall be terminated in the manner provided above, whichever
is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
Litigation. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings
or similar actions affecting Borrower or any Guarantor which could
materially affect the financial condition of Borrower or the financial
condition of any Guarantor.
Financial Records.Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and audit Borrower's books and records at all
reasonable times.
Financial Statements. Furnish Lender with, as soon as available, but in no
event later than ninety (90) days after the end of each fiscal year,
Borrower's balance sheet and income statement for the year ended, audited
by a certified public accountant satisfactory to Lender, and as soon as
available, but in no event later than sixty (60) days after the end of each
fiscal quarter, Borrower's balance sheet and profit and loss statement for
the period ended, prepared and certified as correct to the best knowledge
and belief by Borrower's chief financial officer or other officer or person
acceptable to Lender. All financial reports required to be provided under
this Agreement shall be prepared in accordance with generally accepted
accounting principles, applied on a consistent basis, and certified by
Borrower as being true and correct.
Additional Information. furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables,
inventory schedules, budgets, forecasts, tax returns, and other reports
with respect to Borrower's financial condition and business operations as
Lender may request from time to time.
Insurance. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon request
of Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be canceled or diminished without at
least ten (10) days' prior written notice to Lender. Each insurance policy
also shall include an endorsement providing that coverage in favor of
Lender will not be impaired in any way by any act, omission or default of
Borrower or any other person. In connection with all policies covering
assets in which Lender holds or is offered a security interest for the
Loans, Borrower will provide Lender with such loss payable or other
endorsements as Lender may require.
Insurance Reports.Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the
name of the insurer; (b) the risks insured; (c) the amount of the policy;
(d) the properties insured;
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09-22-1998 LOAN AGREEMENT Page 6
Loan No 3000009903 (Continued)
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(e) the then current property values on the basis of which insurance has
been obtained, and the manner of determining those values; and (f) the
expiration date of the policy. In addition, upon request of Lender (however
not more often than annually) Borrower will have an independent appraiser
satisfactory to Lender determine, as applicable, the actual cash value or
replacement cost of any Collateral. The cost of such appraisal shall be
paid by Borrower.
Guaranties. Prior to disbursement of any Loan proceeds, furnish executed
guaranties of the Loans in favor of Lender, executed by the guarantors
named below, on Lender's forms, and in the amounts and under the conditions
spelled out in those guaranties.
Guarantors Amounts
---------- -------
AEROMET AMERICA, INC. Unlimited
PACIFIC COAST TECHNOLOGIES, INC. Unlimited
SEISMIC SAFETY PRODUCTS, INC. Unlimited
BALO PRECISION PARTS, INC. Unlimited
CASHMERE MANUFACTURING CO., INC. Unlimited
CERAMIC DEVICES, INC. Unlimited
ELECTRONIC SPECIALITY CORPORATION Unlimited
NORTHWEST TECHNICAL INDUSTRIES, INC. Unlimited
Other Agreements. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
Loan Proceeds. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
Taxes, Charges and Liens. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all assessments,
taxes, governmental charges, levies and liens, of every kind and nature,
imposed upon Borrower or its properties, income, or profits, prior to the
date on which penalties would attach, and all lawful claims that, if
unpaid, might become a lien or charge upon any of Borrower's properties,
income, or profits. Provided however, Borrower will not be required to pay
and discharge any such assessment, tax, charge, levy, lien or claim so long
as (a) the legality of the same shall be contested in good faith by
appropriate proceedings, and (b) Borrower shall have established on its
books adequate reserves with respect to such contested assessment, tax,
charge, levy, lien, or claim in accordance with generally accepted
accounting practices. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies,
liens and claims and will authorize the appropriate governmental official
to deliver to Lender at any time a written statement of any assessments,
taxes, charges, levies, liens and claims against Borrower's properties,
income, or profits.
Performance. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely
manner, and promptly notify Lender if Borrower learns of the occurrence of
any event which constitutes an Event of Default under this Agreement or
under any of the Related Documents.
Operations. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and
management personnel; provide written notice to Lender of any change in
executive and management personnel; conduct its business affairs in a
reasonable and prudent manner and in compliance with all applicable
federal, state and municipal laws, ordinances, rules and regulations
respecting its properties, charters, businesses and operations, including
without limitation, compliance with the Americans With Disabilities Act and
with all minimum funding standards and other requirements of ERISA and
other laws applicable to Borrower's employee benefit plans.
Inspection. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and
records. If Borrower now or at any time hereafter maintains any records
(including without limitation computer generated records and computer
software programs for the generation of such records) in the possession of
a third party, Borrower, upon request of Lender, shall notify such party to
permit Lender free access to such records at all reasonable times and to
provide Lender with copies of any records it may request, all at Borrower's
expense.
Compliance Certificate. Unless waived in writing by Lender, provide Lender
at least annually and at the time of each disbursement of Loan proceeds
with a certificate executed by Borrower's chief financial officer, or other
officer or person acceptable to Lender, certifying that the representations
and warranties set forth in this Agreement are true and correct as of the
date of the certificate and further certifying that, as of the date of the
certificate, no Event of Default exists under this Agreement.
Environmental Compliance and Reports. Borrower shall comply in all respects
with all environmental protection federal, state and local laws, statutes,
regulations and ordinances; not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part or on the part
of any third party, on property owned and/or occupied by Borrower, any
environmental activity where damage may result to the environment, unless
such environmental activity is pursuant to and in compliance with the
conditions of a permit issued by the appropriate federal, state or local
governmental authorities; shall furnish to Lender promptly and in any event
within thirty (30) days after receipt thereof a copy of any notice,
summons, lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or
unintentional action or omission on Borrower's part in connection with any
environmental activity whether or not there is damage to the environment
and/or other natural resources.
Additional Assurances. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing
statements, instruments, documents and other agreements as Lender or its
attorneys may reasonably request to evidence and secure the Loans and to
perfect all Security Interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
Continuity of Operations. Make any acquisition which individually would
dilute the Borrower's net worth by more than twenty-five percent (25%) in
<PAGE>
09-22-1998 LOAN AGREEMENT Page 7
Loan No 3000009903 (Continued)
================================================================================
any one year or jeopardize Borrower's ability to comply with any other
covenant or commitment under this Agreement, the Loan or Related Documents.
Loans, Acquisitions and Guaranties.(a) Loan, invest in or advance money or
assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) incur any obligation as surety or guarantor
other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; or (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loan with Lender.
ADDITIONAL DEFINITIONS.
Adjusted Tangible Capital means Tangible Capital less investments in, advances
to, promissory notes and any receivables from, any affiliate or other related
entity of Borrower.
Capital Expenditures means current period net fixed assets less prior period net
fixed assets, plus current period depreciation.
Cash Flow means net income after taxes, and exclusive of extraordinary gains and
income, plus depreciation and amortization.
Current Assets shall be as defined by GAAP, minus prepaid expenses.
Current Liabilities shall be as defined by GAAP.
Debt means all of Borrower's liabilities excluding Subordinated Debt.
EBITDA means, calculated for the period of the previous four fiscal quarters,
the net earnings of Borrower plus the aggregate amounts deducted in determining
such net income in respect of interest expenses, taxes, depreciation and
amortization; but not, however, giving effect to extraordinary losses or gains
in calculating net income.
Fixed Charges means interest expense plus lease expense, current maturities of
long-term debt and current maturities of capital leases.
Funded Debt means all interest bearing term loan Debt or capital lease payments
of Borrower having a maturity of greater than one year.
Liquid Assets means Borrower's cash on hand plus Borrower's readily marketable
securities.
Operating Cash Flow means net income after taxes, and exclusive of extraordinary
gains, gains on asset sales, and other income, plus depreciation, and
amortization, plus interest expense, plus lease expense, less dividends, and
distributions.
Subordinated Debt means indebtedness and liabilities of Borrower which have been
subordinated by written agreement to indebtedness owed by Borrower to Lender in
form and substance acceptable to Lender.
Tangible Capital means Tangible Net Worth plus Subordinated Debt.
Tangible Net Worth means Borrower's total assets excluding all intangible assets
(i.e., goodwill, trademarks, patents, copyrights, organizational expenses, and
similar intangible items, but including leaseholds and leasehold improvements)
less total Debt.
Total Fixed Charges means interest expense, plus current maturities of long-term
debt and current maturities of capital leases, plus lease expenses, plus
preferred stock dividends, plus Capital Expenditures.
Total Liquid Assets means Borrower's cash on hand plus Borrower's readily
marketable securities, plus Borrower's net trade accounts receivable.
Total Senior Liabilities means total liabilities less Subordinated Debt.
Unencumbered Liquidity means the sum of unpledged cash, stocks, bonds, and other
near cash investments held in a person's name and immediately available with
unimpaired value; but not including pledged assets, IRA, 401(k), annuity or
trust accounts.
Working Capital means Borrower's current assets, excluding prepaid expenses,
less Borrower's current liabilities.
ADDITIONAL COVENANTS. Borrower covenants and agrees with Lender that, while this
Agreement is in effect, Borrower will:
Tangible Net Worth. Borrower shall maintain a Tangible Net Worth of not less
than $35,000,000.00; calculated at the end of each QUARTER.
Debt/Tangible Capital RadioBorrower shall maintain a ratio of Debt to Tangible
Capital of less than .75 to 1.0; calculated at the end of each QUARTER.
Working Capital. Borrower shall maintain Working Capital in excess of
$10,000,000.00; calculated at the end of each QUARTER.
Current Ratio. Borrower shall maintain a ratio of current assets to current
liabilities in excess of 2.0 to 1.0; calculated at the end of each QUARTER.
<PAGE>
09-22-1998 LOAN AGREEMENT Page 8
Loan No 3000009903 (Continued)
================================================================================
Minimum Debt Service Coverage. Borrower shall maintain a ratio of Minimum Debt
Service Coverage in excess of 1.50 to 1.00; measured annually (Debt Service
Coverage Ratio is defined as: net income plus depreciation minus cash dividends
minus unfinanced capital expenditures divided by prior year's current portion of
long term debt).
BORROWING PLAN. An exhibit, titled "BORROWING PLAN," is attached to this
Agreement and by this reference is made a part of this Agreement just as if all
the provisions, terms and conditions of the Exhibit had been fully set forth in
this Agreement.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness. Failure of Borrower to make any payment when due
on the Loans.
Other Defaults. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at
any time thereafter.
Defective CollateralizationThis Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time
and for any reason.
Insolvency. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings.Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any creditor
of any Grantor against any collateral securing the Indebtedness, or by any
governmental agency. This includes a garnishment, attachment, or levy on or
of any of Borrower's deposit accounts with Lender. However, this Event of
Default shall not apply if there is a good faith dispute by Borrower or
Grantor, as the case may be, as to the validity or reasonableness of the
claim which is the basis of the creditor or forfeiture proceeding, and if
Borrower or Grantor gives Lender written notice of the creditor or
forfeiture proceeding and furnishes reserves or a surety bond for the
creditor or forfeiture proceeding satisfactory to Lender.
Events Affecting Guarantor.Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness, or any Guarantor dies or
becomes incompetent, or revokes or disputes the validity of, or liability
under, any Guaranty of the Indebtedness. Lender, at its option, may but
shall not be required to, permit the Guarantor's estate to assume
unconditionally the obligations arising under the guaranty in a manner
satisfactory to Lender, and, in doing so, cure the Event of Default.
Adverse Change. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
Right to Cure. If any default, other than a Default on Indebtedness, is
curable and if Borrower or Grantor, as the case may be, has not been given
a notice of a similar default within the preceding twelve (12) months, it
may be cured (and no Event of Default will have occurred) if Borrower or
Grantor, as the case may be, after receiving written notice from Lender
demanding cure of such default: (a) cures the default within fifteen (15)
days; or (b) if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lender's sole discretion to be
sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will terminate (including any obligation to make
Loan Advances or disbursements), and at Lender's option, all Indebtedness
immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
in the "Insolvency" subsection above, such acceleration shall be automatic and
not optional. In addition, Lender shall have all the rights and remedies
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire and final understanding and agreement of the parties
as to the matters set forth in this Agreement. No alteration of or
amendment to this agreement shall be effective unless given in writing and
signed by the party or parties sought to be charged or bound by the
alteration or amendment.
Applicable Law. This Agreement 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, the State of Washington. Lender and Borrower hereby waive
the right to any jury trial in any action, proceeding, or counterclaim
brought by either Lender or Borrower against the other. This Agreement
shall be governed by and construed in accordance with the laws of the State
of Washington.
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
Multiple Parties; Corporate AuthoriAll obligations of Borrower under this
Agreement shall be joint and several, and all references to Borrower shall
<PAGE>
09-22-1998 LOAN AGREEMENT Page 9
Loan No 3000009903 (Continued)
================================================================================
mean each and every Borrower. This means that each of the persons signing
below is responsible for all obligations in this Agreement.
Consent to Loan Participation. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation whatsoever,
to any one or more purchasers, or potential purchasers, any information or
knowledge Lender may have about Borrower or about any other matter relating
to the Loan, and Borrower hereby waives any rights of privacy it may have
with respect to such matters. Borrower additionally waives any and all
notices of sale of participation interests, as well as all notices of any
repurchase of such participation interests. Borrower also agrees that the
purchasers of any such participation interests will be considered as the
absolute owners of such interests in the Loans and will have all the rights
granted under the participation agreement or agreements governing the sale
of such participation interests. Borrower further waives all rights of
offset or counterclaim that it may have now or later against Lender or
against any purchaser of such a participation interest and unconditionally
agrees that either Lender or such purchaser may enforce Borrower's
obligation under the Loans irrespective of the failure or insolvency of any
holder of any interest in the Loans. Borrower further agrees that the
purchaser of any such participation interests may enforce its interests
irrespective of any personal claims or defenses that Borrower may have
against Lender.
Costs and Expenses. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification and
collection of this Agreement or in connection with the Loans made pursuant
to this Agreement. Lender may pay someone else to help collect the Loans
and to enforce this Agreement, and Borrower will pay that amount. This
includes, subject to any limits under applicable law, Lender's attorneys'
fees and Lenders' legal expenses, whether or not there is a lawsuit,
including attorneys' fees for bankruptcy proceedings (including efforts to
modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. Borrower also will pay any
court costs, in addition to all other sums provided by law.
Notices. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile 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 Borrower, notice to any Borrower will constitute notice to
all Borrowers. For notice purposes, Borrower will keep Lender informed at
all times of Borrower's current address(es).
Severability. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
Subsidiaries and Affiliates of BorrTo the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation, any representation, warranty or covenant, the word "Borrower"
as used herein shall include all subsidiaries and affiliates of Borrower.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other
financial accommodation to any subsidiary or affiliate of Borrower.
Successors and Assigns. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to
the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
Survival.All warranties, representations, and covenants made by Borrower in
this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery
to Lender of the Related Documents, regardless of any investigation made by
Lender or on Lender's behalf.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Borrower, or between Lender and any
Grantor, shall constitute a waiver of any of Lender's rights or of any
obligations of Borrower or of any Grantor as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the
granting of such consent by Lender in any instance shall not constitute
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.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND
BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED SEPTEMBER 22, 1998.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
<PAGE>
09-22-1998 LOAN AGREEMENT Page 10
Loan No 3000009903 (Continued)
================================================================================
BORROWER:
PACIFIC AEROSPACE & ELECTRONICS, INC.
By: /s/ DONALD A. WRIGHT
-----------------------------------
DONALD A. WRIGHT, CEO & PRESIDENT
LENDER:
KEYBANK NATIONAL ASSOCIATION
By: /s/
-----------------------------------
Authorized Officer
PROMISSORY NOTE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
- ---------- ---------- ---------- ---------- ---- ---------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$6,300,000 09-22-1998 09-05-1999 3000009903 403 302 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
430 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: $6,300,000.00 Initial Rate: 8.000% Date of Note: September 22, 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 Six Million Three Hundred
Thousand & 00/100 Dollars (($6,300,000.00) or so much as may be outstanding,
together with interest on the unpaid outstanding principal balance of each
advance. Interest shall be calculated from the date of each advance until
repayment of each advance.
PAYMENT. Borrower shall pay this loan on demand, or if no demand is made, in one
payment of all outstanding principal plus all accrued unpaid interest on
September 5, 1999. In addition, Borrower will pay regular monthly payments of
accrued unpaid interest beginning November 5, 1998, and all subsequent interest
payments are due on the same day of each month after that. Interest on this Note
is computed on a 365/360 simple interest basis; that is, by applying the ratio
of the annual interest rate over a year of 360 days, times the outstanding
principal balance, times the actual number of days the principal balance is
outstanding. Borrower will pay Lender at Lender's address shown above or at such
other place as Lender may designate in writing. Unless otherwise agreed or
required by applicable law, payments will be applied first to accrued unpaid
interest, then to principal, and any remaining amount to any unpaid collection
costs and late charges.
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 of 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 of 0.500 percentage points under the Index, resulting in an initial
rate of 8.000% per annum. NOTICE: Under no circumstances will the interest rate
on this Note be more than the maximum rate allowed by applicable law.
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 of accrued unpaid interest.
Rather, they will reduce the principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment or $50.00, 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 commenced either by Borrower or against Borrower under any
bankruptcy or insolvency laws. (e) Any creditor tries to take any of Borrower's
property on or in which Lender has a lien or security Interest. This includes a
garnishment of any of Borrower's accounts with Lender. (f) Any 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 ore 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 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 is option, may also, if permitted under applicable
law, increase the variable interest rate on this Note 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, the State of Washington. Lender and Borrower
hereby waive the right to any jury trial in any action, proceeding or
counterclaim brought by either Lender or Borrower against the other. This 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.
<PAGE>
09-22-1998 PROMISSORY NOTE Page 2
Loan No 3000009903 (Continued)
================================================================================
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note may be requested either orally or in writing by Borrower or by an
authorized person. Lender may, but need not, require that all oral requests be
confirmed in writing. All communications, instructions, or directions by
telephone or otherwise to Lender are to be directed to Lender's office shown
above. The following party or parties are authorized to request advances under
the line of credit until Lender receives from Borrower at Lender's address shown
above written notice of revocation of their authority: DONALD A. WRIGHT, CEO &
PRESIDENT; NICK A. GERDE, VICE PRESIDENT, CHIEF FINANCIAL OFFICER, TREASURER;
and SHERYL A. SYMONDS, SECRETARY. Borrower agrees to be liable for all sums
either: (a) advanced in accordance with the instructions of an authorized person
or (b) credited to any of Borrower's accounts with Lender. The unpaid principal
balance owing on this Note at any time may be evidenced by endorsements on this
Note or by Lender's internal records, including daily computer print-outs.
Lender will have no obligation to advance funds under this Note if: (a) Borrower
or any guarantor is in default under the terms of this Note or any agreement
that Borrower or any guarantor has with Lender, including any agreement made in
connection with the signing of this Note; (b) Borrower or any guarantor ceases
doing business or is insolvent; (c) any guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such guarantor's guarantee of this Note or
any other loan with Lender; or (d) Borrower has applied funds provided pursuant
to this Note for purposes other than those authorized by Lender.
ADDITIONAL PROVISION. Any advance that Lender in its sole discretion may permit
after the final payment date provided in this Note will be due on demand and
otherwise subject to the terms of this Note.
LIBOR ADDENDUM. THE TERMS IN THE LIBOR ADDENDUM ATTACHED TO THIS NOTE ARE
INCORPORATED HEREIN.
PRIOR NOTE. This Note is a renewal of that Promissory Note from Borrower to
Lender dated JUNE 30, 1997, IN THE ORIGINAL PRINCIPAL AMOUNT OF $3,500,000.00.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. 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 change in the terms of this Note, and unless otherwise
expressly stated in writing, no party who signs this Note, whether as maker,
guarantor, accommodation maker or endorser, shall be released from liability.
All such parties agree that Lender may renew or extend (repeatedly and for any
length of time) this loan, or release any party or guarantor or collateral; or
impair, fail to realize upon or perfect Lender's security interest in the
collateral; and take any other action deemed necessary by Lender without the
consent of or notice to anyone. All such parties also agree that Lender may
modify this loan without the consent of or notice to anyone other than the party
with whom the modification is made.
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
COMMERCIAL SECURITY AGREEMENT
<TABLE>
<CAPTION>
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Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
$6,300,000.00 09-22-1998 09-05-1999 3000009903 403 302 E 357577 JCT02
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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.
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Borrower: PACIFIC AEROSPACE & ELECTRONICS, INC. LENDER: KEYBANK NATIONAL ASSOCIATION
430 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
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</TABLE>
THIS COMMERCIAL SECURITY AGREEMENT is entered into between PACIFIC AEROSPACE &
ELECTRONICS, 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 additional 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 dollar 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.
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 inventory, chattel paper, accounts, and general intangibles.
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.
(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property
described in this Collateral section.
(d) 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.
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 AEROSPACE & ELECTRONICS, INC. ,
and its successors and assigns.
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 is responsible under
this Agreement or under any of the Related Documents.
Lender. The word "Lender" means KEYBANK NATIONAL ASSOCIATION, its
successors and assigns.
Note. The word "Note" means the note or credit agreement dated September
22, 1998, in the principal, amount of $6,300,000.00 from Grantor 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.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
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09-22-1998 COMMERCIAL SECURITY AGREEMENT Page 2
Loan No 3000009903 (Continued)
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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-win-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.
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 CollateraTo 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. At the time any account becomes subject to a
security interest in favor of Lender, the account shall be a good and valid
account representing an undisputed, bona fide indebtedness incurred by the
account debtor, for merchandise held subject to delivery instructions
theretofore shipped or delivered pursuant to a contract of sale, or for
services theretofore performed by Grantor with or for the account debtor;
there shall be no setoffs or counterclaims against any such account; and no
agreement under which any deductions or discounts may be claimed shall have
been made with the account debtor except those disclosed to Lender in
writing.
Location of the Collateral.Grantor, upon request of Lender, will deliver to
Lender in form satisfactory to Lender a schedule of real property and
Collateral locations relating to Grantor's operations, including without
limitation the following: (a) all real property owned or being purchased by
Grantor; (b) all real property being rented or leased by Grantor; (c) all
storage facilities owned, rented, leased, or being used by Grantor; and (d)
all other properties where Collateral is or may be located. Except in the
ordinary course of its business, Grantor shall not remove the Collateral
from its existing location without the prior written agreement of Lender.
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
covering 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.
Collateral Schedules and Locations.As often as Lender shall require, and
insofar as the Collateral consists of accounts and general intangibles,
Grantor shall deliver to Lender schedules of such Collateral, including
such information as Lender may require, including without limitation names
and addresses of account debtors and aging of accounts and general
intangibles. Insofar as the Collateral consists of inventory, Grantor shall
deliver to Lender, as often as Lender shall require, such lists,
descriptions, and designations of such Collateral as Lender may require to
identify the nature, extent and location of such Collateral. Such
information shall be submitted for Grantor and each of its subsidiaries or
related companies.
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 LienGrantor will pay when due all taxes, assessments
and liens upon the Collateral, its use or operation, upon this 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' 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
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09-22-1998 COMMERCIAL SECURITY AGREEMENT Page 3
Loan No 3000009903 (Continued)
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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 (Note: 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), 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, Pub. 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.
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
canceled 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 Lender 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 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 AND TO COLLECT ACCOUNTS. Until default and except
as otherwise provided below with respect to accounts, 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. Until otherwise notified by Lender, Grantor may collect any of
the Collateral consisting of accounts. At any time and even though no Event of
Default exists, Lender may exercise its rights to collect the accounts and to
notify account debtors to make payments directly to Lender for application to
the Indebtedness. 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 be
apportioned among and be payable with any installment payments to become 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
<PAGE>
09-22-1998 COMMERCIAL SECURITY AGREEMENT Page 4
Loan No 3000009903 (Continued)
================================================================================
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.
Other Defaults. Failure of Grantor or Borrower to comply with or to perform
any other term, obligation, covenant or condition contained in this
Agreement or in 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 CollateralizationThis 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 creditor 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.
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 CollateraLender 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
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09-22-1998 COMMERCIAL SECURITY AGREEMENT Page 5
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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.
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 agreement of the parties
as to the matters set forth in this Agreement. No alteration of or
amendment to this Agreement shall be effective unless given in writing and
signed by the party or parties sought to be charged or bound by the
alteration or amendment.
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 AuthoriAll 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).
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
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
<PAGE>
09-22-1998 COMMERCIAL SECURITY AGREEMENT Page 6
Loan No 3000009903 (Continued)
================================================================================
Successor InterestSubject 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.
<PAGE>
09-22-1998 COMMERCIAL SECURITY AGREEMENT Page 7
Loan No 3000009903 (Continued)
================================================================================
Successor InterestSubject to the limitations set forth above on transfer of
the Collateral, this Agreement shall be binding upon and inure to the
benefit of
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY
AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED SEPTEMBER
22, 1998.
GRANTOR:
PACIFIC AEROSPACE & ELECTRONICS, INC.
By: /s/ DONALD A. WRIGHT
-----------------------------------
DONALD A. WRIGHT, CEO & PRESIDENT
PROMISSORY NOTE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
- ------------- ---------- ---------- -------- ---- ---------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$1,200,000.00 09-30-1998 06-01-2008 9002 133 802 E357577 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
430 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: $1,200,000.00 Initial Rate: 8.000% Date of Note: September 30, 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 One Million Two Hundred
Thousand & 00/100 Dollars (($1,200,000.00), together with interest on the unpaid
principal balance from September 30, 1998, until paid in full.
PAYMENT. Subject to any payment changes resulting from changes in the Index,
Borrower will pay this loan in 115 regular payments of $10,127.05 each and one
irregular last payment estimated at $858,346.48. Borrower's first payment is due
November 1, 1998, and all subsequent payments are due on the same day of each
month after that. Borrower's final payment due June 1, 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 of 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 of 0.500 percentage points under the Index, resulting in an initial
rate of 8.000% 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.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment or $50.00, 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 commenced either by Borrower or against Borrower under any
bankruptcy or insolvency laws. (e) Any creditor tries to take any of Borrower's
property on or in which Lender has a lien or security Interest. This includes a
garnishment of any of Borrower's accounts with Lender. (f) Any 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 ore 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 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 is option, may also, if permitted under applicable
law, increase the variable interest rate on this Note 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, the State of Washington. Lender and Borrower
hereby waive the right to any jury trial in any action, proceeding or
counterclaim brought by either Lender or Borrower against the other. This Note
shall be governed by and construed in accordance with the laws of the State of
Washington.
<PAGE>
09-30-1998 PROMISSORY NOTE Page 2
Loan No 9002 (Continued)
================================================================================
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.
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 change
in the terms of this Note, and unless otherwise expressly stated in writing, no
party who signs this Note, whether as maker, guarantor, accommodation maker or
endorser, shall be released from liability. All such parties agree that Lender
may renew or extend (repeatedly and for any length of time) this loan, or
release any party or guarantor or collateral; or impair, fail to realize upon or
perfect Lender's security interest in the collateral; and take any other action
deemed necessary by Lender without the consent of or notice to anyone. All such
parties also agree that Lender may modify this loan without the consent of or
notice to anyone other than the party with whom the modification is made.
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
AFTER RECORDING MAIL TO:
KEYBANK NATIONAL ASSOCIATION
COMMERCIAL LOAN SERVICES
P. O. BOX 5278
BOISE, ID 83705-5278
- --------------------------------------------------------------------------------
DEED OF TRUST
Reference # (if applicable): ___________ Additional on page ____
Grantor(s):
1. PACIFIC AEROSPACE & ELECTRONICS, INC.
Grantee(s)/Assignee/Beneficiary:
KEYBANK NATIONAL ASSOCIATION, Beneficiary
LAND TITLE COMPANY, CHELAN-DOUGLAS COUNTY, INC., Trustee
Legal Description: IN THE COUNTY OF CHELAN, STATE OF WASHINGTON
A TRACT OF LAND SITUATED IN THE NORTHEAST QUARTER OF THE NORTHEAST QUARTER OF
SECTION 28, TOWNSHIP 23 NORTH, RANGE 20 E.W.M., CHELAN COUNTY, WASHINGTON, MORE
PARTICULARLY DESCRIBED AS FOLLOWS:
Additional on page ____
Assessor's Tax Parcel ID#: 23 20 28 110 450
THIS DEED OF TRUST IS DATED SEPTEMBER 30, 1998, among PACIFIC AEROSPACE &
ELECTRONICS, INC., A WASHINGTON CORPORATION, whose mailing address is 430 OLDS
STATION RD, WENATCHEE, WA 98801(referred to below as "Grantor"); KEYBANK
NATIONAL ASSOCIATION, whose mailing address is 102 SOUTH WENATCHEE AVENUE, P. O.
BOX 1301 WA-31-35-0163, WENATCHEE, WA 98807 (referred to below sometimes as
"Lender" and sometimes as "Beneficiary"); and LAND TITLE COMPANY, CHELAN-DOUGLAS
COUNTY, INC., whose mailing address is P. O. BOX 1726-16 S. MISSION, WENATCHEE,
WA 98807-1726 (referred to below as "Trustee").
CONVEYANCE AND GRANT. For valuable consideration, Grantor conveys to Trustee in
trust with power of sale, right of entry and possession and for the benefit of
Lender as Beneficiary, all of Grantor's right, title, and interest in and to the
following-described real property, together with all existing or subsequently
erected or affixed buildings, improvements and fixtures;
<PAGE>
09-30-1998 DEED OF TRUST Page 2
Loan No 9002 (Continued)
================================================================================
all easements, rights of way, and appurtenances; all water, water rights and
ditch rights (including stock in utilities with ditch or irrigation rights); and
all other rights, royalties, and profits relating to the real property,
including without limitation all minerals, oil, gas, geothermal and similar
matters, located in CHELAN County, State of Washington (the "Real Property"):
IN THE COUNTY OF CHELAN, STATE OF WASHINGTON
A TRACT OF LAND SITUATED IN THE NORTHEAST QUARTER OF THE NORTHEAST
QUARTER OF SECTION 28, TOWNSHIP 23 NORTH, RANGE 20, E.W.M., CHELAN
COUNTY, WASHINGTON, MORE PARTICULARLY DESCRIBED AS FOLLOWS:
BEGINNING AT THE NORTHEAST CORNER OF THE SAID SECTION 28; THENCE SOUTH
00(degree)28'37" EAST ALONG THE EAST LINE OF SAID SECTION 28 A
DISTANCE OF 498.47 FEET; THENCE NORTH 90(degree)00'00" WEST A DISTANCE
OF 332.19 FEET TO A POINT OF CURVE; THENCE ALONG A CURVE TO THE RIGHT
HAVING A RADIUS OF 830.00 FEET; THROUGH A CENTRAL ANGLE OF
4(degree)13'17", AN ARC DISTANCE OF 61.15 FEET; THENCE SOUTH
39(degree)40'05" WEST A DISTANCE OF 314.36 FEET TO THE POINT OF
BEGINNING;
THENCE SOUTH 39(degree)40'05" WEST 313.93 FEET TO A POINT OF CURVE;
THENCE 125.22 FEET ALONG A 120.00 FEET RADIUS TO THE LEFT THROUGH A
CENTRAL ANGLE OF 59(degree)47'24"; THENCE 46.63 FEET ALONG A 27.00
FEET RADIUS CURVE TO THE LEFT THROUGH A CENTRAL ANGLE OF
98(degree)57'28"; THENCE NORTH 60(degree)55'13" EAST 17.52 FEET TO A
POINT OF CURVE; THENCE 179.44 FEET ALONG A 640.00 FEET RADIUS CURVE TO
THE RIGHT THROUGH A CENTRAL ANGLE OF 16(degree)03'51"; THENCE NORTH
00(degree)00'00" EAST 301.10 FEET TO THE POINT OF BEGINNING.
The Real Property or its address is commonly known as NNA OLDS STATION RD,
WENATCHEE, WA 98801. The Real Property tax identification number is 23 20 28 110
450.
Grantor hereby assigns as security to Lender, all of Grantor's right, title, and
interest in and to all leases, Rents, and profits of the Property. This
assignment is recorded in accordance with RCW 65.08.070; the lien created by
this assignment is intended to be specific, perfected and choate upon the
recording of this Deed of Trust. Lender grants to Grantor a license to collect
the Rents and profits, which license may be revoked at Lender's option and shall
be automatically revoked upon acceleration of all or part of the Indebtedness.
<PAGE>
09-30-1998 DEED OF TRUST Page 3
Loan No 9002 (Continued)
================================================================================
DEFINITIONS. The following words shall have the following meanings when used in
this Deed of Trust. Terms not otherwise defined in this Deed of Trust shall have
the meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
Beneficiary. The word "Beneficiary" means KEYBANK NATIONAL ASSOCIATION, its
successors and assigns. KEYBANK NATIONAL ASSOCIATION also is referred to as
"Lender" in this Deed of Trust.
Deed of Trust. The words "Deed of Trust" mean this Deed of Trust among
Grantor, Lender, and Trustee, and includes without limitation all
assignment and security interest provisions relating to the Personal
Property and Rents.
Grantor. The word "Grantor" means any and all persons and entities
executing this Deed of Trust, including without limitation PACIFIC
AEROSPACE & ELECTRONICS, INC.
Guarantor. The word "Guarantor" means and includes without limitation any
and all guarantors, sureties, and accommodation parties in connection with
the Indebtedness.
Improvements. The word "Improvements" means and includes without limitation
all existing and future improvements, buildings, structures, mobile homes
affixed on the Real Property, facilities, additions, replacements and other
construction on the Real Property.
Indebtedness. The word "Indebtedness" means all principal and interest
payable under the Note and any amounts expended or advanced by Lender to
discharge obligations of Grantor or expenses incurred by Trustee or Lender
to enforce obligations of Grantor under this Deed of Trust, together with
interest on such amounts as provided in this Deed of Trust.
Lender. The word "Lender" means KEYBANK NATIONAL ASSOCIATION, its
successors and assigns.
Note. The word "Note" means the Note dated September 30, 1998, in the
original principal amount of $1,200,000.00 from Grantor to Lender, together
with all renewals, extensions, modifications, refinancings, and
substitutions for the Note. NOTICE TO GRANTOR: THE NOTE CONTAINS A VARIABLE
INTEREST RATE.
Personal Property. The words "Personal Property" mean all equipment,
fixtures, and other articles of personal property now or hereafter owned by
Grantor, and now or hereafter attached or affixed to the Real Property;
together with all accessions, parts, and additions to, all replacements of,
and all substitutions for, any of such property; and together with all
issues and
<PAGE>
09-30-1998 DEED OF TRUST Page 4
Loan No 9002 (Continued)
================================================================================
profits thereon and proceeds (including without limitation all insurance
proceeds and refunds of premiums) from any sale or other disposition of the
Property.
Property. The word "Property" means collectively the Real Property and the
Personal Property.
Real Property. The words "Real Property" mean the property, interests and
rights described above in the "Conveyance and Grant" section.
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 nor
or hereafter existing, executed in connection with the Indebtedness.
Rents. The word "Rents" means all present and future rents, revenues,
Income, issues, royalties, profits, and other benefits derived from the
Property.
Trustee. The word "Trustee" means LAND TITLE COMPANY, CHELAN-DOUGLAS
COUNTY, INC., and any substitute or successor trustees.
THIS DEED OF TRUST, INCLUDING THE ASSIGNMENT OF RENTS AND THE SECURITY INTEREST
IN THE RENTS AND PERSONAL PROPERTY, IS GIVEN TO SECURE (1) PAYMENT OF THE
INDEBTEDNESS AND (2) PERFORMANCE OF ANY AND ALL OBLIGATIONS OF GRANTOR UNDER THE
NOTE, THE RELATED DOCUMENTS, AND THIS DEED OF TRUST. THIS DEED OF TRUST IS GIVEN
AND ACCEPTED ON THE FOLLOWING TERMS:
PAYMENT AND PERFORMANCE. Except as otherwise provided in this Deed of Trust,
Grantor shall pay to Lender all amounts secured by this Deed of Trust as they
become due, and shall strictly and in a timely manner perform all of Grantor's
obligations under the Note, this Deed of Trust, and the Related Documents.
POSSESSION AND MAINTENANCE OF THE PROPERTY. Grantor agrees that Grantor's
possession and use of the Property shall be governed by the following
provisions:
Possession and Use. Until the occurrence of an Event of Default, Grantor
may (a) remain in possession and control of the Property, (b) use, operate
or manage the Property, and (c) collect any Rents from the Property (this
privilege is a license from Lender to Grantor automatically revoked upon
default). The following provisions relate to the use of the Property or to
other limitations on the Property. The Real Property is not used
principally for agricultural purposes.
Duty to Maintain. Grantor shall maintain the Property in tenantable
condition and promptly perform all repairs, replacements, and maintenance
necessary to preserve its value.
<PAGE>
09-30-1998 DEED OF TRUST Page 5
Loan No 9002 (Continued)
================================================================================
Hazardous Substances. The terms "hazardous waste, "hazardous substance,
"disposal," "release," and "threatened release," as used in this Deed of
Trust, shall have the same meanings as set forth 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, Pub. 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. Grantor
represents and warrants to Lender that, except as previously disclosed by
Grantor to Lender in writing: (a) During the period of Grantor's ownership
of the Property, there has been no use, generation, manufacture, storage,
treatment, disposal, release or threatened release of any hazardous waste
or substance by any person on, under, about or from the property; (b)
Grantor has no knowledge of or reason to believe that there has been,
except as previously disclosed to and acknowledged by Lender in writing,
(i) any use, generation, manufacture, storage, treatment, disposal,
release, or threatened release of any hazardous waste or substance on,
under, about or from the Property by any prior owners or occupants of the
Property or (ii) any actual or threatened litigation or claims of any kind
by any person relating to such matters; and (c) Except as previously
disclosed to and acknowledged by Lender in writing, (i) neither Grantor nor
any tenant, contractor, agent or other authorized user of the Property
shall use, generate, manufacture, store, treat, dispose of, or release any
hazardous waste or substance on, under, about or from the Property and (ii)
any such activity shall be conducted in compliance with all applicable
federal, state, and local laws, regulations and ordinances, including
without limitation those laws, regulations, and ordinances described above.
Grantor authorizes Lender and its agents to enter upon the Property to make
such inspections and tests, at Grantor's expense, as Lender may deem
appropriate to determine compliance of the Property with this section of
the Deed of Trust. Any inspections or tests made by Lender shall be for
Lender's purposes only and shall not be construed to create any
responsibility or liability on the part of Lender to Grantor or to any
other person. The representations and warranties contained herein are based
on Grantor's due diligence in investigating the Property for hazardous
waste and hazardous 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, losses, liabilities, damages, penalties, and expenses which Lender
may directly or indirectly sustain or suffer resulting from a breach of
this section of the Deed of Trust or as a consequence of any use,
generation, manufacture, storage, disposal, release or threatened release
of a hazardous waste or substance on the properties. The provisions of this
section of the Deed of Trust, including the obligation to indemnify, shall
survive the payment of the Indebtedness and
<PAGE>
09-30-1998 DEED OF TRUST Page 6
Loan No 9002 (Continued)
================================================================================
the satisfaction and reconveyance of the lien of this Deed of Trust and
shall not be affected by Lender's acquisition of any interest in the
Property, whether by foreclosure or otherwise.
Nuisance, Waste. Grantor shall not cause, conduct or permit any nuisance
nor commit, permit, or suffer any stripping of or waste on or to the
Property or any portion of the Property. Without limiting the generality of
the foregoing, Grantor will not remove, or grant to any other party the
right to remove, any timber, minerals (including oil and gas), soil, gravel
or rock products without the prior written consent of Lender.
Removal of Improvements. Grantor shall not demolish or remove any
Improvements from the Real Property without the prior written consent of
Lender. As a condition to the removal of any Improvements, Lender may
require Grantor to make arrangements satisfactory to Lender to replace such
Improvements with Improvements of at least equal value.
Lender's Right to Enter. Lender and its agents and representatives may
enter upon the Real Property at all reasonable times to attend to Lender's
interests and to inspect the Property for purposes of Grantor's compliance
with the terms and conditions of this Deed of Trust.
Compliance With Governmental Requirements. Grantor shall promptly comply,
and shall promptly cause compliance by all agents, tenants or other persons
or entities of every nature whatsoever who rent, lease or otherwise use or
occupy the Property in any manner, with all laws, ordinances, and
regulations, now or hereafter in effect, of all governmental authorities
applicable to the use or occupancy of the Property, including without
limitation, the Americans With Disabilities Act. Grantor may contest in
good faith any such law, ordinance or regulation and withhold compliance
during any proceeding, including appropriate appeals, so long as Grantor
has notified Lender in writing prior to doing so and so long as, in
Lender's sole opinion, Lender's interests in the Property are not
jeopardized. Lender may require Grantor to post adequate security or a
surety bond, reasonably satisfactory to Lender, to protect Lender's
interest.
Duty to Protect. Grantor agrees neither to abandon nor leave unattended the
Property. Grantor shall do all other acts, in addition to those acts set
forth above in this section, which from the character and use of the
Property are reasonably necessary to protect and preserve the Property.
DUE ON SALE - CONSENT BY LENDER. Lender may, at its option, (a) declare
immediately due and payable all sums secured by this Deed of Trust or (b)
increase the interest rate provided for in the Note or other document evidencing
the Indebtedness and impose such other conditions as Lender deems appropriate,
upon the sale or transfer, without the Lender's prior written consent, of all or
any part of the Real Property, or any interest in the Real Property. A "sale or
transfer" means the conveyance of Real Property or any right, title or interest
therein; whether legal, beneficial or equitable; whether voluntary or
involuntary; whether by outright sale, deed, installment
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sale contract, land contract, contract for deed, leasehold interest with a term
greater than three (3) years, lease-option contract, or by sale, assignment, or
transfer of any beneficial interest in or to any land trust holding title to the
Real Property, or by any other method of conveyance of Real Property interest.
However, this option shall not be exercised by Lender if such exercise is
prohibited by federal law or by Washington law.
TAXES AND LIENS. Th following provisions relating to the taxes and liens on the
Property are a part of this Deed of Trust.
Payment. Grantor shall pay when due (and in all events prior to
delinquency) all taxes, special taxes, assessments, charges (including
water and sewer), fines and impositions levied against or on account of the
Property, and shall pay when due all claims for work done on or for
services rendered or material furnished to the Property. Grantor shall
maintain the Property free of all liens having priority over or equal to
the interest of Lender under this Deed of Trust, except for the lien of
taxes and assessments not due and except as otherwise provided in this Deed
of Trust.
Right to Contest. Grantor may withhold payment of any tax, assessment, or
claim in connection with a good faith dispute over the obligation to pay,
so long as Lender's interest in the Property is not jeopardized. If a lien
arises or is filed as a result of nonpayment, Grantor shall within fifteen
(15) days after the lien arises or, if a lien is filed, within fifteen (15)
days after Grantor has notice of the filing, secure the discharge of the
lien, or if requested by Lender, deposit with Lender cash or a sufficient
corporate surety bond or other security satisfactory to Lender in an amount
sufficient to discharge the lien plus any costs and attorneys' fees or
other charges that could accrue as a result of a foreclosure or sale under
the lien. In any contest, Grantor shall defend itself and Lender and shall
satisfy any adverse judgment before enforcement against the Property.
Grantor shall name Lender as an additional obligee under any surety bond
furnished in the contest proceedings.
Evidence of Payment. Grantor shall upon demand furnish to Lender
satisfactory evidence of payment of the taxes or assessments and shall
authorize the appropriate governmental official to deliver to Lender at any
time a written statement of the taxes and assessments against the Property.
Notice of Construction. Grantor shall notify Lender at least fifteen (15)
days before any work is commenced, any services are furnished, or any
materials are supplied to the Property, if any mechanic's lien,
materialmen's lien, or other lien could be asserted on account of the work,
services, or materials and the cost exceeds $10,000.00. Grantor will upon
request of Lender furnish to Lender advance assurances satisfactory to
Lender that Grantor can and will pay the cost of such improvements.
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PROPERTY DAMAGE INSURANCE. The following provisions relating to insuring the
Property are a part of this Deed of Trust.
Maintenance of Insurance. Grantor shall procure and maintain policies of
fire insurance with standard extended coverage endorsements on an actual
cash value basis for the full insurable value covering all Improvements on
the Real Property in an amount sufficient to avoid application of any
coinsurance clause, and with a standard mortgagee clause in favor of
Lender. Grantor shall also procure and maintain such other insurance,
including but not limited to hazard, business interruption, and boiler
insurance, as Lender may reasonably require. Policies shall be written 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 canceled or diminished
without at least ten (10) days' prior written notice to Lender. Each
insurance policy also shall include an endorsement providing that coverage
in favor of Lender will not be impaired in any way by any act, omission or
default of Grantor or any other person. Should the Real Property at any
time become located in an area designated by the Director of the Federal
Emergency Management Agency as a special flood hazard area, Grantor agrees
to obtain and maintain Federal Flood Insurance for the full unpaid
principal balance of the loan, up to the maximum policy limits set under
the National Flood Insurance Program, or as otherwise required by Lender,
and to maintain such insurance for the term of the loan.
Application of Proceeds. Grantor shall promptly notify Lender of any loss
or damage to the Property if the estimated cost of repair or replacement
exceeds $5,000.00. Lender may make proof of loss if Grantor fails to do so
within fifteen (15) days of the casualty. Whether or not Lender's security
is impaired, Lender may, at its election, receive and retain the proceeds
of any insurance and apply the proceeds to the reduction of the
Indebtedness, payment of any lien affecting the Property, or the
restoration and repair of the Property. If Lender elects to apply the
proceeds to restoration and repair, Grantor shall repair or replace the
damaged or destroyed improvements in a manner satisfactory to Lender.
Lender shall, upon satisfactory proof of such expenditure, pay or reimburse
Grantor from the proceeds for the reasonable cost of repair or restoration
if Grantor is not in default under this Deed of Trust, then to pay accrued
interest, and the remainder, if any, shall be applied to the principal
balance of the Indebtedness. If Lender holds any proceeds after payment in
full of the Indebtedness, such proceeds shall be paid without interest to
Grantor as Grantor's interests may appear.
Unexpired Insurance at Sale. Any unexpired insurance shall inure to the
benefit of, and pass to, the purchaser of the Property covered by this Deed
of Trust at any trustee's sale or other sale held under the provisions of
this Deed of Trust, or at any foreclosure sale of such Property.
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Grantor's Report on Insurance. Upon request of Lender, however, not more
than once a year, Grantor shall furnish to Lender a report on each existing
policy of insurance showing: (a) the name of the insurer; (b) the risks
insured; (c) the amount of the policy; (d) the property insured, the then
current replacement value of such property, and the manner of determining
that value; and (e) the expiration date of the policy. Grantor shall, upon
request of Lender, have an independent appraiser satisfactory to Lender
determine the cash value replacement cost of the Property.
EXPENDITURES BY LENDER. If Grantor fails to comply with any provision of this
Deed of Trust, or if any action or proceeding is commenced that would materially
affect Lender's interests in the Property, Lender on Grantor's behalf may, but
shall not be required to, take any action that Lender deems appropriate. Any
amount that Lender expends in so doing will bear interest at the rate provided
for in the Note from the date Incurred or paid by Lender to the date of
repayment by Grantor. All such expenses, at Lender's option, will (a) be payable
on demand, (b) be added to the balance of the Note and be apportioned among and
be payable with any installment payments to become 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 Deed of Trust also will secure payment of these amounts.
The rights provided for in this paragraph shall be in addition to any other
rights or any remedies to which Lender may be entitled on account of the
default. Any such action by Lender shall not be construed as curing the default
so as to bar Lender from any remedy that it otherwise would have had.
WARRANTY; DEFENSE OF TITLE. The following provisions relating to ownership of
the Property are a part of this Deed of Trust.
Title. Grantor warrants that: (a) Grantor holds good and marketable title
of record to the Property in fee simple, free and clear of all lens and
encumbrances other than those set forth in the Real Property description or
in any title insurance policy, title report, or final title opinion issued
in favor of, and accepted by, Lender in connection with this Deed of Trust,
and (b) Grantor has the full right, power, and authority to execute and
deliver this Deed of Trust to Lender.
Defense of Title. Subject to the exception in the paragraph above, Grantor
warrants and will forever defend the title to the Property against the
lawful claims of all persons. In the event any action or proceeding is
commenced that questions Grantor's title or the interest of Trustee or
Lender under this Deed of Trust, Grantor shall defend the action at
Grantor's expense. Grantor may be the nominal party in such proceeding, but
Lender shall be entitled to participate in the proceeding and to be
represented in the proceeding by counsel of Lender's own choice, and
Grantor will deliver, or cause to be delivered, to Lender, such instruments
as Lender may request from time to time to permit such participation.
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Compliance With Laws. Grantor warrants that the Property and Grantor's use
of the Property complies with all existing applicable laws, ordinances, and
regulations of governmental authorities.
CONDEMNATION. The following provisions relating to condemnation proceedings are
a part of this Deed of Trust.
Application of Net Proceeds. If all or any part of the Property is
condemned by eminent domain proceedings or by any proceeding or purchase in
lieu of condemnation, Lender may at its election require that all or any
portion of the net proceeds of the award be applied to the Indebtedness or
the repair or restoration of the Property. The net proceeds of the award
shall mean the award after payment of all reasonable costs, expenses, and
attorney's fees incurred by Trustee or Lender in connection with the
condemnation.
Proceedings. If any proceeding in condemnation is filed, Grantor shall
promptly notify Lender in writing, and Grantor shall promptly take such
steps as may be necessary to defend the action and obtain the award.
Grantor may be the nominal party in such proceeding, but Lender shall be
entitled to participate in the proceeding and to be represented in the
proceeding by counsel of its own choice all at Grantor's expense, and
Grantor will deliver or cause to be delivered to Lender such instruments as
may be requested by it from time to time to permit such participation.
IMPOSITION OF TAXES, FEES AND CHARGES BY GOVERNMENTAL AUTHORITIES. The following
provisions relating to governmental taxes, fees, and charges are a part of this
Deed of Trust:
Current Taxes, Fees, and Charges. Upon request by Lender, Grantor shall
execute such documents in addition to this Deed of Trust and take whatever
other action is requested by Lender to perfect and continue Lender's lien
on the Real Property. Grantor shall reimburse Lender for all taxes, as
described below, together with all expenses incurred in recording,
perfecting or continuing this Deed of Trust, including without limitation
all taxes, fees, documentary stamps, and other charges for recording or
registering this Deed of Trust.
Taxes. The following shall constitute taxes to which this section applies:
(a) a specific tax upon this type of Deed of Trust or upon all or any part
of the Indebtedness secured by this Deed of Trust; (b) a specific tax on
Grantor which Grantor is authorized or required to deduct from payments on
the Indebtedness secured by this type of Deed of Trust; (c) a tax on this
type of Deed of Trust chargeable against the Lender or the holder of the
Note; and (d) a specific tax on all or any portion of the Indebtedness or
on payments of principal and interest made by Grantor.
Subsequent Taxes. If any tax to which this section applies is enacted
subsequent to the date of this Deed of Trust, this event shall have the
same effect as an Event of Default (as defined
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09-30-1998 DEED OF TRUST Page 11
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below), and Lender may exercise any or all of its available remedies for an
Event of Default as provided below unless Grantor either (a) pays off the
tax before it becomes delinquent, or (b) contests the tax as provided above
in the Taxes and Liens section and deposits with Lender cash or a
sufficient corporate surety bond or other security satisfactory to Lender.
SECURITY AGREEMENT; FINANCING STATEMENTS. The following provisions relating to
this Deed of Trust as a security agreement are a part of this Deed of Trust.
Security Agreement. This instrument shall constitute a security agreement
to the extent any of the Property constitutes fixtures or other personal
property, and Lender shall have all of the rights of a secured party under
the Uniform Commercial Code as amended from time to time.
Security Interest. Upon request by Lender, Grantor shall execute financing
statements and take whatever other action is requested by Lender to perfect
and continue Lender's security interest in the Rents and Personal Property.
In addition to recording this Deed of Trust in the real property records,
Lender may, at any time and without further authorization from Grantor,
file executed counterparts, copies or reproductions of this Deed of Trust
as a financing statement. Grantor shall reimburse Lender for all expenses
incurred in perfecting or continuing this security interest. Upon default,
Grantor shall assemble the Personal Property in a manner and at a place
reasonably convenient to Grantor and Lender and make it available to Lender
within three (3) days after receipt of written demand from Lender.
Addresses. The mailing addresses of Grantor (debtor) and Lender (secured
party), from which information concerning the security interest granted by
this Deed of Trust may be obtained (each as required by the Uniform
Commercial Code), are as stated on the first page of this Deed of Trust.
FURTHER ASSURANCES: ATTORNEY-IN-FACT. The following provisions relating to
further assurances and attorney-in-fact are a part of this Deed of Trust.
Further Assurances. At any time, and from time to time, upon request of
Lender, Grantor will make, execute and deliver, or will cause to be made,
executed or delivered, to Lender or to Lender's designee, and when
requested by Lender, cause to be filed, recorded, refiled, or rerecorded,
as the case may be, at such times and in such offices and places as Lender
may deem appropriate, any and all such mortgages, deeds of trust, security
deeds, security agreements, financing statements, continuation statements,
instruments of further assurance, certificates, and other documents as may,
in the sole opinion of Lender, be necessary or desirable in order to
effectuate, complete, perfect, continue, or preserve (a) the obligations of
Grantor under the Note, this Deed of Trust, and the Related Documents, and
(b) the liens and security interests created by this Deed of Trust as first
and prior liens on the Property, whether nor owned or hereafter acquired by
Grantor. Unless prohibited by law or agreed to the contrary by Lender in
writing,
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09-30-1998 DEED OF TRUST Page 12
Loan No 9002 (Continued)
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Grantor shall reimburse Lender for all costs and expenses incurred in
connection with the matters referred to in this paragraph.
Attorney-in-Fact. If Grantor fails to do any of the things referred to in
the preceding paragraph, Lender may do so for and in the name of Grantor
and at Grantor's expense. For such purposes, Grantor hereby irrevocably
appoints Lender as Grantor's attorney-in-fact for the purpose of making,
executing, delivering, filing, recording, and doing all other things as may
be necessary or desirable, in Lender's sole opinion, to accomplish the
matters referred to in the preceding paragraph.
FULL PERFORMANCE. If Grantor pays all the Indebtedness when due, and otherwise
performs all the obligations imposed upon Grantor under this Deed of Trust,
Lender shall execute and deliver to Trustee a request for full reconveyance and
shall execute and deliver to Grantor suitable statements of termination of any
financing statement on file evidencing Lender' security interest in the Rents
and the Personal Property. Any reconveyance fee shall be paid by Grantor, if
permitted by applicable law. The grantee in any reconveyance may be described as
the "person or persons legally entitled thereto", and the recitals in the
reconveyance of any matters or facts shall be conclusive proof of the
truthfulness of any such matters or facts.
DEFAULT. Each of the following, at the option of Lender, shall constitute an
event of default ("Event of Default") under this Deed of Trust:
Default on Indebtedness. Failure of Grantor to make any payment when due on
the Indebtedness.
Default on Other Payments. Failure of Grantor within the time required by
this Deed of Trust to make any payment for taxes or insurance, or any other
payment necessary to prevent filing of or to effect discharge of any lien.
Compliance Default. Failure of Grantor to comply with any other term,
obligation, covenant or condition contained in this Deed of Trust, the Note
or any of the Related Documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor under this Deed of Trust,
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 Deed of Trust 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's existence as a
going business, the insolvency of Grantor, the appointment of a receiver
for any part of Grantor'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.
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Loan No 9002 (Continued)
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Foreclosure, Forfeiture, etc. Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding, self-help, repossession or any
other method, by any creditor of Grantor or by any governmental agency
against any of the Property. However, this subsection shall not apply in
the event of a good faith dispute by Grantor as to the validity or
reasonableness of the claim which is the basis of the foreclosure or
forfeiture proceeding, provided that Grantor gives Lender written notice of
such claim and furnishes reserves or a surety bond for the claim
satisfactory to Lender.
Breach of Other Agreement. Any breach by Grantor under the terms of any
other agreement between Grantor and Lender that is not remedied within any
grace period provided therein, including without limitation any agreement
concerning any indebtedness or other obligation of Grantor to Lender,
whether existing now or later.
Events Affecting Guarantor. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or any Guarantor dies or
becomes incompetent, or revokes or disputes the validity of, or liability
under, any Guaranty of the Indebtedness. Lender, at its option, may, but
shall not be required to, permit the Guarantor's estate to assume
unconditionally the obligations arising under the guaranty in a manner
satisfactory to Lender, and, in doing so, cure the Event of Default.
Adverse Change. A material adverse change occurs in Grantor's financial
condition, or Lender believes the prospect of payment or performance of the
indebtedness is impaired.
Right to Cure. If such a failure is curable and if Grantor has not been
given a notice of a breach of the same provision of this Deed of Trust
within the preceding twelve (12) months, it may be cured (and no Event of
Default will have occurred) if Grantor, after Lender sends written notice
demanding cure of such failure: (a) cures the failure within fifteen (15)
days; or (b) if the cure requires more than fifteen (15) days, immediately
initiates steps sufficient to cure the failure and thereafter continues and
completes all reasonable and necessary steps sufficient to produce
compliance as soon as reasonably practical.
RIGHTS AND REMEDIES ON DEFAULT. Upon the occurrence of any Event of Default and
at any time thereafter, Trustee or Lender, at its option, may exercise any one
or more of the following rights and remedies, in addition to any other rights or
remedies provided by law:
Accelerate Indebtedness. Lender shall have the right at its option to
declare the entire indebtedness immediately due and payable, including any
prepayment penalty which Grantor would be required to pay.
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Foreclosure. With respect to all or any part of the Real Property, the
Trustee shall have the right to exercise its power of sale and to foreclose
by notice and sale, and Lender shall have the right to foreclose by
judicial foreclosure, in either case in accordance with and to the full
extent provided by applicable law.
UCC Remedies. With respect to all or any part of the Personal Property,
Lender shall have all the rights and remedies of a secured party under the
Uniform Commercial Code.
Collect Rents. Lender shall have the right, without notice to Grantor, to
take possession of and manage the Property and collect the Rents, including
amounts past due and unpaid, and apply the net proceeds, over and above
Lender's costs, against the indebtedness. In furtherance of this right,
Lender may acquire any tenant or other user of the Property to make
payments of rent or use fees directly to Lender. If the Rents are collected
by Lender, then Grantor irrevocably designates Lender as Grantor's
attorney-in-fact to endorse instruments received in payment thereof in the
name of Grantor and to negotiate the same and collect the proceeds.
Payments by tenants or other users to Lender in response to Lender's demand
shall satisfy the obligations for which the payments are made, whether or
not any proper grounds for the demand existed. Lender may exercise its
rights under this subparagraph either in person, by agent, or through a
receiver.
APPOINT RECEIVER. Lender shall have the right to have a receiver appointed
to take possession of all or any part of the Property, with the power to
protect and preserve the Property, to operate the Property preceding or
pending foreclosure or sale, and to collect the Rents from the Property and
apply the proceeds over and above the cost of the receivership, against the
indebtedness. The receiver may serve without bond if permitted by law.
Lender's right to the appointment of a receiver shall exist whether or not
the apparent value of the Property exceeds the indebtedness by a
substantial amount. Employment by Lender shall not disqualify a person from
serving as a receiver.
Tenancy at Sufferance. If Grantor remains in possession of the Property
after the Property is sold as provided above or Lender otherwise becomes
entitled to possession of the Property upon default of Grantor, Grantor
shall become a tenant at sufferance of Lender or the purchaser of the
Property and shall, at Lender's option, either (a) pay a reasonable rental
for the use of the Property, or (b) vacate the Property immediately upon
the demand of Lender.
Other Remedies. Trustee or Lender shall have any other right or remedy
provided in this Deed of Trust or the Note or by law.
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Notice of Sale. Lender shall give Grantor reasonable notice of the time and
place of any public sale of the Personal Property or the time after which
any private sale or other intended disposition of the Personal Property is
to be made. Reasonable notice shall mean notice given at least ten (10)
days before the time of sale or disposition. Any sale of Personal Property
may be made in conjunction with any sale of the Real Property.
Sale of Property. To the extent permitted by applicable law, Grantor hereby
waives any and all rights to have the Property marshaled. In exercising its
rights and remedies, the Trustee or Lender shall be free to sell all or any
part of the Property together or separately, in one sale or by separate
sales. Lender shall be entitled to bid at any public sale on all or any
portion of the Property.
Waiver; Election of Remedies. A waiver by any party of a breach of a
provision of this Deed of Trust shall not constitute a waiver of or
prejudice the party's rights otherwise to demand strict compliance with
that provision or any other provision. Election by Lender to pursue any
remedy provided in this Deed of Trust, the Note, in any Related Document,
or provided by law shall not exclude pursuit of any other remedy, and an
election to make expenditures or to take action to perform an obligation of
Grantor under this Deed of Trust after failure of Grantor to perform shall
not affect Lender's right to declare a default and to exercise any of its
remedies.
Attorneys' Fees; Expenses. If Lender institutes any suit or action to
enforce any of the terms of this Deed of Trust, Lender shall be entitled to
recover such sum as the court may adjudge reasonable as attorneys' fees at
trial and on any appeal. Whether or not any court action is involved, all
reasonable expenses incurred by Lender which in Lender's opinion are
necessary at any time for the protection of its interest or the enforcement
of its rights shall become a part of the indebtedness payable on demand and
shall bear interest at the Note rate from the date of expenditure until
repaid. Expenses covered by this paragraph include, without limitation,
however subject to any limits under applicable law, Lender's attorneys'
fees whether or not there is a lawsuit, including attorneys' fees for
bankruptcy proceedings (including efforts to modify or vacate any automatic
stay or injunction), appeals and any anticipated post-judgment collection
services, the cost of searching records, obtaining title reports (including
foreclosure reports), surveyors' reports, appraisal fees, title insurance,
and fees for the Trustee, to the extent permitted by applicable law.
Grantor also will pay any court costs, in addition to all other sums
provided by law.
POWERS AND OBLIGATIONS OF TRUSTEE. The following provisions relating to the
powers and obligations of Trustee (pursuant to Lender's instructions) are part
of this Deed of Trust.
Powers of Trustee. In addition to all powers of Trustee arising as a matter
of law, Trustee shall have the power to take the following actions with
respect to the Property upon the written request of Lender and Grantor: (a)
join in preparing and filing a map or plat of the Real Property,
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including the dedication of streets or other rights to the public; (b) join
in granting any easement or creating any restriction on the Real Property;
and (c) join in any subordination or other agreement affecting this Deed of
Trust or the interest of Lender under this Deed of Trust.
Obligations to Notify. Trustee shall not be obligated to notify any other
party of a pending sale under any other trust deed or lien, or any action
or proceeding in which Grantor, Lender, or Trustee shall be a party, unless
required by applicable law, or unless the action or proceeding is brought
by Trustee.
Trustee. Trustee shall meet all qualifications required for Trustee under
applicable law. In addition to the rights and remedies set forth above,
with respect to all or any part of the Property, the Trustee shall have the
right to foreclose by notice and sale, and Lender shall have the right to
foreclose by judicial foreclosure, in either case in accordance with and to
the full extent provided by applicable law.
Successor Trustee. Lender, at Lender's option, may from time to time
appoint a successor Trustee to any Trustee appointed hereunder by an
instrument executed and acknowledged by Lender and recorded in the office
of the recorder of CHELAN County, Washington. The instrument shall contain,
in addition to all other matters required by state law, the names of the
original Lender, Trustee, and Grantor, the book and page or the Auditor's
File Number where this Deed of Trust is recorded, and the name and address
of the successor trustee, and the instrument shall be executed and
acknowledged by Lender or its successors in interest. The successor
trustee, without conveyance of the Property, shall succeed to all the
title, power, and duties conferred upon the Trustee in this Deed of Trust
and by applicable law. This procedure and substitution of trustee shall
govern to the exclusion of all other provisions for substitution.
NOTICES TO GRANTOR AND OTHER PARTIES. Subject to applicable law, and except for
notice required or allowed by law to be given in another manner, any notice
under this Deed of Trust shall be 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,
if mailed, shall be deemed effective when deposited in the United States mail
first class, certified or registered mail, postage prepaid, directed to the
addresses shown near the beginning of this Deed of Trust. Any party may change
its address for notices under the Deed of Trust by giving formal written notice
to the other parties, specifying that the purpose of the notice is to change the
party's address. All copies of notices of foreclosure from the holder of any
lien which has priority over this Deed of Trust shall be sent to Lender's
address, as shown near the beginning of this Deed of Trust. For notice purposes,
Grantor agrees to keep Lender and Trustee informed at all times of Grantor's
current address.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Deed of Trust:
Amendments. This Deed of Trust, together with any Related Documents,
constitutes the entire and final understanding and agreement of the parties
as to the matters set forth in this Deed of Trust. No alteration of or
amendment to this Deed of Trust 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.
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Annual Reports. If the Property is used for purposes other than Grantor's
residence, Grantor shall furnish to Lender, upon request, a certified
statement of net operating income received from the Property during
Grantor's previous fiscal year in such form and detail as Lender shall
require. "Net operating income" shall mean all cash receipts from the
Property less all cash expenditures made in connection with the operation
of the Property.
Applicable Law. This Deed of Trust has been delivered to Lender and
accepted by Lender in the State of Washington. This Deed of Trust shall be
governed by and construed in accordance with the laws of the State of
Washington.
Caption Headings. Caption headings in this Deed of Trust are for
convenience purposes only and are not to be used to interpret or define the
provisions of this Deed of Trust.
Merger. There shall be no merger of the interest or estate created by this
Deed of Trust with any other interest or estate in the Property at any time
held by or for the benefit of Lender in any capacity, without the written
consent of Lender.
Multiple Parties; Corporate Authority. All obligations of Grantor under
this Deed of Trust shall be joint and several, 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 Deed of
Trust.
Severability. If a court of competent jurisdiction finds any provision of
this Deed of Trust to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Deed of Trust in all other respects shall remain valid and
enforceable.
Successors and Assigns. Subject to the limitations stated in this Deed of
Trust on transfer of Grantor's interest, this Deed of Trust shall be
binding upon and inure to the benefit of the parties, their successors and
assigns. If ownership of the Property becomes vested in a person other than
Grantor, Lender, without notice to Grantor, may deal with Grantor's
successors with reference to this Deed of Trust and the indebtedness by way
of forbearance or extension without releasing Grantor from the obligations
of this Deed of Trust or liability under the Indebtedness.
Time is of the Essence. Time is of the essence in the performance of this
Deed of Trust.
Waivers and Consents. Lender shall not be deemed to have waived any rights
under this Deed of Trust (or under the Related Documents) unless such
waiver is 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 any party of a provision of this Deed of
Trust shall not constitute a waiver of or prejudice the party's right
otherwise to demand strict compliance with that provision or any other
provision. 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
any of Grantor's obligations as to any future transactions. Whenever
consent by Lender is required in this Deed of Trust, the granting of such
consent by Lender in any instance shall not constitute continuing consent
to subsequent instances where such consent is required.
<PAGE>
09-30-1998 DEED OF TRUST Page 18
Loan No 9002 (Continued)
================================================================================
Waiver of Homestead Exemption. Grantor hereby releases and waives all
rights and benefits of the homestead exemption laws of the State of
Washington as to all indebtedness secured by this Deed of Trust.
EACH GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS DEED OF TRUST,
AND EACH GRANTOR AGREES TO ITS TERMS.
GRANTOR:
PACIFIC AEROSPACE & ELECTRONICS, INC.
By: /s/ DONALD A. WRIGHT
-----------------------------------
DONALD A. WRIGHT, CEO & President
<PAGE>
09-30-1998 DEED OF TRUST Page 19
Loan No 9002 (Continued)
================================================================================
CORPORATE ACKNOWLEDGMENT
STATE OF _______________ )
) ss.
COUNTY OF ______________ )
On this _____ day of _______________, 19 _____, before me, the undersigned
Notary Public, personally appeared DONALD A. WRIGHT, CEO & President of PACIFIC
AEROSPACE & ELECTRONICS, INC., and personally known to me or proved to me on he
basis of satisfactory evidence to be an authorized agent of the corporation that
executed the Deed of Trust and acknowledged the Deed of Trust to be the free and
voluntary act and deed of the corporation, by authority of its Bylaws or by
resolution of its board of directors, for the uses and purposes therein
mentioned, and on oath stated that he or she is authorized to execute this Deed
of Trust in fact executed the Deed of Trust on behalf of the corporation.
By Residing at
------------------------------- ------------------------------
Notary Public in and for the State of My Commission expires
---------- --------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
unaudited consolidated financial statements of Pacific Aerospace & Electronics,
Inc. and its subsidiaries for the three-month period ended August 31, 1998, and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> AUG-31-1998
<CASH> 18,998,000
<SECURITIES> 2,719,000
<RECEIVABLES> 21,546,000
<ALLOWANCES> 183,000
<INVENTORY> 28,611,000
<CURRENT-ASSETS> 70,770,000
<PP&E> 51,965,000
<DEPRECIATION> (5,816,000)
<TOTAL-ASSETS> 171,465,000
<CURRENT-LIABILITIES> 24,084,000
<BONDS> 87,053,000
0
0
<COMMON> 16,000
<OTHER-SE> 61,484,000
<TOTAL-LIABILITY-AND-EQUITY> 171,465,000
<SALES> 19,178,000
<TOTAL-REVENUES> 19,178,000
<CGS> 14,504,000
<TOTAL-COSTS> 14,504,000
<OTHER-EXPENSES> 3,776,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,069,000
<INCOME-PRETAX> (6,666,000)
<INCOME-TAX> (2,255,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,411,000)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
