UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended May 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
incorporation or organization) Identification No.)
430 Olds Station Road
Wenatchee, Washington 98801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (509) 667-9600
Securities registered pursuant to Section 12(b) of the Act
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of class)
Common Stock Purchase Warrants
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
<PAGE>
State the aggregate market value of the voting stock held by non-affiliates,
based on the closing price for the registrant's Common Stock on the Nasdaq
National Market System, as of August 27, 1998: approximately $46,808,154.00.
Indicate the number of shares outstanding of each of the registrant's classes of
common equity, as of August 27, 1998: Common Stock, $.001 par value ("Common
Stock"): 15,986,323 shares
Documents Incorporated by Reference: None, except certain Exhibits referred to
on the list of Exhibits, contained in Item 14 of this report.
<PAGE>
TABLE OF CONTENTS
-----------------
Item of Form 10-K Page
- ----------------- ----
PART I
Item 1 - Description of Business............................................ 1
Item 2 - Description of Property............................................17
Item 3 - Legal Proceedings..................................................18
Item 4 - Submission of Matters to a Vote of Security Holders................18
PART II
Item 5 - Market for Common Equity and Related Shareholder Matters...........19
Item 6 - Selected Financial Data ...........................................23
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................25
Item 8 - Financial Statements...............................................31
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................54
PART III
Item 10 - Directors and Executive Officers of the Company....................55
Item 11 - Executive Compensation.............................................58
Item 12 - Security Ownership of Certain Beneficial
Owners and Management..............................................62
Item 13 - Certain Relationships and Related
Transactions.......................................................64
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K....66
SIGNATURES....................................................................71
EXHIBIT INDEX.................................................................72
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview
Pacific Aerospace & Electronics, Inc. and its subsidiaries as of May 31,
1998 (the "Company") develop, manufacture and market high-performance
electronics and metal components and assemblies for the aerospace, defense,
electronics and transportation industries. The Company has been an active
consolidator of companies, having integrated eight U.S. operating companies
since 1990. On July 30, 1998, the Company nearly doubled its size by acquiring
Aeromet International plc, a British limited company ("Aeromet"). See
"--Corporate History--Aeromet Acquisition," and "--Risk Factors--Acquisition
Risks" and "--Management of Growth." The Company has focused its consolidation
strategy on identifying and acquiring companies that (i) provide the opportunity
for increased sales penetration with the Company's existing customers and new
sales to the Company's potential customers and (ii) extend and vertically
integrate the Company's manufacturing capabilities or product lines. Since the
Company acquired Aeromet after fiscal 1998, references to the "Company" in this
Form 10-K generally do not include Aeromet, which is addressed separately.
Corporate History
The Holding Company
Donald A. Wright, the Company's Chief Executive Officer and President,
acquired Pacific Coast Technologies, Inc. ("Pacific Coast") in 1990. In 1994,
Mr. Wright formed PCT Holdings, Inc., a Washington corporation, to hold the
stock of Pacific Coast and future acquisitions. In 1995, that holding company
merged into a wholly owned subsidiary of Verazzana Ventures, Ltd. ("Verazzana"),
an inactive public company. In that merger, Verazzana changed its name to PCT
Holdings, Inc., a Nevada corporation ("PCTH"). In 1996, PCTH merged into the
Company, with the Company as the surviving entity, in order to reincorporate
under the laws of the State of Washington.
Acquisitions Through May 31, 1998
The following chart identifies each of the Company's acquisitions through
May 31, 1998, the year in which each acquisition was completed and the current
location of the acquired company's facilities, assets or processes:
<TABLE>
<CAPTION>
Year of
Acquired Company Acquisition Current Location
---------------- ----------- ----------------
<S> <C> <C>
Pacific Coast Technologies, Inc. 1990 Wenatchee, Washington
Cashmere Manufacturing Co., Inc. ("Cashmere") 1994 Wenatchee, Washington
Ceramic Devices, Inc. ("Ceramic Devices") 1995 Wenatchee, Washington
Morel Industries, Inc. ("Morel") 1995 Entiat, Washington
Seismic Safety Products, Inc. ("Seismic") 1995 Wenatchee, Washington
Northwest Technical Industries, Inc. ("NTI") 1997 Sequim, Washington
Balo Precision Parts, Inc. ("Balo") 1998 Butler, New Jersey
Electronic Speciality Corporation and Displays &
Technologies, Inc. (collectively, "ESC") 1998 Vancouver, Washington
</TABLE>
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Aeromet Acquisition
On July 30, 1998, the Company acquired Aeromet through the Company's
indirect wholly owned subsidiary, Pacific Aerospace & Electronics (UK) Limited,
for (pound)42 million (approximately $69 million) in cash (the "Aeromet
Acquisition"). Aeromet is the largest company acquired by the Company to date
and nearly doubles the Company's workforce, facilities and revenues. Aeromet is
one of the leading suppliers in the United Kingdom of magnesium and aluminum
precision sand and investment castings and titanium and aluminum formed sheet
products for the aerospace, defense and motorsport industries in Europe. The
Aeromet Acquisition has significantly expanded the Company's customer base and
product offerings. Aeromet's casting and forming technologies and products are
complementary extensions of the Company's precision metals product lines.
In order to fund the Aeromet Acquisition and provide working capital, the
Company issued $75 million of 11 1/4% Senior Subordinated Notes due 2005 (the
"Notes") in a private placement under Rule 144A of the Securities Act of 1933,
as amended ("Securities Act") that closed simultaneously with the Aeromet
Acquisition (the "Offering"). The Notes were purchased by qualified
institutional buyers and were issued pursuant to an Indenture (the "Indenture"),
dated July 30, 1998, between the Company, the Company's U.S. subsidiaries (the
"Subsidiaries") and IBJ Schroder Bank & Trust Company, as trustee. The Notes (i)
are senior subordinated, unsecured, general obligations of the Company, (ii)
will mature on August 1, 2005, unless previously redeemed pursuant to the
Indenture, and (iii) are jointly and severally guaranteed on a senior
subordinated basis by each of the Subsidiaries. See "--Business
Considerations--Significant Leverage; Liquidity" and "--Restrictive Debt
Covenants."
Business Strengths
Significant Customer Base
The Company counts among its customers many of the world's leading
aerospace, defense, electronics and transportation companies, including The
Boeing Company ("Boeing"), Raytheon/ Hughes Aircraft Company
("Raytheon/Hughes"), Honeywell, Inc. ("Honeywell"), Lockheed Martin Corporation
("Lockheed Martin"), Northrop Grumman Corporation ("Northrop Grumman"), Space
Systems/Loral, Inc., Westinghouse Electric Corporation, TRW, Inc., and Litton
Industries Inc. ("Litton"). Aeromet's leading customers include British
Aerospace plc ("British Aerospace"), Rolls Royce plc ("Rolls Royce"), GKN
Westland Aerospace, a division of GKN plc ("GKN Westland"), Lucas Aerospace plc
("Lucas Aerospace") and Alenia (Aermacchi). The Company believes that one of the
key advantages of the Aeromet Acquisition is the opportunity it creates for the
Company to access this significant base of additional customers.
Strong Position in Major Aerospace and Defense Programs
The Company supplies components and parts to Boeing for each of Boeing's
737, 747, 757, 767 and 777 commercial aircraft construction programs. Aeromet
participates in the Airbus A300/310, A320 and A330/340 commercial aircraft
construction programs. In addition, both the Company and Aeromet participate in
major defense and military aircraft programs. The Company has received numerous
quality awards from customers such as Boeing, Northrop Grumman and the aerospace
group of Kawasaki Heavy Industries Ltd. ("Kawasaki").
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Diversity of Product Offerings and Capabilities
The Company manufactures a broad range of precision cast, machined and
assembled electronics products, which in fiscal 1998 were sold to over 250
customers in approximately 25 countries. Aeromet manufactures a broad range of
precision cast and formed metal products. In calendar 1997, Aeromet products
were sold to over 350 customers in approximately 16 countries. The Company
collaborates with many of its customers to develop products that meet specific
design or customization requests. In addition, many of the Company's
custom-developed electronics components have become widely accepted in the
industry. The Company believes that its experience and capabilities in working
with the changing needs of its customers will allow it to continue to respond to
changing market trends in its industries.
Strong Technology Position
The Company and Aeromet utilize specialized manufacturing techniques,
advanced materials science, process engineering and proprietary technologies or
processes in the manufacture of their metals and assembled products. In
particular, the Company has a broad base of expertise in the manufacture of cast
aluminum products using lost foam, sand and permanent mold casting technologies,
and in its precision machined, explosively bonded and assembled electronics
products. Aeromet possesses specialized expertise in casting magnesium and
aluminum products using lost wax and sand casting techniques and its licensed
"Sophia Process" technology, and in super plastic forming of titanium and
stretch forming of aluminum alloys. The Company owns 32 U.S. patents used in the
manufacture of its electronics products and maintains an ongoing program of
evaluating and protecting its proprietary rights and processes. The Company and
Aeromet have a number of additional patent applications pending.
Strategy
The Company's objective is to generate profitable growth by taking
advantage of available opportunities in its industries. The Company believes
that pursuing the following business strategies will enable the Company to
increase market penetration, create operating efficiencies and enhance its
competitive position in its core markets.
Leverage the Aeromet Platform
The Aeromet Acquisition significantly enhances the Company's commercial
aerospace and defense industry presence and provides the Company with a solid
platform from which to access major European commercial aircraft and aircraft
engine programs as well as markets within the European defense and
transportation industries. These markets would be difficult for the Company to
enter without a physical presence in Europe. The Company also believes that
Aeromet may provide a strategic opportunity for pursuing acquisitions of other
European aerospace, defense and transportation companies on a model similar to
that which the Company has pursued successfully in the United States.
Increase Margins Through Enhanced Marketing and Vertical Integration
The Company's strategy is to improve profit margins and revenues by (i)
consolidating the marketing of companies that share similar product lines or
customer bases and by leveraging the synergies among its consolidated companies
in order to increase customer penetration and (ii) continuing to vertically
integrate its manufacturing processes in order to improve operating efficiencies
and to develop new products and product enhancements. A key component of this
strategy is to use the Company's and Aeromet's expertise in advanced materials
science and in the manufacture and assembly of precision products to identify
new products, services and markets. The Company also
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intends to capitalize on the current shift of commercial aircraft manufacturers
and defense contractors toward purchasing from a smaller number of suppliers
that can supply more complete systems and preassembled parts. Assembled parts
and systems generally are higher margin products than individual metal parts. By
producing products that integrate the Company's and Aeromet's metals casting,
forming and machining expertise with the Company's expertise in the manufacture
of connectors, seals, filters, relays and electronic packages, the Company
expects to improve its profit margins and position itself to capture a larger
share of its customers' total product requirements.
Leverage Product Development through Strategic and Proprietary Technologies
The Company develops new products from existing technologies in response to
specific customer requests. The Company plans to continue development of new
products for its customers and, where appropriate, to apply for additional
patents for those new technologies. The Company may acquire additional strategic
and proprietary technologies from third parties and expects to continue to
develop its research and development capabilities. The Company does not expect
to devote substantial resources to research and development that is not funded
by customers.
Pursue Other Strategic Acquisitions
The Company believes that there are and will continue to be opportunities
to grow the Company and enhance its profitability through acquisitions. The
Company intends to continue to pursue acquisitions of companies and technologies
that it believes will provide the opportunity for increased sales penetration
with existing customers and new sales to potential customers, and that will
extend and vertically integrate the Company's products and technologies.
Industry Overview
The aerospace supply industry is currently enjoying favorable trends driven
by strong growth in commercial aircraft fundamentals. Industry sources estimate
that the worldwide market for aircraft, including components, will be
approximately $520 billion over the ten-year period of 1997 through 2007.
Demand for aerospace components is closely related to delivery and use
rates for commercial aircraft. Delivery and use rates are in turn directly
related to the actual and projected volume of passenger and freight traffic,
average aircraft age and global fleet size. According to the Boeing 1998 Current
Market Outlook, world air traffic grew 6% from 1996 to 1997, following a 7%
increase in the previous year. Boeing and Airbus forecast that world air traffic
will grow by more than 5% each year over the next ten years. Boeing also
projects that during this same period domestic and international airlines will
lease or purchase over 7,600 new aircraft, thereby increasing the worldwide
commercial fleet from approximately 12,300 aircraft at the end of 1997 to
approximately 17,700 aircraft (net of retirements) at the end of 2007.
In 1997, Boeing delivered over 320 new aircraft compared to 220 new
aircraft it delivered in the prior year. In 1997, Airbus delivered 182 new
aircraft compared to 126 in the prior year. Boeing predicts that in 1998,
approximately 550 airplanes will be delivered. The Company believes that through
the near term the world's airlines will continue to add capacity and order new
aircraft in order to meet anticipated demand.
Additionally, according to the U.S. Department of Defense, defense
procurement funding is expected to grow by 40%, from approximately $43 billion
in 1998 to approximately $60 billion in 2001. The Company believes that both its
electronics and aerospace business segments will benefit from this trend.
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As in other transportation segments, aircraft manufacturers and defense
contractors have been aggressively searching for ways to improve the quality and
reduce the cost of their manufactured products. One major area of focus has been
the manner in which they work with their supply base. Similar to automotive
manufacturers, aircraft manufacturers and defense contractors have increasingly
become product designers and assemblers rather than vertically integrated
manufacturers. As a result, these manufacturers are outsourcing component
manufacturing to independent suppliers, seeking to benefit from an independent
supplier's lower cost structure and specialized manufacturing knowledge.
Suppliers that demonstrate an ability to effectively deliver a high quality
product on the required delivery schedule at a reasonable cost will benefit from
this shift. In addition, commercial aircraft manufacturers are tending, and
defense contractors are being strongly encouraged by the U.S. Department of
Defense, to purchase from suppliers that can supply more complete systems and
preassembled parts. These shifts are leading to a consolidation in the supply
base. Certain segments of the aerospace supply base are already consolidated,
such as engines, avionics and landing gears. Other segments, however, including
structural components and electronics, remain fragmented. The Company believes
that this trend toward consolidation presents an opportunity for suppliers with
the financial and management resources to complete acquisitions and expand their
operations.
The electronics industry is similarly enjoying revenue growth in several
product sectors. According to the Economic Industries Alliance, the annual
worldwide market for electronics and components produced in the United States
totaled approximately $460 billion in 1997, representing an 11% increase over
1996 figures. Electronics components comprise the largest portion of the
worldwide electronics market, accounting for $148 billion in sales in 1997. The
Company estimates the current size of the electronics connector market to be
approximately $1 billion in annual sales. The Company believes that both defense
industry sales and sales of hermetically sealed components accounted for
significant portions of that market. Additionally, the Company estimates the
size of the electronics packaging market to be over $50 million in annual sales.
The growth in the electronics industry has been fueled by several factors,
including the rapid pace of technological advancement and development of new
products. The growth in demand by consumers and businesses for technologically
advanced electronics products has prompted manufacturers to create more
elaborate designs, which frequently require more components per unit.
Additionally, international demand for advanced electronics components is
growing rapidly as an increasing array of more complex products becomes
available in developing regions. The Company expects these favorable trends in
the electronics industry to continue and believes the outlook for the
electronics component supply industry will continue to be strong.
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Products, Processes and Markets
The products, manufacturing processes and markets of the Company in fiscal
1998 and of Aeromet, and the industry segments in which they operate, are
summarized separately below. See "Financial Statements -- Note 3."
<TABLE>
<CAPTION>
Segments Manufacturing Processes Sample Products Company/Facility
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aerospace Metals Hot and superplastic Jet engine bulkhead components, Aeromet: Welwyn
Forming titanium forming airframe and engine details, Garden City, England
helicopter erosion shields
---------------------------------------------------------------------------------------
Cold stretch Aircraft skin panels, leading Aeromet:
aluminum forming edges and acoustic panels Birmingham, England
-------------------------------------------------------------------------------------------------------
Precision Sand, lost foam and Aircraft and truck parts Pacific Aerospace:
Casting permanent mold Entiat, Washington
casting
---------------------------------------------------------------------------------------
Investment casting Aircraft parts Aeromet: Worcester
and Rochester, England
---------------------------------------------------------------------------------------
Sand casting Aircraft engine parts and Aeromet:
windscreen canopies; Sittingbourne, England
motorsport engine parts
-------------------------------------------------------------------------------------------------------
Precision Precision machining Aircraft parts Pacific Aerospace:
Machining of bonded and cast Wenatchee, Washington
metals
------------------------------------------------------------
Aircraft parts Aeromet:
Sittingbourne, England
- -----------------------------------------------------------------------------------------------------------------------
Electronics Explosive Explosive bonding Bonded stainless steel and Pacific Aerospace:
Bonding of dissimilar metals aluminum for use in electronic Sequim, Washington
connectors and assemblies
-------------------------------------------------------------------------------------------------------
Assembled Design and Electronic connectors and Pacific Aerospace:
Electronic manufacture assemblies with ceramic and Wenatchee, Washington
Products glass hermetic seals Butler, New Jersey
------------------------------------------------------------
Ceramic discoidal electromagnetic Pacific Aerospace:
filters and capacitors Wenatchee, Washington
------------------------------------------------------------
Relays and solenoids; ruggedized Pacific Aerospace:
flat panel displays Vancouver, Washington
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Metals Forming
At its Welwyn Garden City and Birmingham facilities, Aeromet uses hot and
cold metal forming technologies to manufacture titanium and aluminum assemblies
and details for the commercial aerospace and defense industry. Aeromet also
performs finishing, welding, brazing and riveting processes on these parts.
Testing of these products is done using non-destructive techniques and in-house
X-ray facilities. Interactive discussions with customers enable Aeromet to
closely match component design to the most suitable forming process.
Hot Forming of Titanium. Aeromet's Welwyn Garden City facility specializes
in hot and super-plastic forming of titanium, and the Company believes it has
the largest independent capability in the European Union for that process.
Unlike most sheet metal materials, titanium and its alloys are extremely
difficult to form in a cold condition. To overcome this, Aeromet has developed
at its Welwyn Garden City site a variety of hot forming processes, including hot
die forming, hot brake press forming, superplastic forming, gas blow forming and
hot stretch-forming. These processes maximize weight savings, maintain
structural integrity, minimize cost and enable the designer to manipulate the
developing alloys into complex shapes. The components have no spring back,
little or no residual stress and are repeatable in form and thickness. Aeromet
undertakes responsibility for the design and manufactures the necessary tooling
using its in-house pattern facility, coupled with a tool bedding, fettling and
surface dressing capability. The forming equipment consists of air circulating,
low thermal mass heat treatment furnaces for temperatures up to 1,100 degrees
centigrade and related
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quenching facilities. The Welwyn Garden City site also has the capability to
chemically mill three-dimensional components in titanium. Aeromet markets its
hot-formed titanium products primarily to the commercial aircraft, helicopter
and military aircraft markets. Aeromet's titanium products include jet engine
Nacelle bulkhead components, airframe and engine details and erosion shields for
helicopters. Aeromet's titanium products are included on the Airbus model 320,
321, 330 and 340 aircraft, the Boeing model 717 and 737 aircraft and the Dash
8-400 aircraft.
Cold Forming of Aluminum Alloys. At its Birmingham facility, Aeromet
specializes in the pressing and cold forming of aluminum alloys used for
aircraft skin panels, leading edges and acoustic panel liners. Stretch forming
is a process well suited to producing aircraft skin panels and leading edges.
Specialized equipment in the Birmingham facility has the capability to form
sheets up to 8 feet wide and up to 13 feet long with stretching loads of up to
700 tons being applied. Most tools are machined from oxidation-resistant
stainless steel castings, and forming dies up to four tons can be handled.
Together with specialist gripper jaws and rotational platen, this enables
Aeromet to stretch-form aluminum alloys into a wide variety of shapes and sizes.
Aeromet's capabilities extend from design to completion, including tooling
design and manufacture, forming, chemical milling, trimming, assembly and
quality control. The cold formed aluminum alloy products are marketed primarily
to the aerospace market.
Precision Casting
Pacific Aerospace. At its Morel facility in Entiat, Washington, the Company
designs and manufactures precision cast aluminum parts using permanent mold,
sand and lost foam casting technologies. The cast parts produced at the Morel
facility are sold principally to the transportation and aerospace industries.
Permanent Mold Casting. The permanent mold process is well-suited for
high strength, long production life parts that do not require frequent changes
in design and can be made in high volume. The Company uses this process
primarily to produce components used in diesel engines and other structural
parts for the transportation industry. The permanent mold process uses a cast
iron mold to shape the part to be cast. Molten aluminum is ladled into the
heated mold and, once cooled, the casting is removed from the mold. As the mold
is not destroyed in the production process, it can be reused.
Sand Casting. The sand casting process is more appropriate for lower
volume parts. This process uses a wooden pattern of the part to be cast, with
complex geometry and high metalicized quality. The Company uses this process to
produce parts for the aerospace industry such as housings. An automatic molding
machine hydraulically squeezes molding sand to accurately reproduce the pattern.
After molten aluminum is poured into the mold, the sand is removed, leaving the
casting. The sand mold is destroyed in the process but the sand may be recycled
for future moldings.
Lost Foam Casting. The lost foam process is well-suited for producing
parts with complex patterns, which reduces the amount of machining that would be
required if the parts had been made with sand or permanent mold castings. The
Company uses this process to produce support brackets and housings for the
transportation and aerospace industries. In the lost foam process, the pattern
is created from expanded polystyrene beads. The foam pattern is then suspended
in a large metal flask and surrounded with dry sand. Molten aluminum is poured
directly on the pattern, which vaporizes as the aluminum replaces every detail
of the pattern. The lost foam process allows for complex details of a part to be
cast with little or no touch-up, and the tooling used to create the polystyrene
patterns has an unlimited life as the tooling only comes in contact with the
polystyrene beads.
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Aeromet. At its Rochester, Worcester and Sittingbourne, England facilities,
Aeromet manufactures aluminum investment castings and aluminum and magnesium
precision sand castings. Aeromet is a European leader in the production of light
alloy sand and investment castings for the commercial aerospace and defense
sectors.
Precision Investment Casting. At its Worcester, England facility,
Aeromet manufactures aluminum investment casting products, including aircraft
and defense system components such as electronic enclosures, aircraft engine
outer guide vanes, navigation lights, wing tip fences, winglet components, duct
stators and heads up display units. At its Rochester, England facility, Aeromet
manufactures aircraft components such as pressure tight fuel connectors. The
versatility, accuracy and replicability of the investment casting process
provides many advantages over more traditional methods of machining and
fabricating metal products from solid components. The investment casting process
uses a metal die manufactured to required specifications. Aeromet's precision
tooling capabilities permit production of metal dies that incorporate a variety
of details and features. A die can be reused to produce the required number of
parts without degradation to the original die. Aeromet's production of the die
gives the customer an incentive to order additional units of the part from
Aeromet.
Sophia Process Investment Casting. At its Worcester, England facility,
Aeromet uses the computerized "Sophia Process" to manufacture significantly
larger, more complex castings than can be made as a single part using more
traditional investment casting processes. Aeromet is one of only four licensees
of the Sophia Process, and is licensed to make and sell metal castings in the
United Kingdom, Ireland, Australia, New Zealand and certain African and Asian
countries. Parts made with the Sophia Process have relatively thin wall
thickness but have strength and ductility values comparable to fabricated,
forged and machined solid components. The Sophia Process stringently controls
the heat level and process parameters to make lighter but stronger components
that resist fracture and fatigue, and reduces machining, fabrication and
assembly costs, by eliminating both doublers at material interfaces and the
weakness and stress associated with riveted assemblies. Aeromet uses high
strength alloys with good castability to ensure that the integrity and enhanced
properties from one casting are identical to the next, and to achieve the
desired combination of tensile strength, ductility and elongation. Parts made
with the Sophia Process are used for the commercial aerospace, defense and
transportation industries. Such applications include civil aircraft, military
aircraft, missiles and underwater weapons applications and applications for the
motorsport industry. Aeromet is using the Sophia Process to produce components
for the Airbus A320, A330 and A340 aircraft, such as navigation light housings
and wing tip fences, as a single part. Parts manufactured with the Sophia
Process constituted 2% of Aeromet's 1997 net revenues. The Company believes that
the advantages of the Sophia Process and the increasing customer awareness of
those advantages will result in increased demand for parts fabricated using the
Sophia Process.
Sand Casting. At its Sittingbourne, England facility, Aeromet
manufactures aluminum and magnesium alloy precision sand castings, including
machined and finished parts for the commercial aerospace, defense and motorsport
industries. Sand casting is suitable for products that are larger than the
typical investment casting parts or products that require heavy wall sections.
These products include aircraft engine heat exchangers and air intakes, aircraft
engine fuel pump housings, aircraft windscreen canopies and high performance
motorsport engine components and gearboxes. The aluminum and magnesium alloys
have high strength and long freezing ranges and are resistant to elevated
temperatures. For such customer requirements, sand casting provides an effective
method of producing components with strength and uniformity. Aeromet has made
significant advances in both the process and materials technology for magnesium
and aluminum sand castings. Aeromet uses engineered patterns utilizing computer
assisted design technologies in order to achieve repeatable high casting
integrity and enhanced mechanical properties. Aeromet has complete
non-destructive testing and inspection facilities, such as dye penetrant flaw
detection and X-ray testing of components, as required by the rigorous standards
of the aerospace industry.
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Precision Machining
Pacific Aerospace. At its Cashmere facility in Wenatchee, Washington, the
Company operates a precision machine shop that produces precision machined
components, structural parts and assemblies principally from aluminum and
explosively bonded metals for the commercial aerospace and defense industries.
These products range from small connectors to complex assemblies for use in
commercial and military aircraft, heavy trucks and seismic safety gas shutoff
valves. The Company uses computerized numerical control ("CNC") machining cells
to manufacture particularly complex components and assembly housings. The
Company builds its machined products either to customer specifications or
according to an engineering and tooling design developed by the Company to suit
a customer's particular need. The Company has a direct computer link to Boeing
that allows immediate access to the drawings for Boeing parts. The Company
inspects and tests its machined products at various stages of production using
non-destructive methods such as X-ray, ultra-sound and dyes before being passed
for shipment to the customer. The Company's machining operations are ISO 9002
compliant, qualifying it to perform work for most aerospace, medical equipment
and general electronic companies, and are also DI-9000A approved by Boeing.
In response to changes in its customers' manufacturing processes, the
Company often supplies its precision machined parts on a "just in time to point
of use" basis. As a result of these processes and the high quality of its
machined parts, the Company has won numerous awards for supplier excellence from
Boeing, Northrop Grumman and Kawasaki.
Aeromet. At its Sittingbourne, England facility, Aeromet operates a
precision machine shop that provides machinery and assembling capabilities for
Aeromet's casting and forming operations. This machining facility has the
technical capabilities to provide the range of machining services for complete
production and finishing of components, including design, pattern production,
casting and final machining of a component. Aeromet also performs specialized
machining of small detail components in steel and titanium.
Explosive Bonding
At its NTI facility in Sequim, Washington, the Company manufactures over 30
specialty metals using explosive metallurgical technology. Using this
technology, an explosive charge combines, at the molecular level, the surfaces
of metals such as aluminum and stainless steel, that will not normally bond to
each other using adhesives or welding. The result is a strong but lightweight
metal that can be machined and welded into complex assemblies. The Company
finishes the metals to the customer's specifications using milling, welding,
lathe and rolling techniques, and tests the finished products in its
metallurgical lab using non-destructive testing such as dye penetration and
ultrasonic scanning. The Company also uses its explosive technology to
shock-harden metals for use in applications where extremely high tensile
strength is required, such as rail track intersections and switch components and
to pressure form complex metal parts under water.
The Company's explosively bonded metals are used by customers in the
aerospace, defense, energy and marine industries. Explosively bonded metals are
used to fabricate products for highly specialized applications such as
satellites, aircraft and missiles where weight minimization is a critical
factor; oil drill heads, aircraft engine exchange tubes, and flanges and
feed-throughs for nuclear particle accelerators where strength at high
temperature and heat dissipation are critical; and naval interfaces and galvanic
structures where corrosion resistance is a requirement.
Assembled Electronics Products
The Company develops, manufactures and markets a wide array of complex
hermetically-sealed electronic connectors and assemblies, ceramic capacitors and
filters, relays and solenoids and
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flat panel display units. These products are used for specialized applications
in the aerospace, defense, telecommunications, energy, medical and electronics
industries. Many of the Company's assembled electronics products are
specifically engineered to withstand degradation or destruction in harsh
environments, such as the ocean, space and the human body. These environments
experience extremes in temperature, pressure, corrosiveness and impact that can
make product repair or replacement difficult or impossible. To meet the demands
of these challenging applications, the Company has developed or acquired 32
patents and many proprietary processes. The types of assembled electronics
products manufactured by the Company, and their respective manufacturing
processes are as follows:
Hermetically Sealed Products. At its Pacific Coast facility in Wenatchee,
Washington, and at its Balo facility in Butler, New Jersey, the Company designs
and manufactures two lines of hermetically sealed electronic connectors,
feed-throughs, assemblies and instrument packages. Electronics must be
hermetically sealed when used in locations where the external environment can
penetrate the unit. The product line manufactured at the Balo facility is sealed
with a cost-effective, traditional glass-based sealant, which provides an
effective seal in less demanding environments. The product line manufactured at
the Pacific Coast facility is sealed with the Company's more expensive,
proprietary Kryoflex ceramic sealant for use in products that must withstand
extremely invasive environments, such as pacemakers, down-hole drilling tools,
the fiber optic termini used on the Space Station and radar arrays. Both lines
of the Company's hermetically sealed products are manufactured to customer
specifications using the Company's engineering and design expertise,
metallurgical and ceramic analysis capabilities and ceramics formulation and
production processes. Raw materials for the connectors' packages and assemblies
are formed on the Company's machining centers, CNC lathes, Swiss screw machines
and CNC-controlled laser welding machines. The Company also has the capacity to
electroplate and chemically film its products.
The Company's Pacific Coast facility also manufactures hermetically bonded
products using the Company's proprietary ceramic adhesive. This ceramic adhesive
bonds metals that will not normally bond, such as aluminum and stainless steel.
The resulting component is nearly as light as aluminum but has the superior
bonding and sealing capacity of stainless steel, making it the preferred product
where weight minimization is important, such as in space applications. The
Company also holds patents in metal matrix composite technology, which the
Company believes will allow it to produce even lighter, more durable electronics
packages in the future.
Ceramic Filters. At its Ceramic Devices facility in Wenatchee, Washington,
the Company designs and manufactures very small, specialized multilayer
discoidal (round) ceramic capacitors and filters. These products are advanced
electronic circuit filtering devices designed to filter out electromagnetic
interference ("EMI") and other undesirable electrical signals that pose
significant problems for the manufacturers and users of high-performance,
high-reliability electronic systems operating in harsh environments. The
Company's products include mini screw-in filters for telecommunications,
aerospace and defense applications; ring laser gyros; commercial eyelets for
identification friend or foe systems and satellite amplifiers; high reliability
bolts for the space shuttle's main engine controllers; filter pins and custom
filter assemblies and broad bands for military display systems. The Company is
an approved supplier of EMI devices to most aerospace and defense contractors,
and uses these filters in its own hermetically sealed electronic products. The
Company's Ceramic Devices operation has a self contained facility with plating,
Swiss turning, assembly, and product testing capabilities, and has received a
number of military and industry qualification ratings.
Relays and Solenoids. At its ESC facility in Vancouver, Washington, the
Company designs, manufactures and markets electromechanical devices, such as
relays, solenoids, sensors, electronic assemblies, actuators, time delays and
flat panel display units used in a wide variety of satellite, aircraft and
military hardware applications. The Company's relay and solenoid products
function as automatic electrical switches, designed to military specifications,
for use in demanding environments.
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These high reliability but low power switches use only one to ten amperes,
making them suitable for applications such as satellite power bus controllers
and aircraft fuel control valves. The Company's products have been used in many
space vehicles launched by the United States and European countries. The Company
has specialized equipment for CNC milling, turning and welding which is used for
producing these products.
Flat Panel Displays and Optical Filters. At its Displays & Technologies
unit at the ESC facility, the Company designs and manufactures ruggedized and
optically enhanced flat panel displays and optical filters. The flat panel
display unit is used for commercial applications that range from GPS displays
and light control filters used on private and commercial aircraft to ground
vehicle displays and automatic teller machine displays. Military uses include
military aircraft cockpit instrumentation and high impact displays on M1A2
tanks. These displays allow users to view the image at a much higher resolution
than standard commercial resolutions. The Company's flat panel display product
is a commercial liquid crystal display ("LCD") sandwiched between layers of
glass and optical filter in the front, and heating and cooling units, and a
computerized optical enhancer, in the back. The entire unit is mounted in a
heavy duty housing unit.
Sales and Marketing; Distribution
The Company markets its precision cast and precision machined products
using the Company's direct sales force. The Company currently has direct
regional sales personnel covering the west coast of the United States and
intends to expand this sales force to cover other geographic regions as the
Company's business expands. The Company markets its assembled electronics
products in the United States, Europe and Japan through a network of
manufacturer representatives and resellers, generally established on a
geographic basis. In addition, the Company maintains an internal sales and
customer service staff and engineering capability for its assembled electronics
products to meet customer requirements for technical support. Aeromet utilizes
its own employee sales force for sales of its products to customers in England
and Wales. This internal sales force is organized into two groups, one group
responsible for sales of precision castings and one group responsible for metal
formed products. Aeromet uses independent agents to market its products to
customers in Scotland and in countries other than the United Kingdom.
Customers
The Company's top five customers, Boeing, PACCAR, Northrop Grumman, Deere &
Company and Honeywell, accounted for approximately 28%, 17%, 8%, 4% and 4%,
respectively, of the Company's fiscal 1998 net sales. Aeromet's top five
customers, British Aerospace, Rolls Royce, GKN Westland, Lucas Aerospace and
Alenia (Aermacchi), accounted for 12%, 11%, 7%, 6% and 5% of Aeromet's calendar
1997 net sales. No other customer accounted for more than 5% of either the
Company's or Aeromet's revenues during those periods. Because of the relatively
small number of customers for most of the products made by both the Company and
Aeromet, the Company's largest customers can influence product pricing and other
terms of trade. The loss of any of the Company's or Aeromet's largest customers
or reduced or canceled orders from any of those customers could have a material
adverse effect on the Company and its financial performance.
The Company and Aeromet currently serve substantially different customer
bases in similar markets. For example, the Company currently supplies components
and parts to Boeing (not currently a significant Aeromet customer) for each of
Boeing's 737, 747, 757, 767 and 777 commercial aircraft construction programs.
Aeromet currently supplies components and parts for each of Airbus' A300/310,
A320 and A330/340 commercial aircraft construction programs, for which Pacific
Aerospace is not currently a supplier. As a result, the Company expects that the
Aeromet Acquisition will provide substantial opportunities to cross market to
the Company's and Aeromet's respective customer bases.
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Backlog
The majority of the Company's sales are made pursuant to individual
purchase orders and are subject to termination by the customer upon payment of
the cost of work in process plus a related profit factor. Historically, the
Company has experienced no significant order cancellations. As of May 31, 1998,
the Company had purchase orders and contractual arrangements evidencing
anticipated future deliveries ("backlog") through fiscal year 2000 of
approximately $70.0 million. After giving pro forma effect to the Aeromet
Acquisition as if it had occurred on June 1, 1997, the Company would have had
pro forma revenue backlog of approximately $110.0 million through fiscal year
2000, of which approximately $80.0 million is expected to be delivered in fiscal
year 1999. There is no assurance that backlog will be completed and booked as
net sales. Cancellations of pending contracts or terminations or reductions of
contracts in progress could have a material adverse effect on the Company and
its financial performance.
Competition
The Company and Aeromet are subject to substantial competition in many of
the markets that they serve. In the hot forming market, Aeromet's competitors
include Die Barnes Group Inc. and GKN Westland Aerospace (North America). In the
cold forming market, Aeromet competes with companies such as AHF and Pendle as
well as the in-house cold forming capabilities of certain of its customers,
including British Aerospace. In the sand casting market, the Company competes
with a number of regional foundries, and Aeromet's competitors include SFU
Naley, Hitchcock, and Teledyne Ryan Aeronautical. In the investment casting
market, Aeromet's competitors include the Cercast Group, Tital and Tritech. In
the precision machining market, the Company competes with a number of regional
machine shops. In the assembled electronics markets, the Company's competitors
include Amphenol Corporation, Hermetiz Seal Corporation, AVX Corporation,
Spectrum Control, Inc. and Electronics Design and Communications Instruments.
Many of these competitors have greater financial resources, broader experience,
better name recognition and more substantial marketing operations than the
Company or Aeromet, and represent substantial long-term competition for the
Company.
Components and products similar to those made by the Company and Aeromet
can be made by competitors using a number of different manufacturing processes.
Although the Company believes that its manufacturing processes, technology and
experience provide advantages to the Company's customers, such as high quality,
competitive prices and physical properties that often meet stringent demands,
alternative forms of manufacturing can be used to produce many of the components
and products made by the Company and Aeromet. Although the Company believes that
its proprietary technology may give it a competitive advantage with respect to
certain of its products, new developments by competitors are expected to
continue. The Company's and Aeromet's competitors may develop products that are
viewed by customers as more effective or more economic than the Company's
product lines. The Company and Aeromet may not be able to compete successfully
against current and future competitors, and the competitive pressures faced by
the Company and Aeromet may have a material adverse effect on the Company and
Aeromet and their financial performance.
Raw Materials
Aeromet obtains approximately 70% of its titanium from one supplier and is
subject to a lead time of approximately 80 weeks in ordering and obtaining
titanium. While Aeromet generally has managed the ordering process to obtain
titanium when needed, any failure of Aeromet to obtain titanium when needed or
any titanium cost increases imposed by that supplier could have a material
adverse effect on the Company and its financial performance. The Company
generally has readily
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available sources of all raw materials and supplies it needs to manufacture its
products and, where possible, the Company maintains alternate sources of supply.
However, the Company does not have fixed price contracts or arrangements for all
of the raw materials and other supplies it purchases. Shortages of, or price
increases for, certain raw materials and supplies used by the Company have
occurred in the past and may occur in the future. Future shortages or price
fluctuations could have a material adverse effect on the Company's and Aeromet's
ability to manufacture and sell their products in a timely and cost-effective
manner.
Proprietary Rights
Significant aspects of the business of the Company and of Aeromet depend on
proprietary processes, know-how and other technology that is not subject to
patent protection. The Company and Aeromet each rely on a combination of trade
secret, copyright and trademark laws, confidentiality procedures and other
intellectual property protection to protect their proprietary technology.
However, there is no assurance that the Company's competitors may not develop or
utilize technology that is the same as or similar to such technology of the
Company.
The Company has 32 U.S. patents, four U.S. patent applications pending, one
Canadian patent application pending and one European patent enforceable in the
U.K., almost all of which apply to certain aspects of the Company's electronics
business and not to its aerospace business. Aeromet currently holds no patents,
but has one patent application pending in the U.K. and before the European
Patent Office. There is no assurance that any of these patent applications will
result in issued patents, that existing patents or any future patents will give
the Company any competitive advantages for its products or technology, or that,
if challenged, these patents will be held valid and enforceable. The Company's
issued patents expire at various times over the next 17 years, with 14 patents
expiring over the next five years. Although the Company believes that the
manufacturing processes of much of its patented technology are sufficiently
complex that competing products made with the same technology are unlikely,
there is no assurance that the Company's competitors will not design competing
products using the same or similar technology after these patents have expired.
Despite the precautions taken by the Company, unauthorized parties may
attempt to copy aspects of the Company's products or obtain and use information
that the Company regards as proprietary. Existing intellectual property laws
give only limited protection with respect to such actions and policing
violations of such laws is difficult. The laws of certain countries in which the
Company's products are or may be distributed do not protect products and
intellectual property rights to the same extent as do the laws of the United
States. The Company may be required to enter into costly litigation to enforce
its intellectual property rights or to defend infringement claims by others.
Such infringement claims could require the Company to license the intellectual
property rights of third parties. There is no assurance that such licenses would
be available on reasonable terms, or at all.
Environmental Matters
The Company's and Aeromet's facilities are subject to federal, state and
local laws and regulations concerning solid waste disposal, hazardous materials
generation, storage, use and disposal, air emissions, waste water discharge,
employee health and other environmental matters (together, "Environmental
Laws"). Proper waste disposal and environmental regulation are major
considerations for the Company because a number of the metals, chemicals and
other materials used in and resulting from its manufacturing processes are
classified as hazardous substances and hazardous wastes. If permitting and other
requirements of applicable Environmental Laws are not met, the Company could be
liable for damages and for the costs of remedial actions and could also be
subject to fines or other penalties, including revocation of permits needed to
conduct its business. Any permit revocation could require the Company to cease
or limit production at one or more of its facilities, which could have a
material adverse effect on the Company and its financial performance. The
Company has an
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<PAGE>
ongoing program of monitoring and addressing environmental matters and from time
to time in the ordinary course of business is required to address minor issues
of noncompliance at its operating sites. Recently the Company identified certain
operations or processes that lacked required permits or otherwise are not in
full compliance with applicable Environmental Laws that the Company believes are
not material. The Company is taking steps to remedy this noncompliance. In
connection with its evaluation of the Aeromet Acquisition, the Company obtained
an environmental investigation of each of Aeromet's facilities. These
environmental investigations identified certain issues related to potential
permitting and remediation matters that the Company believes are not material.
The Company intends to investigate further to determine whether any actions are
required under applicable United Kingdom law.
Environmental Laws could become more stringent over time, imposing greater
compliance costs and increasing risks and penalties associated with any
violations. As a generator of hazardous materials, the Company is subject to
financial exposure with regard to its properties even if it fully complies with
these laws. In addition, certain of the Company's facilities are located in
industrial areas and have lengthy operating histories. As a consequence, it is
possible that historical or neighboring activities have affected properties
currently owned by the Company and that, as a result, additional environmental
issues may arise in the future, the precise nature of which the Company cannot
now predict. There is no assurance that any present or future noncompliance with
Environmental Laws or future discovery of contamination will not have a material
adverse effect on the Company's results of operations or financial condition.
Government Regulation
Certain of the Company's products are manufactured and sold under United
States government contracts or subcontracts. As with all companies that provide
products or services to the federal government, the Company is directly and
indirectly subject to various federal rules, regulations and orders applicable
to government contractors. Some of these regulations relate specifically to the
vendor-vendee relationship with the government, such as the bidding and pricing
rules. Under regulations of this type, the Company must observe certain pricing
restrictions, produce and maintain detailed accounting data, and meet various
other requirements. The Company is also subject to many regulations affecting
the conduct of its business generally. For example, the Company must adhere to
federal acquisition requirements and standards established by the Occupational
Safety and Health Act relating to labor practices and occupational safety
standards. The Company is currently updating and implementing written policies
and training programs relating to employee health and safety matters at several
of its facilities. See "--Environmental Matters." Violation of applicable
government rules and regulations could result in civil liability, in
cancellation or suspension of existing contracts, or in ineligibility for future
contracts or subcontracts funded in whole or in part with federal funds. Some of
the Company's customers are in the defense industry, and loss of governmental
certification by such customers could have a material adverse effect on their
purchases from the Company and the Company's business and financial performance.
Employees
The Aeromet Acquisition nearly doubled the Company's workforce. As of May
31, 1998, the Company had a total of 748 employees, of whom approximately 679
were engaged in manufacturing functions, 19 in sales and marketing, 38 in
administrative functions and 12 in executive functions. As of May 31, 1998,
Aeromet had a total of 580 employees, of whom approximately 543 were engaged in
manufacturing functions, 13 in sales and marketing, 16 in administrative
functions and eight in executive functions. None of the Company's workforce is
unionized. Certain of Aeromet's manufacturing and engineering employees are
represented by labor unions, although all negotiations are carried out through
employee work committees. Neither the Company nor Aeromet
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have experienced any work stoppages and both believe that their relationships
with their employees are good.
Risk Factors
Acquisition Risks. The Aeromet Acquisition has substantially expanded the
Company's operations, and the performance of Aeromet will have a significant
impact on the Company's future financial results. The Aeromet Acquisition more
than doubled the Company's net sales on a pro forma basis, nearly doubled the
Company's workforce, resulted in the Company having substantial foreign
operations and imposed substantial debt service obligations on the Company. In
fiscal 1998, the Company's net sales were $54.1 million, with less than 5%
derived from foreign sales. After giving effect to the Aeromet Acquisition, pro
forma net sales for fiscal 1998 would have been $115.5 million, with
approximately 48% derived from sales outside the United States. The success of
the Company's strategy to pursue acquisitions depends upon the Company's ability
to manage the risks associated with acquisitions, including the risks of
assessing the value, strengths and weaknesses of acquisition candidates,
possible diversion of management attention from operating aspects of the
Company's business, increased borrowings, disruption of product development
cycles and dilution of earnings per share. The success of the Company's strategy
to pursue acquisitions also depends on the ability of the Company to accurately
assess problems and efficiently implement necessary changes at newly acquired
subsidiaries. For example, the Company is currently in the process of
instituting personnel and management changes and developing and implementing new
business plans for ESC, which the Company acquired in the fourth quarter of
fiscal 1998. There is no assurance that the Company's assessment of problems and
implementation of changes will be successful. A failure to achieve or sustain
the anticipated benefits of the Aeromet Acquisition or any other acquisition by
the Company could have a material adverse effect on the Company and its
financial performance.
Foreign Operations. Aeromet subjects the Company to the risks of foreign
operations, including foreign government policies and regulations; tariffs,
taxes and other trade barriers; exchange controls and limitations on dividends
or other payments; and devaluations and fluctuations in currency exchange rates.
The Company has not previously engaged in foreign currency hedging transactions,
and there is no assurance that any hedging transactions by the Company would
offset unfavorable changes in foreign currency rates.
Significant Leverage; Liquidity. As a result of the Offering, the Company
has substantial indebtedness and significant debt service obligations. The level
of the Company's indebtedness could have important consequences, including, but
not limited to, the following: (i) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions,
product development, general corporate purposes or other purposes may be
materially limited or impaired; (ii) a significant portion of the Company's cash
flow from operations will be dedicated to the payment of principal and interest
on the Notes, thereby reducing the funds available to the Company for its
operations and future business opportunities; (iii) the Company's borrowings
from its primary bank lender bear interest at variable rates, which could result
in higher interest expense in the event of increases in interest rates; (iv) the
Company may be substantially more leveraged than certain of its competitors,
which may place the Company at a competitive disadvantage; and (v) the Company's
substantial degree of leverage may limit its flexibility to adjust to changing
market conditions, reduce its ability to withstand competitive pressures and
make it more vulnerable to a downturn in general economic conditions or in its
business or may make the Company unable to make capital expenditures. The
Company's ability to make scheduled payments on the Notes or to refinance its
other debt obligations will depend upon its future financial and operating
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, certain of which are beyond its control.
There is no assurance that the Company's operating results, cash flow and
capital resources will be sufficient for payment of its indebtedness in the
future, and if insufficient, the Company could face substantial liquidity
problems and could be forced to reduce or
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<PAGE>
delay capital expenditures, dispose of material assets or operations, reduce,
restructure or refinance its indebtedness or seek additional equity capital to
meet its debt service and other obligations. There is no assurance that any of
these actions could be effected on satisfactory terms, if at all.
Restrictive Debt Covenants. The Indenture contains a number of significant
covenants that, among other things, restrict the ability of the Company and its
subsidiaries to dispose of assets, incur additional indebtedness, prepay other
indebtedness (including the Notes), amend certain debt instruments (including
the Indenture), pay dividends, create liens on assets, enter into sale and
leaseback transactions, make investments, loans or advances, make acquisitions,
engage in mergers or consolidations, make capital expenditures, change the
business conducted by the Company or its subsidiaries, or engage in certain
transactions with affiliates and otherwise restrict certain corporate
activities. In addition, under some of the agreements governing its senior
indebtedness, the Company is subject to similar covenants and certain additional
restrictions. The Company's ability to comply with such covenants may be
affected by events beyond its control, including prevailing economic, financial
and industry conditions. The breach of any of such covenants or restrictions
could result in a default, which would permit the senior lenders, or the holders
of the Notes, or both, as the case may be, to declare all amounts owed them to
be due and payable, together with accrued and unpaid interest. As a result, any
commitments of the Company's senior lenders to make further extensions of credit
could be terminated. If the Company is unable to repay its indebtedness to its
senior lenders, such lenders could proceed against any collateral securing such
indebtedness.
Aerospace Industry Risks; Cyclicality; Asia Volatility. The Company and
Aeromet operate in historically cyclical industries. The aerospace, defense and
transportation industries are sensitive to general economic conditions and have
been adversely affected by past recessions. For example, from 1990 to 1994 the
aerospace industry experienced reduced demand for commercial aircraft, a decline
in military spending and the postponement of overhaul and maintenance on
existing aircraft. In past years, the aerospace industry has been adversely
affected by a number of factors, including increased fuel and labor costs and
intense price competition. Although the aerospace supply industry currently is
enjoying favorable trends driven by strong growth in commercial aircraft demand,
there is no assurance that such trends will continue or that general economic
conditions will not lead to a downturn in demand for core components and
products of the Company or Aeromet. Moreover, as of January 1998, Boeing and
Airbus each had a 10% backlog of aircraft sales to customers in Asia. Current
financial difficulties in Asia, including currency devaluations and volatile
financial markets, are adversely affecting some Asian customers. These
difficulties may result in cancellations or delays in aircraft orders. Boeing
indicated that due to the Asian financial crisis, it expects worldwide
requirements for commercial jets will be reduced over the five-year period of
1998 through 2002 from 4,150 to 4,000 aircraft. Any cancellations or delays in
aircraft orders from customers of Boeing or Airbus could reduce demand for the
Company's products and could have a material adverse effect on the Company and
its financial performance. See "--Industry Overview."
Management of Growth. The Company has experienced rapid growth that has
placed and will continue to place significant demands on its managerial,
administrative, financial and operational resources. The Company's total number
of employees increased from approximately 748 to over 1,200 upon consummation of
the Aeromet Acquisition, and the number of its operating sites increased from
five in the United States to a total of ten in the United States and the United
Kingdom. The Company has pursued an aggressive growth strategy and expects to
continue to evaluate and pursue potential strategic acquisitions. To manage its
growth effectively, the Company must continue to improve its operational,
financial and other management processes and systems and continue to attract and
retain highly skilled personnel. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Possible Need for Additional Capital. The Company believes that the net
proceeds from the Offering together with cash from operations and other sources
will be sufficient to meet the
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Company's currently budgeted working capital requirements for at least the next
12 months. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The Company's actual capital needs, however, will depend
on many factors, including the amount of revenue generated from operations,
amounts required to pay principal and interest on the Notes, bank borrowings and
other indebtedness, capital expenditures required to remain competitive, cash
required for acquired companies and future acquisitions and acquisition and
financing transaction costs, none of which can be predicted with certainty. As a
result of these factors, the Company is unable to predict accurately the amount
or timing of its future capital needs, if any. The inability to obtain
additional capital if and when needed could have a material adverse effect on
the Company and its financial performance.
Dependence on Key Personnel. The Company's success depends significantly on
Donald A. Wright, the Company's Chief Executive Officer and President, and on a
number of other senior management and operational personnel. The loss of the
services of any of these employees could have a material adverse effect on the
Company's ability to achieve its business objectives. The Company has a key man
life insurance policy on the life of Mr. Wright in the amount of $3 million. The
Company's growth and future success will depend in large part on its ability to
attract and retain additional senior managers and highly skilled personnel to
provide management and technological depth and support, to enhance and market
its existing products and to develop new products. Competition for skilled
management, technical, marketing and sales personnel is intense. There is no
assurance that the Company will be successful in attracting and retaining the
key management, technical, marketing and sales personnel needed to support its
business and its recent and future acquisitions, and failure to do so could have
a material adverse effect on the Company and its financial performance.
Technological Change; Development of New Products. The market for the
Company's and Aeromet's products is characterized by evolving technology and
industry standards, changes in customer needs, adaptation of products to
customer needs and new product introductions. The Company's success will depend
on its ability to enhance its current products and to develop new products that
meet changing customer needs, advertise and market its products and respond to
evolving industry standards and other technological changes on a timely and
cost-effective basis. The Company may not succeed in developing new products or
enhancing its existing products on a timely basis, and such new products or
enhancements may not achieve market acceptance. Furthermore, from time to time
the Company's competitors may announce new products, enhancements or
technologies that have the potential to replace or render the Company's existing
products obsolete. Any failure by the Company to anticipate or respond
adequately to changes in technology and customer preferences or to product
introductions or enhancements by others, or any significant delays in the
development or introduction of new products or product enhancements by the
Company could have a material adverse effect on the Company and its financial
performance. See "--Business Strengths; --Strategy."
Product Liability. The Company is subject to the risk of product liability
claims and lawsuits for harm caused by products of the Company. The Company
maintains product liability insurance with a maximum coverage of $2 million.
However, there is no assurance that the Company's insurance will be sufficient
to cover any claims that may arise. A successful product liability claim in
excess of the Company's insurance coverage could have a material adverse effect
on the Company and its financial performance.
ITEM 2. DESCRIPTION OF PROPERTY
The principal executive and administrative offices of the Company are
located at 430 Olds Station Road, Wenatchee, Washington. The Company's
headquarters building provides approximately 18,000 square feet of office space,
and is owned by the Company. The Company also occupies leased office facilities
in Bothell, Washington, of approximately 21,390 square feet, for base rent of
$295,000
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per year under a lease that expires in 2003. The Company subleases 95% of the
Bothell facility to a third party and guarantees payment of the sublease. See
"Certain Relationships and Related Transactions."
The general location, use and approximate size of the Company's and
Aeromet's principal owned and leased manufacturing properties are as follows:
<TABLE>
<CAPTION>
Approx. Own/ Annual Lease Mortgage
Segment Location Area Lease Rent Expiration Balance
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aerospace Wenatchee, Washington 42,000 Lease $199,000 2007 N/A
----------------------------------------------------------------------------------------------------------
Entiat, Washington 84,000 Own N/A N/A $1,107,000
----------------------------------------------------------------------------------------------------------
Sittingbourne, Welwyn 157,000 Lease (pound)751,000 2018 N/A
Garden City and Worcester
----------------------------------------------------------------------------------------------------------
Worcester 15,000 Lease (pound) 45,000 2003 N/A
----------------------------------------------------------------------------------------------------------
Rochester 34,000 Lease (pound)180,000 2001 N/A
----------------------------------------------------------------------------------------------------------
Birmingham 59,000 Lease (pound)236,000 2008 N/A
----------------------------------------------------------------------------------------------------------
Sittingbourne 7,000 Lease (pound) 45,000 2005 N/A
- ---------------------------------------------------------------------------------------------------------------------------
Electronics Wenatchee, Washington 49,000 Lease $200,000 2007 N/A
----------------------------------------------------------------------------------------------------------
Sequim, Washington 18,355 Own N/A N/A None
----------------------------------------------------------------------------------------------------------
Butler, New Jersey 22,400 Lease $192,000 1998 N/A
----------------------------------------------------------------------------------------------------------
Vancouver, Washington 50,000 Lease $336,000 2009 N/A
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
In connection with the Aeromet Acquisition, the Company entered into a
12-month option to purchase the Sittingbourne, Worcester and Welwyn Garden City
facilities that are being leased by Aeromet, for a purchase price of
approximately $12.5 million in cash. The Company is also currently negotiating
to purchase its Butler, New Jersey facility for $1.1 million in cash. That
purchase is expected to close in September 1998, subject to satisfaction of
certain closing conditions. The Company's lease on the Butler, New Jersey
facility expired in July 1998, and the Company is currently renting the facility
on a month-to-month basis.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market Information, Shareholders, and Dividends
- -----------------------------------------------
Until March 13, 1995, there was no public market for the Company's Common
Stock. From that date through September 14, 1995, the Common Stock was listed on
the Nasdaq Electronic Bulletin Board. From September 15, 1995 through July 15,
1996, the Common Stock was traded on the Nasdaq - Small Cap Market System under
the symbol "PCTH." Since July 16, 1996, the Company's Common Stock and Common
Stock Purchase Warrants ("Warrants") have been traded on the Nasdaq National
Market System under the symbols "PCTH" for the Common Stock and "PCTHW" for the
Warrants. Each Warrant entitles the holder to purchase one share of Common Stock
at an exercise price of $4.6875 per share.
The Nasdaq National Market System reported the following range of high and
low sales prices for the Common Stock and the Warrants for each calendar quarter
within the Company's 1997 and 1998 fiscal years:
<TABLE>
<CAPTION>
Common Stock Warrants
-------------------- --------------------
Calendar Period High Low High Low
--------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
1996
First Quarter.................................. $4.38 $3.75 -- --
Second Quarter................................. 5.00 2.75 -- --
Third Quarter.................................. 5.0625 2.00 $ .75 $ .375
Fourth Quarter ................................ 3.125 1.9375 .6875 .28125
1997
First Quarter.................................. 4.75 2.75 1.40625 .5
Second Quarter ................................ 4.0625 2.6875 1.1875 .71875
Third Quarter.................................. 5.0625 3.7188 2.25 1.25
Fourth Quarter................................. 6.8750 4.00 2.75 1.50
1998
First Quarter.................................. 7.0313 4.1875 3.1250 1.1250
Second Quarter (April 1 - May 31, 1998)........ 6.9375 5.75 3.00 2.375
</TABLE>
As of August 27, 1998, the closing sales price on the Nasdaq National
Market System for the Common Stock was $3.00 per share and the closing sales
price on the Nasdaq National Market System for the Warrants was $1.219 per
Warrant.
The Company has never declared or paid cash dividends on the Common Stock.
The Company currently anticipates that it will retain all future earnings to
fund the operation of its business and does not anticipate paying dividends on
the Common Stock in the foreseeable future. The Company's agreement with its
principal lender and the Indenture restrict the Company's ability to pay
dividends.
Common Stock
As of August 27, 1998, there were 940 holders of record of 15,986,323
shares of fully paid and nonassessable Common Stock outstanding. Each share of
outstanding Common Stock is entitled to participate equally in dividends as and
when declared by the Board of Directors of the Company, out of funds legally
available therefor, and is entitled to participate equally in any distribution
of net assets made to the Company's shareholders in the event of liquidation of
the Company after payment
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to all creditors thereof. There are no preemptive rights or rights to convert
Common Stock into any other securities. The holders of the Common Stock are
entitled to one vote for each share held of record on all matters voted upon by
the Company's shareholders and may not cumulate votes for the election of
directors. Thus, the owners of a majority of the shares of the Common Stock
outstanding may elect all of the directors of the Company and the owners of the
balance of the shares of the Common Stock would not be able to elect any
directors of the Company.
Preferred Stock
The Company's Board of Directors has the authority to issue shares of
Preferred Stock in one or more series and to fix the powers, designations,
preferences and relative, participating, optional or other rights of any series
of preferred stock, including dividend rights, conversion rights, voting rights,
redemption terms, liquidation preferences, sinking fund terms and the number of
shares constituting any series, without shareholder approval, unless such
approval is required by applicable law or by the rules of any stock exchange or
automated quotation system on which securities of the Company may be listed or
traded.
Series A Preferred. In February 1997, the Board of Directors authorized the
issuance of 50,000 shares of the Company's Series A Convertible Preferred Stock
("Series A Preferred"), which were sold to a limited number of institutional
investors under Rule 506 of the Securities Act. Effective as of June 11, 1997,
the Company registered for resale up to 1,948,541 shares of Common Stock
underlying the Series A Preferred on a Form S-3 registration statement. As of
May 14, 1998, the Series A Preferred had been fully converted into 1,494,593
shares of Common Stock. The Company is in the process of deregistering the
remaining unissued 453,948 shares of Common Stock.
Series B Preferred. In May 1998, the Company sold 100,000 shares of Series
B Convertible Preferred Stock ("Series B Preferred"), and warrants to purchase
138,888 shares of Common Stock, in a private offering that generated $10.0
million in gross proceeds. In addition, the purchasers deposited $7.0 million
into escrow. Upon the closing of the Aeromet Acquisition, the Company issued the
purchasers 70,000 additional shares of Series B Preferred, and warrants to
purchase an additional 97,221 shares of Common Stock, in exchange for delivery
of the escrowed funds to the Company. The holders of the warrants issued in
connection with the Series B Preferred 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 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
shares of Common Stock underlying the Series B Preferred and the related
warrants.
Upon conversion of a share of Series B Preferred, the holder will receive
the number of shares of Common Stock equal to $100 divided by the
then-applicable conversion price of the Series B Preferred. Up to $7,000,000 of
the Common Stock underlying the Series B Preferred may be converted and sold at
any time, if that Common Stock is included in an effective piggyback
registration. Shares of Series B Preferred whose underlying shares of Common
Stock are not included in a piggyback registration are not convertible until
August 1998, and may not be sold until February 1999. At that time, the
underlying Common Stock may be sold upon the effectiveness of a registration
statement, or under any applicable exemption from registration. From August 1998
until February 1999, the conversion price of the Series B Preferred is $7.20 per
share. After February 1999, the conversion price of the Series B Preferred is
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
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<PAGE>
$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.
After the sale in a piggyback registration, if any, of any Common Stock
issued upon conversion of Series B Preferred, the Floor Price would be
recomputed to an amount that would allow the maximum number of shares of Common
Stock 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 occurring after August 13, 1998, and a conversion of the Series B
Preferred into Common Stock 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 shares
of Common Stock (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. So long as 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.
Warrants
As of August 27, 1998, the Company had outstanding warrants to purchase
Common Stock as follows: (a) publicly traded Warrants to purchase 2,295,000
shares of Common Stock that were issued as part of the units sold in a July 1996
registered public offering, which have an exercise price of $4.6875 per share
and expire in July 2001 ("Units"); (b) warrants to purchase Units consisting of
180,000 shares of registered Common Stock and 180,000 Warrants, which were
issued to underwriters in the July 1996 public offering, and which have an
exercise price of $3.75 per Unit and expire in July 2001; (c) warrants to
purchase a total of 247,500 shares of Common Stock issued to several employees
and consultants of the Company, which have exercise prices ranging from $2.00 to
$4.80 per share, and expiration dates that range from December 2000 to February
2005; and (d) warrants to purchase 170,000 shares of Common Stock issued in
connection with the Series B Preferred ("Series B warrants"), as discussed
above. No holder of the warrants possesses any rights as a shareholder under
such warrants until such holder exercises such warrant. Of the shares issuable
upon exercise of the employee and consultant warrants, 160,000 shares have been
registered by the Company under a Form S-8 registration statement (see
"Executive Compensation") and 87,500 shares are registered for resale under a
Form S-3 registration statement.
Registration Rights
As of August 27, 1998, up to $7,000,000 in value of the Common Stock
issuable upon conversion of the Series B Preferred and Series B warrants (the
"Conversion Shares") and 590,000 shares of unregistered Common Stock are
entitled to exercise certain piggyback rights to register such shares for resale
in certain public offerings of Common Stock by the Company for its own account
or for the account of others, subject to certain conditions, including the right
of the Company's underwriters to limit the number of such shares included in the
registration. The Company has agreed to register for resale
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<PAGE>
any unregistered Conversion Shares by November 1998 and to use its best efforts
to have such registration statement declared effective by January 1999.
Anti-Takeover Laws
The Company, as a Washington corporation, is subject to certain provisions
of Washington law regarding significant business transactions and fair price
restrictions. These provisions may have the effect of delaying or deterring a
hostile takeover of the Company.
Washington's "Significant Business Transactions" statute (Chapter 23B.19 of
the Washington Business Corporation Act) applies to public companies that are
incorporated under Washington law. The statute prohibits, subject to certain
exceptions, a corporation from entering into any "significant business
transactions" with an "Acquiring Person" (defined generally as a person who or
an affiliated group that beneficially owns 10% or more of the outstanding voting
securities of a corporation) for a period of five years after such person or
affiliated group becomes an Acquiring Person unless the transaction or share
acquisition made by the Acquiring Person is approved prior to the share
acquisition by a majority of the target corporation's directors. In addition,
this statute prohibits a corporation subject thereto from entering into a
significant business transaction with an Acquiring Person unless the
consideration to be received by the corporation's shareholders in connection
with the proposed transaction satisfies the "fair price" provisions set forth in
the statute.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Company's Common Stock and
publicly traded Warrants is Interwest Transfer Co., Inc.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presents selected historical
financial data of the Company as of and for the years ended May 31, 1994, 1995,
1996, 1997 and 1998, is derived from the Company's audited financial statements
and contains no financial data of Aeromet. This data should be read in
conjunction with the Company's Financial Statements and Notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
<TABLE>
<CAPTION>
Years Ended May 31,
--------------------------------------------------------
(in thousands, except percentage and per share data)
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales(1)....................... $ 2,940 $ 11,035 $20,725 $ 34,175 $ 54,099
Cost of sales...................... 2,860 9,092 16,439 25,969 39,487
-------- -------- -------- -------- --------
Gross profit....................... 80 1,943 4,286 8,206 14,612
Operating expenses................. 964 2,789 4,869 6,259 9,872
-------- -------- -------- -------- --------
Income (loss) from operations...... (884) (846) (583) 1,947 4,740
Net interest expense............... 203 282 498 384 755
Other income (expense)............. (11) (524) 15 169 (853)
-------- -------- -------- -------- --------
Income (loss) before taxes......... (1,098) (1,652) (1,066) 1,732 3,132
Income taxes (benefit)............. -- (241) (67) 50 (482)
-------- -------- -------- -------- --------
Net income (loss).................. $ (1,098) $ (1,411) $ (999) $ 1,682 $ 3,614
======== ======== ======== ======== ========
Net income (loss) per share:
Basic............................ (.60) (.41) (.16) .18 .29
Diluted.......................... (.60) (.41) (.16) .17 .27
Shares used in computation of
income (loss) per share:
Basic............................ 1,826 3,469 6,209 9,500 12,486
Diluted.......................... 1,826 3,469 6,209 10,036 13,606
Other Financial Data:
EBITDA(2).......................... $ (739) $ (437) $ 288 $ 3,305 $ 6,944
EBITDA margin...................... -- -- 1.4% 9.7% 12.8%
Depreciation and amortization...... $ 145 $ 409 $ 871 $ 1,358 $ 2,204
Capital expenditures(3)............ 81 959 1,293 2,739 10,290
At May 31,
--------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
Balance Sheet Data:
Cash and cash equivalents.......... $ 27 $ 1,079 $ 725 $ 3,048 $ 11,461
Working capital (deficit).......... (1,237) 1,758 952 13,090 25,599
Total assets....................... 7,894 11,630 27,649 35,752 78,580
Long-term debt (including current
portion)........................ 3,662 3,902 6,304 4,233 11,233
Shareholders' equity............... 1,226 5,454 12,539 25,619 56,142
- --------------
(1) The increases in net sales are attributable to acquisitions by the Company
and internal growth. See "Description of Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(2) "EBITDA" represents income from operations plus depreciation and
amortization expense. EBITDA should not be construed as an alternative to
(i) net income, as defined by generally accepted accounting principles, as
an indicator of the Company's operating performance or (ii) cash flow, as
defined by generally accepted accounting principles, as a measure of
liquidity.
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<PAGE>
(3) Fiscal 1998 includes capital expenditures of approximately $1.3 million for
a manufacturing building expansion, approximately $500,000 for capital
equipment and approximately $400,000 of metal finishing expenditures
associated with such manufacturing building expansion, approximately $2.0
million for a machining cell and approximately $2.7 million associated with
the acquisition and construction of the Company's headquarters building.
</TABLE>
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<PAGE>
ITEM 7. 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 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" under
the captions "Overview" and "Liquidity and Capital Resources," and in
"Description of Business" under each of the captions.
Overview
The Company has been an active consolidator of companies, and its results
of operations have been substantially affected by acquisitions. As of May 31,
1998, the Company had acquired and integrated eight companies since 1990. See
"Description of Business--Corporate History." 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 completed the Aeromet Acquisition. 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.
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. Sales to commercial aerospace and defense industry customers
comprised 42% and 20%, respectively, of total net sales in fiscal 1998. The
commercial aerospace and defense industries are cyclical in nature and subject
to changes based on general economic conditions and commercial airline industry,
defense and government spending. See "Description of Business--Industry
Overview" and "--Business Considerations--Aerospace Industry Risks; Cyclicality;
Asia Volatility."
The Company's operations are focused in development, manufacturing and
marketing of 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. See "--Results of Operations."
The Company believes that margins will remain higher for electronic and
assembled products than for its metals products. 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.
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<PAGE>
Results of Operations
For an understanding of the significant factors that influenced the
Company's performance during the past three fiscal years, the following
discussion should be read in conjunction with the consolidated financial
statements presented in this report.
The following table sets forth for the periods indicated certain historical
statement of operations data of the Company expressed in dollars (in thousands)
and as a percentage of net sales.
<TABLE>
<CAPTION>
Years Ended May 31,
--------------------------------------------------------------------
1996 1997 1998
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales................................ $ 20,725 100.0% $ 34,175 100.0% $ 54,099 100.0%
Cost of sales............................ 16,439 79.3 25,969 76.0 39,487 73.0
-------- -------- -------- -------- -------- --------
Gross profit............................. 4,286 20.7 8,206 24.0 14,612 27.0
Operating expenses....................... 4,869 23.5 6,259 18.3 9,872 18.2
-------- -------- -------- -------- -------- --------
Income (loss) from operations............ (583) (2.8) 1,947 5.7 4,740 8.8
Net interest expense..................... 498 2.4 384 1.1 755 1.4
Other income (expense)................... 15 -- 169 0.5 (853) (1.6)
Income tax benefit (expense)............. 67 0.3 (50) (0.1) 482 0.9
-------- -------- -------- -------- -------- --------
Net income (loss)........................ $ (999) (4.8) $ 1,682 4.9 $ 3,614 6.7
======== ======== ========
EBITDA................................... $ 288 1.4 $ 3,305 9.7 $ 6,944 12.8
</TABLE>
Year Ended May 31, 1998 Compared to Year Ended May 31, 1997
Net Sales. Net sales increased by $19.9 million, or 58%, to $54.1 million
for fiscal 1998 from $34.2 million in fiscal 1997. The significant increase in
net sales for fiscal 1998 from fiscal 1997 included increases in both commercial
aerospace industry net sales (an $11.3 million increase) and defense industry
net sales (a $3.5 million increase). The commercial aerospace industry net sales
increase was primarily attributable to increases in production at Boeing and the
related increase in demand from that customer for the Company's precision cast
and machined products. The defense industry net sales increase was primarily
attributable to an increase in orders of aerospace, satellite and weapons
systems electronics products.
Of total net sales in fiscal 1998, commercial aerospace industry net sales
comprised 42.6% of total net sales, up from 34.5% of net sales in fiscal 1997.
Defense industry sales comprised 19.9% of total net sales in fiscal 1998, down
from 21.3% of net sales in fiscal 1997.
The Company completed its Balo acquisition in February 1998 and its ESC
acquisition, effective as of March 1998. These acquisitions expanded production
of hermetically sealed product offerings and added relay, solenoid and flat
panel display product lines. See "Description of Business--Corporate History"
and "--Products, Processes and Markets--Assembled Electronics Products."
Accordingly, net sales for fiscal 1998 also included approximately four months
of operations of Balo and three months of operations for ESC, contributing
approximately $4.3 million to net sales in fiscal 1998.
Gross Profit. Gross profit increased by $6.4 million, or 78.0%, to $14.6
million for fiscal 1998 from $8.2 million in fiscal 1997. As a percentage of net
sales, gross profit increased to 27.0% in fiscal 1998 from 24.0% in fiscal 1997,
which was primarily attributable to increased efficiencies gained in
manufacturing processes and in-house production of processes that had previously
been purchased from outside vendors. The Company also believes that capital
investments in equipment and production processes contributed to the improvement
in gross profit margins.
26
<PAGE>
Operating Expenses. Operating expenses increased by $3.6 million, or 57.1%,
to $9.9 million for fiscal 1998 from $6.3 million in fiscal 1997, partially due
to the Balo and ESC acquisitions and increased levels of operations in fiscal
1998. As a percentage of net sales, operating expenses remained essentially
unchanged.
EBITDA. EBITDA increased by $3.6 million, or 109.1%, to $6.9 million for
fiscal 1998 from $3.3 million in fiscal 1997. As a percentage of net sales,
EBITDA increased to 12.8% in fiscal 1998 from 9.7% in fiscal 1997. The increase
in EBITDA as a percentage of net sales during this period was primarily
attributable to production efficiencies and improved capacity utilization.
Net Interest Expense. Net interest expense increased $371,000, or 96.6%, to
$755,000 for fiscal 1998 from $384,000 in fiscal 1997. This increase was
primarily due to the Company's financing of capital equipment purchases and the
debt incurred to finance the expansion of its Wenatchee facilities to support
growth in net sales.
Other Income (Expense). Other income (expense) represents non-recurring and
non-operational income and expense for the period. Other expense increased to
$853,000 in fiscal 1998 from income of $169,000 in fiscal 1997. This increase of
$1,022,000 was due principally to a $1.0 million write-off of portions of notes
receivable and associated debt restructuring and related expenses in connection
with the termination of the Company's efforts during the third quarter of fiscal
1998 to form an information technology group. See "Certain Relationships and
Related Transactions."
Net Income. Net income increased $1.9 million, or 111.8% to $3.6 million
for fiscal 1998 from $1.7 million in 1997, primarily as a result of the factors
discussed above.
Year Ended May 31, 1997 Compared to Year Ended May 31, 1996
Net Sales. Net sales increased by $13.5 million, or 65.2%, to $34.2 million
for fiscal 1997 from $20.7 million in fiscal 1996. This increase was primarily
attributable to larger order sizes for electronics products, due to broader
market acceptance of the Company's electronics products and technologies, which
increased sales of higher priced products and added new customers.
The Company acquired NTI in April 1997, which added capabilities for
explosive bonding of specialty metals. See "Business--Corporate History" and
"--Products, Processes and Markets--Explosive Bonding." Accordingly, net sales
for fiscal 1997 included one month of operations of NTI, which contributed
$183,000 to total net sales for that year.
Gross Profit. Gross profit increased by $3.9 million, or 90.7%, to $8.2
million for fiscal 1997, up from $4.3 million in fiscal 1996. As a percentage of
net sales, gross profit increased to 24.0% in fiscal 1997 from 20.7% in fiscal
1996. The increase in gross profit as a percentage of net sales was primarily
attributable to achieving revenue levels which allowed for production
efficiencies and increased capacity utilization. The Company also believes that
its investments in manufacturing equipment contributed to improvements in gross
profit margins.
Operating Expenses. Operating expenses increased by $1.4 million, or 28.6%,
to $6.3 million for fiscal 1997, from $4.9 million for fiscal 1996. As a
percentage of net sales, operating expenses decreased to 18.3% in fiscal 1997
from 23.5% in fiscal 1996. The substantial decrease in operating expenses as a
percentage of net sales was primarily attributable to the Company's improved
ability to leverage its operating costs and the consolidation of certain
operations to the Company's Wenatchee manufacturing campus. Specifically, both
CDI in the electronics segment and Cashmere in the aerospace segment were
consolidated into the Company's Wenatchee manufacturing campus. See "Description
of Business--Products, Processes and Markets--Assembled Electronics Products"
and "--Precision Machining."
27
<PAGE>
EBITDA. EBITDA increased by $3.0 million, or 1,000.0%, to $3.3 million for
fiscal 1997, up from $300,000 for fiscal 1996. As a percentage of net sales,
EBITDA increased to 9.7% in fiscal 1997, from 1.4% in fiscal 1996. The
substantial increase in EBITDA as a percentage of net sales was primarily
attributable to efficiencies gained in manufacturing processes, consolidation of
certain operations to the Company's Wenatchee campus allowing for overhead
efficiencies, and increases in net sales not requiring incremental increases in
operating expenses.
Net Interest Expense. Net interest expense decreased $114,000, or 22.9%, to
$384,000 for fiscal 1997 from $498,000 in fiscal 1996, primarily as a result of
the repayment of debt that was funded by proceeds from a July 1996 public and a
February 1997 private offering of equity securities, and the reduction of bank
line of credit balances throughout the year.
Other Income (Expense). Other income increased to $169,000 in fiscal 1997
from income of $15,000 in fiscal 1996 primarily as a result of sale of scrap and
recycling of excess materials in the manufacturing process.
Net Income. Net income increased $2.7 million to $1.7 million for fiscal
1997 from a loss of $999,000 in fiscal 1996 primarily as a result of factors
discussed above.
Inflation
Management believes that the Company's operations for the periods discussed
have not been adversely affected by inflation.
Liquidity and Capital Resources
Cash generated from operating activities was $1.6 million for fiscal 1998
compared to cash used of $212,000 in fiscal 1997. The change in net cash from
operations was primarily a result of 111.8% increase in net income from $1.7
million in fiscal 1997 to $3.6 million in fiscal 1998. The increase in net
income was partially offset by increases in accounts receivable and inventories
to support revenue growth. Increases in accounts payable, accrued liabilities
and other liabilities also contributed to increased cash from operations.
Cash used in investing activities increased from $2.0 million in fiscal
1997 to $16.7 million in fiscal 1998, an increase of $14.7 million. The change
results primarily from the Company's increased investment in property and
equipment of $6.5 million in fiscal 1998 compared to $2.1 million in fiscal 1997
and the issuance of $6.3 million in notes receivable in connection with the
investment in a proposed information technology group. Of the total $6.3
million, a net of $4.6 million is represented by an investment in the common
stock of a third party internet services provider. See "Certain Relationships
and Related Transactions."
Cash generated from financing activities increased by $19.0 million, to
$23.5 million in fiscal 1998, from $4.5 million in fiscal 1997. During fiscal
1998, the Company completed several financing transactions, receiving net
proceeds from long-term debt financing of $10.1 million (including net proceeds
from convertible notes of $5.4 million); $2.2 million from the sale of Common
Stock; net proceeds of $9.3 million from the sale of Series B Preferred, and
$3.8 million from the proceeds from exercise of stock options and warrants. Cash
generated by the equity financing transactions was offset to a certain degree by
payments on long-term debt and capital leases of $1.5 million during the year.
See "Market for Common Equity and Related Shareholder Matters."
Capital expenditures were $10.3 million during fiscal 1998, which is higher
than normal due to approximately $4.7 million for expansion of the Company's
Wenatchee manufacturing facilities and acquisition and construction of its
headquarters, with the balance of $5.6 million related primarily to
28
<PAGE>
purchases of machinery and equipment. During fiscal 1998, the Company
substantially completed an addition to its Wenatchee facilities consisting of
approximately 12,000 square feet of production space. The cost of this expansion
was approximately $1.3 million. The Company has entered into a term loan with
its primary senior lender for approximately $712,000 of these expansion costs.
The Company has also acquired certain property adjacent to its existing
Wenatchee on which it built an office building to house the Company's executive,
administrative and accounting personnel. This facility was occupied in August
1998. Total project costs for the office building are estimated at approximately
$3.0 million and have been or will be funded from working capital. The Company
is currently negotiating the purchase of the Balo facility for approximately
$1.1 million. As of May 31, 1998, the Company had no material commitments
outstanding for purchases of additional capital assets.
The Company's working capital, as of May 31, 1998 and 1997 was $25.6
million and $13.1 million, respectively. The increase in working capital in
fiscal 1998 over fiscal 1997 was primarily the result of the equity and
financing activities discussed above and the Company's improved net income from
operations. In July 1998, the Company completed an offering of $75,000,000 of 11
1/4% senior subordinated notes (the "Notes") to qualified institutional buyers
to finance the Aeromet Acquisition. The Notes will mature on August 1, 2005,
unless previously redeemed. The Notes will be redeemable at the option of the
Company on or after August 1, 2003. In addition, on or before August 1, 2001,
the Company may redeem up to 20% of the original aggregate principal amount of
the Notes, subject to certain conditions. The Company believes that the net
proceeds from this Offering plus cash from operations will be sufficient to meet
the Company's cash requirements and to fund budgeted capital expenditures for
fiscal 1999. See "Description of Business--Corporate History--Aeromet
Acquisition" and "--Business Considerations--Significant Leverage; Liquidity;
- --Possible Need for Additional Capital."
The Company's banking relationships include a revolving line of credit up
to $3.5 million, a non-revolving capital expenditures facility up to $2.0
million expiring September 30, 1998, and a term loan for approximately $700,000
for building improvements. The line of credit and capital expenditure facilities
have no outstanding balance, and the term loan was funded during fiscal 1998.
The Company has received a proposal from its bank to extend and increase the
revolving line of credit to $7.5 million through September 1999, subject to
final credit committee approval. The Company has also received a facility
commitment letter from Aeromet's current lead bank in the United Kingdom to
provide a revolving line of credit for 4.5 million pounds sterling, or
approximately $7.5 million.
The Company has net operating loss (NOLs) carryforwards for federal income
tax purposes of approximately $4.9 million, the benefits of which expire in the
tax year 2001 through the tax year 2011. The NOLs created by the Company's
subsidiaries prior to their acquisition and the NOLs created as a consolidated
group or groups subsequent to a qualifying tax free merger or acquisition, have
limitations related to the amount of usage by each subsidiary or consolidated
group as described in the Internal Revenue Code. As a result of these
limitations, approximately $800,000 of the $4.9 million of NOLs will never
become available.
At May 31, 1997, the Company recorded a valuation allowance because
management believed that it was uncertain that some portion or all of the
deferred tax assets would be realized. At May 31, 1998, the Company eliminated
the valuation allowance for deferred taxes due to management's assessment of
improved probability of realization. The Company anticipates that its effective
income tax rate will continue to approach the statutory rate in the future.
29
<PAGE>
Year 2000
The Company (including Aeromet) is in the process of developing a plan to
address the Year 2000 computer problem and to begin converting its computer
systems to be Year 2000 compliant. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. The Company presently believes that with upgrades to existing
software and possibly some replacement, the Year 2000 problem will not pose
significant operational problems for the Company's computer systems. However, if
such upgrades and replacements are not completed timely or effectively, the Year
2000 problem could have a material impact on the operations of the Company. The
Company expects to incur internal staffing costs, as well as the cost of the
software upgrades and replacement as a part of this effort. However, until the
Company's plan is finalized, management is unable to reasonably estimate the
costs of achieving Year 2000 compliance.
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 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 February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
About Pensions and Other Postretirement Benefits. SFAS No. 132 revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997. The Company has
not determined the manner in which it will present the information required by
SFAS No. 132.
30
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pacific Aerospace & Electronics, Inc.:
We have audited the accompanying consolidated balance sheet of Pacific
Aerospace & Electronics, Inc. and subsidiaries as of May 31, 1998, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pacific
Aerospace & Electronics, Inc. and subsidiaries as of May 31, 1998, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Seattle, Washington
June 30, 1998
31
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pacific Aerospace & Electronics, Inc.:
We have audited the accompanying consolidated balance sheet of Pacific
Aerospace & Electronics, Inc. and subsidiaries as of May 31, 1997, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the two-year period ended May 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pacific
Aerospace & Electronics, Inc. and subsidiaries as of May 31, 1997, and the
results of their operations and their cash flows for each of the years in the
two-year period ended May 31, 1997 in conformity with generally accepted
accounting principles.
/s/ MOSS ADAMS LLP
Everett, Washington
July 2, 1997
32
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
May 31, 1997 and 1998
1997 1998
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................................... $ 3,048,000 $ 11,461,000
Certificate of deposit............................................................ 1,000,000 --
Accounts receivable, net of allowance for doubtful accounts of $247,000 in
1997 and $130,000 in 1998...................................................... 5,455,000 9,375,000
Inventories....................................................................... 9,082,000 16,184,000
Deferred income taxes............................................................. -- 386,000
Prepaid expenses and other........................................................ 354,000 272,000
------------ ------------
Total current assets......................................................... 18,939,000 37,678,000
------------ ------------
Property, plant and equipment, net..................................................... 13,190,000 26,335,000
------------ ------------
Other assets:
Note receivable from related party................................................ 125,000 700,000
Investment........................................................................ -- 4,579,000
Costs in excess of net book value of acquired subsidiaries, net of accumulated
amortization of $223,000 in 1997 and $439,000 in 1998.......................... 2,071,000 6,515,000
Patents, net of accumulated amortization of $205,000 in 1997 and $307,000
in 1998........................................................................ 1,331,000 1,229,000
Deferred income taxes............................................................. -- 222,000
Other............................................................................. 96,000 1,322,000
------------ ------------
Total other assets........................................................... 3,623,000 14,567,000
------------ ------------
$ 35,752,000 $ 78,580,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 3,736,000 $ 6,748,000
Accrued liabilities............................................................... 1,116,000 2,587,000
Current portion of long-term debt................................................. 855,000 1,027,000
Current portion of capital lease obligations...................................... 142,000 206,000
Line of credit.................................................................... -- 1,511,000
------------ ------------
Total current liabilities.................................................... 5,849,000 12,079,000
Long-term liabilities:
Long-term debt, net of current portion............................................ 2,899,000 9,059,000
Capital lease obligations, net of current portion................................. 337,000 941,000
Deferred income taxes............................................................. 592,000 --
Deferred rent and other........................................................... 456,000 359,000
------------ ------------
Total liabilities............................................................ 10,133,000 22,438,000
------------ ------------
Shareholders' equity:
Convertible preferred stock, $0.001 par value, 5,000,000 shares authorized:
Series A, 50,000 shares issued and outstanding at May 31, 1997 and
none issued and outstanding at May 31, 1998.................................. -- --
Series B, none issued and outstanding at May 31, 1997 and
100,000 shares issued and outstanding at May 31, 1998........................ -- --
Common stock, $0.001 par value. 100,000,000 shares authorized,
10,220,249 and 15,395,723 issued and outstanding at May 31, 1997
and 1998, respectively......................................................... 10,000 15,000
Additional paid-in capital........................................................ 30,490,000 57,830,000
Cumulative unrealized loss on investment.......................................... -- (436,000)
Accumulated deficit............................................................... (4,881,000) (1,267,000)
------------ ------------
Total shareholders' equity................................................... 25,619,000 56,142,000
Commitments, contingencies, and subsequent events...................................... -- --
------------ ------------
$ 35,752,000 $ 78,580,000
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended May 31, 1996, 1997 and 1998
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net sales............................................................. $ 20,725,000 $ 34,175,000 $ 54,099,000
Cost of sales......................................................... 16,439,000 25,969,000 39,487,000
------------ ------------ ------------
Gross profit................................................ 4,286,000 8,206,000 14,612,000
Operating expenses.................................................... 4,869,000 6,259,000 9,872,000
------------ ------------ ------------
Income (loss) from operations............................... (583,000) 1,947,000 4,740,000
------------ ------------ ------------
Other income (expense):
Interest income.................................................. 37,000 126,000 110,000
Interest expense................................................. (535,000) (510,000) (865,000)
Other............................................................ 15,000 169,000 (853,000)
------------ ------------ ------------
(483,000) (215,000) (1,608,000)
------------ ------------ ------------
Income (loss) before income taxes........................... (1,066,000) 1,732,000 3,132,000
Income tax benefit (expense).......................................... 67,000 (50,000) 482,000
------------ ------------ ------------
Net income (loss)........................................... $ (999,000) $ 1,682,000 $ 3,614,000
============ ============ ============
Net income (loss) per share:
Basic............................................................ $ (0.16) 0.18 0.29
Diluted.......................................................... (0.16) 0.17 0.27
Shares used in computation of net income (loss) per share:
Basic............................................................ 6,209,000 9,499,980 12,486,077
Diluted.......................................................... 6,209,000 10,035,846 13,606,061
See accompanying notes to consolidated financial statements.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended May 31, 1996, 1997 and 1998
Series A Series B
convertible convertible
preferred stock preferred stock Common stock Additional Cumulative Total
----------------- ----------------- ------------------- paid-in unrealized Accumulated shareholders'
Shares Amount Shares Amount Shares Amount capital losses deficit equity
-------- -------- -------- -------- ---------- -------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
May 31, 1995 -- $ -- -- $ -- 5,196,008 $ 5,000 11,013,000 -- (5,564,000) 5,454,000
Sale of common
stock -- -- -- -- 1,503,551 2,000 4,930,000 -- -- 4,932,000
Issuance of
warrant -- -- -- -- -- -- 69,000 -- -- 69,000
Issuance of
common stock
in connection
with acquisitions -- -- -- -- 778,750 1,000 3,082,000 -- -- 3,083,000
Net loss -- -- -- -- -- -- -- -- (999,000) (999,000)
-------- -------- -------- -------- ---------- -------- ---------- ---------- ---------- -------------
Balance at
May 31, 1996 -- -- -- -- 7,478,309 8,000 19,094,000 -- (6,563,000) 12,539,000
Sale of common
stock -- -- -- -- 2,264,400 2,000 5,347,000 -- -- 5,349,000
Issuance of
warrants -- -- -- -- -- -- 16,000 -- -- 16,000
Issuance of
common stock
in connection
with an
acquisition -- -- -- -- 477,540 -- 1,552,000 -- -- 1,552,000
Sale of preferred
stock for cash 50,000 -- -- -- -- -- 4,481,000 -- -- 4,481,000
Net income -- -- -- -- -- -- -- -- 1,682,000 1,682,000
-------- -------- -------- -------- ---------- -------- ---------- ---------- ---------- -------------
Balance at
May 31, 1997 50,000 -- -- -- 10,220,249 10,000 30,490,000 -- (4,881,000) 25,619,000
Issuance of
common stock -- -- -- -- 8,559 -- 13,000 -- -- 13,000
Sale of common
stock for cash -- -- -- -- 524,000 1,000 2,222,000 -- -- 2,223,000
Increase in
preferred stock,
net of issuance
costs -- -- 100,000 -- -- -- 9,260,000 -- -- 9,260,000
Issuance of warrants -- -- -- -- -- -- 444,000 -- -- 444,000
Exercise of warrants
for cash, net of
tax effects of
$99,000 -- -- -- -- 795,000 1,000 3,723,000 -- -- 3,724,000
Issuance of common
stock on conversion
of convertible
notes and accrued
interest of $154,000 -- -- -- -- 1,405,018 1,000 5,518,000 -- -- 5,519,000
Exercise of options
for cash -- -- -- -- 25,000 -- 53,000 -- -- 53,000
Issuance of common
stock on
conversion of
preferred stock (50,000) -- -- -- 1,494,593 1,000 (1,000) -- -- --
Unrealized losses
on available
for sale securities -- -- -- -- -- -- -- (436,000) -- (436,000)
Issuance of common
stock in
connection with
acquisition -- -- -- -- 923,304 1,000 6,108,000 -- -- 6,109,000
Net income -- -- -- -- -- -- -- -- 3,614,000 3,614,000
-------- -------- -------- -------- ---------- -------- ---------- ---------- ---------- -------------
Balance at
May 31, 1998 -- $ -- 100,000 $ -- 15,395,723 $ 15,000 57,830,000 (436,000) (1,267,000) 56,142,000
======== ======== ======== ======== ========== ======== ========== ========== ========== =============
See accompanying notes to consolidated financial statements.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended May 31, 1996, 1997 and 1998
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss) ................................................ $ (999,000) 1,682,000 3,614,000
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization................................. 871,000 1,358,000 2,204,000
Allowance on note receivable.................................. -- -- 250,000
Loss on restructuring of note receivable...................... -- -- 1,038,000
Loss on sale of property, plant and equipment................. 8,000 -- --
Director compensation paid in common stock.................... 24,000 44,000 13,000
Consulting services paid through issuance of stock options
and warrants............................................... -- 6,000 139,000
Federal income tax benefit.................................... (67,000) -- (1,200,000)
Changes in operating assets and liabilities:
Accounts receivable...................................... (1,018,000) (1,774,000) (2,286,000)
Inventories.............................................. (1,303,000) (1,951,000) (3,387,000)
Prepaid expenses and other current assets................ 8,000 (178,000) 474,000
Other assets............................................. (79,000) 44,000 (1,176,000)
Accounts payable, accrued liabilities and
other liabilities..................................... (216,000) 557,000 1,911,000
------------ ------------ ------------
Net cash provided by (used in) operating activities. (2,771,000) (212,000) 1,594,000
------------ ------------ ------------
Cash flow from investing activities:
Sale (purchase) of certificate of deposit.......................... -- (1,000,000) 1,000,000
Proceeds from stock subscription receivable........................ -- 1,030,000 --
Acquisition of property, plant and equipment....................... (754,000) (2,100,000) (6,509,000)
Proceeds from sale of property, plant and equipment................ 9,000 -- --
Acquisition of subsidiaries........................................ -- -- (3,289,000)
Acquisition of patents............................................. (400,000) -- --
Acquisition of investment.......................................... -- -- (742,000)
Issuance of notes receivable....................................... -- -- (6,261,000)
Payments received on note receivable from related party............ 44,000 58,000 125,000
Purchase of goodwill............................................... -- -- (1,029,000)
------------ ------------ ------------
Net cash used in investing activities............... (1,101,000) (2,012,000) (16,705,000)
------------ ------------ ------------
Cash flow from financing activities:
Net borrowings (repayments) under line of credit................... 308,000 (1,224,000) (358,000)
Decrease (increase) in restricted cash............................. (1,000,000) 1,000,000 --
Proceeds from long-term debt and convertible notes................. 2,105,000 237,000 10,125,000
Payments on long-term debt and capital leases...................... (1,457,000) (5,686,000) (1,503,000)
Proceeds from sale of common stock, net............................ 3,550,000 5,739,000 2,223,000
Proceeds from sale of preferred stock, net......................... -- 4,481,000 9,260,000
Proceeds from exercise of stock options and warrants............... -- -- 3,777,000
Proceeds from sale of warrants..................................... 12,000 -- --
------------ ------------ ------------
Net cash provided by financing activities........... 3,518,000 4,547,000 23,524,000
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (354,000) 2,323,000 8,413,000
------------ ------------ ------------
Cash and cash equivalents at beginning of year.......................... 1,079,000 725,000 3,048,000
------------ ------------ ------------
Cash and cash equivalents at end of year................................ $ 725,000 $ 3,048,000 $ 11,461,000
============ ============ ============
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Years ended May 31, 1996, 1997 and 1998
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Supplemental cash flow: Cash paid during the year for:
Interest........................................................ $ 658,000 $ 613,000 $ 712,000
Federal income taxes............................................ -- 18,000 521,000
Acquisition of subsidiaries:
Fair value of assets acquired and resulting goodwill,
excluding cash................................................ 10,286,000 1,928,000 10,034,000
Liabilities assumed............................................. (7,203,000) (482,000) 3,925,000
Common stock issued............................................. 3,083,000 1,446,000 6,109,000
Noncash investing and financing activities:
Seller financed acquisition of property, plant and equipment.... 539,000 639,000 3,336,000
Seller financed acquisition of patents.......................... 520,000 35,000 --
Stock subscriptions receivable for issuance of common stock .... 1,030,000 -- --
Conversion of notes and accrued interest to common stock........ -- -- 5,519,000
Restructuring of certain notes receivable for an investment
in common stock............................................... -- -- 6,053,000
Property, plant and equipment included in accounts payable ..... -- -- 445,000
Deferred portion of common stock issued for consulting services. -- -- 305,000
Long-term debt retired through acquisition of subsidiary ....... -- -- 139,000
See accompanying notes to consolidated financial statements.
</TABLE>
37
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 1996, 1997 and 1998
(1) Description of Business and Basis of Presentation
Description of Business
Pacific Aerospace & Electronics, Inc., with headquarters in Wenatchee,
Washington, develops, manufactures and markets high performance electronics and
metal components and assemblies for the aerospace, defense, electronics and
transportation industries. The consolidated financial statements include the
accounts of Pacific Aerospace & Electronics, Inc. and its wholly-owned
subsidiaries (collectively, the "Company").
Basis of Presentation
These consolidated financial statements are prepared in accordance with
generally accepted accounting principles (GAAP) in the United States (U.S.) and
present the financial position, results of operations and changes in financial
position of the Company. All material intercompany balances and transactions
have been eliminated in consolidation.
Certain 1996 and 1997 amounts have been reclassified to conform with the
1998 presentation.
(2) Summary of Significant Accounting Principles
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, demand deposits with banks and
highly liquid investments with maturity dates at purchase of three months or
less.
Inventories
Inventories are stated at the lower of cost, primarily determined by the
first-in, first-out method, or market (replacement cost for raw materials and
net realizable value for work in progress and finished goods).
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Property, plant and
equipment under capital leases are stated at the lower of the fair market value
of the assets or the present value of minimum lease payments at the inception of
the leases.
Depreciation is calculated using the straight-line method over the
estimated useful lives of the owned assets ranging from 5 years for certain
machinery and equipment to 40 years for certain buildings. Property, plant and
equipment held under capital leases are amortized using the straight-line method
over the shorter of the estimated useful lives of the assets or the lease terms,
ranging from 7 to 10 years from the inception of the leases.
Expenditures for maintenance and repairs are charged to expense as
incurred. Upon sale or retirement, the cost and related accumulated depreciation
or amortization are removed from the accounts and any resulting gain or loss is
reflected in other income or expense.
38
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Investments
At May 31, 1998, the Company had an investment in the common stock,
registered and unregistered shares, of a public company of approximately 19.5%.
The investment is classified as an available-for-sale security in accordance
with Statements of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities, and is reported at fair
value, with unrealized gains and losses excluded from the statements of
operations and reported as a separate component of shareholders' equity.
Unrealized losses which are determined to be other-than-temporary are included
in the statements of operations. Fair value of the common stock is determined as
the quoted value of the stock in the over-the-counter market, without any
discounts for large blocks or unregistered shares. There is no assurance that
such values will be realizable upon liquidation or sale.
Intangible Assets
Costs in excess of net book value of acquired subsidiaries is amortized
using the straight-line method over 15 years from the date of acquisition.
Purchased patents are recorded at cost. Developed patents are recorded at
the value of related compensation awarded. Patents are amortized using the
straight-line method over the estimated useful lives of the patents ranging from
10 to 17 years.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
Revenue Recognition
Revenue is recognized when products are shipped to customers.
Research and Development
Research and development costs are expensed as incurred and are included in
operating expenses.
Income Taxes
The Company follows the asset and liability method of accounting for income
taxes. Under the asset and liability method of accounting for income taxes,
deferred tax assets and liabilities are recognized based on the estimated future
tax consequences attributable to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
39
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
The Company follows the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. This statement permits a company to choose either a
new fair-value method or the Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, intrinsic-value based method of
accounting for stock-based compensation arrangements. SFAS No. 123 requires pro
forma disclosure of net income and earnings per share computed as if the
fair-value based method had been applied in financial statements of companies
that continue to account for such arrangements under APB Opinion No. 25. The
Company has elected to continue to record stock-based compensation using the APB
Opinion No. 25 intrinsic-value-based method and, therefore, the adoption of SFAS
No. 123 has not impacted the Company's financial positions, results of
operations, or liquidity.
Net Income (Loss) Per Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, Earnings Per Share. SFAS No. 128 requires the presentation of
basic earnings per share, and for companies with complex capital structures,
diluted earnings per share. Basic earnings per share is computed using the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period using the
treasury stock method. The Company has presented historical basic and diluted
income (loss) per share in accordance with SFAS No. 128. As the Company had a
net loss in the year ended May 31, 1996, basic and diluted net loss per share is
the same.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
New Accounting Pronouncements
In June 1997, the FASB issued 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 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 February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
About Pensions and Other Postretirement Benefits. SFAS No. 132 revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent
40
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures. SFAS No. 132 is effective for
fiscal years beginning after December 15, 1997. The Company has not determined
the manner in which it will present the information required by SFAS No. 132.
(3) Segment Information and Concentration of Risk
The Company conducts its business in two business segments, "Aerospace"
and "Electronics." The Aerospace business segment primarily comprises machined
and cast metal products operations. Net sales of the Aerospace business segment
include sales to customers in the aerospace, defense and transportation
industries. Net sales of the Electronics business segment also include sales to
customers in the aerospace and defense industries. Historically, these segments
have been cyclical and sensitive to general economic and industry specific
conditions. In particular, the aerospace industry, in past years, has been
adversely affected by a number of factors, including reduced demand for
commercial aircraft, a decline in military spending, postponement of overhaul
and maintenance of aircraft, increased fuel and labor costs, increased
regulations, and intense price competition, among other factors. Although the
aerospace supply industry currently is enjoying favorable trends, there is no
assurance that such trends will continue. There is also no assurance that
general economic conditions will not lead to a downturn in demand for core
components and products of the Company, in each of its business segments.
Presented below is the Company's business segment information. Identifiable
assets are those assets used in the Company's operations in each business
segment, and do not include advances or loans between the business segments.
Corporate assets are identified below, and no allocations were necessary for
assets used jointly by the business segments.
Year ended May 31, 1996:
<TABLE>
<CAPTION>
Corporate,
other and
Aerospace Electronics elimination Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales to customers............................ $12,382,000 8,343,000 -- 20,725,000
Net sales between segments........................ 376,000 -- (376,000) --
Income (loss) from operations..................... (278,000) 405,000 (710,000) (583,000)
Identifiable assets............................... 17,429,000 7,527,000 2,693,000 27,649,000
Capital expenditures.............................. 824,000 469,000 -- 1,293,000
Depreciation and amortization..................... 541,000 330,000 -- 871,000
Year ended May 31, 1997:
Corporate,
other and
Aerospace Electronics eliminations Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales to customers............................ $22,949,000 11,226,000 -- 34,175,000
Net sales between segments........................ 151,000 -- (151,000) --
Income (loss) from operations..................... 1,043,000 2,203,000 (1,299,000) 1,947,000
Identifiable assets............................... 21,011,000 11,419,000 3,322,000 35,752,000
Capital expenditures.............................. 1,961,000 778,000 -- 2,739,000
Depreciation and amortization..................... 897,000 461,000 -- 1,358,000
</TABLE>
41
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Year ended May 31, 1998:
<TABLE>
<CAPTION>
Corporate,
other and
Aerospace Electronics elimination Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales to customers............................ $34,146,000 19,953,000 -- 54,099,000
Net sales between segments........................ 162,000 5,000 (167,000) --
Income (loss) from operations..................... 4,665,000 2,454,000 (2,379,000) 4,740,000
Identifiable assets............................... 29,761,000 28,943,000 19,876,000 78,580,000
Capital expenditures.............................. 4,212,000 1,333,000 4,745,000 10,290,000
Depreciation and amortization..................... 1,301,000 855,000 48,000 2,204,000
</TABLE>
The Company had two customers, each comprising greater than 10% of net
sales, aggregating 65%, 43%, and 45% for the fiscal years ended May 31, 1996,
1997, and 1998, respectively.
At May 31, 1997, the Company had one customer which represented 14% of
accounts receivable. At May 31, 1998, the Company had two customers, aggregating
25%, each of which comprised greater than 10% of accounts receivable.
Credit is extended to customers based on an evaluation of their financial
condition and collateral is generally not required.
The Company currently purchases aluminum and other raw materials from a
limited number of suppliers. Although there are a limited number of potential
suppliers of such raw materials, management believes that other suppliers could
provide these raw materials on comparable terms. A change in suppliers, however,
could cause a delay in manufacturing, increased costs, and a possible loss of
sales, which could have a material adverse effect on the manufacturing and
delivery of the Company's products. The Company purchased $1,762,000,
$2,570,000, and $2,723,000 from one supplier during the years ended May 31,
1996, 1997, and 1998, respectively.
The Company purchases other raw materials, of lesser significance, which
are available from a limited number of suppliers.
At May 31, 1998, the Company had purchase commitments for raw materials
aggregating $4,064,000.
(4) Business Acquisitions
In November 1995, a wholly-owned subsidiary of the Company acquired all of
the assets and assumed certain liabilities of Seismic Safety Products, Inc. The
asset purchase price consisted of $70,000 in cash and 128,750 shares of the
Company's common stock valued at $483,000, for a total of $553,000. In
connection with the transaction, the Company acquired certain patents for total
consideration of $520,000. Costs in excess of net book value of $535,000 were
recorded as a result of this acquisition.
Effective for accounting purposes in November 1995, a wholly-owned
subsidiary of the Company merged with Morel Industries, Inc. The purchase price
consisted of 650,000 shares of the Company's common stock valued at
approximately $2.6 million. Costs in excess of net book value of $939,000 were
recorded as a result of this acquisition.
In April 1997, a wholly-owned subsidiary of the Company acquired all of the
assets and assumed certain liabilities of Northwest Technical Industries, Inc.
The asset purchase price consisted of 477,540 shares of the Company's common
stock valued at $1,552,000. Costs in excess of net book value of $270,000 were
recorded as a result of this acquisition.
Effective for accounting purposes in February 1998, a wholly-owned
subsidiary of the Company acquired substantially all of the assets and assumed
certain liabilities of PCC Composites, Inc.'s
42
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
operating unit, Balo Precision Parts. The purchase price consisted of $2.25
million in cash and resulted in costs in excess of net book value of $1,029,000.
Effective for accounting purposes in March 1998, a wholly-owned subsidiary
of the Company acquired substantially all assets and certain liabilities of
Electronic Specialty Corporation and its wholly-owned subsidiary, Displays &
Technologies, Inc. (collectively "ESC"). The purchase price consisted of $2.0
million in cash, 923,304 shares of the Company's common stock valued at
$6,109,000, and acquisition costs of $77,000 for a total of $8,186,000. Costs in
excess of net book value of $3,631,000 were recorded as a result of this
acquisition.
The business combinations described above have been accounted for using the
purchase method. Accordingly, assets and liabilities have been recorded at their
fair value at acquisition date. Operating results of these acquired companies
are included in the Company's consolidated statements of operations from the
respective acquisition dates.
The following summary, prepared on a pro forma basis, presents the
unaudited consolidated condensed results of operations of the Company, as if the
aforementioned business acquisitions were made as of the first day of the
immediately preceding fiscal year in which the entity was acquired.
There are no material adjustments which impact the summary.
<TABLE>
<CAPTION>
Year ended May 31 (unaudited)
--------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net sales....................................................... $ 26,801,000 $ 49,117,000 $ 64,968,000
Income (loss) from operations................................... (908,000) 444,000 4,384,000
Net income (loss)............................................... (1,660,000) 249,000 3,003,000
Net income (loss) per share:
Basic...................................................... (0.25) 0.03 0.23
Diluted.................................................... (0.25) 0.02 0.21
Shares used in computation of net income (loss) per share:
Basic...................................................... 6,687,000 9,936,962 13,287,961
Diluted.................................................... 6,687,000 10,027,762 14,407,945
</TABLE>
The pro forma results are not necessarily indicative of the actual results
of operations that would have occurred had the transactions been consummated as
of the date indicated nor are they intended to indicate results that may occur
in the future.
(5) Inventories
Inventories at May 31 consist of the following:
1997 1998
----------- -----------
Raw materials....................... $ 2,685,000 $ 5,789,000
Work in progress.................... 3,387,000 5,683,000
Finished goods...................... 3,010,000 4,712,000
----------- -----------
$ 9,082,000 $16,184,000
43
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Property, Plant and Equipment
Property, plant and equipment, including assets under capital lease
arrangements, at May 31 consist of the following:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Land.............................................................. $ 895,000 $ 1,171,000
Buildings......................................................... 4,300,000 4,380,000
Leasehold improvements............................................ 401,000 1,738,000
Machinery and equipment........................................... 9,305,000 18,331,000
Furniture and fixtures............................................ 1,215,000 2,494,000
------------ ------------
16,116,000 28,114,000
Less accumulated depreciation and amortization .............. 3,309,000 5,108,000
------------ ------------
12,807,000 23,006,000
Construction and purchases in progress............................ 383,000 3,329,000
------------ ------------
$ 13,190,000 $ 26,335,000
</TABLE>
The Company recognized depreciation of property, plant and equipment of
$696,000, $1,103,000 and $1,851,000 during the years ended May 31, 1996, 1997
and 1998, respectively.
(7) Note Receivable From Related Party
At May 31, 1997, the Company had a note receivable from a shareholder
collectible in monthly principal and interest installments of $5,900, with the
final principal balance due in March 1999. During the year ended May 31, 1998,
the note receivable was repaid in full. Also see Note 8.
(8) Investment
At May 31, 1998, the Company held an interest in the common stock,
registered and unregistered shares, of a public company of approximately 19.5%.
The investment consists of shares which were purchased on the open market and
shares which were obtained in conjunction with the settlement of certain
outstanding notes receivable from the public company under a restructuring
agreement, amounting to approximately $359,000 and $4,220,000, respectively, at
May 31, 1998. The Company recorded an unrealized loss, included in shareholders'
equity, on the shares of $436,000 as of May 31, 1998. Under the restructuring
agreement, the public company converted notes, previously issued by the Company
to the public company and its subsidiaries, into shares of the public company
stock at $2.00 per share. In addition, the public company agreed to grant the
Company demand registration rights for those shares and, in the event of an
underwritten public offering, piggyback registration rights, which will be
effective after the earliest of (a) the closing of the public company's third
round of financing, or (b) the first anniversary of the closing of the
restructuring agreement. The Company also agreed to continue guaranteeing the
public company credit facility of $1.3 million and an equipment lease of
$373,000.
At May 31, 1998, the Company had a note receivable from the public company.
The note accrues interest at 8% per annum, requires interest-only payments for
the first year, and requires fully amortizing monthly payments of principal plus
interest for the final four years of the note. In the restructuring agreement,
the public company also agreed to purchase certain other notes and interests of
the Company (including warrants and interests in a lawsuit and bankruptcy
action) for a $950,000 promissory note from the public company. The note accrues
interest at 8% per annum, requires interest-only payments for the first year,
and requires fully-amortizing monthly payments of principal plus interest for
the final four years of the note.
In conjunction with the restructuring agreement, the Company recorded a
nonrecurring charge during the year ended May 31, 1998 of $1,038,000 to reflect
the restructuring of the debt and the difference between the Company's carrying
amounts of the other notes and the interest in the lawsuit
44
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and bankruptcy and the public company promissory note. The amount has been
included in other expense for the year ending May 31, 1998.
Certain of the Company's directors were also directors of the public
company through January 1998. In addition, certain officers of the Company were
individual shareholders of the public company until such shares were sold in May
1998. The Company also subleases approximately 95% of the square footage of its
Bothell, Washington office space to the public company for an amount equivalent
to the percentage of the lease payment for that space. Certain directors and
officers of the Company personally guarantee certain debt of the public company.
(9) Credit Facility
In May 1997, the Company executed a commitment letter with a bank for a
credit facility consisting of (a) a revolving working capital line of credit of
up to $3,500,000 that extends from June 1997 to September 1998 (the "Line of
Credit"), (b) a seven-year capital equipment acquisition credit facility of up
to $2,000,000 (the "Equipment Line"), and (c) a 10-year term loan of
approximately $700,000, or approximately 80% of the cost of a recent addition to
a subsidiary's building (the "Construction Loan"). The Company has executed the
documents for the Line of Credit and the Construction Loan, but has not yet
elected to close the Equipment Line. As of May 31, 1998, the Line of Credit had
no outstanding balance and the Company had not yet requested funding of the
Equipment Line. Borrowings will bear interest at variable rates, and will be
secured by inventories, accounts receivable, and certain equipment and building
improvements. The agreement contains restrictive covenants related to working
capital, net worth and debt service coverage. Management believes the Company is
in compliance with these covenants at May 31, 1998.
In connection with the acquisition of ESC, the Company assumed a revolving
working capital line of credit. Interest accrues at the 30-day commercial paper
rate plus 3.25% (8.75% at May 31, 1998) and the outstanding balance was
$1,511,000 at May 31, 1998. There are certain restrictive covenants related to
tangible net worth and debt to tangible net worth ratios. Management believes
the Company is in compliance with these covenants at May 31, 1998. Subsequent to
May 31, 1998, the line of credit was reduced to $1,200,000.
45
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(10) Long-Term Debt
Long-term debt at May 31 consists of the following:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Industrial revenue bond payable to a bank in monthly installments of
$19,200, including interest at 8.12%, through November 2009..................... $1,242,000 $1,108,000
Note payable to a bank in monthly installments of $7,000, including
interest at 8.39% with the principal balance due in full in March 2008.......... -- 712,000
Subordinated note payable to the City of Entiat in monthly installments of
$7,300, including interest at 8%, with the principal balance due in full
in May 2001..................................................................... 551,000 505,000
Note payable to bank in monthly principal installments of $5,000 plus
interest at the 30-day commercial paper rate plus 3.25% (8.75% at May
31, 1998) through October 2002.................................................. -- 265,000
Notes payable to a pension fund and others, with interest only payments at
6.75% due quarterly commencing January 1998 through October 2001,
with the principal balance due in full in October 2001.......................... -- 4,050,000
Notes payable to a financing company for certain equipment in aggregate
monthly installments of $58,000, including interest at 9% to 10.7%,
with maturity dates ranging from April 2000 to May 2004......................... -- 2,685,000
Other notes payable for vehicles and certain equipment in aggregate
monthly installments of $52,000, including interest at 5.9% to 10.9%
with maturity dates ranging from November 1998 to July 2006..................... 1,216,000 761,000
Notes payable with interest ranging from 8% to 10.25%, repaid in full
during the year ended May 31, 1998.............................................. 745,000 --
---------- ----------
3,754,000 10,086,000
Less current portion............................................................... 855,000 1,027,000
---------- ----------
Long-term portion............................................................. $2,899,000 9,059,000
========== ==========
</TABLE>
The industrial revenue bond agreement requires, among other items, that the
Company maintain minimum working capital, tangible net worth and debt to
tangible net worth ratios. Management believes the Company is in compliance with
these covenants at May 31, 1998.
Scheduled principal maturities of long-term debt at May 31, 1998 are as
follows for each of the following fiscal year-ends:
1999.................................................. $ 1,027,000
2000.................................................. 1,038,000
2001.................................................. 984,000
2002.................................................. 4,957,000
2003.................................................. 812,000
Thereafter............................................ 1,268,000
------------
$ 10,086,000
============
Long-term debt is secured by substantially all assets of the Company and,
in certain circumstances, through personal guarantees of certain shareholders.
46
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(11) Leasing Arrangements
Capital Leases
The Company leases certain property, plant and equipment under capital
lease agreements that expire through September 2004. Aggregate minimum principal
payments to be made under these agreements at May 31, 1998 are as follows for
each of the following fiscal year-ends:
1999.................................................. $ 206,000
2000 ................................................. 218,000
2001 ................................................. 216,000
2002 ................................................. 186,000
2003 ................................................. 151,000
Thereafter ........................................... 170,000
----------
$1,147,000
==========
Included in property, plant and equipment are costs of $551,000 and
$1,402,000 and related accumulated amortization of $58,000 and $208,000 recorded
under capital leases at May 31, 1997 and 1998, respectively.
Operating Leases
The Company leases certain property, plant and equipment under operating
lease agreements that expire through June 2026. Aggregate minimum rental
payments to be made under these agreements at May 31, 1998 are as follows for
each of the following fiscal year-ends:
1999 ................................................ $ 1,252,000
2000 ................................................ 1,206,000
2001 ................................................ 1,194,000
2002 ................................................ 1,192,000
2003 ................................................ 1,090,000
Thereafter .......................................... 4,400,000
------------
$ 10,334,000
============
Total rent expense during the years ended May 31, 1996, 1997 and 1998
amounted to $516,000, $475,000 and $788,000, respectively.
(12) Convertible Notes
In August 1997, the Company closed a private offering of $5,800,000, before
expenses of $435,000, in convertible promissory notes (the "Convertible Notes")
to two accredited investors. The Company intends to use the proceeds of this
offering primarily in connection with proposed and future acquisitions. The
Company subsequently filed a registration statement, which was declared
effective, registering for resale up to 1,720,690 shares of common stock
issuable upon conversion of the Convertible Notes. As of May 31, 1998, all of
the Convertible Notes had been converted into 1,405,018 shares of common stock.
(13) Common Stock
During the year ended May 31, 1996, the Company sold 1,429,470 shares of
its common stock at an average of $3.43 per share, in a private offering to
institutional investors. The Company incurred approximately $375,000 of costs
related to the offering, which were charged against the proceeds of the offering
in 1996.
In July 1996, the Company conducted a public offering of 2,250,000 units,
each unit composed of one share of the Company's common stock and a warrant to
purchase one share of the Company's
47
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
common stock at a price of $3.125 per unit in a public offering. The warrants
entitled the holder to purchase one share of common stock at $4.6875 per share,
exercisable any time through July 2001. In addition, the Company issued warrants
to two underwriters for the purchase of an additional 225,000 units at $3.75 per
unit. All of these warrants were outstanding at May 31, 1997 and 1998. During
the years ended May 31, 1996 and 1997, the Company incurred $328,000 and
$1,398,000, respectively, of costs related to the offering. The costs incurred
during the year ended May 31, 1996 were deferred and were charged against the
proceeds of the stock offering in the year ended May 31, 1997. During the year
ended May 31, 1998, 45,000 of the underwriter's warrants were exercised for
45,000 units.
In November 1997, the Company closed a private offering of $6,408,000,
before expenses of $320,000, in common stock and notes payable to three
accredited investors. The Company subsequently filed a registration statement,
which was declared effective, registering for resale the 524,000 shares of
common stock sold in the offering. The outstanding balance of the notes payable
of $4,050,000 is included in long-term debt at May 31, 1998. In conjunction with
the private offering, consulting fees of $320,000 were paid to a director and
shareholder of the Company.
(14) Convertible Preferred Stock
Series A Convertible Preferred Stock
In February 1997, the Company sold 50,000 shares of Series A convertible
preferred stock (Series A) in a private placement for $5,000,000, and incurred
related offering costs of $519,000, resulting in net proceeds of $4,481,000.
Conversion provisions include conversion any time after June 12, 1997;
conversion to common stock at a rate equal to $100 divided by the lower of $3.49
or 85% of the average closing common per share bid price over the five days
before conversion; and total shares converted cannot exceed 20% of total common
stock outstanding, or approximately 1,950,000 shares. At May 31, 1998, all of
the shares of Series A were converted into 1,494,593 shares of common stock.
Series B Convertible Preferred Stock
In May 1998, the Company sold 100,000 shares of Series B convertible
preferred stock (Series B) for $100 per share, and issued warrants to purchase
138,888 shares of Common Stock, in a private offering which resulted in gross
proceeds of $10,000,000, less related offering costs of $740,000, for net
proceeds of $9,260,000. In addition, the purchasers deposited $7,000,000 into
escrow, and, upon the closing of the acquisition of Aeromet International plc
(Aeromet), the Company will issue the purchasers 70,000 additional shares of
Series B, and warrants to purchase an additional 97,221 shares of Common Stock,
in exchange for the escrowed funds. If the Aeromet Acquisition fails to close,
the purchasers may elect not to purchase the additional shares of Series B and
related warrants, and to have the escrowed funds returned to them.
The Common Stock issuable upon conversion of the Series B and upon exercise
of the related warrants are 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 shares of Common Stock
underlying the Series B and the related warrants.
Upon conversion of a share of Series B, the holder will receive the number
of shares of Common Stock equal to $100 divided by the then applicable
conversion price of the Series B. Up to $7,000,000 in value of the Common Stock
underlying the Series B Preferred may be converted and sold at any time, if that
Common Stock is included in an effective piggyback registration. Shares of
Series B whose underlying shares of Common Stock are not included in a piggyback
registration are not convertible until August 1998, and may not be sold until
February 1999. At that time, the underlying Common Stock may be sold upon the
effectiveness of a registration statement, or under any applicable
48
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
exemption from registration. From August 1998 until February 1999, the
conversion price of the Series B is $7.20 per share. After February 1999, the
conversion price of the Series B is 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
$5.67, except in certain limited circumstances. No holder of Series B is
entitled to voluntarily convert Series B 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 outstanding on May 2003 will be automatically converted into Common
Stock at the then-applicable conversion price.
The Series B has no voting rights and certain preferences relating to
dividends, liquidation, and in specific situations, redemption.
(15) Warrants
In connection with certain notes payable, in May 1996, the Company issued
the lenders warrants to purchase 337,500 shares of common stock at an exercise
price of $4.80 per share. The warrants expire in May 2001 and were valued at
approximately $12,000. During the year ended May 31, 1997, there were no
warrants exercised for shares of common stock. During the year ended May 31,
1998, there were 300,000 warrants exercised for shares of common stock.
In June 1997, the Company issued warrants to purchase 125,000 shares of
common stock for $3.45 per share in consideration for certain financial
consulting services. The warrants, which expire in June 2002, were valued at
$24,000. During the year ended May 31, 1998, 75,000 of the warrants were
exercised for shares of common stock.
In December 1997, the Company issued warrants to purchase 375,000 shares of
common stock for $4.6875 per share in consideration for a financial consulting
and services agreement. The warrants, which expire in June 1998, were valued at
$60,000. During the year ended May 31, 1998, all of the warrants were exercised
for shares of common stock.
In February 1998, the Company issued warrants to purchase 1,290,000 shares
of common stock at an exercise price of $4.62 per share in consideration for a
financial consulting and services agreement. The warrants, which expire in
February 2002, were valued at $360,000. During the year ended May 31, 1998,
there were no warrants exercised for shares of common stock.
In May 1998, the Company issued warrants to purchase 138,888 shares of
common stock at an exercise price of $7.20 per share in conjunction with the
Series B offering. The warrants, which expire in May 2003, were valued at
$220,589 and included in additional paid in capital at May 31, 1998.
A summary of the Company's warrants, excluding warrants issued in
connection with the public offering in July 1996, is as follows:
<TABLE>
<CAPTION>
Weighted
average
price
Warrants of shares
---------- ----------
<S> <C> <C>
Balance at June 1, 1995........................... 160,000 $ 2.00
Granted........................................... 337,500 4.80
---------- ----------
Balance at May 31, 1996 and 1997.................. 497,500 4.34
Granted........................................... 1,928,888 4.74
Exercised......................................... (750,000) 4.61
---------- ----------
Balance at May 31, 1998........................... 1,676,388 $ 4.36
========== ==========
</TABLE>
49
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following summarizes warrants outstanding, excluding warrants issued in
connection with the public offering in July 1996, at May 31, 1998:
<TABLE>
<CAPTION>
Weighted
average Weighted
Range of remaining average
exercise Number contractual exercise Number
prices outstanding life price exercisable
------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
$2.00 - 4.00 210,000 4.69 years $ 2.35 210,000
4.01 - 6.00 1,327,500 3.97 years 4.63 1,327,500
6.01 - 8.00 138,888 5.00 years 7.20 --
---------- ---------
1,676,388 1,537,500
========== =========
</TABLE>
The 138,888 warrants issued in connection with the Series B are exercisable
beginning in May 1999. All other warrants are fully exercisable at May 31, 1998.
(16) Compensation Plans
Long-Term Investment and Incentive Plan
The Company has a long-term stock investment and incentive plan (Option
Plan) under which directors, officers, key employees and other key individuals
may be awarded stock options, stock appreciation rights, stock and cash bonuses,
restricted stock, or performance units. Under the Option Plan, the exercise
price of options issued is not less than fair-market value at the date of grant.
Options expire ten years from the grant date.
For the year ended May 31, 1998, the Company had not issued any stock
appreciation rights, stock or cash bonuses, restricted stock, or performance
units under the Option Plan.
As the Company applies APB Opinion No. 25 and related interpretations in
accounting for its Option Plan, no compensation costs have been recognized for
stock options issued to employees. Had compensation costs for stock options been
determined consistent with SFAS No. 123, the results of the Company would have
been adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss):
As reported................................................... $ (999,000) $ 1,682,000 $ 3,614,000
Pro forma..................................................... (1,043,000) 75,000 2,478,000
Net income (loss) per share:
As reported:
Basic.................................................... (0.16) 0.18 0.29
Diluted.................................................. (0.16) 0.17 0.27
Pro forma:
Basic.................................................... (0.17) 0.01 0.20
Diluted.................................................. (0.17) 0.01 0.18
Shares used in computation of net income (loss) per share:
Basic ...................................................... 6,209,000 9,499,980 12,486,077
Diluted ..................................................... 6,209,000 10,035,846 13,606,061
</TABLE>
The fair value of the options granted during 1996, 1997 and 1998 is
estimated as $248,000, $1,853,000 and $3,007,000, respectively, using the
Black-Scholes option-pricing model with the
50
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
following assumptions on the date of grant: zero percent dividend yield,
expected volatility from 24% to 73%, risk-free interest rate from 5.55% to
6.59%, and expected lives ranging from 5 to 10 years.
A summary of the Company's Stock Option Plan is as follows:
<TABLE>
<CAPTION>
Shares of common stock Weighted
---------------------------- average
Available Options price
options under plan of shares
----------- ----------- -----------
<S> <C> <C> <C>
Balance at June 1, 1995....................................... 1,000,000 -- $ --
Granted....................................................... (145,283) 145,283 5.09
----------- ----------- -----------
Balance at May 31, 1996....................................... 854,717 145,283 5.09
Authorized.................................................... 1,000,000 -- --
Granted....................................................... (998,333) 998,333 4.53
----------- ----------- -----------
Balance at May 31, 1997....................................... 856,384 1,143,616 4.61
Authorized.................................................... 1,000,000 -- --
Granted....................................................... (1,112,500) 1,112,500 5.49
Exercised..................................................... -- (25,000) 2.11
----------- ----------- -----------
Balance at May 31, 1998....................................... 743,884 2,231,116 $ 5.09
=========== =========== ===========
</TABLE>
No options were exercised or lapsed during the years ended May 31, 1996 and
1997.
The following summarizes options outstanding at May 31, 1998:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
--------------------------------------------------- -----------------------------
Weighted average Weighted Weighted
Range of Number remaining average Number average
exercise prices outstanding contractual life exercise price exercisable exercise price
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$2.00--4.00 248,333 8.68 years $ 3.05 248,333 $ 3.05
4.01--6.00 1,400,283 8.56 years 4.74 1,327,113 4.72
6.01--8.00 580,500 9.97 years 6.13 97,500 6.13
---------- ---------
2,229,116 1,672,946
========== =========
</TABLE>
Independent Director Stock Plan
The Company has an Independent Director Stock Plan under which nonemployee
directors of the Company are awarded common stock of the Company for serving on
its board of directors. The plan authorizes and reserves for issuance a maximum
of 100,000 common shares. At May 31, 1998, 68,041 shares were available for
future issuance. During the years ended May 31, 1996, 1997 and 1998, 9,000,
14,400 and 8,559 shares of the Company's common stock, respectively, were issued
under the plan of which 27,009 were vested at May 31, 1998. Included in
compensation expense is $24,000, $44,000 and $13,000 for the years ended May 31,
1996, 1997 and 1998, respectively, resulting from the shares issued.
Retirement Plan
The Company maintains a 401(k) plan covering all eligible employees who
meet service requirements as provided in the plan. Company contributions to the
profit-sharing plan are determined annually by the board of directors. No
contributions were made by the Company to the plan during
51
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the years ended May 31, 1996 and 1997. The Company contributed $27,000 to the
plan in the year ended May 31, 1998.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan under which employees are
eligible to purchase shares of the Company's common stock, through payroll
deductions, at the lower of 85% of the Company's stock price on the first day of
an offering period or 100% of the Company's stock price on the last day of an
offering period. The first offering period is expected to begin in September
1998 and end approximately one year later.
(17) Income Taxes
Total income tax benefit (expense) is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- -----------
<S> <C> <C> <C>
Current Federal............................................ $ -- $(50,000) $ (593,000)
Deferred Federal........................................... 67,000 -- 1,075,000
-------- -------- -----------
Total................................................. $ 67,000 $(50,000) $ 482,000
======== ======== ===========
</TABLE>
A reconciliation of the Federal statutory tax rate of 34% and the Company's
effective tax rates of 6%, 3% and 15% in the years ended May 31, 1996, 1997 and
1998, respectively, is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------- ---------- ------------
<S> <C> <C> <C>
Computed expected income tax benefit (expense)............. $ 362,000 $ (588,000) $ (1,065,000)
Change in valuation allowance.............................. (241,000) 558,000 1,717,000
Other...................................................... (54,000) (20,000) (170,000)
--------- ---------- ------------
$ 67,000 $ (50,000) $ 482,000
========= ========== ============
</TABLE>
Significant components of the Company's deferred tax assets (liabilities)
are as follows:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
NOL carryforward...................................... $ 2,135,000 $ 1,387,000
Other................................................. 290,000 641,000
Valuation allowances.................................. (1,717,000) --
----------- -----------
708,000 2,028,000
Deferred tax liabilities--depreciation................ (1,300,000) (1,420,000)
----------- -----------
Net deferred tax asset (liability)............... $ (592,000) $ 608,000
=========== ===========
</TABLE>
The Company has net operating loss (NOLs) carryforwards for Federal income
tax purposes of approximately $4,880,000, the benefits of which expire in the
tax year 2001 through the tax year 2011. The NOLs created by the Company's
subsidiaries prior to their acquisition and the NOLs created as a consolidated
group or groups subsequent to a qualifying tax free merger or acquisition, have
limitations related to the amount of usage by each subsidiary or consolidated
group as described in the Internal Revenue Code. As a result of these
limitations, approximately $800,000 of the $4,880,000 of NOLs will never become
available.
At May 31, 1997, the Company recorded a valuation allowance because
management believed that it was uncertain that some portion or all of the
deferred tax assets would not be realized. At May 31, 1998, the Company
eliminated the valuation allowance for deferred taxes due to management's
assessment of improved probability of realization.
52
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(18) Fair Value of Financial Instruments
The Company's financial instruments include cash, receivables, an
investment, accounts payable and short- and long-term borrowings. The fair value
of these financial instruments approximates their carrying amounts based on
current market indicators, such as prevailing interest rates.
(19) Contingencies
Legal
The Company is currently subject and party to various legal actions arising
out of the normal course of business. Management believes the ultimate
liability, if any, arising from such claims or contingencies is not likely to
have a material adverse effect on the Company's results of operations or
financial condition.
In the normal course of business, the Company disposes of potentially
hazardous material which could result in claims related to environmental
cleanup. The Company has not been notified of any related claims. The Company is
subject to various other environmental and governmental regulations. Although
the extent of any noncompliance with those regulations, if any, is not
completely ascertainable, management believes the ultimate liability is not
likely to have a material adverse effect on the Company's results of operations
or financial condition.
Year 2000
The Company is in process of developing a plan to address the Year 2000
computer problem and to begin converting its computer systems to be Year 2000
compliant. The Year 2000 problem is the result of computer programs being
written using two digits rather than four to define the applicable year. The
Company presently believes that with upgrades to existing software and possibly
some replacement, the Year 2000 problem will not pose significant operational
problems for the Company's computer systems. However, if such upgrades and
replacements are not completed timely or effectively, the Year 2000 problem may
have a material impact on the operations of the Company. The Company expects to
incur internal staffing costs, as well as the cost of software upgrades and
replacement as part of this effort. However, until the Company's plan is
finalized, management is unable to reasonably estimate the costs of achieving
Year 2000 compliance.
(20) Subsequent Events
In July 1998, the Company expects to complete the issuance of $75 million
of notes and, subsequently, consummate the acquisition of Aeromet, a company
headquartered in the United Kingdom. Aeromet is one of the leading suppliers of
magnesium and aluminum precision sand and investment castings, and titanium and
aluminum formed sheet products for the aerospace, defense, and transportation
industries in the United Kingdom. For the year ended December 31, 1997, Aeromet
had net sales of $48.7 million, income from operations of $1.6 million, and a
net loss of approximately $30,000. The acquisition is expected to be accounted
for using the purchase method. There is no assurance that the aforementioned
transactions will be completed or that the aforementioned financial results will
be indicative of future results.
53
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 17, 1998, the appointment of Moss Adams LLP, the Company's
previous principal independent accountant, was terminated, and KPMG Peat Marwick
LLP was engaged, as the Company's principal independent accountant. The decision
to change principal independent accountants was approved by the finance and
audit committee of the Company's Board of Directors.
In connection with the audits for fiscal years ended May 31, 1996 and May
31, 1997, and the subsequent interim period through April 17, 1998:
(a) the reports of Moss Adams LLP contained no adverse opinion or
disclaimer of opinion, or modification as to uncertainty, audit scope or
accounting principles; and
(b) there were no disagreements with Moss Adams LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures, which, if not resolved to the satisfaction of Moss Adams
LLP, would have caused it to make reference to the subject matter of the
disagreement in connection with its reports.
54
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Directors and Executive Officers
The following table sets forth information as of August 27, 1998 (unless
otherwise noted), regarding the directors and executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position with Company
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Donald A. Wright(1)................ 46 Chairman of the Board, Chief Executive
Officer and President
Nick A. Gerde...................... 53 Chief Financial Officer, Vice President
Finance, Treasurer and Assistant Secretary
Sheryl A. Symonds.................. 43 Vice President Administration, General
Counsel and Secretary
Allen W. Dahl, M.D.(2)(4).......... 70 Director
Dr. Urs Diebold(1)(2)(3)........... 47 Director
Werner Hafelfinger (5)............. 52 Director
Dale L. Rasmussen(1)(3)(4)......... 48 Director
William A. Wheeler(2)(3)(4)........ 64 Director
- --------------
(1) Member of the Nominating Committee
(2) Member of the Option Committee
(3) Member of the Finance and Audit Committee
(4) Member of the Compensation Committee
(5) Director of the Company since August 17, 1998
</TABLE>
Donald A. Wright. Donald A. Wright has been the Chairman of the Board,
Chief Executive Officer and President of the Company since February 1995, and of
its predecessors since 1990. Mr. Wright is also an officer and director of each
of the Company's operating subsidiaries.
Nick A. Gerde. Nick A. Gerde has been the Vice President Finance and Chief
Financial Officer of the Company since February 1995. He has been the Treasurer
of the Company since August 1996, and Assistant Secretary since November 1996.
Mr. Gerde is also an officer and director of each of the Company's operating
subsidiaries. Mr. Gerde served as Controller/CFO of Hydraulic Repair & Design,
Inc., a regional hydraulic component repair and wholesale distribution company,
from March 1990 through April 1993, as a Business Development Specialist with
the Economic Development Council of North Central Washington from July 1993 to
June 1994, and as Vice President of Televar Northwest, Inc. (a subsidiary of
Orca Technologies, Inc.) from July 1994 to February 1995. See "Certain
Relationships and Related Transactions." Mr. Gerde is a Certified Public
Accountant.
Sheryl A. Symonds. Sheryl A. Symonds has been the Vice President
Administration and General Counsel of the Company since September 1997. Prior to
joining the Company, Ms. Symonds was a partner at Stoel Rives LLP, currently the
Company's primary outside legal counsel. Ms. Symonds joined Stoel Rives LLP in
1985 and became a partner in 1992. Ms. Symonds has been Secretary of the Company
since August 1996 and is also Secretary of each of the Company's operating
subsidiaries.
Allen W. Dahl. Dr. Allen W. Dahl has been a director of the Company since
February 1995, and of its predecessors since September 1994. Dr. Dahl is retired
from practice as a physician in the Puget Sound region of Washington.
55
<PAGE>
Urs Diebold. Dr. Urs Diebold has been a director of the Company since July
1997. Dr. Diebold has been a director of Lysys AG ("Lysys"), a Swiss financing
and investment management company, since September 1990. Prior to joining Lysys
in 1990, Dr. Diebold was an investment advisor at the Zurich office of Credit
Suisse. Dr. Diebold is also a director of one of the Company's shareholders,
Capital International Fund Limited. See "Certain Relationships and Related
Transactions."
Werner Hafelfinger. Werner Hafelfinger has been a director of the Company
since August 17, 1998. Mr. Hafelfinger has been Vice President of Global
Manufacturing of St. Jude Medical (Cardiac Rhythm Management Division), a
manufacturer of implantable medical devices, since 1984.
Dale L. Rasmussen. Dale L. Rasmussen has been a director of the Company
since June 1997. Mr. Rasmussen has been employed as the Senior Vice President
and Secretary of AirSensors, Inc., now IMPCO Technologies, Inc. since 1989.
William A. Wheeler. William A. Wheeler has been a director of the Company
since June 1997. Mr. Wheeler retired from Dowty Aerospace Yakima in May 1997,
where he served as President, Chief Executive Officer and Chairman of the Board
of Directors since 1979.
Significant Employees
Lewis L. Wear. Lewis L. Wear, 57, has been the Electronics Group President
since August 1996, President of Pacific Coast since February 1996, and a
director of Pacific Coast since November 1995. He also has been a director of
Ceramic Devices since November 1995, President and a director of NTI since April
1997 and a director of Balo since February 1998. Prior to November 1995, Mr.
Wear was Vice President of Operations for Vacuum Atmospheres, a division of
WEMS, Inc.
Garry R. Vandekieft. Garry R. Vandekieft, 57, has been the Aerospace Group
President since October 1996, President of Cashmere since August 1996, a
director of Cashmere since October 1996, and was General Manager of Cashmere
from June 1996 to August 1996. Prior to being employed by Cashmere, Mr.
Vandekieft served as Manufacturing Operations Manager of Advanced Wind Turbines
during 1995 and 1996, and as Director of Manufacturing of Master-Halco from 1990
through 1994.
Duncan Crighton. Duncan Crighton, 62, has been Chief Executive Officer of
Aeromet since March 1997 and became President of the Company's Aerospace (U.K.)
Group upon closing of the Aeromet Acquisition. Mr. Crighton served as Managing
Director of Aeromet's predecessor, Kent Aerospace Castings plc, from 1990
through 1995, and as a management consultant to Aeromet from 1995 to February
1997.
Committees of the Board of Directors; Tenure; Compensation
The Option Committee of the Board of Directors administers the Company's
Amended and Restated Stock Incentive Plan. Dr. Dahl, Dr. Diebold and Mr. Wheeler
are the current members of the Option Committee. The Finance and Audit Committee
of the Board of Directors reviews the Company's accounting policies, practices,
internal accounting controls and financial reporting. The Finance and Audit
Committee also oversees the engagement of the Company's independent auditors,
reviews the audit findings and recommendations of the independent auditors and
monitors the extent to which management has implemented the findings and
recommendations of the independent auditors. Dr. Diebold, Mr. Rasmussen and Mr.
Wheeler are the current members of the Finance and Audit Committee. The
Compensation Committee of the Board of Directors establishes salaries,
incentives and other forms of compensation for the chief executive officer, the
chief financial officer, the general counsel, the subsidiary presidents and
certain other key employees of the Company and its subsidiaries. The
Compensation Committee also administers policies relating to compensation and
benefits other than option grants, including the Director Plan and the Employee
Stock Purchase Plan. Dr. Dahl, Mr. Rasmussen and Mr. Wheeler are the current
members of the Compensation Committee. The Nominating Committee of the Board of
Directors recommends individuals to be presented to the
56
<PAGE>
shareholders for election or reelection to the Board of Directors. Mr. Wright,
Dr. Diebold and Mr. Rasmussen are the current members of the Nominating
Committee.
Directors of the Company hold office until the next annual meeting of the
Company's shareholders and until their successors have been elected and duly
qualified. Under the terms of a 1995 agreement between Lysys and the Company,
Lysys had the right to nominate one of the Company's Board members until July
1998. Dr. Diebold is the current designee of Lysys to the Board of Directors.
See "Certain Relationships and Related Transactions." Executive officers are
elected by the Board of Directors of the Company at the first Board meeting
after each annual meeting of shareholders and hold office until their successors
are elected and duly qualified.
Pursuant to the Company's Independent Director Stock Plan as of May 31,
1998 (the "Director Plan"), each non-employee director of the Company receives
an initial award of 500 shares of Common Stock, an annual award of $5,000 worth
of Common Stock, $1,000 in cash per year for each committee on which the
director serves, and an additional $500 in cash per year for serving as
chairperson of a committee. The Board may elect to pay any of the cash fees in
shares of Common Stock. See "Executive Compensation--Benefit Plans--Independent
Director Stock Plan." All directors are reimbursed for reasonable travel and
other out-of-pocket expenses incurred in attending meetings of the Board of
Directors. On August 14, 1998, the Board of Directors approved an Amended and
Restated Independent Director Plan, which will be submitted to the Company's
shareholders for approval at the 1998 annual meeting of shareholders. See
"Executive Compensation--Benefit Plans--Independent Director Stock Plan."
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on a review of Forms 3, 4 and 5 and amendments thereto
furnished to the Company pursuant to Rule 16a-3(e) during its most recent fiscal
year, and on written representations of the Company's officers, directors, or
principal shareholders ("Reporting Persons") that no other reports were
required, the Company believes that, during the fiscal year ended May 31, 1998,
the Reporting Persons complied in all material respects with all applicable
filing requirements under Section 16(a) of the Exchange Act, except that Mr.
Wright filed a Form 5 that was two days late, and Mr. Gerde and Ms. Symonds each
filed a Form 5 that was one day late, each of which was amended in August 1998.
57
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth in summary form the compensation paid by the
Company to the Chief Executive Officer and to the Company's three most highly
compensated executive officers (the "Named Executives") for services in all
capacities to the Company for the last three fiscal years:
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual --------------
Compensation Securities
Fiscal ------------ Underlying Other Annual
Name and Principal Position Year Salary($) Options/SARs(#) Compensation($)(2)
- --------------------------- ------ ------------ --------------- ------------------
<S> <C> <C> <C> <C>
Donald A. Wright...................................... 1998 192,000 275,000 4,800
CEO and President 1997 160,000 920,000 400
1996 110,577 15,000 400
Nick A. Gerde......................................... 1998 100,000 40,000 2,400
CFO, VP Finance, Treasurer 1997 84,160 38,333 --
and Assistant Secretary 1996 62,500 8,333 --
Sheryl A. Symonds(3).................................. 1998 105,000 125,000 --
VP Administration, General
Counsel and Secretary
- --------------
(1) Represents exercisable warrants and options to purchase shares of Common
Stock. See "Aggregated Options and Fiscal Year-End Option Values."
(2) Represents estimated value of the personal use of a company car and other
miscellaneous benefits.
(3) Represents the compensation received by Ms. Symonds during the nine months
since she joined the Company. Under her employment agreement, Ms. Symonds
received salary at an annual rate of $140,000 for fiscal year 1998.
</TABLE>
Option Grants
The following table sets forth information on grants of stock options by
the Company during the year ended May 31, 1998 to the Named Executives:
<TABLE>
<CAPTION>
Securities % of Total
Underlying Options Granted Exercise or Market Price
Options Granted to Employees in Base Price on Grant Date
Name (#) Fiscal Year ($/Share) ($/Share) Expiration Date
---- --------------- --------------- ------------ -------------- --------------------
<S> <C> <C> <C> <C> <C>
Donald A. Wright............. 650,000 58.4% 4.72 to 6.13 4.72 to 6.13 2/9/08 to 5/28/08
Nick A. Gerde................ 75,000 6.7% 3.00 to 6.13 3.00 to 6.13 6/2/07 to 5/28/08
Sheryl A. Symonds............ 160,000 14.4% 4.00 to 6.13 4.00 to 6.13 7/18/07 to 5/28/08
</TABLE>
Aggregated Options and Fiscal Year-End Option Values
The following table summarizes the aggregate stock options and warrants,
and their market values at May 31, 1998, held by the Named Executives:
58
<PAGE>
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at FY-end(#) at FY-end($)
-------------------------- -----------------------------
Name Exercisable Unexercisable Exercisable(1) Unexercisable
---- ----------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Donald A. Wright....................................... 1,349,024 433,536 2,345,101 58,536
Nick A. Gerde.......................................... 121,422 49,634 344,880 14,634
Sheryl A. Symonds...................................... 125,000 35,000 229,625 --
- --------------
(1) Value of exercisable options and warrants having exercise prices of less
than $6.125 per share, the closing price of the Common Stock on May 29,
1998.
</TABLE>
Employment Agreements
The Company has entered into employment agreements with each of the Named
Executives. The employment agreements employ Mr. Wright through fiscal 2003, Mr.
Gerde through fiscal 2000 and Ms. Symonds through fiscal 2002. The employment
agreements provide for an annual salary in fiscal 1999 of $253,920, $130,000 and
$163,300, for Mr. Wright, Mr. Gerde and Ms. Symonds, respectively. The
employment agreements also provide for the annual grant to each of the Named
Executives of options to purchase up to 275,000, 25,000 and 50,000 shares of
Common Stock, respectively. The exercise price of such options shall be equal to
the fair market value of the Common Stock on the date of grant. Each option will
contain vesting and other terms as are approved by the Board of Directors, and
will expire ten years after the date of grant. If a Named Executive's employment
with the Company is terminated without cause, or if there is a change of
control, as those terms are defined in their employment agreements, the Company
will be required to make severance payments equal to, in the case of Mr. Wright,
twice Mr. Wright's then-current annual base salary, in the case of Mr. Gerde,
six months of Mr. Gerde's then-current annual base salary and, in the case of
Ms. Symonds, eighteen months of Ms. Symonds' then-current annual base salary.
Under these employment agreements, Mr. Wright and Mr. Gerde agree not to compete
with the Company for two years following termination of employment.
Certain Tax Considerations Related to Executive Compensation
As a result of Section 162(m) of the Code, if the Company pays more that
$1,000,000 in compensation to a "covered employee" (the chief executive officer
and the next four highest paid employees) in a single year, then the Company's
deduction for such compensation could be limited to $1,000,000.
Benefit Plans
Amended and Restated Stock Incentive Plan
The Company's shareholders adopted the Company's Amended and Restated Stock
Incentive Plan (the "Option Plan") in October 1996. The Company has reserved for
issuance under the Option Plan a maximum of 3,000,000 shares of Common Stock,
subject to certain adjustments. Under the Option Plan, the plan administrator
may award incentive stock options ("ISOs") to key employees, and may award
non-qualified stock options ("NSOs"), stock appreciation rights ("SARs"), stock
and cash bonus awards, restricted stock, and performance units to employees and
certain non-employees (other than non-employee directors) who have important
relationships with the Company or its subsidiaries. However, no person may
receive options to purchase more than 1,000,000 shares in any one year. As of
May 31, 1998, options to purchase an aggregate of 2,256,116 shares of Common
Stock had been granted under the Option Plan, of which options for 25,000 shares
have been exercised, leaving 743,884 shares available for future grant under the
Option Plan. No SARs, stock or cash bonus awards, restricted stock or
performance units have been granted under the Option Plan.
The Option Plan is administered by the Option Committee of the Board of
Directors, which is comprised of disinterested directors in accordance with Rule
16b-3 under the Exchange Act, and of
59
<PAGE>
outside directors under Section 162(m) of the Internal Revenue Code. However,
only the Board of Directors may amend or terminate the Option Plan. Unless
terminated sooner by the Board of Directors, the Option Plan expires in October
2006. In general, vested options and any related rights may only be exercised
when (a) the recipient is employed by or in the service of the Company, (b)
within 12 months following termination of employment by reason of death or
disability, or (c) within three months following termination for any other
reason except for cause. Options, SARs, cash and stock bonus awards and
performance units are nonassignable and nontransferable except by will or by the
laws of descent and distribution at the time of the recipient's death. On the
date an ISO is granted, the aggregate fair market value of the Common Stock
issuable under ISOs available for exercise during any calendar year, may not
exceed $100,000. ISOs must expire ten years from the date of grant, and the
exercise price must equal the fair market value of the underlying shares of
Common Stock at the date of grant. ISOs may not be granted to employees holding
more than 10% of the Company's total voting power unless (a) the exercise price
is at least 110% of the Common Stock's fair market value on the date of grant,
and (b) the option is not exercisable until five years after the date of grant.
Independent Director Stock Plan
The Company's shareholders adopted the Company's Independent Director Stock
Plan (the "Director Plan") in November 1995. The Company has reserved for
issuance under the Director Plan a maximum of 100,000 shares of Common Stock,
subject to adjustments, to directors who are not employees of the Company or any
of its subsidiaries. At May 31, 1998, 31,959 shares had been issued under the
Director Plan, 27,009 of which are fully vested, and 68,041 remain available for
future grant.
The Director Plan is administered by the Compensation Committee of the
Board of Directors in accordance with Rule 16b-3 adopted under the Exchange Act.
No director may vote on any matter relating to an award held by such director.
Only the Board of Directors may suspend, amend or terminate the Director Plan.
Unless terminated sooner by the Board of Directors, the Director Plan expires on
October 2005. Under the Director Plan each Independent Director receives 500
fully-vested shares of Common Stock upon election to the Board (the "Initial
Award"). Each time an Independent Director is elected to the Board (or on the
date of each annual shareholders' meeting during terms longer than one year),
each Independent Director receives $5,000 worth of shares based on fair market
value of the Common Stock on the award date (the "Annual Award"). Annual Awards
vest in full on the first anniversary of grant (the "Vesting Period") only if
the Independent Director has attended at least 75% of the regularly scheduled
Board meetings during the Vesting Period. Otherwise the Annual Award is
forfeited, unless the Board of Directors votes unanimously to waive or modify
the vesting requirement. An unvested Annual Award will also be forfeited if the
director ceases to be an Independent Director during the Vesting Period for any
reason other than death or disability. However, unvested Annual Awards
automatically vest (a) if the director is unable to continue due to disability
or death, (b) upon the closing of any merger, consolidation or plan of exchange
in which the Company does not survive or (c) upon sale of all or substantially
all of the Company's assets. No Independent Director may transfer any interest
in unvested Annual Awards to any person other than to the Company.
On August 14, 1998, the Board of Directors of the Company approved the
Amended and Restated Independent Director Plan (the "Amended Director Plan"),
subject to shareholder approval at the 1998 Annual Meeting of Shareholders (the
"Annual Meeting"). The proposed amendments to the Director Plan (1) increase the
number of shares of Common Stock reserved for issuance under the Director Plan
from 100,000 to 500,000 shares, (2) provide for the award of non-qualified stock
options, instead of shares of the Company's Common Stock, to non-employee
directors of the Company, and (3) change the formula for determining the fair
market value of the shares of the Company's Common Stock. The Board of Directors
believes that the grant of stock options instead of shares helps to provide
non-employee directors with an incentive for continued service and to more
closely align their interests with those of the shareholders. Under the Amended
Director Plan each Independent Director would receive a fully-vested option to
purchase 2,500 shares of Common Stock upon election to the Board. Each time an
Independent Director is elected to the Board (or on the date of each annual
shareholders' meeting during terms longer than one year), each Independent
Director would receive an unvested option to purchase 10,000 shares of
60
<PAGE>
Common Stock. Upon shareholder approval and unless terminated sooner by the
Board of Directors, the Amended Director Plan would continue in effect until the
earlier of: (i) ten years from the date on which the Director Plan was first
adopted by the Board, and (ii) the date on which all shares of Common Stock
available for issuance under the Amended Director Plan have been issued.
Employee Stock Purchase Plan
The Company's shareholders adopted the Company's 1997 Employee Stock
Purchase Plan in October 1997 (the "Employee Stock Plan"). The Company has
reserved for issuance under the Employee Stock Plan a maximum of 1,000,000
shares of Common Stock, subject to certain adjustments, for issuance to eligible
employees of the Company and its subsidiaries. The Company pays all expenses
relating to the Employee Stock Plan except expenses related to the resale of
shares acquired by employees under the plan. The Employee Stock Plan is
administered by the Compensation Committee of the Board of Directors. The plan
administrator will designate a financial firm as the plan's custodian to vote
the shares pursuant to the participants' instructions, keep the plan records,
and provide periodic statements to participants. Under the Employee Stock Plan,
eligible employees may purchase shares of the Company's Common Stock through
payroll deductions ranging from a minimum of $20 bi-weekly, to a maximum of 15%
of the employee's annual gross pay or $25,000. The purchase price per share will
be the lower of (a) 85% of fair market value on the first day of the offering
period, or (b) 100% of fair market value on the last day of the offering period.
The Company currently anticipates that the first offering period will begin
approximately November 1, 1998 and that offering periods will be one month each.
Plan participants may sell their shares through the plan custodian for a
discounted brokage fee. If a participant's employment terminates before the end
of any offering period, no shares will be purchased for the participant during
that period and the payroll deductions will be returned to the participant.
61
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
The following table shows, to the best of the Company's knowledge based on
the records of the Company's transfer agent and the Company's records on
issuances of shares, as adjusted to reflect changes in ownership documented in
filings with the Securities and Exchange Commission made by certain shareholders
and provided to the Company pursuant to Section 16 of the Exchange Act, and
statements provided to the Company by certain shareholders, the Common Stock
owned as of August 27, 1998 by (1) each person known by the Company to own
beneficially more than 5% of the outstanding Common Stock (each a "Principal
Shareholder"); (2) each of the Company's directors; (3) the Named Executives and
(4) all executive officers and directors of the Company as a group. Except as
otherwise noted, the Company believes the persons listed below have sole
investment and voting power with respect to the Common Stock owned by them.
<TABLE>
<CAPTION>
Amount and Percentage
Nature of of
Beneficial Common
Name and Address of Beneficial Owner: Ownership (1) Stock
- ------------------------------------ ------------- -------------
<S> <C> <C>
Donald A. Wright 2,067,986(2) 11.66%
c/o Pacific Aerospace & Electronics, Inc.
430 Olds Station Road
Wenatchee, WA 98801
Allen W. Dahl, M.D. 32,401(3) *
7300 Madrona Drive NE
Bainbridge Island, WA 98110
Dr. Urs Diebold 1,900(3) *
c/o Lysys AG
Gessnerallee 38
PO Box CH-8023
Zurich, Switzerland
Werner Hafelfinger(4) 2,220(4) *
15900 Valley View Court
Sylmar, CA 91342
William A. Wheeler 6,092(3) *
2011 Lombard Lane
Yakima, WA 98902
Dale L. Rasmussen 2,092(3) *
c/o IMPCO Technologies, Inc.
708 Industrial Dr.
Tukwila, WA 98188
Nick A. Gerde 180,550(5) 1.12%
c/o Pacific Aerospace & Electronics, Inc.
430 Olds Station Road
Wenatchee, WA 98801
Sheryl A. Symonds 161,200(6) 1.00%
c/o Pacific Aerospace & Electronics, Inc.
430 Olds Station Road
Wenatchee, WA 98801
62
<PAGE>
Deltec Holdings, Inc. 901,187 5.85%
14511 NE 13th Avenue
Vancouver, Washington 98668-3501
All executive officers and directors as a group 2,454,441(7) 13.59%
(8 persons)
- --------------
* Less than 1%.
(1) Shares that a person has the right to acquire within 60 days are treated as
outstanding for determining the amount and percentage of Common Stock owned
by such person but are not deemed to be outstanding as to any other person
or group.
(2) Includes (a) 32,666 shares held by Ragen MacKenzie, Incorporated, custodian
for Donald A. Wright, in two IRA accounts, (b) 1,500 shares issuable upon
exercise of Warrants, (c) 100,000 shares issuable upon exercise of another
warrant and (d) 1,643,536 shares issuable upon exercise of vested stock
options. Does not include 39,024 unvested stock options.
(3) Includes 825 unvested shares issued pursuant to the Director Plan on
October 8, 1997 which will vest at the next annual Board of Directors
meeting if certain conditions have been satisfied.
(4) Includes 600 shares issued on August 17, 1998 pursuant to the Director
Plan, 100 shares of which will vest at the next annual Board of Directors
meeting if certain conditions have been met.
(5) Includes (a) 4,000 shares issuable upon exercise of Warrants, (b) 25,000
shares issuable upon exercise of another warrant, and (c) 136,300 shares
issuable upon exercise of vested stock options.
Does not include 9,756 unvested stock options.
(6) Includes (a) 500 shares issuable upon exercise of Warrants and (b) 160,000
shares issuable upon exercise of vested stock options.
(7) Includes currently exercisable Warrants, other warrants and options to
purchase up to 2,070,836 shares of Common Stock.
</TABLE>
63
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has entered into employment agreements with Donald A. Wright,
Nick A. Gerde and Sheryl A. Symonds. See "Executive Officers--Employment
Agreements."
Dr. Urs Diebold, a director of the Company, is also a director of Lysys and
a director of Capital International Fund Limited (the "CI Fund"), a shareholder
of the Company. Lysys provided placement agency services in connection with
certain capital raising transactions in May 1996, November 1997 and May 1998.
The May 1996 transaction involved the issuance by the Company of 838,470 shares
of Common Stock to private investors for gross proceeds of approximately $3.4
million, from which Lysys was paid a commission of $235,000. The Company also
issued 30,000 shares of Common Stock to a designee of Lysys as additional
compensation in connection with that offering. The November 1997 transactions
involved the issuance by the Company of 524,000 shares of Common Stock and
$4,050,000 in principal amount of promissory notes to private investors, one of
which was the CI Fund. Lysys received a $320,000 fee for its services in that
transaction, of which $142,000 was paid directly to Dr. Diebold. The May 1998
transaction involved the issuance by the Company of 100,000 shares of its Series
B Convertible Preferred Stock to third-party investors for gross proceeds to the
Company of $10.0 million. Lysys received $425,000 in placement agency fees for
its services in the May transaction, none of which was paid to Dr. Diebold.
In June 1997, the Company announced a plan to form an Information
Technology Group and to acquire six companies for that group. The Company
entered into nonbinding letters of intent with six potential target companies
for inclusion in that group, including Orca Technologies, Inc. ("Orca") and
Brigadoon.com, Inc. ("Brigadoon"), two development stage internet service
providers. In connection with the proposed acquisitions, the Company advanced
operating funds to Brigadoon and Orca and guaranteed a $1.3 million bank line of
credit and a $373,000 equipment lease to Orca. In December 1997, the Company
announced that after completing due diligence investigations it had determined
to terminate the letters of intent and related operating agreements. As a part
of terminating its effort to develop an information technology group, in April
1998 the Company completed a debt restructuring arrangement with Orca under
which (i) $4.2 million of indebtedness from Orca and its subsidiaries to the
Company was converted into 2,109,709 shares of Orca common stock, (ii) Orca
granted the Company certain demand and piggyback registration rights with regard
to those shares and (iii) the Company agreed to continue guaranteeing Orca's
credit facility and equipment lease, subject to certain time limitations. In
addition, Orca delivered to the Company a $950,000 promissory note (the "Orca
Note") in exchange for (i) $1.3 million in promissory notes made by Brigadoon to
the Company, (ii) a common stock purchase warrant held by the Company to
purchase a 12.5% fully diluted interest in Brigadoon common stock, (iii) the
Company's collection lawsuit against Brigadoon and (iv) the Company's claim in
an involuntary bankruptcy action against Brigadoon. The Orca Note matures in
April 2003 and accrues interest at 8% per annum. Under the Orca Note, Orca is
obligated to pay interest only for the first year and to then make
fully-amortizing monthly payments of principal plus interest for the final four
years of the note term. The Company currently owns 2,289,309 shares of Orca
common stock, which the Company believes as of May 31, 1998 represents
approximately 19.5% of Orca's outstanding common stock. The Company also
subleases approximately 95% of the square footage of its Bothell, Washington
office space to Orca for an equivalent percentage of the lease payment for that
space. 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.
In June 1997, 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, which resulted in their beneficially owning more than 5% of the
outstanding Common Stock as of May 31, 1998. In August 1998, the Company,
Liviakis and Mr. Prag entered into an agreement in which (a)
64
<PAGE>
a finder's fee claim by Liviakis was resolved in exchange for the Company's
issuance of an aggregate of 590,000 shares of Common Stock to Liviakis and Mr.
Prag, and (b) Liviakis and Mr. Prag transferred the warrants previously issued
to them to the Company for cancellation.
65
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
2.1 Share Acquisition Agreement dated July 1, 1998, by and between
Charles Baynes plc, Westpark Limited, Pacific Aerospace and
Electronics (U.K.) Limited, and Pacific Aerospace & Electronics,
Inc.(18)
3.1 Articles of Incorporation of Pacific Aerospace & Electronics,
Inc. as filed on September 20, 1996, with the Secretary of State
of the State of Washington.(6)
3.2 Amendment to Articles of Incorporation containing Designation of
Rights and Preferences of Series A Preferred, as corrected. (8)
3.3 Amendment to Articles of Incorporation containing Designation of
Rights and Preferences of Series B Preferred. (20)
3.4 Bylaws of Pacific Aerospace & Electronics, Inc.(6)
4.1 Form of specimen certificate for Common Stock.(6)
4.2 Form of specimen certificate for Warrants.(6)
4.3 Form of specimen certificate for the Series A Preferred.(8)
4.4 Form of specimen certificate for the Series B Preferred.(20)
4.5 Form of Common Stock Purchase Warrant issued to holders of the
Series B Preferred on May 15, 1998.(20)
4.6 Registration Rights Agreement, dated May 15, 1998 between Pacific
Aerospace & Electronics, Inc. and the holders of the Series B
Preferred.(20)
4.7 Warrant Agreement between Interwest Transfer Co., Inc. and PCT
Holdings, Inc. dated July 1, 1996.(4)
4.8 Form of Stock Purchase Agreement for Fall 1997 Offering (14)
4.9 Purchase Warrant from Pacific Aerospace & Electronics, Inc. to
Paulson Investment Company, Inc., dated September 30, 1997.(20)
4.10 Purchase Warrant from Pacific Aerospace & Electronics, Inc. to
Chester L. Paulson, dated September 30, 1997.(20)
4.11 Purchase Warrant from Pacific Aerospace & Electronics, Inc. to M.
Lorraine Maxfield dated September 30, 1997.(20)
4.12 Common Stock Purchase Warrant No. 001 from Pacific Aerospace &
Electronics, Inc. to Donald A. Wright dated as of November 30,
1996.(10)
66
<PAGE>
Exhibit
Number Description
------- -----------
4.13 Common Stock Purchase Warrant No. 002 from Pacific Aerospace &
Electronics, Inc. to Nick A. Gerde dated as of November 30,
1996.(10)
4.14 Common Stock Purchase Warrant No. 003 from Pacific Aerospace &
Electronics, Inc. to Edward A. Taylor dated as of November 30,
1996.(10)
4.15 Common Stock Purchase Warrant from PCT Holdings, Inc. to Robert
L. Smith Unified Credit Trust dated as of February 5, 1998.(20)
4.16 Common Stock Purchase Warrant from Pacific Aerospace &
Electronics, Inc. to David A. Noyes & Company dated June 3, 1997.
(9)
4.17 Common Stock Purchase Warrant from Pacific Aerospace &
Electronics, Inc. to Gregory K. Smith dated June 3, 1997. (9)
4.18 Common Stock Purchase Warrant from Pacific Aerospace &
Electronics, Inc. to Nestor Wiegand dated June 3, 1997. (9)
4.19 Securities Purchase Agreement, dated May 15, 1998, between
Pacific Aerospace & Electronics, Inc. and the purchasers of the
Company's Series B Preferred. (20)
4.20 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.(18)
4.21 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.(18)
4.22 Form of Global Note from Pacific Aerospace & Electronics,
Inc.(18)
4.23 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.(18)
10.1 Letter Agreement, dated January 3, 1995, between PCT Holdings,
Inc. and Lysys Ltd.(1)
10.2 Placement Agreement, dated October 21, 1997, between Pacific
Aerospace & Electronics, Inc. and Lysys Ltd. (12)
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<PAGE>
Exhibit
Number Description
------- -----------
10.3 Placement Agreement, dated March 25, 1998, as amended May 15,
1998, between Pacific Aerospace & Electronics, Inc. and Lysys
Ltd. (20)
10.4 Amended and Restated Stock Incentive Plan.(5)
10.5 Amendment No. 1 to the Amended and Restated Stock Incentive Plan.
(19)
10.6 Independent Director Stock Plan.(7)
10.7 1997 Employee Stock Purchase Plan (11)
10.8 Employment Agreement, dated June 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Donald A. Wright.(9)
10.9 Employment Agreement, dated June 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Nick A. Gerde.(9)
10.10 Employment Agreement, dated September 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Sheryl A. Symonds.(12)
10.11 Loan Agreement, dated June 30, 1997, between Key Bank National
Association and Pacific Aerospace & Electronics, Inc.(9)
10.12 Revolving Note, dated June 30, 1997, from Pacific Aerospace &
Electronics, Inc. to KeyBank National Association.(9)
10.13 Consulting Agreement, dated February 3, 1998, between Liviakis
Financial Communications, Inc. and the Company.(15)
10.14 Debt Restructuring Agreement, dated April 6, 1998, between
Pacific Aerospace & Electronics, Inc., Orca Technologies, Inc.,
Televar, Inc. and MONITRx, Inc.(15)
10.15 Commercial Guaranty, dated July 16, 1997, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association.(13)
10.16 Promissory Note, dated March 18, 1998, from Pacific Aerospace &
Electronics, Inc. to KeyBank National Association.(15)
10.17 Security Agreement, dated March 18, 1998, from Pacific Aerospace
& Electronics Inc. to KeyBank National Association.(15)
10.18 Facility Letter, dated July 30, 1998, from Barclays Bank plc to
Aeromet International plc.(20)
10.19 Asset Purchase Agreement, dated April 13, 1998, between Pacific
Aerospace & Electronics, Inc. and Electronic Specialty, Inc.(17)
10.20 Sublease between Pacific Aerospace & Electronics, Inc. and Orca
Technologies, Inc. dated April 27, 1998.(20)
68
<PAGE>
Exhibit
Number Description
------- -----------
10.21 General Terms Agreement No. PLR-950 Relating to Boeing Model
Aircraft between Cashmere Manufacturing Co., Inc. and Boeing
Commercial Airplane Group, effective as of February 5, 1990, as
amended.(2)
10.22 Special Business Provisions No. L-890821-8140N between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
December 18, 1992.(2)(3)
10.23 Special Business Provisions No. L-500660-8134N between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
December 31, 1991.(2)(3)
10.24 Special Business Provisions No. L-435579-8180N between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
August 11, 1994.(2)(3)
10.25 Special Business Provisions No. PLR-950A between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
February 5, 1990.(2)(3)
10.26 Administrative Agreement No. L-435579-8180N between Cashmere
Manufacturing Co., Inc. and Boeing Commercial Airplane Group
effective as of August 11, 1994.(2)
10.27 Special Business Provisions No. POP-65311-0047 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
February 26, 1996.(2)(3)
10.28 General Terms Agreement No. BCA-65311-0044 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
February 26, 1996.(2)
10.29 General Terms Agreement No. BCA-65311-0140 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of June
11, 1997.(20)
10.30 Special Business Provisions No. POP-65311-0143 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of June
11, 1997.(20)(3)
10.31 Long Term Agreement No. 0108098 between Northrop Grumman
Corporation and Cashmere Manufacturing Co., Inc. effective as of
April 6, 1998.(20)(3)
10.32 Agreement, dated as of August 27, 1998, between Pacific Aerospace
& Electronics, Inc., Liviakis Financial Communications, Inc. and
Robert B. Prag.(20)
16.1 Letter from accountant regarding a change of accountants.(16)
21.1 List of Subsidiaries.(20)
23.1 Consent of Moss Adams LLP.(20)
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<PAGE>
Exhibit
Number Description
------- -----------
23.2 Consent of KPMG Peat Marwick LLP.(20)
27.1 Financial Data Schedule.(20)
- --------------
(1) Incorporated by reference to the Company's Annual Report on Form 10-KSB of
the year ended May 31, 1995.
(2) Incorporated by reference to Amendment No. 1 to the Company's Registration
Statement on Form SB-2 filed on June 19, 1996.
(3) Subject to confidential treatment. Omitted confidential information was
filed separately with the Securities and Exchange Commission.
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended May 31, 1996.
(5) Incorporated by reference to the Company's Current Report on Form 10-QSB
for the quarterly period ended November 30, 1996.
(6) Incorporated by reference to the Company's Current Report on Form 8-K filed
on December 12, 1996, reporting the Reincorporation Merger.
(7) Incorporated by reference to the Company's Registration Statement of
Certain Successor Issuers on Form 8-B filed on February 6, 1997.
(8) Incorporated by reference to the Company's Current Report on Form 8-K filed
on March 12, 1997, reporting the Series A Preferred Stock offering.
(9) Filed with the Company's Annual Report on Form 10-KSB for the fiscal year
ending May 31, 1997.
(10) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed on June 11, 1997.
(11) Filed with the Company's Definitive Proxy Statement for its 1997 Annual
Shareholders Meeting, on August 28, 1997.
(12) Submitted with the Post-Effective Amendment No. 1 to Form SB-2, filed on
October 31, 1997.
(13) Filed with the Company's Quarterly Report on Form 10-QSB for the quarterly
period ending November 30, 1997.
(14) Incorporated by reference to the Company's Registration Statement on Form
S-3 filed on December 3, 1997.
(15) Filed with the Company's Quarterly Report on Form 10-QSB for the quarterly
period ending February 28, 1998.
(16) Filed with the Company's Current Report on Form 8-K, dated April 22, 1998.
(17) Incorporated by reference to the Company's Current Report on Form 8-K filed
on July 10, 1998.
(18) Incorporated by reference to the Company's Current Report on Form 8-K filed
on August 14, 1998.
(19) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed on November 7, 1997.
(20) Filed with this report.
(b) Reports on Form 8-K.
(i) The Company filed a Current Report on Form 8-K, dated April 22,
1998 and an amendment thereto dated May 1, 1998, reporting the changes in the
Company's certifying accountant.
70
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: August 28, 1998
PACIFIC AEROSPACE & ELECTRONICS, INC.
By /s/ DONALD A. WRIGHT
--------------------------------------
DONALD A. WRIGHT
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the following capacities on August 28, 1998.
Signatures Title
- ---------- -----
/s/ DONALD A. WRIGHT President, Chief Executive Officer, and
- ---------------------------------- Chairman of the Board
DONALD A. WRIGHT (Principal Executive Officer)
/s/ NICK A. GERDE Vice President, Finance, Chief Financial
- ---------------------------------- Officer, Treasurer and Assistant
NICK A. GERDE Secretary (Principal Financial and
Accounting Officer)
/s/ ALLEN W. DAHL Director
- ----------------------------------
ALLEN W. DAHL
/s/ DALE L. RASMUSSEN Director
- ----------------------------------
DALE L. RASMUSSEN
/s/ URS DIEBOLD Director
- ----------------------------------
URS DIEBOLD
/s/ WILLIAM A. WHEELER Director
- ----------------------------------
WILLIAM A. WHEELER
Director (since 8/17/98)
- ----------------------------------
WERNER HAFELFINGER
71
<PAGE>
EXHIBIT INDEX
The following documents are filed herewith or have been included as
exhibits to previous filings with the Securities and Exchange Commission and are
incorporated by reference as indicated below.
Exhibit
Number Description
------- -----------
2.1 Share Acquisition Agreement dated July 1, 1998, by and between
Charles Baynes plc, Westpark Limited, Pacific Aerospace and
Electronics (U.K.) Limited, and Pacific Aerospace & Electronics,
Inc.(18)
3.1 Articles of Incorporation of Pacific Aerospace & Electronics,
Inc. as filed on September 20, 1996, with the Secretary of State
of the State of Washington.(6)
3.2 Amendment to Articles of Incorporation containing Designation of
Rights and Preferences of Series A Preferred, as corrected. (8)
3.3 Amendment to Articles of Incorporation containing Designation of
Rights and Preferences of Series B Preferred. (20)
3.4 Bylaws of Pacific Aerospace & Electronics, Inc.(6)
4.1 Form of specimen certificate for Common Stock.(6)
4.2 Form of specimen certificate for Warrants.(6)
4.3 Form of specimen certificate for the Series A Preferred.(8)
4.4 Form of specimen certificate for the Series B Preferred.(20)
4.5 Form of Common Stock Purchase Warrant issued to holders of the
Series B Preferred on May 15, 1998.(20)
4.6 Registration Rights Agreement, dated May 15, 1998 between Pacific
Aerospace & Electronics, Inc. and the holders of the Series B
Preferred.(20)
4.7 Warrant Agreement between Interwest Transfer Co., Inc. and PCT
Holdings, Inc. dated July 1, 1996.(4)
4.8 Form of Stock Purchase Agreement for Fall 1997 Offering (14)
4.9 Purchase Warrant from Pacific Aerospace & Electronics, Inc. to
Paulson Investment Company, Inc., dated September 30, 1997.(20)
4.10 Purchase Warrant from Pacific Aerospace & Electronics, Inc. to
Chester L. Paulson, dated September 30, 1997.(20)
4.11 Purchase Warrant from Pacific Aerospace & Electronics, Inc. to M.
Lorraine Maxfield dated September 30, 1997.(20)
4.12 Common Stock Purchase Warrant No. 001 from Pacific Aerospace &
Electronics, Inc. to Donald A. Wright dated as of November 30,
1996.(10)
<PAGE>
Exhibit
Number Description
------- -----------
4.13 Common Stock Purchase Warrant No. 002 from Pacific Aerospace &
Electronics, Inc. to Nick A. Gerde dated as of November 30,
1996.(10)
4.14 Common Stock Purchase Warrant No. 003 from Pacific Aerospace &
Electronics, Inc. to Edward A. Taylor dated as of November 30,
1996.(10)
4.15 Common Stock Purchase Warrant from PCT Holdings, Inc. to Robert
L. Smith Unified Credit Trust dated as of February 5, 1998.(20)
4.16 Common Stock Purchase Warrant from Pacific Aerospace &
Electronics, Inc. to David A. Noyes & Company dated June 3, 1997.
(9)
4.17 Common Stock Purchase Warrant from Pacific Aerospace &
Electronics, Inc. to Gregory K. Smith dated June 3, 1997. (9)
4.18 Common Stock Purchase Warrant from Pacific Aerospace &
Electronics, Inc. to Nestor Wiegand dated June 3, 1997. (9)
4.19 Securities Purchase Agreement, dated May 15, 1998, between
Pacific Aerospace & Electronics, Inc. and the purchasers of the
Company's Series B Preferred. (20)
4.20 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.(18)
4.21 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.(18)
4.22 Form of Global Note from Pacific Aerospace & Electronics,
Inc.(18)
4.23 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.(18)
10.1 Letter Agreement, dated January 3, 1995, between PCT Holdings,
Inc. and Lysys Ltd.(1)
10.2 Placement Agreement, dated October 21, 1997, between Pacific
Aerospace & Electronics, Inc. and Lysys Ltd. (12)
<PAGE>
Exhibit
Number Description
------- -----------
10.3 Placement Agreement, dated March 25, 1998, as amended May 15,
1998, between Pacific Aerospace & Electronics, Inc. and Lysys
Ltd. (20)
10.4 Amended and Restated Stock Incentive Plan.(5)
10.5 Amendment No. 1 to the Amended and Restated Stock Incentive Plan.
(19)
10.6 Independent Director Stock Plan.(7)
10.7 1997 Employee Stock Purchase Plan (11)
10.8 Employment Agreement, dated June 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Donald A. Wright.(9)
10.9 Employment Agreement, dated June 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Nick A. Gerde.(9)
10.10 Employment Agreement, dated September 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Sheryl A. Symonds.(12)
10.11 Loan Agreement, dated June 30, 1997, between Key Bank National
Association and Pacific Aerospace & Electronics, Inc.(9)
10.12 Revolving Note, dated June 30, 1997, from Pacific Aerospace &
Electronics, Inc. to KeyBank National Association.(9)
10.13 Consulting Agreement, dated February 3, 1998, between Liviakis
Financial Communications, Inc. and the Company.(15)
10.14 Debt Restructuring Agreement, dated April 6, 1998, between
Pacific Aerospace & Electronics, Inc., Orca Technologies, Inc.,
Televar, Inc. and MONITRx, Inc.(15)
10.15 Commercial Guaranty, dated July 16, 1997, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association.(13)
10.16 Promissory Note, dated March 18, 1998, from Pacific Aerospace &
Electronics, Inc. to KeyBank National Association.(15)
10.17 Security Agreement, dated March 18, 1998, from Pacific Aerospace
& Electronics Inc. to KeyBank National Association.(15)
10.18 Facility Letter, dated July 30, 1998, from Barclays Bank plc to
Aeromet International plc.(20)
10.19 Asset Purchase Agreement, dated April 13, 1998, between Pacific
Aerospace & Electronics, Inc. and Electronic Specialty, Inc.(17)
10.20 Sublease between Pacific Aerospace & Electronics, Inc. and Orca
Technologies, Inc. dated April 27, 1998.(20)
<PAGE>
Exhibit
Number Description
------- -----------
10.21 General Terms Agreement No. PLR-950 Relating to Boeing Model
Aircraft between Cashmere Manufacturing Co., Inc. and Boeing
Commercial Airplane Group, effective as of February 5, 1990, as
amended.(2)
10.22 Special Business Provisions No. L-890821-8140N between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
December 18, 1992.(2)(3)
10.23 Special Business Provisions No. L-500660-8134N between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
December 31, 1991.(2)(3)
10.24 Special Business Provisions No. L-435579-8180N between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
August 11, 1994.(2)(3)
10.25 Special Business Provisions No. PLR-950A between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
February 5, 1990.(2)(3)
10.26 Administrative Agreement No. L-435579-8180N between Cashmere
Manufacturing Co., Inc. and Boeing Commercial Airplane Group
effective as of August 11, 1994.(2)
10.27 Special Business Provisions No. POP-65311-0047 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
February 26, 1996.(2)(3)
10.28 General Terms Agreement No. BCA-65311-0044 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
February 26, 1996.(2)
10.29 General Terms Agreement No. BCA-65311-0140 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of June
11, 1997.(20)
10.30 Special Business Provisions No. POP-65311-0143 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of June
11, 1997.(20)(3)
10.31 Long Term Agreement No. 0108098 between Northrop Grumman
Corporation and Cashmere Manufacturing Co., Inc. effective as of
April 6, 1998.(20)(3)
10.32 Agreement, dated as of August 27, 1998, between Pacific Aerospace
& Electronics, Inc., Liviakis Financial Communications, Inc. and
Robert B. Prag.(20)
16.1 Letter from accountant regarding a change of accountants.(16)
21.1 List of Subsidiaries.(20)
23.1 Consent of Moss Adams LLP.(20)
<PAGE>
Exhibit
Number Description
------- -----------
23.2 Consent of KPMG Peat Marwick LLP.(20)
27.1 Financial Data Schedule.(20)
- --------------
(1) Incorporated by reference to the Company's Annual Report on Form 10-KSB of
the year ended May 31, 1995.
(2) Incorporated by reference to Amendment No. 1 to the Company's Registration
Statement on Form SB-2 filed on June 19, 1996.
(3) Subject to confidential treatment. Omitted confidential information was
filed separately with the Securities and Exchange Commission.
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended May 31, 1996.
(5) Incorporated by reference to the Company's Current Report on Form 10-QSB
for the quarterly period ended November 30, 1996.
(6) Incorporated by reference to the Company's Current Report on Form 8-K filed
on December 12, 1996, reporting the Reincorporation Merger.
(7) Incorporated by reference to the Company's Registration Statement of
Certain Successor Issuers on Form 8-B filed on February 6, 1997.
(8) Incorporated by reference to the Company's Current Report on Form 8-K filed
on March 12, 1997, reporting the Series A Preferred Stock offering.
(9) Filed with the Company's Annual Report on Form 10-KSB for the fiscal year
ending May 31, 1997.
(10) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed on June 11, 1997.
(11) Filed with the Company's Definitive Proxy Statement for its 1997 Annual
Shareholders Meeting, on August 28, 1997.
(12) Submitted with the Post-Effective Amendment No. 1 to Form SB-2, filed on
October 31, 1997.
(13) Filed with the Company's Quarterly Report on Form 10-QSB for the quarterly
period ending November 30, 1997.
(14) Incorporated by reference to the Company's Registration Statement on Form
S-3 filed on December 3, 1997.
(15) Filed with the Company's Quarterly Report on Form 10-QSB for the quarterly
period ending February 28, 1998.
(16) Filed with the Company's Current Report on Form 8-K, dated April 22, 1998.
(17) Incorporated by reference to the Company's Current Report on Form 8-K filed
on July 10, 1998.
(18) Incorporated by reference to the Company's Current Report on Form 8-K filed
on August 14, 1998.
(19) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed on November 7, 1997.
(20) Filed with this report.
EXHIBIT 3.3
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION OF
PACIFIC AEROSPACE & ELECTRONICS, INC.
Pursuant to RCW 23B.06.020, Pacific Aerospace & Electronics, Inc., a
Washington corporation, by its undersigned officer, hereby delivers the
following Articles of Amendment of Articles of Incorporation to the Secretary of
State for filing:
1. The name of the corporation is Pacific Aerospace & Electronics, Inc.
2. The text of the amendment setting forth the rights and preferences of
the Series B Convertible Preferred Stock of the corporation is
attached hereto as Exhibit A.
3. The amendment was duly adopted by the Board of Directors on May 13,
1998, and shareholder action is not required.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment in an official and authorized capacity under penalty of perjury this
14th day of May, 1998.
PACIFIC AEROSPACE & ELECTRONICS, INC.
By /s/ SHERYL A. SYMONDS
--------------------------------------
Sheryl A. Symonds
Its Vice President, Administration
1
<PAGE>
DESIGNATION OF RIGHTS AND PREFERENCES
OF
SERIES B CONVERTIBLE PREFERRED STOCK
OF
PACIFIC AEROSPACE & ELECTRONICS, INC.
1. Designation. The Series B Convertible Preferred Stock of Pacific Aerospace
& Electronics, Inc. (the "Corporation") shall consist of 200,000 shares,
par value $0.001 per share, and shall be designated the "Series B
Convertible Preferred Stock" (the "Series B Stock"). The Series B Stock
shall have liquidation and dividend preferences on a parity with the
Corporation's Series A Preferred Stock.
2. Dividends. Dividends shall be declared and set aside, out of funds or
assets of the Corporation legally available therefor, for any shares of
Series B Stock only on resolution of the Board of Directors in its sole
discretion; provided, however:
(a) no dividend may be declared or paid on shares of Common Stock if the
net assets of the Corporation thereafter would be insufficient to make
the liquidation payment described in Section 3(a) on all outstanding
shares of Series B Stock;
(b) if the Board of Directors declares a dividend payable on the
outstanding shares of Common Stock, other than a dividend payable in
shares of Common Stock, the holders of Series B Stock shall be
entitled to a dividend per share of Series B Stock that would be
payable on the number of shares of Common Stock into which a share of
Series B Stock could be converted (as of the record date for the
determination of holders of Common Stock entitled to receive such
dividend) pursuant to Section 5 hereof; and
(c) if the Board of Directors declares a dividend in respect of the
outstanding Common Stock payable in shares of the Corporation's Common
Stock, the number of shares of Common Stock to be received on the
conversion of Series B Stock shall be adjusted as described in Section
5(d)(i).
3. Liquidation, Dissolution, or Winding Up.
(a) Treatment at Liquidation, Dissolution, or Winding Up.
(i) In the event of any liquidation, dissolution, or winding up of
the Corporation, whether voluntary or involuntary, the holders of
Series B Stock shall be entitled to be paid, before any sums are
paid or any assets distributed among the holders of the shares of
Common Stock or any junior series or class of preferred stock,
out of the assets of the Corporation available for distribution
to holders of the Corporation's capital stock, the sum of $100
(plus any
2
<PAGE>
declared but unpaid dividends) per share of Series B Stock (which
amount shall be subject to proportionate adjustment on any stock
split, combination, reclassification, or other similar event
involving the Series B Stock) or, if greater, the amount the
holders of the Series B Preferred Stock would be entitled to
receive as if all of the Series B Preferred Stock were converted
into Common Stock.
(ii) If the assets of the Corporation are insufficient to permit
payment in full to the holders of Series B Stock as provided in
this subsection (a), then the entire assets of the Corporation
available for such distribution shall be distributed ratably
among the holders of Series B Stock and any other class or series
of capital stock having parity with the Series B Stock in respect
of such distributions according to the respective amounts that
would be payable in respect of the shares held by them on such
distribution if all amounts payable on or with respect to said
shares were paid in full. After payment is made in full to the
holders of Series B Stock, or funds needed for such payments
shall have been set aside by the Corporation in trust for the
account of holders of Series B Stock so as to be available for
such payments, all remaining assets available for distribution to
shareholders shall be distributed ratably solely among holders of
shares of other shares of capital stock of the Corporation to the
exclusion of the holders of shares of Series B Stock.
(b) Consolidations, Mergers, and Sales of Assets.
(i) At least 20 days before the consolidation or merger of the
Corporation into or with another corporation, as a result of
which the holders of more than 50% of the shares of Common Stock
receive cash, securities of another entity, or other property in
exchange for their shares, or a sale of all or substantially all
of the assets of the Corporation, the Corporation shall notify
the holders of Series B Stock thereof in writing, and the closing
of such event shall be regarded as a liquidation, dissolution, or
winding up of the affairs of the Corporation within the meaning
of Section 3(a); provided, however, that for 20 days after the
date of such notice, each holder of Series B Stock shall have the
right, exercisable by written notice to the Corporation, to elect
the benefits of Section 3(b)(ii) hereof in lieu of receiving
payment in liquidation, dissolution, or winding up of the
Corporation pursuant to this Section 3(b)(i).
(ii) As part of any consolidation, merger, or sale of assets described
in Section 3(b)(i), provision shall be made so that each holder
of Series B Stock shall be entitled to elect to receive in such
3
<PAGE>
transaction for or in respect of the Series B Stock held by such
holder, the number of shares of stock or other securities or
property to which such holder would have been entitled if such
holder had converted its shares of Series B Stock immediately
before the closing of such consolidation, merger, or sale of
assets.
(c) Distribution Other Than Cash. If the distribution provided for in this
Section 3 is to be paid in property other than cash, the value of such
distribution shall be the fair market value of such property as
determined in good faith by the Board of Directors of the Corporation.
4. Voting Rights.
(a) Series Voting Rights. So long as any shares of the Series B Stock
remain outstanding, the Corporation shall not, without the affirmative
vote or consent of the holders of at least two-thirds of the shares of
the Series B Stock outstanding at the time, given in person or by
proxy, either in writing or at a meeting in which the holders of the
Series B Stock vote separately as a voting group: (i) authorize,
create, or issue or increase the authorized or issued amount of, any
class or series of stock ranking prior to the Series B Stock, with
respect to the payment of dividends or the distribution of assets on
liquidation, dissolution, or winding up; (ii) amend, alter, or repeal
the rights and preferences of the Series B Stock or the Articles of
Incorporation or the Bylaws of the Corporation so as to affect
materially and adversely any right, preference, privilege or voting
power of the Series B Stock, provided, however, that any creation and
issuance of other series of preferred stock having liquidation and
dividend preferences on a parity with or subordinate to the Series B
Stock shall not be deemed to materially and adversely affect such
rights, preferences, privileges or voting powers; (iii) effect any
distribution with respect to any other class of the Corporation's
capital stock of (1) shares of any class of its capital stock (other
than a dividend or other distribution of Common Stock payable to the
holders of Common Stock), (2) rights to purchase any class of its
capital stock, or (3) other securities convertible into any class of
its capital stock; or (iv) reclassify the Corporation's outstanding
securities.
(b) No General Voting Rights. Except with respect to transactions on which
the Series B Stock is entitled to vote separately as a voting group
pursuant to Section 4(a) above, or as otherwise required by Washington
law, the holders of shares of Series B Stock shall not be entitled to
vote.
5. Conversion. The holders of shares of Series B Stock shall have the
following rights with respect to the conversion of shares of Series B Stock
into shares of Common Stock ("Conversion Rights"):
4
<PAGE>
(a) Voluntary Conversion. Subject to Sections 5(a)(i), 5(e) and 6(b), any
holder of Series B Stock may elect to convert all or any portion of
his or her shares of Series B Stock (a "Voluntary Conversion") into a
number of fully paid and nonassessable shares of Common Stock equal to
the quotient that results when $100 is divided by the Conversion Price
(as defined in Section 5(c)(iii)) then in effect for each share of
Series B Stock so converted.
(i) Timing. Voluntary Conversions may be exercised at any time or
from time to time beginning 90 days after the date that the
Series B Stock is initially issued (the "Issuance Date").
Notwithstanding the above, if any shares of Common Stock issuable
upon conversion of Series B Stock are registered within such
90-day period in connection with an underwritten public offering
by the Company, then Voluntary Conversion as to such shares of
Common Stock may be exercised when the registration statement for
such offering is declared effective by the Securities and
Exchange Commission (the "Commission").
(ii) Exercise Procedure. A Voluntary Conversion may be exercised by
giving, at any time during normal business hours at the office of
the Corporation or at such other place as the Company may
designate in writing to the holders of the Series B Stock,
written notice of the holder's election to convert, in a form
required by the Corporation (a "Conversion Notice"), accompanied
(or if the Conversion Notice is delivered by verifiable facsimile
transmission, followed within 48 hours thereafter) by delivery of
(1) the certificates evidencing the shares of Series B Stock to
be converted, (2) if so required by the Corporation, instruments
of transfer, in form satisfactory to the Corporation, duly
executed by the registered holder or its duly authorized
attorney, and (3) transfer tax stamps or funds therefor, if
required pursuant to Section 5(h). The Conversion Notice shall
also state the name or names (with address or addresses) in which
the certificate or certificates for shares of Common Stock
issuable on such conversion shall be issued. The "Voluntary
Conversion Date" shall be the date indicated in the Conversion
Notice.
(b) Mandatory Conversion.
(i) Subject to Section 6(b), on the fifth anniversary of the Issuance
Date (the "Mandatory Conversion Date"), each share of
then-unconverted Series B Stock shall automatically convert (the
"Mandatory Conversion") into a number of fully paid and
nonassessable shares of Common Stock equal to the quotient of
$100 divided by the Conversion Price in effect on the Mandatory
5
<PAGE>
Conversion Date, without any action on the part of the holder,
and whether or not the certificates representing such shares are
surrendered to the Corporation or its transfer agent.
(ii) Upon Mandatory Conversion, the holders of the Series B Stock
shall surrender to the Corporation the certificates representing
the then-unconverted shares of Series B Stock. The Corporation
shall issue and deliver to each such holder within five trading
days, in the name as shown on such surrendered certificate or
certificates, a certificate or certificates for the number of
shares of Common Stock into which the shares of Series B Stock
surrendered were convertible on the Mandatory Conversion Date.
However, the Corporation need not issue certificates evidencing
the shares of Common Stock issuable on conversion of any shares
of Series B Stock unless certificates evidencing such shares of
Series B Stock are either delivered to the Corporation or the
holder has notified the Corporation that such certificates have
been lost, stolen, or destroyed and has executed an agreement
satisfactory to the Corporation to indemnify the Corporation from
any loss incurred by it in connection therewith.
(c) Conversion Price.
(i) The term "Average Share Price" shall mean the average of the
three lowest closing bid prices for shares of Common Stock as (1)
quoted on Nasdaq NMS, (2) otherwise quoted on the Nasdaq system,
or (3) reported by the National Quotation Bureau, Inc. or quoted
on the Electronic Bulletin or the "Pink Sheets", as the case may
be, during the 22 consecutive trading days before the date of, as
applicable, any Voluntary Conversion Date or the Mandatory
Conversion Date.
(ii) The term "Maximum Conversion Price" shall mean $7.20 per share.
(iii) The term "Conversion Price" shall mean:
(1) the Maximum Conversion Price with respect to any conversion
of Series B Stock made on or before the 270th day following
the Issuance Date; or
(2) with respect to any conversion of Series B Stock made after
the 270th day following the Issuance Date, the lesser of (A)
the Maximum Conversion Price, or (B) the Average Share Price
as of the Conversion Date, (as defined in Section 5(m)).
However, no conversion at a Conversion Price
6
<PAGE>
below the Floor Price (as defined in Section 5(c)(iv)) shall
be allowed, except in compliance with Section 6(b)(i).
(iv) The term "Floor Price" shall initially mean $5.67 per share.
However, if any Common Stock issued upon conversion of Series B
Stock is sold in connection with the exercise of piggyback
registration rights under a Registration Rights Agreement between
the holder of Series B Stock and the Corporation (an
"Underwritten Offering"), then the Floor Price immediately after
such sale shall be adjusted to an amount equal to:
(A) (1) the original purchase price of all Series B Stock, less
(2) the purchase price of the Series B Stock that was
converted into the Common Stock sold in such offering;
divided by
(B) (1) 3,000,000, less (2) the number of shares of Common Stock
issued upon conversion of Series B Stock and sold in the
Underwritten Offering.
(d) Adjustments of Conversion Price and Mandatory Conversion Threshold.
(i) Adjustments for Stock Splits, Stock Dividends, and Combinations.
If the Corporation shall, at any time or from time to time after
the Issuance Date, effect a stock split of the outstanding Common
Stock or issue additional shares of Common Stock as a dividend or
other distribution on outstanding Common Stock of the
Corporation, the Maximum Conversion Price and the Floor Price in
effect immediately before such stock split, dividend, or
distribution shall be proportionately decreased. If the
Corporation shall at any time or from time to time after the
Issuance Date combine the outstanding shares of Common Stock,
then the Maximum Conversion Price and the Floor Price in effect
immediately before the combination shall be proportionately
increased. Any adjustments under this Section 5(d)(i) shall be
effective at the close of business on the date of such stock
split, dividend, distribution, or combination.
(ii) Adjustments for Reclassification, Exchange, or Substitution. If
the Common Stock is changed into the same or a different number
of shares of any class or classes of stock at any time or from
time to time after the Issuance Date, whether by
reclassification, exchange, substitution, or otherwise (other
than by way of a stock split or combination of shares or stock
dividend provided for in Section 5(d)(i), or a reorganization,
merger, consolidation, or sale of assets provided for in Section
5(d)(iii)), then, and in each event,
7
<PAGE>
an appropriate revision , if any, to the Maximum Conversion Price
and the Floor Price shall be made, and provisions shall be made
(by adjustment of the Conversion Price or otherwise) so that the
holder of each share of Series B Stock shall have the right
thereafter to convert such share of Series B Stock into the kind
and amount of shares of stock and other securities receivable on
reclassification, exchange, substitution, or other change, by
holders of the number of shares of Common Stock into which such
share of Series B Stock might have been converted immediately
before such reclassification, exchange, substitution, or other
change, all subject to further adjustment as provided herein.
(iii) Adjustments for Reorganization, Merger, Consolidation, or Sale
of Assets. If at any time or from time to time after the Issuance
Date there is a capital reorganization of the Corporation (other
than by way of a stock split or combination of shares or stock
dividends or distributions provided for in Section 5(d)(i), or a
reclassification, exchange, or substitution of shares provided
for in Section 5(d)(ii)), or a merger or consolidation of the
Corporation with or into another corporation, or the sale of all
or substantially all of the Corporation's properties or assets to
any other person, then as a part of such reorganization, merger,
consolidation, or sale, then an appropriate revision to the
Maximum Conversion Price and the Floor Price shall be made, and
provision shall be made (by adjustment of the Conversion Price or
otherwise) so that the holder of each share of Series B Stock
shall have the right thereafter to convert such share of Series B
Stock into the kind and amount of shares of stock and other
securities or property of the Corporation or any successor
corporation resulting from such reorganization, merger,
consolidation, or sale, to which a holder of Common Stock
deliverable on conversion of such shares would have been entitled
on such reorganization, merger, consolidation, or sale. In any
such case, appropriate adjustment shall be made in the
application of this Section 5(d)(iii) with respect to the rights
of the holders of the Series B Stock after the reorganization,
merger, consolidation, or sale to the end that the provisions of
this Section 5(d)(iii) (including any adjustment in the
applicable Conversion Price then in effect and the number of
shares of stock or other securities deliverable on conversion of
the Series B Stock) shall be applied after that event in as
nearly an equivalent manner as may be practicable.
(e) Restriction on Number of Shares Converted. No holder of Series B Stock
shall be entitled to convert voluntarily more than the number of
shares of Series B Stock that, when converted, would result in such
holder owning at any one time 9.9 percent or more of the total number
of the outstanding shares of Common Stock.
8
<PAGE>
(f) No Impairment. The Corporation shall not, by amendment of its Articles
of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issuance or sale of securities, or
any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder
by the Corporation, but will at all times in good faith assist in the
performance of all the provisions of this Section 5 and in the taking
of all such action needed to protect the Conversion Rights of the
holders of the Series B Stock against impairment.
(g) Certificate as to Adjustments. On occurrence of each adjustment or
readjustment of the Conversion Price or number of shares of Common
Stock issuable on conversion of the Series B Stock pursuant to this
Section 5, the Corporation at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof. At the
request of any holder of Series B Stock, the Corporation shall give
such holder a certificate from the Corporation's independent auditors
setting forth such adjustment and readjustment, showing in detail the
facts on which such adjustment or readjustment is based, the
applicable Conversion Price in effect at the time and the number of
shares of Common Stock and the amount, if any, of other securities or
property that at the time would be received on the conversion of a
share of such Series B Stock. Notwithstanding the foregoing, the
Corporation need not deliver a certificate unless such certificate
would reflect an increase or decrease of at least one percent of such
adjusted number of shares or amount since the last request from such
holder.
(h) Issue Taxes. The Corporation shall pay any and all issue, stamp,
documentary and other taxes, excluding federal, state, or local income
taxes, that may be payable in respect of any issuance or delivery of
shares of Common Stock on conversion of shares of Series B Stock
pursuant hereto; provided, however that the Corporation need not pay
any transfer taxes resulting from any transfer requested by any holder
in connection with any such conversion.
(i) Fractional Shares. The Corporation shall not be required to issue
fractional shares of Common Stock on conversion of the Series B Stock.
In lieu of any fractional shares to which the holder would otherwise
be entitled, the Corporation may at its option pay cash equal to the
product of such fraction multiplied by the Conversion Price on the
Conversion Date.
9
<PAGE>
(j) Reservation of Common Stock. The Corporation shall at all times
reserve and keep available, out of its authorized but unissued shares
of Common Stock, solely for the purpose of effecting the conversion of
the Series B Stock, the full number of shares deliverable on
conversion of all the shares of Series B Stock from time to time
outstanding.
(k) Regulatory Compliance. If any shares of Common Stock to be reserved
for the purpose of conversion of Series B Stock require registration
or listing with or approval of any governmental authority, stock
exchange, or other regulatory body under any federal or state law or
regulation or otherwise before such shares may be validly issued or
delivered on conversion, the Corporation shall, at its sole cost and
expense, in good faith and as expeditiously as possible, endeavor to
secure such registration, listing, or approval, as the case may be.
(l) Late Fee. If, for any reason other than the failure of a holder of
Series B Stock to comply with its obligations or any applicable
restrictions hereunder, the Corporation neither converts shares of
Series B Stock to Common Stock nor redeems them pursuant to Section
6(b) within five trading days after receipt of a Conversion Notice in
proper form and the related stock certificate and other items required
by the Corporation for conversion from a holder of Series B Stock then
entitled to convert such shares, the holder thereof shall be entitled
to receive from the Corporation a payment equal to 2% of the
liquidation preference of such shares for each month (or a ratable
portion thereof for any fractional month) the conversion or redemption
is delayed.
(m) Effective Date of Conversion. Conversion of Series B Stock shall be
deemed to have been effected on the applicable Voluntary Conversion
Date or Mandatory Conversion Date, and such date is referred to herein
as the "Conversion Date." The converting holder shall be deemed to
have become a stockholder of record on the applicable Conversion Date
of the Common Stock into which the Series B Stock is converted.
6. Redemption. Except as specifically described in this Section, the
Corporation shall not be entitled to redeem or retire all or any part of
the Series B Stock without the consent or affirmative vote of the holder of
record of each share to be redeemed or retired.
(a) Voluntary Redemption. The Corporation may elect to redeem all or any
portion of any unconverted Series B Stock at any time (the "Redeemable
Shares") upon 20-days prior written notice to the holder thereof
("Voluntary Redemption Notice"). In such case, the holder of such
stock shall have the right to either: (1) exercise its Conversion
Rights against the stock to be redeemed, or (2) accept the redemption.
The holder of such stock shall notify the Corporation in writing of
its election within 15 days after receiving the Voluntary Redemption
Notice. Failure to respond
10
<PAGE>
on a timely basis to the Voluntary Redemption Notice within such time
period shall be deemed an acceptance of such redemption.
(b) Mandatory Redemption and Shareholder Approval.
(i) When Required. If the average closing bid price (1) quoted on
Nasdaq NMS, (2) otherwise quoted on the Nasdaq system, or (3)
reported by the National Quotation Bureau, Inc. or quoted on the
Electronic Bulletin or the "Pink Sheets", as the case may be, for
the Common Stock remains below the Floor Price for any 30
consecutive trading days occurring 90 days after the Issuance
Date, and a Voluntary Conversion is properly requested or
Mandatory Conversion is required, then the Corporation shall, at
the Corporation's election, (A) redeem any Redeemable Shares in
excess of the number of shares that would result in the issuance
of 3,000,000 shares of Common Stock ("Mandatory Redemption"), or
(B) obtain any shareholder approval necessary under its Nasdaq
maintenance requirements to allow the Voluntary or Mandatory
Conversion to occur.
(ii) Redemption Period; Penalty. The Corporation shall complete any
Mandatory Redemption or obtain any required shareholder approval,
within 45 calendar days after the expiration of the relevant
30-day trading period (the "Redemption Period"). If the
Corporation fails to complete such Mandatory Redemption or to
obtain any required shareholder approval within the Redemption
Period, then the Corporation shall pay a cash penalty to the
holders of such shares of 2% of the liquidation preference of
such shares per month until the Mandatory Redemption occurs or
the required shareholder approval is obtained.
(c) Redemption Price. The Corporation shall promptly pay to the redeeming
holder $115 for each Redeemable Share (which amount shall be subject
to proportionate adjustment on any stock split, combination,
reclassification, or other similar event involving the Series B Stock)
plus any declared but unpaid dividends (together, the "Redemption
Price").
(d) Effective Date of Redemption. Redemption of Series B Stock shall be
deemed to have been effected on the applicable Voluntary Redemption
Date or Mandatory Redemption Date, and such date is referred to herein
as the "Redemption Date." The redeeming holder shall cease to be a
stockholder of record as to the Common Stock issued upon redemption of
the Series B Stock on the applicable Redemption Date.
11
<PAGE>
7. Bank Restrictions. If any cash payment, including any penalty,
otherwise payable in connection with the Series B Stock or with the
Common Stock issued upon conversion of such stock, is subject to
approval by the Corporation's senior secured lender (the "Lender"),
then the Corporation shall use its best efforts to obtain such
approval before the payment is due. If the Lender does not approve any
payment within 20 days after it is due, then the Corporation shall
issue a subordinated debenture, in a principal amount equal to, and in
full satisfaction of, each such payment, to the holders of the Series
B Stock or of the Common Shares issued upon conversion of the Series B
Stock, as the case may be, on a pro rata basis. However, the issuance
of subordinated debentures in lieu of any penalty payment shall not
effect the accrual of future penalties which may also be required to
be converted into subordinated debentures under this Section 7. All of
these subordinated debentures shall be subordinated to the
Corporation's debt to the Lender, shall bear interest at 12% per
annum, and shall be payable in full as soon the Lender no longer
prohibits payment of such subordinated debentures.
8. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by
verifiable facsimile, or three business days after being mailed by
certified or registered mail, postage prepaid, return-receipt
requested, addressed to the Corporation at its offices or to the
holder of record at its address appearing on the books of the
Corporation, as applicable.
9. Surrender and Replacement of Certificates. On conversion or redemption
of only a portion of the number of shares of Series B Stock
represented by a certificate surrendered for conversion or redemption,
the Corporation shall issue and deliver to such holder, at the expense
of the Corporation, a new certificate covering the number of shares of
Series B Stock representing the unconverted and unredeemed portion of
the certificate so surrendered.
10. No Preemptive Rights. Except as specifically provided herein, no
holder of Series B Stock shall be entitled to subscribe for, purchase,
or receive any part of any new or additional shares of any class,
whether now or hereinafter authorized, or of bonds or debentures, or
other evidences of indebtedness convertible into or exchangeable for
shares of any class, but all such new or additional shares of any
class or bond or debentures, or other evidences of indebtedness
convertible into or exchangeable for shares, may be issued and
disposed of by the Board of Directors on such terms and for such
consideration (to the extent permitted by law), and to such person or
persons as the Board of Directors in their absolute discretion may
deem advisable.
11. Amendment; Waivers. Any provision of this Designation of Rights and
Preferences may be amended or waived (i) by the holders of two-thirds
of the Series B Stock at a meeting at which such amendment or waiver
is presented and which is attended by a majority of the shares of the
then-outstanding Series B Stock, in person or by proxy; or (ii) by the
written consent of the holders of two-thirds of all outstanding shares
of Series B Stock.
12
EXHIBIT 4.4
Form of Specimen Certificate for the Series B Preferred
PB-0 0
PACIFIC AEROSPACE & ELECTRONICS, INC.
Organized under the Laws of the State of Washington
Zero (0) ---------------------------------------------------------
of the Series B Convertible Preferred Stock, $.001 Par Value,
of Pacific Aerospace & Electronics, Inc.
- ---------------------------------- ----------------------------------
President Secretary
EXHIBIT 4.5
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN AND WILL NOT BE, AS OF THE TIME OF ISSUANCE, REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY APPLICABLE
STATE SECURITIES LAW, AND MAY NOT BE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR ANY EXEMPTION THEREFROM UNDER THE SECURITIES ACT OR ANY
APPLICABLE STATE SECURITIES LAW OR UNLESS IN THE OPINION OF COUNSEL TO PACIFIC
AEROSPACE & ELECTRONICS, INC., NO SUCH REGISTRATION IS REQUIRED. THIS WARRANT
AND SUCH SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE CONDITIONS
SPECIFIED IN THIS WARRANT.
PACIFIC AEROSPACE & ELECTRONICS, INC.
-------------------------------------
COMMON STOCK PURCHASE WARRANT
No. __________
Expiring May 15, 2001
May 15, 1998
PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington corporation (the
"Company"), for value received, hereby certifies that _________________
("Holder"), is entitled to purchase ______________ (__________) shares of the
Company's voting common stock, par value $.001 per share (the "Warrant Stock"),
at the times and according to the terms set forth in this Warrant.
1. Terms of Warrant. This Warrant is being issued by the Company as additional
consideration to the purchasers of its Series B Convertible Preferred
Stock. This Warrant shall be exercisable at any time after one year from
the date hereof. The exercise price (the "Exercise Price") of this Warrant
shall be $7.20 per share of the Warrant Stock acquired upon any such
exercise.
2. Exercise of Warrant. The holder of this Warrant may exercise it during
normal business hours on any business day commencing on the first
anniversary of the date hereof and expiring at 5:00 p.m., P.D.T., on May
15, 2001, or if such date is a day on which federal or state chartered
banking institutions are authorized by federal law to close, then on the
next succeeding day which shall not be such a day, by surrendering this
Warrant to the Company at the Company's principal office or at such other
place as the Company may designate in writing, accompanied by an executed
subscription agreement in substantially the form annexed hereto as Exhibit
"A" and by payment by wire transfer, in cash or by certified or official
bank check payable to the order of the Company, or by any combination of
such methods, in
<PAGE>
the amount obtained by multiplying (a) the number of shares of Warrant
Stock designated in such subscription by (b) the Exercise Price, whereupon
such holder shall be entitled to receive the number of duly authorized,
validly issued, fully paid and nonassessable shares of Warrant Stock as is
indicated in the subscription agreement.
3. Partial Exercise Allowed; Issuance of Substitute Warrant. This Warrant is
exercisable in whole or in part by Holder. In the event Holder exercises
this Warrant with respect to only a portion of the shares of Warrant Stock
that could be acquired upon exercise, a replacement warrant ("Replacement
Warrant") with identical terms except for a corresponding reduction in the
number of shares of Warrant Stock receivable upon exercise of the
Replacement Warrant shall be issued by the Company within five trading days
after any such partial exercise.
4. When Exercise Effective. The exercise of this Warrant shall be deemed to
have been effected immediately prior to the close of business on the
business day on which this Warrant shall have been surrendered to the
Company as provided in Section 2, and at such time the person or persons in
whose name or names any certificate or certificates for shares of Warrant
Stock shall be issued upon such exercise shall be deemed for all corporate
purposes to have become the holder of record thereof.
5. Delivery of Stock Certificates. As soon as practicable after the exercise
of this Warrant, and in any event within five trading days thereafter, the
Company at its expense (including the payment by it of any applicable issue
taxes) will cause to be issued in the name of and delivered to Holder or to
the person or entity such holder may direct (and upon payment by such
holder of any applicable transfer taxes), a certificate or certificates for
the number of duly authorized, validly issued, fully paid and nonassessable
shares of Warrant Stock to which the holder or its designee shall be
entitled upon such exercise.
6. Adjustment of Warrant Stock Issuable Upon Exercise. If the Company at any
time or from time to time after the date of this Warrant but before
expiration effects (a) a split or subdivision of the outstanding shares of
its then outstanding common stock into a greater number of shares of common
stock, (b) declares a dividend or other distribution on its common stock
payable in shares of common stock or rights convertible into or
exchangeable or exercisable for shares of common stock, or (c) effects a
reverse split of the outstanding shares of its common stock into a lesser
number of shares of common stock, (by reclassification or otherwise than by
payment of a dividend in common stock), then, and in each such case, the
number of shares called for on the face of this Warrant (or the face of any
replacement Warrant issued upon partial exercise) shall be adjusted
proportionally, and the exercise price with respect to such adjusted number
of shares also shall be adjusted proportionally. On occurrence of each
adjustment of the Exercise Price or the number of shares of Warrant Stock
payable upon exercise of the Warrant, the Company at its expense, shall
promptly compute such adjustment in accordance
2
<PAGE>
with the terms hereof. At the request of the Holder, the Company shall give
the Holder a certificate from the Company's independent auditors setting
forth such adjustment, showing in detail the facts on which such adjustment
is based, the applicable Exercise Price in effect at the time and the
number of shares of Warrant Stock that would be received after giving
effect to such adjustment.
7. Merger. If at any time after the date hereof there shall be a merger or
consolidation of the Company with or into another entity or a transfer of
all or substantially all of the assets of the Company to another entity,
then before such transaction may be consummated and become effective, the
Company shall notify the Holder at least 10 days prior to the consummation
of such transaction, and the Holder shall be entitled to receive upon such
transfer, merger or consolidation becoming effective, at the election of
the Holder either (i) upon payment of the Exercise Price then in effect,
the number of shares or other securities or property of the Company or of
the successor corporation resulting from such merger or consolidation,
which would have been received by Holder for the shares of stock subject to
this Warrant had this Warrant been exercised just prior to such transfer,
merger or consolidation becoming effective or to the applicable record date
thereof as the case may be, or (ii) a warrant to acquire common stock or
other securities of such other entity at an exercise price and upon such
other terms as will provide the Holder with economic and other benefits and
rights substantially equivalent to those provided herein.
8. Reservation of Shares. The Company will at all times reserve and keep
available, solely for issuance and delivery upon the exercise of this
Warrant, the number of shares of common stock that would be issuable upon
the exercise, in whole, of this Warrant or any replacement Warrant. All
such shares shall be duly authorized and, when issued upon such exercise,
shall be validly issued, fully paid and nonassessable with no liability on
the part of the holders thereof.
9. Ownership, Transfer and Substitution of Warrant. The Company will treat
Holder as the owner and holder of this Warrant for all purposes, until the
Company receives notice to the contrary. This Warrant shall be transferable
by Holder, and the Company shall recognize on its books and records any
lawful transfer of this Warrant upon receipt of notice of such transfer by
Holder. Upon receipt of evidence reasonably satisfactory to the Company of
the loss, theft, destruction or mutilation of this Warrant and, in the case
of any such loss, theft of destruction of this Warrant, upon delivery of
indemnity reasonably satisfactory to the Company in form and amount or, in
the case of any such mutilation, upon surrender of such, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like
tenor.
10. No Rights or Liabilities as Stockholder. Nothing herein shall give or shall
be construed to give Holder any of the rights of a shareholder of the
Company including, without limitation, the right to vote on matters
requiring the vote of shareholders, the right to receive any dividend
declared and payable to the holders
3
<PAGE>
of common stock, and the right to a pro-rata distribution upon the
Company's dissolution.
11. Authorization; No Breach. The Company represents and warrants that (i) the
Company is duly organized, validly existing, and in good standing under the
laws of the State of Washington, and has the requisite power and authority
to issue this Warrant and the Warrant Stock; (ii) the number of shares of
Warrant Stock issuable upon the entire exercise of this Warrant are
presently authorized but unissued; (iii) the issuance of this Warrant and
the issuance of the Warrant Stock issuable upon exercise of this Warrant
have been authorized and approved by all necessary corporate action; (iv)
the execution, delivery and issuance of this Warrant and the issuance of
the Warrant Stock underlying this Warrant will not violate any law, rule,
regulation, order, writ, judgment, injunction, decree or award binding on
the Company or the provision or provisions of any agreement to which the
Company is a party or is subject, or by which any of the Company's property
is bound, or conflict with or constitute a material default thereunder, or
result in the creation or imposition of any lien pursuant to the terms of
any such agreement, or constitute a breach of any fiduciary duty owed by
the Company to any third party, or require the approval of any third party
pursuant to any contract, agreement, instrument, relationship or legal
obligation to which the Company is subject or to which any of its
properties may be subject; and (v) when issued, both this Warrant and the
Warrant Stock issuable upon exercise of this Warrant shall be duly and
validly issued, fully paid and nonassessable.
12. No Impairment. The Company will not, by amendment of its Articles of
Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking
of all such action as may be necessary or appropriate in order to protect
the rights of the Holder against impairment.
13. Replacement of Warrant. On receipt of evidence reasonably satisfactory to
the Company of the loss, theft, destruction or mutilation of the Warrant
and, in the case of any such loss, theft or destruction of the Warrant, on
delivery of an indemnity agreement or security reasonably satisfactory in
form and amount to the Company or, in the case of any such mutilation, on
surrender and cancellation of such Warrant, the Company, upon receipt by it
of a form of Warrant reflecting the terms of the new Warrant, at its
expense will execute and deliver, in lieu thereof, a new Warrant of like
tenor.
14. Notices. All notices and other communications provided for herein shall be
delivered or mailed by first class mail, postage prepaid, addressed (a) if
to any holder of any Warrant or Warrant Stock, at the registered address of
such holder as set forth in the register kept at the principal office of
the Company, or (b) if to the Company, at its principal office, or to such
other location as the Company shall
4
<PAGE>
have furnished to each holder of any Warrants or Warrant Stock in writing,
provided that the exercise of any Warrants shall be effective only in the
manner provided in Section 2.
15. Miscellaneous. This Warrant, and the Securities Purchase Agreement and
Registration Rights Agreement, each of even date herewith, between the
Company and the Holder embody the entire agreement and understanding
between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings relating to the subject
matter hereof. There are no unwritten oral agreements between the parties
with respect to the subject matter hereof. This Warrant and any term hereof
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of such change,
waiver, discharge or termination is sought. This Warrant shall be governed
by the laws of the State of Washington. The headings of this Warrant are
inserted for convenience only and shall not be deemed to constitute a part
hereof.
PACIFIC AEROSPACE & ELECTRONICS, INC.
By:
-------------------------------------
Donald A. Wright, President
5
<PAGE>
Exhibit A
SUBSCRIPTION
------------
(To be executed by the holder of the Warrant to exercise the right to
purchase common stock evidenced by the Warrant)
To: Pacific Aerospace & Electronics, Inc.
c/o Eugenie D. Mansfield
Stoel Rives LLP
One Union Square
600 University Street, Suite 3600
Seattle, Washington 98101-3197
Fax: (206) 386-7500
The undersigned hereby irrevocably subscribes for ___________shares of the
common stock, par value $.001 per share, of Pacific Aerospace & Electronics,
Inc., a Washington corporation, pursuant to and in accordance with the terms and
conditions of a Warrant dated May 15, 1998 (the "Warrant"), and tenders with
this Subscription Agreement (a) the Warrant and (b) payment of $_____________ as
payment for the shares, and requests that a certificate for such shares be
issued in the name of the undersigned and be delivered to the undersigned at the
address stated below.
----------------------------------
----------------------------------
----------------------------------
----------------------------------
The undersigned agrees that, upon issuance of the shares, the undersigned
will execute an investment letter in the form attached hereto as Exhibit 1, to
reflect that the shares are being acquired for investment purposes and not with
a view toward their resale or distribution to the public.
- ---------------------------------------
Signed
- ---------------------------------------
Dated
<PAGE>
Exhibit 1
---------
Pacific Aerospace & Electronics, Inc.
434 Olds Station Road
Wenatchee, WA 98801
Re: ___________ shares of common stock, $.001 par value per
share, of Pacific Aerospace & Electronics, Inc., a
Washington corporation (the "Shares")
Ladies and Gentlemen:
This letter is given to you in connection with the undersigned's
acquisition of the above described Shares.
1. The Shares are being acquired by the undersigned for investment for the
undersigned's own account and not on behalf of any other persons, and not with a
view to, or for resale or other distribution in connection with, any
distribution of all or any part of the Shares, unless pursuant to an effective
registration statement under the Acts (as defined below) or a transaction exempt
from the registration and prospectus delivery requirements of state and federal
securities laws.
2. You shall not be required to effect, permit or recognize any sale, offer for
sale, exchange, transfer, assignment or pledge of any or all of the Shares
unless the sale of the Shares is registered under the Securities Act of 1933,
and any applicable state securities acts (collectively, the "Acts"), or unless
in the opinion of your counsel, such registration is not required; and you shall
be entitled to cause legends to this effect to be endorsed on any certificates
evidencing the Shares. If you are provided with an opinion of counsel that such
registration is not required, you shall permit the transfer of the Shares and
within five trading days cause the issuance to the undersigned of certificates
for the Shares without legends. Further, you shall have the right to place a
stop-transfer order with your Secretary or transfer agent pursuant to which
transfer of all or any portion of the Shares shall be prohibited except upon a
proper showing of compliance with this letter.
3. The undersigned understands that it must bear the economic risk of this
investment for an indefinite period of time because the Shares have not been
registered under the Acts, and consequently cannot be sold or otherwise
transferred unless they are subsequently registered under the Acts or exemptions
from registration are available.
4. Notwithstanding anything to the contrary contained herein, the undersigned
does not agree to hold the Shares for any minimum or other specific term and
reserves the
<PAGE>
right to dispose of the Shares at any time in accordance with United States
federal and state securities laws.
Very truly yours,
Dated: _______________
-----------------------------------------
EXHIBIT 4.6
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made as of May 15,
1998, by and among PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington
corporation (the "Company") and each of the purchasers of shares of Series B
Convertible Preferred Stock and Warrants of the Company whose names are set
forth on Exhibit A hereto (each individually, a "Purchaser" and collectively,
the "Purchasers").
RECITALS
A. The Purchasers and the Company have entered into a Securities Purchase
Agreement dated as of May 15, 1998 (the "Securities Purchase Agreement"),
pursuant to which the Purchasers are purchasing up to 170,000 shares of the
Company's Series B Convertible Preferred Stock and are receiving Warrants to
purchase 10% of the shares of Common Stock issuable upon conversion of the
Preferred Stock.
B. It is a condition precedent to the obligations of each Purchaser under
the Securities Purchase Agreement that the Company grant registration rights
with respect to the shares of the Company's Common Stock issuable upon
conversion of the Series B Convertible Preferred Stock and the exercise of the
Warrants, on the terms and conditions set forth in this Agreement.
AGREEMENT
The parties hereto agree as follows:
1. DEFINITIONS
All capitalized terms not otherwise defined in this Agreement shall have
the meaning set forth in the Rights and Preferences, as such term is defined in
Section 1, below. The following terms, as used herein, have the following
meanings:
"Board" means the Board of Directors of the Company.
"Business Day" means any day except a Saturday, Sunday or other day on
which banks in Salt Lake City (or in such other city as may be the headquarters
of the Company's transfer agent) are authorized by law to close.
"Closing Date" shall mean the Closing Date determined pursuant to the
Securities Purchase Agreement.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common stock, par value $0.001 per share, of the
Company.
1
<PAGE>
"Company" means Pacific Aerospace & Electronics, Inc., a Washington
corporation.
"Effective Time" means the date of effectiveness of a Registration
Statement.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Form S-3" means a Form S-3 Registration Statement of the Company relating
to the registration for resale of Restricted Securities contemplated by Section
2, including the Prospectus included therein, all amendments and supplements
thereto (including post-effective amendments) and all exhibits and material
incorporated by reference therein.
"Holders" has the meaning given to it in Section 2.1.2 hereof.
"NASD" means the National Association of Securities Dealers, Inc.
"Person" means an individual, corporation, partnership, association, trust
or other entity or organization, including a government or political subdivision
or an agency or instrumentality thereof.
"Piggyback Registration Statement" means a Registration Statement of the
Company registering the issuance of newly issued Common Stock in an underwritten
registered public offering, including the Prospectus included therein, all
amendments and supplements thereto (including post-effective amendments) and all
exhibits and materials incorporated by reference therein.
"Preferred Stock" means the Series B Convertible Preferred Stock, par value
$0.001 per share, of the Company.
"Prospectus" means the Prospectus included in a Registration Statement, as
amended or supplemented by any Prospectus supplement and by all other amendments
thereto, including post-effective amendments, and all material incorporated by
reference into such Prospectus.
"Registration Request" means a written notice from a Holder to the Company
that such Holder is electing to exercise its Piggyback registration rights under
Section 2.2.
"Registration Statement" means either a Form S-3 or a Piggyback
Registration Statement.
"Restricted Securities" means the Preferred Stock, Warrants or any
Securities until (i) with respect to Securities, a Registration Statement
covering the resale of such Securities has been declared effective by the
Commission and such Securities have been disposed of pursuant to such effective
Registration Statement, (ii) such Preferred Stock, Warrants or Securities are
permitted to be sold under circumstances in which all the applicable conditions
of Rule 144 (or any similar provisions then in force) under the Securities Act
are met, or such Preferred Stock, Warrants or Securities are permitted to be
sold pursuant to Rule 144(k) (or any similar provision
2
<PAGE>
then in force) under the Securities Act, and are freely tradeable after such
sale by the transferee, (iii) such Preferred Stock, Warrants or Securities are
otherwise transferred, the Company has delivered a new certificate or other
evidence of ownership for such Preferred Stock, Warrants or Securities not
bearing a legend restricting further transfer and such Preferred Stock, Warrants
or Securities may be resold without registration under the Securities Act, or
(iv) such Preferred Stock, Warrants or Securities shall have ceased to be
outstanding.
"Rights and Preferences" means the Designation of Rights and Preferences
for the Preferred Stock contained in the Company's Articles of Incorporation, as
amended.
"Securities" means the Company's Common Stock issuable upon conversion of
the Preferred Stock or exercise of the Warrants.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Purchase Agreement" has the meaning given to it in the recitals
to this Agreement.
"Underwriter" means the underwriter or underwriters selected by the Company
in a public offering of Common Stock by the Company.
"Warrants" means the Common Stock Purchase Warrants dated May 15, 1998,
from the Company to the Purchasers.
As used in this Agreement, words in the singular include the plural, and in
the plural include the singular.
2. REGISTRATION RIGHTS
2.1 Applicability of Agreement.
2.1.1 The Securities are entitled to the benefits of this Agreement,
but only as long as they remain Restricted Securities.
2.1.2 A Person is deemed to be a "Holder" whenever such Person is the
registered Holder of Preferred Stock, Warrants or Securities. Notwithstanding
the foregoing, each of the entities set forth on the signature pages hereto as
to which a Purchaser is acting as nominee is deemed to be a "Holder" of
Preferred Stock and Warrants and shall be deemed to be a "Holder" of Securities.
2.2 Piggyback Registration Rights.
2.2.1 Grant. The Company hereby grants the Holders registration rights
to register up to $7,000,000 of the Securities for resale in a Piggyback
Registration Statement, if:
3
<PAGE>
(a) the Company files a Piggyback Registration Statement with the
Commission by November 1, 1998; and
(b) the average closing price of the Common Stock (as quoted on
Nasdaq NMS, otherwise quoted on the Nasdaq system or reported by the
National Quotation Bureau, Inc., or quoted on the Electronic Bulletin or
the "Pink Sheets", as the case may be) reaches 20% over the Maximum
Conversion Price for any consecutive 20- day trading period prior to
written notice by the Company to the Holders of the anticipated filing of a
Piggyback Registration Statement (a "Registration Notice"); and
(c) the Holders agree to sell the Securities through the
Underwriter, subject to the right of the managing Underwriter, in its sole
discretion, to exclude some or all of the Securities from such public
offering under Section 2.2.4.
2.2.2 Registration Notice. If the Company proposes to file a Piggyback
Registration Statement, then it shall give the Holders a Registration Notice at
least 20 days before the anticipated filing date of the Piggyback Registration
Statement. The Registration Notice shall offer the Holder the opportunity to
include up to $7,000,000 of the Securities in the Piggyback Registration
Statement.
2.2.3 Registration Request. In order to exercise its rights under
Section 2.2.1, the Holder must deliver a Registration Request to the Company
within 15 days after receiving a Registration Notice. Each Registration Request
must specify (a) the number of Securities requested to be included in the
Piggyback Registration Statement, and (b) the intended method of disposing of
such Securities.
2.2.4 Underwriting Requirements. The Company shall not be required to
include any of the Securities in a Piggyback Registration Statement unless (a)
the Underwriter in its sole discretion agrees to such inclusion, (b) the Holders
accept the terms of the underwriting as agreed on between the Company and the
Underwriters, and (c) the Holder completes and executes all reasonable
questionnaires, powers of attorney, indemnities, underwriting agreements,
lock-up letters (provided the terms of the lock-up periods contained therein do
not exceed 180 days), and other documents required under the terms of the
underwriting agreement. If the total number of such Securities exceeds the
number of shares that the Underwriters allow for inclusion in the offering, then
the Company shall include in the offering only the number of shares allowed by
the Underwriters. If at any time the Holder disapproves of the terms of any
offering in which it has elected to exercise its piggyback rights pursuant to
Section 2.2 hereof, then the sole remedy of the Holder shall be to withdraw from
that offering and the related Piggyback Registration Statement, by giving
written notice to the Company and the Underwriter. Such withdrawal, however,
shall not impair the Holder from
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exercising its piggyback rights with regard to another or future Piggyback
Registration Statement, subject to the conditions of Section 2.2.1.
2.2.5 Decision Not to File. If the Company decides not to file a
Piggyback Registration Statement after sending a Registration Notice, then the
Holders shall not be entitled to have the Securities registered at such time,
except as may be required under Section 2.3.
2.3 Form S-3 Registration.
2.3.1 After Piggyback Registration. If the Company has filed a
Piggyback Registration Statement by November 1, 1998, then the Company shall
register for resale on a Form S-3, and pursuant to Rule 415 under the Securities
Act, any of the Securities that were not registered for resale in the Piggyback
Registration Statement. The Company shall use its best efforts to cause such
Form S-3 to be declared effective by the Commission by the 270th day following
the date of this Agreement. If the Securities are not registered by the 270th
day following the date of this Agreement, the Company shall pay to the Holders
in cash a penalty of 2% of the liquidation preference of the Preferred Stock per
month (which shall be subject to adjustment in the event of stock splits, stock
recombinations, stock dividends and the like) and shall be prorated for any
partial months and distributed ratably according to the number of shares of
Preferred Stock held by and previously converted by each Holder, for each 30-day
period during which the Securities remain unregistered beyond such date.
2.3.2 No Piggyback Registration. If the Company does not file a
Piggyback Registration Statement by November 1, 1998, then the Company shall:
(a) cause to be filed by November 1, 1998, a Form S-3, and
pursuant to Rule 415 under the Securities Act, which Form S-3 shall permit
resales of all Securities; and
(b) use its best efforts to cause such Registration Statement to
be declared effective by the Commission by January 1, 1999. If the
Securities are not registered by that date, then the Company shall pay a
cash penalty of 2% of the liquidation preference of the Preferred Stock per
month (which shall be subject to adjustment in the event of stock splits,
stock recombinations, stock dividends and the like) and shall be prorated
for any partial months and distributed ratably according to the number of
shares of Preferred Stock held by and previously converted by each Holder
for each 30-day period during which the Securities remain unregistered
beyond January 1, 1999, but only until the Securities may be resold under
Rule 144(k) of the Securities Act.
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2.3.3 Other Form. The Company may elect to file the Registration
Statement on a form other than Form S-3 if the Company determines that doing so
would be in its best interests, so long as the Holders would receive at least
the same rights of resale as would have been available if the Registration
Statement were filed on Form S-3.
2.3.4 Selection of Underwriters. The Holders of Securities covered by
any Form S-3 who desire to do so may sell such Securities in an underwritten
offering. In any such underwritten offering, the investment banker or investment
bankers and manager or managers that will administer the offering will be
selected by the Holders of a majority of the Securities included in such
offering and the terms of such offering shall be reasonably satisfactory to such
Holders; provided, however, that such investment bankers and managers and the
terms of the underwriting must be reasonably satisfactory to the Company.
2.3.5 Participation in Underwritten Registrations. No Holder may
participate in any underwritten registration pursuant to Section 2.3.4 unless
such Holder (a) agrees to sell such Holder's Securities on the basis provided in
any underwriting arrangements approved by the persons entitled hereunder to
approve such arrangements, and (b) completes and executes all reasonable
questionnaires, powers of attorney, indemnities, underwriting agreements,
lock-up letters and other documents required under the terms of such
underwriting arrangements.
2.4 Restrictions on Resale. If and when Securities have been registered for
resale under a Form S-3, the Holders (a) may not begin selling such Securities
until the 271st day after the date of this Agreement, and (b) may not sell a
number of such Securities that exceeds 12.5% of the number of Securities
issuable and issued upon conversion of the Preferred Stock (the "Volume
Restrictions"). Such percentage shall cumulate each month, commencing on the
271st day after the date of this Agreement, unless there is no Piggyback
Registration Statement declared effective by the Commission by November 1, 1998,
in which event such percentage shall cumulate commencing November 1, 1998 as set
forth in Section 2.4.2. Notwithstanding the above:
2.4.1 Voluntary Redemption. If the Holders have converted Preferred
Stock pursuant to Section 6(a)(1) of the Rights and Preferences after receiving
notice of a Voluntary Redemption, then the Holders may immediately sell up to
50% of the Securities issued upon such conversion, and may sell the other 50% of
such Securities beginning 30 days after the Voluntary Conversion Date.
2.4.2 No Piggyback Registration. Upon the effectiveness of a Form S-3
filed pursuant to Section 2.3.2, the Holders may sell the Securities, subject to
the Volume Restrictions, provided that the 12.5% of the Securities permitted to
be sold under the Volume Restrictions will begin to cumulate on November 1,
1998.
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2.5 Registration Statement. In connection with any Registration Statement,
the Company shall comply with all the provisions of Section 2.8 below and shall
use its reasonable best efforts to effect such registration to permit the resale
of the Securities in accordance with the intended method or methods of
distribution thereof (as indicated in the information furnished to the Company
pursuant to Section 2.6). Subject to Section 2.7, the Company shall use its
reasonable best efforts to keep such Registration Statement continuously
effective, supplemented and amended to the extent necessary to ensure that it is
available for resales of Securities by the Holders, and to ensure that it
conforms with the requirements of this Agreement, the Securities Act and the
policies, rules and regulations of the Commission as announced from time to
time, for a period of two (2) years after the Effective Time or such longer
period as required by Section 2.7 or such shorter period that will terminate
when all the Securities covered by the Registration Statement have been sold
pursuant to the Registration Statement or otherwise cease to be Restricted
Securities. The Company shall be obligated to effect only one registration
pursuant to this Agreement, except as otherwise provided in Section 2.3.1. Upon
the occurrence of any event that would cause the Registration Statement or the
Prospectus contained therein (i) to contain a material misstatement or omission
or (ii) not to be effective and usable for resale of Securities during the
period required by this Agreement, the Company shall file promptly an
appropriate amendment to such Registration Statement or the related Prospectus
or any document incorporated therein by reference, in the case of clause (i),
correcting any such misstatement or omission, and, in the case of either clause
(i) or (ii), use its reasonable best efforts to cause such amendment to be
declared effective and such Registration Statement and the related Prospectus to
become usable for their intended purposes as soon as practicable thereafter. The
Company shall give each Holder of Restricted Securities a copy of such amendment
promptly after its filing.
2.6 Holder's Information. No Holder may include any of its Securities in a
Registration Statement pursuant to this Agreement unless and until such Holder
furnishes to the Company in writing, within five Business Days after receipt of
a written request therefor, the information specified in Item 507 of Regulation
S-K under the Securities Act and such other information as the Company may
reasonably request for use in connection with the Registration Statement or
Prospectus or preliminary Prospectus included therein and in any application to
the NASD or Nasdaq. Each Holder as to which the Registration Statement is being
effected agrees to furnish promptly to the Company all information required to
be disclosed in order to make the information previously furnished to the
Company by such Holder not materially misleading.
2.7 Blackout Provisions. Notwithstanding anything to the contrary contained
herein, if (i) the Board determines in good faith that the registration and
distribution of Securities (or the use of a Registration Statement or the
Prospectus contained therein) would interfere with any proposed or pending
material corporate transaction involving the Company or any of its subsidiaries
or would require premature disclosure thereof or would require the Company to
disclose information that the Company has not otherwise made public and that the
Company reasonably determines is in the best interests of the Company not to
disclose at such time, and (ii) the Company notifies the Holders in writing not
later than five (5) business days after such
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determination (such notice shall be a "Blackout Notice"), the Company may (a)
postpone the filing of the Registration Statement, or (b) allow the Registration
Statement to fail to be effective and usable or elect that the Registration
Statement shall not be usable for a reasonable period of time, but not in excess
of 90 days (a "Blackout Period"); provided, however, that the aggregate number
of days included in all Blackout Periods shall not exceed 90 during any
consecutive 12 months and shall not exceed 180 during the period specified in
Section 2.8 of this Agreement; and provided, further, that the period referred
to in Section 2.5 during which the Registration Statement is required to be
effective and usable shall be extended by the aggregate number of days during
which the Registration Statement was not effective or usable pursuant to the
foregoing provisions.
2.8 Registration Procedures. In connection with any Registration Statement
or Prospectus required by this Agreement to permit the resale of Securities, the
Company shall:
2.8.1 Prepare and file with the Commission such amendments and
post-effective amendments to the Registration Statement as may be necessary to
keep the Registration Statement effective for the applicable period set forth in
Section 2.5; cause the Prospectus to be supplemented by any required Prospectus
supplement; and as so supplemented to be filed pursuant to Rule 424 under the
Securities Act, and to comply fully with the applicable provisions of Rules 424
and 430, as applicable, under the Securities Act in a timely manner; and comply
with the provisions of the Securities Act with respect to the disposition of all
securities covered by such Registration Statement during the applicable period
in accordance with the intended method or methods of distribution by the Holders
set forth in such Registration Statement or supplement or the Prospectus;
2.8.2 Advise the Holders of Securities covered by such Registration
Statement and, if requested by such Holders, confirm such advice in writing, (i)
when the Prospectus or any Prospectus supplement or post-effective amendment has
been filed, and when the same has become effective, (ii) of any request by the
Commission for post-effective amendments to such Registration Statement or
post-effective amendments or supplements to the Prospectus or for additional
information relating thereto, (iii) of the issuance by the Commission of any
stop order suspending the effectiveness of any such Registration Statement under
the Securities Act or of the suspension by any state securities Commission of
the qualification of the securities for offering or sale in any jurisdiction, or
the initiation of any proceeding for any of the preceding purposes, and (iv) of
the existence of any fact or the happening of any event that makes any statement
of a material fact made in any such Registration Statement, the related
Prospectus, any amendment or supplement thereto, or any document incorporated by
reference therein untrue, or that requires the making of any additions to or
changes in any such Registration Statement or the related Prospectus to make the
statements therein not materially misleading. If at any time the Commission
shall issue any stop order suspending the effectiveness of such Registration
Statement, or any state securities commission or other regulatory authority
shall issue an order suspending the qualification or exemption from
qualification of the Securities under state
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securities or blue sky laws, the Company shall use its reasonable efforts to
obtain the withdrawal or lifting of such order at the earliest possible time;
2.8.3 Promptly furnish to each Holder whose Securities are covered by
the Registration Statement, and each underwriter, if any, without charge, at
least one conformed copy of any Registration Statement, as first filed with the
Commission, and of each amendment thereto, including all documents incorporated
by reference therein and all exhibits (including exhibits incorporated therein
by reference) and such other documents as such Holder may reasonably request;
2.8.4 Deliver to each Holder whose Securities are covered by the
Registration Statement, and each underwriter, if any, without charge, as many
copies of the Prospectus (including each preliminary Prospectus) and any
amendment or supplement thereto as such person reasonably may request;
2.8.5 Enter into such customary agreements and take all such other
reasonable action in connection therewith (including those reasonably requested
by the selling Holders or the underwriter(s), if any) required to expedite or
facilitate the disposition of such Securities pursuant to such Registration
Statement, including, but not limited to, dispositions pursuant to an
underwritten registration, and in such connection:
(i) make such representations and warranties to the selling
Holders and underwriter(s), if any, in form, substance and scope as
are customarily made by issuers in underwritten offerings (whether or
not sales of securities pursuant to the Registration Statement are to
be to an underwriter(s)) and confirm the same if and when requested;
(ii) obtain opinions of counsel to the Company addressed to
each selling Holder and underwriter, if any, covering the matters
customarily covered in opinions requested in underwritten offerings
(whether or not sales of securities pursuant to such Registration
Statement are to be made to an underwriter(s)) and dated the date of
effectiveness of the Registration Statement (and, in the case of any
underwritten sale of securities pursuant to the Registration
Statement, each closing date of sales to the underwriter(s) pursuant
thereto);
(iii) use its reasonable best efforts to obtain comfort
letters dated the date of effectiveness of the Registration Statement
(and, in the case of any underwritten sale of securities pursuant to
the Registration Statement, each closing date of sales to the
underwriter(s) pursuant thereto) from the independent certified public
accountants of the Company addressed to each selling Holder and
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underwriter, if any, such letters to be in customary form and covering
matters of the type customarily covered in comfort letters in
connection with underwritten offerings (whether or not sales of
securities pursuant to such Registration Statement are to be made to
an underwriter(s));
(iv) provide the indemnification provisions and procedures
of Section 4 hereof with respect to selling Holders and the
underwriter(s), if any; and
(v) deliver such documents and certificates as may be
reasonably requested by the selling Holders or the underwriter(s), if
any, and which are customarily delivered in underwritten offerings
(whether of not sales of securities pursuant to such Registration
Statement are to be made to an underwriter(s)), such documents and
certificates to be dated the date of effectiveness of the Registration
Statement.
The actions required by clauses (i) through (v) above shall be done at each
closing under such underwriting or similar agreement, as and to the extent
required thereunder; provided that the Company shall not be required to
participate in more than one closing in any 180-day period;
2.8.6 Prior to any public offering of securities, cooperate with the
selling Holders, the underwriter(s), if any, and their respective counsel in
connection with the registration and qualification of the Securities under the
securities or blue sky laws of such U.S. jurisdictions as the selling Holders or
underwriter(s), if any, may reasonably request in writing by the time any
Registration Statement is declared effective by the Commission, and do any and
all other acts or filings necessary or advisable to allow the disposition in
such U.S. jurisdictions of the Securities covered by the Registration Statement
and to file such consents to service of process or other documents needed to
effect such registration or qualification; provided, however, that the Company
shall not be required to register or qualify as a foreign corporation in any
jurisdiction where it is not then so qualified or as a dealer in securities in
any jurisdiction where it would not otherwise be required to register or qualify
but for this Section 2.8, or to take any action that would subject it to the
service of process in suits or to taxation, in any jurisdiction where it is not
then so subject;
2.8.7 In connection with any sale of Securities that will result in
such Securities no longer being Restricted Securities, cooperate with the
selling Holders and the underwriter(s), if any, to facilitate the timely
preparation and delivery of certificates representing Securities to be sold and
not bearing any restrictive legends; and enable such Securities to be in such
denominations and registered in such names as the Holders or the underwriter(s),
if any, may request at least two (2) business days prior to any sale of
Securities made by such underwriters;
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2.8.8 Use its reasonable best efforts to cause the disposition of the
Securities covered by the Registration Statement to be registered with or
approved by such other U.S. governmental agencies or authorities as may be
necessary to enable the Holder thereof or the underwriter(s), if any, to
consummate the disposition of such Securities, subject to the proviso contained
in Section 2.8.6;
2.8.9 If any fact or event contemplated by Section 2.8.2 shall exist
or have occurred, prepare a supplemental or post-effective amendment to any
Registration Statement or related Prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to the purchasers of Securities, the Prospectus will not contain an
untrue statement of a material fact or omit to state any material fact necessary
to make the statement therein not misleading;
2.8.10 Cooperate and assist in the performance of any due diligence
investigation by any underwriter (including any "qualified independent
underwriter") that is required to be retained in accordance with the rules and
regulations of the NASD, and use its reasonable best efforts to cause the
Registration Statement to become effective and approved by such U.S.
governmental agencies or authorities as may be necessary to permit the Holders
selling Securities to consummate the disposition of such Securities;
2.8.11 Otherwise use its reasonable best efforts to comply with all
applicable rules and regulations of the Commission, and make generally available
to its Holders with regard to the Registration Statement, as soon as
practicable, a consolidated earnings statement meeting the requirements of Rule
158 (which need not be audited) for the twelve-month period (i) commencing at
the end of any fiscal quarter in which Securities are sold to an underwriter in
a firm or best efforts underwritten offering or (ii) if not sold to an
underwriter in such an offering, beginning with the first month of the Company's
first fiscal quarter commencing after the effective date of any Registration
Statement;
2.8.12 Use its reasonable best efforts to list or have accepted for
quotation, not later than the effective date of the Registration Statement, all
Securities covered by the Registration Statement on the Nasdaq National Market
System or any other trading market on which the Common Stock is then admitted or
quoted for trading; and
2.8.13 Provide promptly to each Holder of Securities covered by the
Registration Statement upon request each document filed with the Commission
pursuant to the requirements of Section 12 and Section 14 of the Exchange Act.
2.9 Each Holder agrees by acquisition of a Restricted Security that, upon
receipt of any notice from the Company of the existence of any fact of the kind
described in Section 2.8 or the commencement of a Black-Out Period, such Holder
will forthwith discontinue disposition
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of Securities pursuant to the Registration Statement until such Holder's receipt
of the copies of the supplemented or amended Prospectus contemplated by Section
2.8.9, or until it is advised in writing (in accordance with the notice
provisions of Section 7.3) by the Company that the use of the Prospectus may be
resumed, and has received copies of any additional or supplemental filings that
are incorporated by reference in the Prospectus. If so directed by the Company,
each Holder will deliver to the Company all copies, other than permanent file
copies then in such Holder's possession, of the Prospectus covering such
Securities that was current at the time of receipt of such notice. If the
Company shall give any such notice, the time period regarding the effectiveness
of the Registration Statement set forth in Section 2.8 shall be extended by the
number of days during the period from and including the date of the giving of
such notice pursuant to Section 2.8.2 or the commencement of a Black-Out Period
until the date that the Company gives notice that the Registration Statement (as
it may then have been amended or supplemented) is again effective or usable.
2.10 Preparation; Reasonable Investigation. In connection with preparation
and filing of any Registration Statement, the Company will give the Holders of
Securities registered under such Registration Statement, their underwriter, if
any, and their respective counsel and accountants, the opportunity to
participate at their own expense in the preparation of the Registration
Statement, each Prospectus included therein or filed with the Commission, and
each amendment thereof or supplement thereto, and will give each of them access
to its books and records and such opportunities to discuss the business,
finances and accounts of the Company and its subsidiaries with its officers,
directors and the independent public accountants who have certified its
financial statements as shall be reasonably necessary, in the opinion of such
Holders and such underwriter's respective counsel, to conduct a reasonable
investigation within the meaning of the Securities Act.
2.11 Certain Rights of Holders. Except as otherwise required by applicable
law or regulation, the Company will not file any Registration Statement under
the Securities Act that refers to any Holder of Securities by name or otherwise
without the prior written approval of such Holder, which may not be unreasonably
withheld.
3. EXPENSES.
3.1 Registration Expenses. All expenses incidental to the Company's
performance of or compliance with this Agreement will be borne by the Company,
regardless of whether a Registration Statement becomes effective, including
without limitation: (i) all registration and filing fees and expenses (including
filings made with the NASD and Nasdaq and counsel fees in connection therewith);
(ii) all fees and expenses of compliance with federal securities and state blue
sky or securities laws (including all reasonable fees and expenses of one
counsel to the underwriter(s) in any underwriting) in connection with compliance
with state blue sky or securities laws; (iii) all expenses of printing,
messenger and delivery services and telephone calls; (iv) all fees and
disbursements of counsel for the Company; and (v) all fees and
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disbursements of independent certified public accountants of the Company
(including the expenses of any special audit and comfort letters required by or
incident to such performance), but excluding from this Section, fees and
expenses of any underwriters or counsel to the underwriter(s), if any, unless
otherwise set forth herein.
3.2 Reimbursement. In addition, in connection with the filing of the
Registration Statement required to be filed by this Agreement, the Company will
reimburse the Holders of the Securities being registered pursuant to any
Registration Statement, as a group, for the reasonable fees and disbursements of
not more than one counsel to review such Registration Statement.
3.3 Other Costs. Notwithstanding the foregoing, the Company will not be
responsible for any underwriting discounts, commissions or fees attributable to
the sale of Securities or any legal fees or disbursements (other than any such
fees or disbursements relating to blue sky compliance or otherwise as set forth
under Section 3.1) incurred by any underwriter(s) in any underwritten offering
if the underwriter(s) participate in such underwritten offering at the request
of the Holders, or any transfer taxes that may be imposed in connection with a
sale or transfer of Securities. The Company may withdraw a Form S-3 at the
request of the Holders of two-thirds of the Securities covered thereby, and in
such case shall not be required to pay any expenses of any registration
proceedings begun pursuant to this Agreement, and Holders participating in the
withdrawal request shall bear such expenses.
3.4 Internal Expenses. The Company shall, in any event, bear its internal
expenses (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expenses of
any annual audit and the fees and expenses of any person, including special
experts, retained by the Company.
4. INDEMNIFICATION; CONTRIBUTION.
4.1 The Company agrees to indemnify and hold harmless (i) each Holder of
Securities covered by the Registration Statement, (ii) each other person who
participates as an underwriter in the offering or sale of Securities pursuant to
the Registration Statement, (iii) each person, if any who controls (within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act)
any such Holder or underwriter (any of the persons referred to in this clause
(iii) being hereinafter referred to as a "Controlling Person"), and (iv) the
respective officers, directors, partners, employees, representatives and agents
of any such Holder or underwriter or any Controlling Person (any person referred
to in clause (i), (ii), (iii) or (iv) may hereinafter be referred to as an
"Indemnified Person"), from and against any and all losses, claims, damages,
liabilities, judgments or expenses (including, without limitation, reasonable
attorneys' fees and disbursements), joint or several (or actions or proceedings,
whether commenced or threatened, in respect thereof) (collectively, "Claims"),
to which such Indemnified Person may become subject under either Section 15 of
the Securities Act or Section 20 of the Exchange Act, insofar
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as such Claims arise out of or are based upon or caused by any untrue statement
or alleged untrue statement of a material fact contained in any Registration
Statement or Prospectus (or any amendment or supplement thereto), or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
any violation by the Company of the Securities Act or any state securities law,
or any rule or regulation promulgated under the Securities Act or any state
securities law, or any other law applicable to the Company relating to any such
registration or qualification, except insofar as such losses, claims, damages,
liabilities, judgments or expenses (including, without limitation, reasonable
attorneys' fees and disbursements) of any such Indemnified Person: (x) are
caused by any such untrue statement or omission or alleged untrue statement or
omission that is based upon information relating to such Indemnified Person
furnished in writing to the Company by or on behalf of any of such Indemnified
Person expressly for use therein; (y) with respect to the preliminary
Prospectus, result from the fact that such Holder sold securities or Restricted
Securities to a person to whom there was not sent or given, at or prior to the
written confirmation of such sale, a copy of the Prospectus, as amended or
supplemented, if the Company shall have previously furnished copies thereof to
such Holder in accordance with this Agreement and the Prospectus, as amended or
supplemented; or (z) are a result of the use by an Indemnified Person of any
Prospectus when, upon receipt of a Black-Out Notice or a notice from the Company
of the existence of any fact of the kind described in Section 2.8.2(iv), the
Indemnified Person or the related Holder was not permitted to do so. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of any Indemnified Person and shall survive the transfer of
such Securities by such Holder.
4.2 If any action shall be brought or asserted against any Indemnified
Person with respect to which indemnity may be sought against the Company, such
Indemnified Person shall promptly notify the Company and the Company shall
assume the defense thereof. Such Indemnified Person shall have the right to
employ separate counsel in any such action and to participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
the Indemnified Person unless (i) the employment of such counsel shall have been
specifically authorized in writing by the Company, (ii) the Company shall have
failed to assume the defense and employ counsel, or (iii) the named parties to
any such action include both the Indemnified Person and the Company and the
Indemnified Person shall have been advised in writing by its counsel that there
may be one or more legal defenses available to it that are different from or
additional to those available to the Company (in which case the Company shall
not have the right to assume the defense of such action on behalf of the
Indemnified Person), it being understood, however, that the Company shall not,
in connection with such action or similar or related actions or proceedings
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys (in
addition to any local counsel) at any time for all the Indemnified Persons,
which firm shall be (a) designated by such Indemnified Persons and (b)
reasonably satisfactory to the Company. The Company shall not be liable for any
settlement of any such action or proceeding effected without the Company's prior
written consent, which consent shall not be withheld unreasonably, and the
Company agrees to indemnify and hold harmless any Indemnified Person from and
against any loss, claim, damage, liability, judgment or expense by reason of any
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settlement of any action effected with the written consent of the Company. The
Company shall not, without the prior written consent of each Indemnified Person,
settle or compromise or consent to the entry of judgment on or otherwise seek to
terminate any pending or threatened action, claim, litigation or proceeding in
respect of which indemnification or contribution may be sought hereunder
(whether or not any Indemnified Person is a party thereto), unless such
settlement, compromise, consent or termination includes an unconditional release
of each Indemnified Person from all liability arising out of such action, claim,
litigation or proceeding.
4.3 Each Holder of Securities covered by any Registration Statement agrees,
severally and not jointly, to indemnify and hold harmless the Company and its
directors, officers and any person controlling (within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act) the Company, its
subsidiaries and their respective officers, directors, partners, employees,
representatives and agents of each such person, to the same extent as the
foregoing indemnity from the Company to each of the Indemnified Persons, but
only with respect to actions based on Claims referred to in clauses (x), (y) or
(z) of Section 4.1), and subject to the limitation that no Holder's liability
for such indemnification shall be greater than an amount equal to the total
original purchase price of the Preferred Stock purchased by such Holder pursuant
to the Securities Purchase Agreement, as set forth on Exhibit A attached hereto.
If any action or proceeding shall be brought against the Company, any of its
subsidiaries or any of their respective directors or officers or any such
Controlling Person in respect of which indemnity may be sought against a Holder
of Securities covered by any Registration Statement, such Holder shall have the
rights and duties given the Company in Section 4.1 (except that the Holder may
but shall not be required to assume the defense thereof), and the Company or
such subsidiary, its directors or officers or such Controlling Person shall have
the rights and duties given to each Holder by Section 4.1.
5. LIQUIDATED DAMAGES
Each of the Company and the Purchasers (on behalf of themselves and each
subsequent Holder of Restricted Securities) agrees that each Holder of
Restricted Securities will suffer damages if a Form S-3 is not filed with and
declared effective by the Commission and maintained in the manner and within the
time periods contemplated by Section 2.3 hereof and it would not be feasible to
ascertain the extent of such damages with precision. Accordingly, subject to
adjustment for any Blackout Period, if (i) a Form S-3 is not filed with the
Commission and declared effective by the applicable time periods in Section 2.3,
or (ii) a Form S-3 is filed and declared effective but shall thereafter cease to
be effective (without being succeeded immediately by an additional Form S-3
filed and declared effective) for a period of time that shall exceed 90 days in
the aggregate per year (defined as a period of 365 days commencing on the date
the Form S-3 is declared effective) (each such event referred to in clauses (i)
and (ii), a "Registration Default"), except as a result of extraordinary
circumstances beyond the Company's control, then the Company shall pay as
liquidated damages to each Holder of Restricted Securities who has complied with
such Holder's obligations hereunder an amount equal to 2% per month of the
liquidation preference of the Preferred Stock in cash (subject to
15
<PAGE>
adjustment in the event of stock splits, stock recombinations, stock dividends
and the like), ratably according to the number of shares of Preferred Stock held
by such Holder or previously converted to Securities held by such Holder,
immediately following the occurrence of such Registration Default and continuing
until such Registration Default is cured.
6. RULE 144A
The Company hereby agrees with each Holder of Restricted Securities,
beginning 270 days from the Closing and for so long as a Registration Statement
is not effective and any of the Restricted Securities remain outstanding and
continue to be "Restricted Securities" within the meaning of Rule 144 under the
Securities Act, and during any period in which the Company is not subject to
Section 13 or 15(d) of the Exchange Act, to make available to the Holders of
Restricted Securities the information required by Rule 144A(d)(4) under the Act
in order to permit resales of such Restricted Securities pursuant to Rule 144A.
7. MISCELLANEOUS
7.1 Entire Agreement. This Agreement, together with the Securities Purchase
Agreement (including the Exhibits and Schedules thereto) and Warrants,
constitutes the entire agreement between the parties with respect to the subject
matter hereof and supersedes all prior agreements and understandings, both oral
and written, between the parties with respect to the subject matter hereof.
7.2 Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the successors and assigns of each of the parties, including
without limitation, subsequent Holders of Restricted Securities; provided,
however, that this Agreement shall not inure to the benefit of or be binding
upon a successor or assign of a Holder unless and then only to the extent such
successor or assign acquired Restricted Securities from such Holder at a time
when such Holder could not transfer such Restricted Securities pursuant to any
Registration Statement or pursuant to Rule 144 under the Securities Act as
contemplated by clause (ii) of the definition of Restricted Securities.
7.3 Notices. All notices and other communications given or made pursuant
hereto, unless otherwise specified, shall be in writing and shall be deemed to
have been duly given or made if delivered personally, by confirmed facsimile
transmission, or by overnight courier or sent by registered or certified mail
(postage prepaid, return receipt requested) to the parties at the facsimile
number, if any, or address set forth below or at such other numbers or addresses
as shall be furnished by the parties by like notice. Notices sent by facsimile
shall be effective when receipt is confirmed, notices delivered personally or by
overnight courier shall be effective upon receipt and notices sent by registered
or certified mail shall be effective three days after mailing:
16
<PAGE>
If to a Holder: To such Holder at the address set forth in Exhibit A. In
addition, copies of all such notices or other communications
shall be concurrently delivered by the person giving the
same to each person who has been identified to the Company
by such Holder as a person who is to receive copies of such
notice.
If to the Company: Sheryl A. Symonds
Vice President Administration and General Counsel
Pacific Aerospace & Electronics, Inc.
24000 - 35th Ave. SE, Suite 200
Bothell, WA 98021
Facsimile: (425) 354-1632
with a copy to: Eugenie D. Mansfield
Stoel Rives LLP
One Union Square
600 University Street, Suite 3600
Seattle, Washington 98101-3197
Fax: (206) 386-7500
7.4 Headings. The headings contained in this Agreement are for convenience
only and shall not affect the meaning or interpretation of this Agreement.
7.5 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to be one and the same instrument.
7.6 Applicable law. This Agreement shall be governed by and construed in
accordance with the internal laws of the state of Washington, without giving
effect to principles of choice of law.
7.7 Rights and Preferences. The Preferred Stock and the Securities are
subject to the terms and conditions of the Rights and Preferences which shall
control if there is any conflict between the Rights and Preferences and this
Agreement. The Holders acknowledge receiving a copy the Rights and Preferences.
7.8 Specific Enforcement. Each party hereto acknowledges that the remedies
at law of the other parties for a breach or threatened breach of this Agreement
would be inadequate,
17
<PAGE>
and, in recognition of this fact, any party to this Agreement, without posting
any bond, and in addition to all other remedies that may be available, shall be
entitled to obtain equitable relief in the form of specific performance, a
temporary restraining order, a temporary or permanent injunction or any other
equitable remedy that may then be available.
7.9 Amendment and Waivers. The provisions of this Agreement may not be
amended, modified or supplemented, and waivers or consents to or departures from
the provisions hereof may not be given unless the Company has obtained the
written consent of Holders of a majority in interest of the Restricted
Securities.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
THE COMPANY:
PACIFIC AEROSPACE & ELECTRONICS, INC.
By: /s/ DONALD A. WRIGHT
-----------------------------------
Donald A. Wright
President and Chief Executive Officer
18
<PAGE>
THE PURCHASERS:
SILVER OAK CAPITAL, L.L.C., AGR HALIFAX FUND, LTD.
as Nominee for the following entities:
AG Arb Partners, L.P.
AG Super Fund, L.P.
AG Long Term Super Fund, L.P.
Nutmeg Partners, L.P.
Northern Trust Company, as Master By /s/ JEFFREY M. SOLOMON
Trustee of the Teachers Retirement ---------------------------------
System of the State of Illinois Name: Jeffrey M. Solomon, Managing
PHS Bay Colony Fund, L.P. Officer of AG Ramius Partners, LLC
PHS Patriot Fund, L.P. Its: Investment Advisor
AG MM, L.P.
Medici Partners, L.P.
Triarc Companies, Inc.
Ramius, L.P.
Baldwin Enterprises, Inc.
GAM Arbitrage Investments, Inc.
AG Super Fund International Partners,
L.P.
Ramius Fund, Ltd.
Leonardo, L.P.
By: /s/ MICHAEL L. GORDON
-----------------------------------
Michael L. Gordon, Manager
19
EXHIBIT 4.9
THIS WARRANT HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933
AND IS NOT TRANSFERABLE
EXCEPT AS PROVIDED HEREIN
PACIFIC AEROSPACE & ELECTRONICS, INC.
(successor in interest to PCT Holdings, Inc.)
PURCHASE WARRANT
Issued to:
PAULSON INVESTMENT COMPANY, INC.
Exercisable to Purchase
155,700 Units
of
PACIFIC AEROSPACE & ELECTRONICS, INC.
Void after July 15, 2001
<PAGE>
This is to certify that, for value received and subject to the terms and
conditions set forth below, the Warrantholder (hereinafter defined) is entitled
to purchase, and the Company promises and agrees to sell and issue to the
Warrantholder, at any time after the date of this Warrant, and on or before July
15, 2001, up to 155,700 Units (hereinafter defined) at the Exercise Price
(hereinafter defined).
This Warrant Certificate is issued subject to the following terms and
conditions:
1. Definitions of Certain Terms. Except as may be otherwise clearly
required by the context, the following terms have the following meanings:
(a) "Act" means the Securities Act of 1933, as amended.
(b) "Closing Date" means the date on which the Offering is closed.
(c) "Commission" means the Securities and Exchange Commission.
(d) "Common Stock" means the common stock, $0.001 par value, of the
Company.
(e) "Company" means Pacific Aerospace & Electronics, Inc., a
Washington corporation (successor in interest to PCT Holdings, Inc., a Nevada
corporation), and any successor corporation.
(f) "Company's Expenses" means any and all expenses payable by the
Company or the Warrantholder in connection with an offering described in Section
6 hereof, except Warrantholder's Expenses.
(g) "Effective Date" means the date on which the Registration
Statement is declared effective by the Commission.
(h) "Exercise Price" means the price at which the Warrantholder may
purchase one complete Unit (or Securities obtainable in lieu of one complete
Unit) upon exercise of Warrants as determined from time to time pursuant to the
provisions hereof. The initial Exercise Price is $3.75 per Unit. If a Warrant is
exercised for a component of a Unit or Units, then the price payable in
connection with such exercise shall be determined by allocating $0.001 to the
Unit Warrant and the balance of the Exercise Price to the share of Common Stock,
or, in each case, to any securities obtainable in addition to or in lieu of such
share of Unit Warrant or Common Stock by virtue of the application of Section 3
of this Warrant.
-1-
<PAGE>
(i) "Offering" means the public offering of Units made pursuant to the
Registration Statement.
(j) "Participating Underwriter" means any underwriter participating in
the sale of the Securities pursuant to a registration under Section 6 of this
Warrant Certificate.
(k) "Registration Statement" means the Company's registration
statement on Form SB-2 (Registration No. 333-5011) as amended on the Closing
Date.
(l) "Rules and Regulations" means the rules and regulations of the
Commission adopted under the Act.
(m) "Securities" means the securities obtained or obtainable upon
exercise of the Warrant or securities obtained or obtainable upon exercise,
exchange, or conversion of such securities.
(n) "Unit" means, as the case may require, either one of the Units
offered to the public pursuant to the Registration Statement or one of the Units
obtainable on exercise of a Warrant.
(o) "Unit Warrant" means a Common Stock purchase warrant included as a
component of a Unit.
(p) "Warrant Certificate" means a certificate evidencing the Warrant.
(q) "Warrantholder" means a record holder of the Warrant or
Securities. The initial Warrantholder is Paulson Investment Company, Inc.
(r) "Warrantholder's Expenses" means the sum of (i) the aggregate
amount of cash payments made to an underwriter, underwriting syndicate, or agent
in connection with an offering described in Section 6 hereof multiplied by a
fraction the numerator of which is the aggregate sales price of the Securities
sold by such underwriter, underwriting syndicate, or agent in such offering and
the denominator of which is the aggregate sales price of all of the securities
sold by such underwriter, underwriting syndicate, or agent in such offering and
(ii) all out-of-pocket expenses of the Warrantholder, except for the fees and
disbursements of one firm retained as legal counsel for the Warrantholders that
will be paid by the Company.
(s) "Warrant" means the warrant evidenced by this certificate, any
similar certificate issued in connection with the Offering, or any certificate
obtained upon transfer or partial exercise of the Warrant evidenced by any such
certificate.
-2-
<PAGE>
2. Exercise of Warrants. All or any part of the Warrant may be exercised
commencing on the first anniversary of the Effective Date and ending at 5:00
p.m. Pacific Time on the fifth anniversary of the Effective Date by surrendering
this Warrant Certificate, together with appropriate instructions, duly executed
by the Warrantholder or by its duly authorized attorney, at the office of the
Company, 434 Olds Station Road, Wenatchee, Washington 98801, attention:
President, or at such other office or agency as the Company may designate. Upon
receipt of notice of exercise, the Company shall immediately instruct its
transfer agent to prepare certificates for the Securities to be received by the
Warrantholder upon completion of the Warrant exercise. When such certificates
are prepared, the Company shall notify the Warrantholder and deliver such
certificates to the Warrantholder or as per the Warrantholder's instructions
immediately upon payment in full by the Warrantholder, in lawful money of the
United States, of the Exercise Price payable with respect to the Securities
being purchased. If the Warrantholder shall represent and warrant that all
applicable registration and prospectus delivery requirements for their sale have
been complied with upon sale of the Securities received upon exercise of the
Warrant, such certificates shall not bear a legend with respect to the
Securities Act of 1933.
If fewer than all the Securities purchasable under the Warrant are
purchased, the Company will, upon such partial exercise, execute and deliver to
the Warrantholder a new Warrant Certificate (dated the date hereof), in form and
tenor similar to this Warrant Certificate, evidencing that portion of the
Warrant not exercised. The Securities to be obtained on exercise of the Warrant
will be deemed to have been issued, and any person exercising the Warrants will
be deemed to have become a holder of record of those Securities, as of the date
of the payment of the Exercise Price.
3. Adjustments in Certain Events. The number, class, and price of
Securities for which this Warrant Certificate may be exercised are subject to
adjustment from time to time upon the happening of certain events as follows:
(a) If the outstanding shares of the Company's Common Stock are
divided into a greater number of shares or a dividend in stock is paid on the
Common Stock, the number of shares of Common Stock for which the Warrant is then
exercisable will be proportionately increased and the Exercise Price will be
proportionately reduced; and, conversely, if the outstanding shares of Common
Stock are combined into a smaller number of shares of Common Stock, the number
of shares of Common Stock for which the Warrant is then exercisable will be
proportionately reduced and the Exercise Price will be proportionately
increased. The increases and reductions provided for in this subsection 3(a)
will be made with the intent and, as nearly as practicable, the effect that
neither the percentage of the total equity of the Company obtainable on exercise
of the Warrants nor the price payable for such percentage upon such exercise
will be affected by any event described in this subsection 3(a). Upon the
occurrence of any such event, the number of Unit Warrants for which the Warrant
is then exercisable shall
-3-
<PAGE>
not be adjusted, if such event results in an adjustment of the number of shares
purchasable or the exercise price (or both) under the Unit Warrants.
(b) In case of any change in the Common Stock through merger,
consolidation, reclassification, reorganization, partial or complete
liquidation, purchase of substantially all the assets of the Company, or other
change in the capital structure of the Company, then, as a condition of such
change, lawful and adequate provision will be made so that the holder of this
Warrant Certificate will have the right thereafter to receive upon the exercise
of the Warrant the kind and amount of shares of stock or other securities or
property to which he would have been entitled if, immediately prior to such
event, he had held the number of shares of Common Stock obtainable upon the
exercise of the Warrant. In any such case, appropriate adjustment will be made
in the application of the provisions set forth herein with respect to the rights
and interest thereafter of the Warrantholder, to the end that the provisions set
forth herein will thereafter be applicable, as nearly as reasonably may be, in
relation to any shares of stock or other property thereafter deliverable upon
the exercise of the Warrant. The Company will not permit any change in its
capital structure to occur unless the issuer of the shares of stock or other
securities to be received by the holder of this Warrant Certificate, if not the
Company, agrees to be bound by and comply with the provisions of this Warrant
Certificate. Upon the occurrence of any such event, the number of Unit Warrants
for which the Warrant is then exercisable shall not be adjusted, if such event
results in an adjustment of the number of shares purchasable or the exercise
price (or both) under the Unit Warrants.
(c) When any adjustment is required to be made in the number of shares
of Common Stock, other securities, or the property purchasable upon exercise of
the Warrant, the Company will promptly determine the new number of such shares
or other securities or property purchasable upon exercise of the Warrant and (i)
prepare and retain on file a statement describing in reasonable detail the
method used in arriving at the new number of such shares or other securities or
property purchasable upon exercise of the Warrant and (ii) cause a copy of such
statement to be mailed to the Warrantholder within thirty (30) days after the
date of the event giving rise to the adjustment.
(d) No fractional shares of Common Stock and no fractional Units
Warrants or other securities will be issued in connection with the exercise of
the Warrant, but the Company will pay, in lieu of fractional shares or
fractional Unit Warrants, a cash payment therefor on the basis of the mean
between the bid and asked prices of the Common Stock, or Unit Warrants, as the
case may be, in the over-the-counter market or the closing price on a national
securities exchange on the day immediately prior to exercise.
(e) If securities of the Company or securities of any subsidiary of
the Company are distributed pro rata to holders of Common Stock, such number of
securities will be distributed to the Warrantholder or his assignee upon
exercise of his rights hereunder as such Warrantholder or assignee would have
been entitled to if this Warrant Certificate had been
-4-
<PAGE>
exercised prior to the record date for such distribution. The provisions with
respect to adjustment of the Common Stock provided in this Section 3 will also
apply to the securities to which the Warrantholder or his assignee is entitled
under this subsection 3(e).
(f) Notwithstanding anything herein to the contrary, there will be no
adjustment made hereunder on account of the sale of the Units or other
Securities purchasable upon exercise of the Warrant.
4. Reservation of Securities. The Company agrees that the number of shares
of Common Stock, Unit Warrants or other Securities sufficient to provide for the
exercise of the Warrant upon the basis set forth above will at all times during
the term of the Warrant be reserved for exercise.
5. Validity of Securities. All Securities delivered upon the exercise of
the Warrant will be duly and validly issued in accordance with their terms, and
the Company will pay all documentary and transfer taxes, if any, in respect of
the original issuance thereof upon exercise of the Warrant.
6. Registration of Securities Issuable on Exercise of Warrant Certificate.
(a) The Company will register the Securities with the Commission
pursuant to the Act so as to allow the unrestricted sale of the Securities to
the public from time to time commencing on the first anniversary of the
Effective Date and ending at 5:00 p.m. Pacific Time on the fifth anniversary of
the Effective Date (the "Registration Period"). The Company will also file such
applications and other documents necessary to permit the sale of the Securities
to the public during the Registration Period in those states in which the Units
were qualified for sale in the Offering or such other states as the Company and
the Warrantholder agree to. In order to comply with the provisions of this
Section 6(a), the Company is not required to file more than one registration
statement at its expense. The Company will register the Securities on Form S-3
if the Company is eligible to use such form. No registration right of any kind,
"piggyback" or otherwise, will last longer than five years from the Closing
Date.
(b) The Company will pay all of the Company's Expenses and each
Warrantholder will pay its pro rata share of the Warrantholder's Expenses
relating to the registration, offer, and sale of the Securities.
(c) Except as specifically provided herein, the manner and conduct of
the registration, including the contents of the registration, will be entirely
in the control and at the discretion of the Company. The Company will file such
post-effective amendments and supplements as may be necessary to maintain the
currency of the registration statement during the period of its use. In
addition, if the Warrantholder participating in the registration is advised by
counsel that the registration statement, in their opinion, is deficient in any
material respect,
-5-
<PAGE>
the Company will use its best efforts to cause the registration statement to be
amended to eliminate the concerns raised.
(d) The Company will furnish to the Warrantholder the number of copies
of a prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as it may reasonably request
in order to facilitate the disposition of Securities owned by it.
(e) The Company will, at the request of Warrantholders holding at
least 50 percent of the then outstanding Warrants, (i) furnish an opinion of the
counsel representing the Company for the purposes of the registration pursuant
to this Section 6, addressed to the Warrantholders and any Participating
Underwriter, (ii) furnish an appropriate letter from the independent public
accountants of the Company, addressed to the Warrantholders and any
Participating Underwriter, and (iii) make representations and warranties to the
Warrantholders and any Participating Underwriter. A request pursuant to this
subsection (e) may be made on three occasions. The documents required to be
delivered pursuant to this subsection (e) will be dated within ten days of the
request and will be, in form and substance, equivalent to similar documents
furnished to the underwriters in connection with the Offering, with such changes
as may be appropriate in light of changed circumstances.
7. Indemnification in Connection with Registration.
(a) If any of the Securities are registered, the Company will
indemnify and hold harmless each selling Warrantholder, any person who controls
any selling Warrantholder within the meaning of the Act, and any Participating
Underwriter against any losses, claims, damages, or liabilities, joint or
several, to which any Warrantholder, controlling person, or Participating
Underwriter may be subject under the Act or otherwise; and it will reimburse
each Warrantholder, each controlling person, and each Participating Underwriter
for any legal or other expenses reasonably incurred by the Warrantholder,
controlling person, or Participating Underwriter in connection with
investigating or defending any such loss, claim, damage, liability, or action,
insofar as such losses, claims, damages, or liabilities, joint or several (or
actions in respect thereof), arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained, on the effective
date thereof, in any such registration statement or any preliminary prospectus
or final prospectus, or any amendment or supplement thereto, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; provided, however, that the Company will not be liable in any case
to the extent that any loss, claim, damage, or liability arises out of or is
based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in any registration statement, preliminary prospectus,
final prospectus, or any amendment or supplement thereto, in reliance upon and
in conformity with written information furnished by a Warrantholder for use in
the preparation thereof. The indemnity agreement contained in this subparagraph
(a) will not apply
-6-
<PAGE>
to amounts paid to any claimant in settlement of any suit or claim unless such
payment is first approved by the Company, such approval not to be unreasonably
withheld.
(b) Each selling Warrantholder, as a condition of the Company's
registration obligation, will indemnify and hold harmless the Company, each of
its directors, each of its officers who have signed any registration statement
or other filing or any amendment or supplement thereto, and any person who
controls the Company within the meaning of the Act, against any losses, claims,
damages, or liabilities to which the Company or any such director, officer, or
controlling person may become subject under the Act or otherwise, and will
reimburse any legal or other expenses reasonably incurred by the Company or any
such director, officer, or controlling person in connection with investigating
or defending any such loss, claim, damage, liability, or action, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any untrue or alleged untrue statement of any material
fact contained in said registration statement, any preliminary or final
prospectus, or other filing, or any amendment or supplement thereto, or arise
out of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, but only to the extent that such untrue statement or
alleged untrue statement or omission or alleged omission was made in said
registration statement, preliminary or final prospectus, or other filing, or
amendment or supplement, in reliance upon and in conformity with written
information furnished by such Warrantholder for use in the preparation thereof;
provided, however, that the indemnity agreement contained in this subparagraph
(b) will not apply to amounts paid to any claimant in settlement of any suit or
claim unless such payment is first approved by the Warrantholder, such approval
not to be unreasonably withheld.
(c) Promptly after receipt by an indemnified party under subparagraphs
(a) or (b) above of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against an indemnifying
party, notify the indemnifying party of the commencement thereof; but the
omission to notify the indemnifying party will not relieve it from any liability
that it may have to any indemnified party otherwise than under subparagraphs (a)
and (b).
(d) If any such action is brought against any indemnified party and it
notifies an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel satisfactory to such indemnified party; and after
notice from the indemnifying party to such indemnified party of its election to
assume the defense thereof, the indemnifying party will not be liable to such
indemnified party for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation.
-7-
<PAGE>
8. Restrictions on Transfer. This Warrant Certificate and the Warrant may
not be sold, transferred, assigned or hypothecated for a one-year period after
the Effective Date except to underwriters of the Offering or to individuals who
are either a partner or an officer of such an underwriter or by will or by
operation of law. The Warrant may be divided or combined, upon request to the
Company by the Warrantholder, into a certificate or certificates evidencing the
same aggregate number of Warrants.
9. No Rights as a Shareholder. Except as otherwise provided herein, the
Warrantholder will not, by virtue of ownership of the Warrant, be entitled to
any rights of a shareholder of the Company but will, upon written request to the
Company, be entitled to receive such quarterly or annual reports as the Company
distributes to its shareholders.
10. Notice. Any notices required or permitted to be given hereunder will be
in writing and may be served personally or by mail; and if served will be
addressed as follows:
If to the Company:
434 Olds Station Road
Wenatchee, Washington 98801
Attn: President
If to the Warrantholder:
at the address furnished by the
Warrantholder to the Company for the purpose
of notice.
Any notice so given by mail will be deemed effectively given 48 hours after
mailing when deposited in the United States mail, registered or certified mail,
return receipt requested, postage prepaid and addressed as specified above. Any
party may by written notice to the other specify a different address for notice
purposes.
11. Applicable Law. This Warrant Certificate will be governed by and
construed in accordance with the laws of the State of Oregon, without reference
to conflict of laws principles thereunder. All disputes relating to this Warrant
Certificate shall be tried before the courts of Oregon located in Multnomah
County, Oregon to the exclusion of all other courts that might have
jurisdiction.
-8-
<PAGE>
Dated as of September 30, 1997.
PACIFIC AEROSPACE & ELECTRONICS, INC.
By: /s/ DONALD A. WRIGHT
-----------------------------------
Donald A. Wright
Its: President
Agreed and Accepted as of September 30, 1997.
PAULSON INVESTMENT COMPANY, INC.
By: /s/ CHESTER PAULSON
-----------------------------------
Chester Paulson
Its: President
-9-
EXHIBIT 4.10
THIS WARRANT HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933
AND IS NOT TRANSFERABLE
EXCEPT AS PROVIDED HEREIN
PACIFIC AEROSPACE & ELECTRONICS, INC.
(successor in interest to PCT Holdings, Inc.)
PURCHASE WARRANT
Issued to:
CHESTER L. PAULSON
Exercisable to Purchase
16,200 Units
of
PACIFIC AEROSPACE & ELECTRONICS, INC.
Void after July 15, 2001
<PAGE>
This is to certify that, for value received and subject to the terms and
conditions set forth below, the Warrantholder (hereinafter defined) is entitled
to purchase, and the Company promises and agrees to sell and issue to the
Warrantholder, at any time after the date of this Warrant, and on or before July
15, 2001, up to 16,200 Units (hereinafter defined) at the Exercise Price
(hereinafter defined).
This Warrant Certificate is issued subject to the following terms and
conditions:
1. Definitions of Certain Terms. Except as may be otherwise clearly
required by the context, the following terms have the following meanings:
(a) "Act" means the Securities Act of 1933, as amended.
(b) "Closing Date" means the date on which the Offering is closed.
(c) "Commission" means the Securities and Exchange Commission.
(d) "Common Stock" means the common stock, $0.001 par value, of the
Company.
(e) "Company" means Pacific Aerospace & Electronics, Inc., a
Washington corporation (successor in interest to PCT Holdings, Inc., a Nevada
corporation), and any successor corporation.
(f) "Company's Expenses" means any and all expenses payable by the
Company or the Warrantholder in connection with an offering described in Section
6 hereof, except Warrantholder's Expenses.
(g) "Effective Date" means the date on which the Registration
Statement is declared effective by the Commission.
(h) "Exercise Price" means the price at which the Warrantholder may
purchase one complete Unit (or Securities obtainable in lieu of one complete
Unit) upon exercise of Warrants as determined from time to time pursuant to the
provisions hereof. The initial Exercise Price is $3.75 per Unit. If a Warrant is
exercised for a component of a Unit or Units, then the price payable in
connection with such exercise shall be determined by allocating $0.001 to the
Unit Warrant and the balance of the Exercise Price to the share of Common Stock,
or, in each case, to any securities obtainable in addition to or in lieu of such
share of Unit Warrant or Common Stock by virtue of the application of Section 3
of this Warrant.
-1-
<PAGE>
(i) "Offering" means the public offering of Units made pursuant to the
Registration Statement.
(j) "Participating Underwriter" means any underwriter participating in
the sale of the Securities pursuant to a registration under Section 6 of this
Warrant Certificate.
(k) "Registration Statement" means the Company's registration
statement on Form SB-2 (Registration No. 333-5011) as amended on the Closing
Date.
(l) "Rules and Regulations" means the rules and regulations of the
Commission adopted under the Act.
(m) "Securities" means the securities obtained or obtainable upon
exercise of the Warrant or securities obtained or obtainable upon exercise,
exchange, or conversion of such securities.
(n) "Unit" means, as the case may require, either one of the Units
offered to the public pursuant to the Registration Statement or one of the Units
obtainable on exercise of a Warrant.
(o) "Unit Warrant" means a Common Stock purchase warrant included as a
component of a Unit.
(p) "Warrant Certificate" means a certificate evidencing the Warrant.
(q) "Warrantholder" means a record holder of the Warrant or
Securities. The initial Warrantholder is Paulson Investment Company, Inc.
(r) "Warrantholder's Expenses" means the sum of (i) the aggregate
amount of cash payments made to an underwriter, underwriting syndicate, or agent
in connection with an offering described in Section 6 hereof multiplied by a
fraction the numerator of which is the aggregate sales price of the Securities
sold by such underwriter, underwriting syndicate, or agent in such offering and
the denominator of which is the aggregate sales price of all of the securities
sold by such underwriter, underwriting syndicate, or agent in such offering and
(ii) all out-of-pocket expenses of the Warrantholder, except for the fees and
disbursements of one firm retained as legal counsel for the Warrantholders that
will be paid by the Company.
(s) "Warrant" means the warrant evidenced by this certificate, any
similar certificate issued in connection with the Offering, or any certificate
obtained upon transfer or partial exercise of the Warrant evidenced by any such
certificate.
-2-
<PAGE>
2. Exercise of Warrants. All or any part of the Warrant may be exercised
commencing on the first anniversary of the Effective Date and ending at 5:00
p.m. Pacific Time on the fifth anniversary of the Effective Date by surrendering
this Warrant Certificate, together with appropriate instructions, duly executed
by the Warrantholder or by its duly authorized attorney, at the office of the
Company, 434 Olds Station Road, Wenatchee, Washington 98801, attention:
President, or at such other office or agency as the Company may designate. Upon
receipt of notice of exercise, the Company shall immediately instruct its
transfer agent to prepare certificates for the Securities to be received by the
Warrantholder upon completion of the Warrant exercise. When such certificates
are prepared, the Company shall notify the Warrantholder and deliver such
certificates to the Warrantholder or as per the Warrantholder's instructions
immediately upon payment in full by the Warrantholder, in lawful money of the
United States, of the Exercise Price payable with respect to the Securities
being purchased. If the Warrantholder shall represent and warrant that all
applicable registration and prospectus delivery requirements for their sale have
been complied with upon sale of the Securities received upon exercise of the
Warrant, such certificates shall not bear a legend with respect to the
Securities Act of 1933.
If fewer than all the Securities purchasable under the Warrant are
purchased, the Company will, upon such partial exercise, execute and deliver to
the Warrantholder a new Warrant Certificate (dated the date hereof), in form and
tenor similar to this Warrant Certificate, evidencing that portion of the
Warrant not exercised. The Securities to be obtained on exercise of the Warrant
will be deemed to have been issued, and any person exercising the Warrants will
be deemed to have become a holder of record of those Securities, as of the date
of the payment of the Exercise Price.
3. Adjustments in Certain Events. The number, class, and price of
Securities for which this Warrant Certificate may be exercised are subject to
adjustment from time to time upon the happening of certain events as follows:
(a) If the outstanding shares of the Company's Common Stock are
divided into a greater number of shares or a dividend in stock is paid on the
Common Stock, the number of shares of Common Stock for which the Warrant is then
exercisable will be proportionately increased and the Exercise Price will be
proportionately reduced; and, conversely, if the outstanding shares of Common
Stock are combined into a smaller number of shares of Common Stock, the number
of shares of Common Stock for which the Warrant is then exercisable will be
proportionately reduced and the Exercise Price will be proportionately
increased. The increases and reductions provided for in this subsection 3(a)
will be made with the intent and, as nearly as practicable, the effect that
neither the percentage of the total equity of the Company obtainable on exercise
of the Warrants nor the price payable for such percentage upon such exercise
will be affected by any event described in this subsection 3(a). Upon the
occurrence of any such event, the number of Unit Warrants for which the Warrant
is then exercisable shall
-3-
<PAGE>
not be adjusted, if such event results in an adjustment of the number of shares
purchasable or the exercise price (or both) under the Unit Warrants.
(b) In case of any change in the Common Stock through merger,
consolidation, reclassification, reorganization, partial or complete
liquidation, purchase of substantially all the assets of the Company, or other
change in the capital structure of the Company, then, as a condition of such
change, lawful and adequate provision will be made so that the holder of this
Warrant Certificate will have the right thereafter to receive upon the exercise
of the Warrant the kind and amount of shares of stock or other securities or
property to which he would have been entitled if, immediately prior to such
event, he had held the number of shares of Common Stock obtainable upon the
exercise of the Warrant. In any such case, appropriate adjustment will be made
in the application of the provisions set forth herein with respect to the rights
and interest thereafter of the Warrantholder, to the end that the provisions set
forth herein will thereafter be applicable, as nearly as reasonably may be, in
relation to any shares of stock or other property thereafter deliverable upon
the exercise of the Warrant. The Company will not permit any change in its
capital structure to occur unless the issuer of the shares of stock or other
securities to be received by the holder of this Warrant Certificate, if not the
Company, agrees to be bound by and comply with the provisions of this Warrant
Certificate. Upon the occurrence of any such event, the number of Unit Warrants
for which the Warrant is then exercisable shall not be adjusted, if such event
results in an adjustment of the number of shares purchasable or the exercise
price (or both) under the Unit Warrants.
(c) When any adjustment is required to be made in the number of shares
of Common Stock, other securities, or the property purchasable upon exercise of
the Warrant, the Company will promptly determine the new number of such shares
or other securities or property purchasable upon exercise of the Warrant and (i)
prepare and retain on file a statement describing in reasonable detail the
method used in arriving at the new number of such shares or other securities or
property purchasable upon exercise of the Warrant and (ii) cause a copy of such
statement to be mailed to the Warrantholder within thirty (30) days after the
date of the event giving rise to the adjustment.
(d) No fractional shares of Common Stock and no fractional Units
Warrants or other securities will be issued in connection with the exercise of
the Warrant, but the Company will pay, in lieu of fractional shares or
fractional Unit Warrants, a cash payment therefor on the basis of the mean
between the bid and asked prices of the Common Stock, or Unit Warrants, as the
case may be, in the over-the-counter market or the closing price on a national
securities exchange on the day immediately prior to exercise.
(e) If securities of the Company or securities of any subsidiary of
the Company are distributed pro rata to holders of Common Stock, such number of
securities will be distributed to the Warrantholder or his assignee upon
exercise of his rights hereunder as such Warrantholder or assignee would have
been entitled to if this Warrant Certificate had been
-4-
<PAGE>
exercised prior to the record date for such distribution. The provisions with
respect to adjustment of the Common Stock provided in this Section 3 will also
apply to the securities to which the Warrantholder or his assignee is entitled
under this subsection 3(e).
(f) Notwithstanding anything herein to the contrary, there will be no
adjustment made hereunder on account of the sale of the Units or other
Securities purchasable upon exercise of the Warrant.
4. Reservation of Securities. The Company agrees that the number of shares
of Common Stock, Unit Warrants or other Securities sufficient to provide for the
exercise of the Warrant upon the basis set forth above will at all times during
the term of the Warrant be reserved for exercise.
5. Validity of Securities. All Securities delivered upon the exercise of
the Warrant will be duly and validly issued in accordance with their terms, and
the Company will pay all documentary and transfer taxes, if any, in respect of
the original issuance thereof upon exercise of the Warrant.
6. Registration of Securities Issuable on Exercise of Warrant Certificate.
(a) The Company will register the Securities with the Commission
pursuant to the Act so as to allow the unrestricted sale of the Securities to
the public from time to time commencing on the first anniversary of the
Effective Date and ending at 5:00 p.m. Pacific Time on the fifth anniversary of
the Effective Date (the "Registration Period"). The Company will also file such
applications and other documents necessary to permit the sale of the Securities
to the public during the Registration Period in those states in which the Units
were qualified for sale in the Offering or such other states as the Company and
the Warrantholder agree to. In order to comply with the provisions of this
Section 6(a), the Company is not required to file more than one registration
statement at its expense. The Company will register the Securities on Form S-3
if the Company is eligible to use such form. No registration right of any kind,
"piggyback" or otherwise, will last longer than five years from the Closing
Date.
(b) The Company will pay all of the Company's Expenses and each
Warrantholder will pay its pro rata share of the Warrantholder's Expenses
relating to the registration, offer, and sale of the Securities.
(c) Except as specifically provided herein, the manner and conduct of
the registration, including the contents of the registration, will be entirely
in the control and at the discretion of the Company. The Company will file such
post-effective amendments and supplements as may be necessary to maintain the
currency of the registration statement during the period of its use. In
addition, if the Warrantholder participating in the registration is advised by
counsel that the registration statement, in their opinion, is deficient in any
material respect,
-5-
<PAGE>
the Company will use its best efforts to cause the registration statement to be
amended to eliminate the concerns raised.
(d) The Company will furnish to the Warrantholder the number of copies
of a prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as it may reasonably request
in order to facilitate the disposition of Securities owned by it.
(e) The Company will, at the request of Warrantholders holding at
least 50 percent of the then outstanding Warrants, (i) furnish an opinion of the
counsel representing the Company for the purposes of the registration pursuant
to this Section 6, addressed to the Warrantholders and any Participating
Underwriter, (ii) furnish an appropriate letter from the independent public
accountants of the Company, addressed to the Warrantholders and any
Participating Underwriter, and (iii) make representations and warranties to the
Warrantholders and any Participating Underwriter. A request pursuant to this
subsection (e) may be made on three occasions. The documents required to be
delivered pursuant to this subsection (e) will be dated within ten days of the
request and will be, in form and substance, equivalent to similar documents
furnished to the underwriters in connection with the Offering, with such changes
as may be appropriate in light of changed circumstances.
7. Indemnification in Connection with Registration.
(a) If any of the Securities are registered, the Company will
indemnify and hold harmless each selling Warrantholder, any person who controls
any selling Warrantholder within the meaning of the Act, and any Participating
Underwriter against any losses, claims, damages, or liabilities, joint or
several, to which any Warrantholder, controlling person, or Participating
Underwriter may be subject under the Act or otherwise; and it will reimburse
each Warrantholder, each controlling person, and each Participating Underwriter
for any legal or other expenses reasonably incurred by the Warrantholder,
controlling person, or Participating Underwriter in connection with
investigating or defending any such loss, claim, damage, liability, or action,
insofar as such losses, claims, damages, or liabilities, joint or several (or
actions in respect thereof), arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained, on the effective
date thereof, in any such registration statement or any preliminary prospectus
or final prospectus, or any amendment or supplement thereto, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; provided, however, that the Company will not be liable in any case
to the extent that any loss, claim, damage, or liability arises out of or is
based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in any registration statement, preliminary prospectus,
final prospectus, or any amendment or supplement thereto, in reliance upon and
in conformity with written information furnished by a Warrantholder for use in
the preparation thereof. The indemnity agreement contained in this subparagraph
(a) will not apply
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<PAGE>
to amounts paid to any claimant in settlement of any suit or claim unless such
payment is first approved by the Company, such approval not to be unreasonably
withheld.
(b) Each selling Warrantholder, as a condition of the Company's
registration obligation, will indemnify and hold harmless the Company, each of
its directors, each of its officers who have signed any registration statement
or other filing or any amendment or supplement thereto, and any person who
controls the Company within the meaning of the Act, against any losses, claims,
damages, or liabilities to which the Company or any such director, officer, or
controlling person may become subject under the Act or otherwise, and will
reimburse any legal or other expenses reasonably incurred by the Company or any
such director, officer, or controlling person in connection with investigating
or defending any such loss, claim, damage, liability, or action, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any untrue or alleged untrue statement of any material
fact contained in said registration statement, any preliminary or final
prospectus, or other filing, or any amendment or supplement thereto, or arise
out of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, but only to the extent that such untrue statement or
alleged untrue statement or omission or alleged omission was made in said
registration statement, preliminary or final prospectus, or other filing, or
amendment or supplement, in reliance upon and in conformity with written
information furnished by such Warrantholder for use in the preparation thereof;
provided, however, that the indemnity agreement contained in this subparagraph
(b) will not apply to amounts paid to any claimant in settlement of any suit or
claim unless such payment is first approved by the Warrantholder, such approval
not to be unreasonably withheld.
(c) Promptly after receipt by an indemnified party under subparagraphs
(a) or (b) above of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against an indemnifying
party, notify the indemnifying party of the commencement thereof; but the
omission to notify the indemnifying party will not relieve it from any liability
that it may have to any indemnified party otherwise than under subparagraphs (a)
and (b).
(d) If any such action is brought against any indemnified party and it
notifies an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel satisfactory to such indemnified party; and after
notice from the indemnifying party to such indemnified party of its election to
assume the defense thereof, the indemnifying party will not be liable to such
indemnified party for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation.
-7-
<PAGE>
8. Restrictions on Transfer. This Warrant Certificate and the Warrant may
not be sold, transferred, assigned or hypothecated for a one-year period after
the Effective Date except to underwriters of the Offering or to individuals who
are either a partner or an officer of such an underwriter or by will or by
operation of law. The Warrant may be divided or combined, upon request to the
Company by the Warrantholder, into a certificate or certificates evidencing the
same aggregate number of Warrants.
9. No Rights as a Shareholder. Except as otherwise provided herein, the
Warrantholder will not, by virtue of ownership of the Warrant, be entitled to
any rights of a shareholder of the Company but will, upon written request to the
Company, be entitled to receive such quarterly or annual reports as the Company
distributes to its shareholders.
10. Notice. Any notices required or permitted to be given hereunder will be
in writing and may be served personally or by mail; and if served will be
addressed as follows:
If to the Company:
434 Olds Station Road
Wenatchee, Washington 98801
Attn: President
If to the Warrantholder:
at the address furnished by the
Warrantholder to the Company for
the purpose of notice.
Any notice so given by mail will be deemed effectively given 48 hours after
mailing when deposited in the United States mail, registered or certified mail,
return receipt requested, postage prepaid and addressed as specified above. Any
party may by written notice to the other specify a different address for notice
purposes.
11. Applicable Law. This Warrant Certificate will be governed by and
construed in accordance with the laws of the State of Oregon, without reference
to conflict of laws principles thereunder. All disputes relating to this Warrant
Certificate shall be tried before the courts of Oregon located in Multnomah
County, Oregon to the exclusion of all other courts that might have
jurisdiction.
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<PAGE>
Dated as of September 30, 1997.
PACIFIC AEROSPACE & ELECTRONICS, INC.
By: /s/ DONALD A. WRIGHT
-----------------------------------
Donald A. Wright
Its: President
Agreed and Accepted as of September 30, 1997.
By: /s/ CHESTER PAULSON
-----------------------------------
Chester Paulson
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EXHIBIT 4.11
THIS WARRANT HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933
AND IS NOT TRANSFERABLE
EXCEPT AS PROVIDED HEREIN
PACIFIC AEROSPACE & ELECTRONICS, INC.
(successor in interest to PCT Holdings, Inc.)
PURCHASE WARRANT
Issued to:
M. LORRAINE MAXFIELD
Exercisable to Purchase
8,100 Units
of
PACIFIC AEROSPACE & ELECTRONICS, INC.
Void after July 15, 2001
<PAGE>
This is to certify that, for value received and subject to the terms and
conditions set forth below, the Warrantholder (hereinafter defined) is entitled
to purchase, and the Company promises and agrees to sell and issue to the
Warrantholder, at any time after the date of this Warrant, and on or before July
15, 2001, up to 8,100 Units (hereinafter defined) at the Exercise Price
(hereinafter defined).
This Warrant Certificate is issued subject to the following terms and
conditions:
1. Definitions of Certain Terms. Except as may be otherwise clearly
required by the context, the following terms have the following meanings:
(a) "Act" means the Securities Act of 1933, as amended.
(b) "Closing Date" means the date on which the Offering is closed.
(c) "Commission" means the Securities and Exchange Commission.
(d) "Common Stock" means the common stock, $0.001 par value, of the
Company.
(e) "Company" means Pacific Aerospace & Electronics, Inc., a
Washington corporation (successor in interest to PCT Holdings, Inc., a Nevada
corporation), and any successor corporation.
(f) "Company's Expenses" means any and all expenses payable by the
Company or the Warrantholder in connection with an offering described in Section
6 hereof, except Warrantholder's Expenses.
(g) "Effective Date" means the date on which the Registration
Statement is declared effective by the Commission.
(h) "Exercise Price" means the price at which the Warrantholder may
purchase one complete Unit (or Securities obtainable in lieu of one complete
Unit) upon exercise of Warrants as determined from time to time pursuant to the
provisions hereof. The initial Exercise Price is $3.75 per Unit. If a Warrant is
exercised for a component of a Unit or Units, then the price payable in
connection with such exercise shall be determined by allocating $0.001 to the
Unit Warrant and the balance of the Exercise Price to the share of Common Stock,
or, in each case, to any securities obtainable in addition to or in lieu of such
share of Unit Warrant or Common Stock by virtue of the application of Section 3
of this Warrant.
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<PAGE>
(i) "Offering" means the public offering of Units made pursuant to the
Registration Statement.
(j) "Participating Underwriter" means any underwriter participating in
the sale of the Securities pursuant to a registration under Section 6 of this
Warrant Certificate.
(k) "Registration Statement" means the Company's registration
statement on Form SB-2 (Registration No. 333-5011) as amended on the Closing
Date.
(l) "Rules and Regulations" means the rules and regulations of the
Commission adopted under the Act.
(m) "Securities" means the securities obtained or obtainable upon
exercise of the Warrant or securities obtained or obtainable upon exercise,
exchange, or conversion of such securities.
(n) "Unit" means, as the case may require, either one of the Units
offered to the public pursuant to the Registration Statement or one of the Units
obtainable on exercise of a Warrant.
(o) "Unit Warrant" means a Common Stock purchase warrant included as a
component of a Unit.
(p) "Warrant Certificate" means a certificate evidencing the Warrant.
(q) "Warrantholder" means a record holder of the Warrant or
Securities. The initial Warrantholder is Paulson Investment Company, Inc.
(r) "Warrantholder's Expenses" means the sum of (i) the aggregate
amount of cash payments made to an underwriter, underwriting syndicate, or agent
in connection with an offering described in Section 6 hereof multiplied by a
fraction the numerator of which is the aggregate sales price of the Securities
sold by such underwriter, underwriting syndicate, or agent in such offering and
the denominator of which is the aggregate sales price of all of the securities
sold by such underwriter, underwriting syndicate, or agent in such offering and
(ii) all out-of-pocket expenses of the Warrantholder, except for the fees and
disbursements of one firm retained as legal counsel for the Warrantholders that
will be paid by the Company.
(s) "Warrant" means the warrant evidenced by this certificate, any
similar certificate issued in connection with the Offering, or any certificate
obtained upon transfer or partial exercise of the Warrant evidenced by any such
certificate.
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<PAGE>
2. Exercise of Warrants. All or any part of the Warrant may be exercised
commencing on the first anniversary of the Effective Date and ending at 5:00
p.m. Pacific Time on the fifth anniversary of the Effective Date by surrendering
this Warrant Certificate, together with appropriate instructions, duly executed
by the Warrantholder or by its duly authorized attorney, at the office of the
Company, 434 Olds Station Road, Wenatchee, Washington 98801, attention:
President, or at such other office or agency as the Company may designate. Upon
receipt of notice of exercise, the Company shall immediately instruct its
transfer agent to prepare certificates for the Securities to be received by the
Warrantholder upon completion of the Warrant exercise. When such certificates
are prepared, the Company shall notify the Warrantholder and deliver such
certificates to the Warrantholder or as per the Warrantholder's instructions
immediately upon payment in full by the Warrantholder, in lawful money of the
United States, of the Exercise Price payable with respect to the Securities
being purchased. If the Warrantholder shall represent and warrant that all
applicable registration and prospectus delivery requirements for their sale have
been complied with upon sale of the Securities received upon exercise of the
Warrant, such certificates shall not bear a legend with respect to the
Securities Act of 1933.
If fewer than all the Securities purchasable under the Warrant are
purchased, the Company will, upon such partial exercise, execute and deliver to
the Warrantholder a new Warrant Certificate (dated the date hereof), in form and
tenor similar to this Warrant Certificate, evidencing that portion of the
Warrant not exercised. The Securities to be obtained on exercise of the Warrant
will be deemed to have been issued, and any person exercising the Warrants will
be deemed to have become a holder of record of those Securities, as of the date
of the payment of the Exercise Price.
3. Adjustments in Certain Events. The number, class, and price of
Securities for which this Warrant Certificate may be exercised are subject to
adjustment from time to time upon the happening of certain events as follows:
(a) If the outstanding shares of the Company's Common Stock are
divided into a greater number of shares or a dividend in stock is paid on the
Common Stock, the number of shares of Common Stock for which the Warrant is then
exercisable will be proportionately increased and the Exercise Price will be
proportionately reduced; and, conversely, if the outstanding shares of Common
Stock are combined into a smaller number of shares of Common Stock, the number
of shares of Common Stock for which the Warrant is then exercisable will be
proportionately reduced and the Exercise Price will be proportionately
increased. The increases and reductions provided for in this subsection 3(a)
will be made with the intent and, as nearly as practicable, the effect that
neither the percentage of the total equity of the Company obtainable on exercise
of the Warrants nor the price payable for such percentage upon such exercise
will be affected by any event described in this subsection 3(a). Upon the
occurrence of any such event, the number of Unit Warrants for which the Warrant
is then exercisable shall
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<PAGE>
not be adjusted, if such event results in an adjustment of the number of shares
purchasable or the exercise price (or both) under the Unit Warrants.
(b) In case of any change in the Common Stock through merger,
consolidation, reclassification, reorganization, partial or complete
liquidation, purchase of substantially all the assets of the Company, or other
change in the capital structure of the Company, then, as a condition of such
change, lawful and adequate provision will be made so that the holder of this
Warrant Certificate will have the right thereafter to receive upon the exercise
of the Warrant the kind and amount of shares of stock or other securities or
property to which he would have been entitled if, immediately prior to such
event, he had held the number of shares of Common Stock obtainable upon the
exercise of the Warrant. In any such case, appropriate adjustment will be made
in the application of the provisions set forth herein with respect to the rights
and interest thereafter of the Warrantholder, to the end that the provisions set
forth herein will thereafter be applicable, as nearly as reasonably may be, in
relation to any shares of stock or other property thereafter deliverable upon
the exercise of the Warrant. The Company will not permit any change in its
capital structure to occur unless the issuer of the shares of stock or other
securities to be received by the holder of this Warrant Certificate, if not the
Company, agrees to be bound by and comply with the provisions of this Warrant
Certificate. Upon the occurrence of any such event, the number of Unit Warrants
for which the Warrant is then exercisable shall not be adjusted, if such event
results in an adjustment of the number of shares purchasable or the exercise
price (or both) under the Unit Warrants.
(c) When any adjustment is required to be made in the number of shares
of Common Stock, other securities, or the property purchasable upon exercise of
the Warrant, the Company will promptly determine the new number of such shares
or other securities or property purchasable upon exercise of the Warrant and (i)
prepare and retain on file a statement describing in reasonable detail the
method used in arriving at the new number of such shares or other securities or
property purchasable upon exercise of the Warrant and (ii) cause a copy of such
statement to be mailed to the Warrantholder within thirty (30) days after the
date of the event giving rise to the adjustment.
(d) No fractional shares of Common Stock and no fractional Units
Warrants or other securities will be issued in connection with the exercise of
the Warrant, but the Company will pay, in lieu of fractional shares or
fractional Unit Warrants, a cash payment therefor on the basis of the mean
between the bid and asked prices of the Common Stock, or Unit Warrants, as the
case may be, in the over-the-counter market or the closing price on a national
securities exchange on the day immediately prior to exercise.
(e) If securities of the Company or securities of any subsidiary of
the Company are distributed pro rata to holders of Common Stock, such number of
securities will be distributed to the Warrantholder or his assignee upon
exercise of his rights hereunder as such Warrantholder or assignee would have
been entitled to if this Warrant Certificate had been
-4-
<PAGE>
exercised prior to the record date for such distribution. The provisions with
respect to adjustment of the Common Stock provided in this Section 3 will also
apply to the securities to which the Warrantholder or his assignee is entitled
under this subsection 3(e).
(f) Notwithstanding anything herein to the contrary, there will be no
adjustment made hereunder on account of the sale of the Units or other
Securities purchasable upon exercise of the Warrant.
4. Reservation of Securities. The Company agrees that the number of shares
of Common Stock, Unit Warrants or other Securities sufficient to provide for the
exercise of the Warrant upon the basis set forth above will at all times during
the term of the Warrant be reserved for exercise.
5. Validity of Securities. All Securities delivered upon the exercise of
the Warrant will be duly and validly issued in accordance with their terms, and
the Company will pay all documentary and transfer taxes, if any, in respect of
the original issuance thereof upon exercise of the Warrant.
6. Registration of Securities Issuable on Exercise of Warrant Certificate.
(a) The Company will register the Securities with the Commission
pursuant to the Act so as to allow the unrestricted sale of the Securities to
the public from time to time commencing on the first anniversary of the
Effective Date and ending at 5:00 p.m. Pacific Time on the fifth anniversary of
the Effective Date (the "Registration Period"). The Company will also file such
applications and other documents necessary to permit the sale of the Securities
to the public during the Registration Period in those states in which the Units
were qualified for sale in the Offering or such other states as the Company and
the Warrantholder agree to. In order to comply with the provisions of this
Section 6(a), the Company is not required to file more than one registration
statement at its expense. The Company will register the Securities on Form S-3
if the Company is eligible to use such form. No registration right of any kind,
"piggyback" or otherwise, will last longer than five years from the Closing
Date.
(b) The Company will pay all of the Company's Expenses and each
Warrantholder will pay its pro rata share of the Warrantholder's Expenses
relating to the registration, offer, and sale of the Securities.
(c) Except as specifically provided herein, the manner and conduct of
the registration, including the contents of the registration, will be entirely
in the control and at the discretion of the Company. The Company will file such
post-effective amendments and supplements as may be necessary to maintain the
currency of the registration statement during the period of its use. In
addition, if the Warrantholder participating in the registration is advised by
counsel that the registration statement, in their opinion, is deficient in any
material respect,
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<PAGE>
the Company will use its best efforts to cause the registration statement to be
amended to eliminate the concerns raised.
(d) The Company will furnish to the Warrantholder the number of copies
of a prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as it may reasonably request
in order to facilitate the disposition of Securities owned by it.
(e) The Company will, at the request of Warrantholders holding at
least 50 percent of the then outstanding Warrants, (i) furnish an opinion of the
counsel representing the Company for the purposes of the registration pursuant
to this Section 6, addressed to the Warrantholders and any Participating
Underwriter, (ii) furnish an appropriate letter from the independent public
accountants of the Company, addressed to the Warrantholders and any
Participating Underwriter, and (iii) make representations and warranties to the
Warrantholders and any Participating Underwriter. A request pursuant to this
subsection (e) may be made on three occasions. The documents required to be
delivered pursuant to this subsection (e) will be dated within ten days of the
request and will be, in form and substance, equivalent to similar documents
furnished to the underwriters in connection with the Offering, with such changes
as may be appropriate in light of changed circumstances.
7. Indemnification in Connection with Registration.
(a) If any of the Securities are registered, the Company will
indemnify and hold harmless each selling Warrantholder, any person who controls
any selling Warrantholder within the meaning of the Act, and any Participating
Underwriter against any losses, claims, damages, or liabilities, joint or
several, to which any Warrantholder, controlling person, or Participating
Underwriter may be subject under the Act or otherwise; and it will reimburse
each Warrantholder, each controlling person, and each Participating Underwriter
for any legal or other expenses reasonably incurred by the Warrantholder,
controlling person, or Participating Underwriter in connection with
investigating or defending any such loss, claim, damage, liability, or action,
insofar as such losses, claims, damages, or liabilities, joint or several (or
actions in respect thereof), arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained, on the effective
date thereof, in any such registration statement or any preliminary prospectus
or final prospectus, or any amendment or supplement thereto, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; provided, however, that the Company will not be liable in any case
to the extent that any loss, claim, damage, or liability arises out of or is
based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in any registration statement, preliminary prospectus,
final prospectus, or any amendment or supplement thereto, in reliance upon and
in conformity with written information furnished by a Warrantholder for use in
the preparation thereof. The indemnity agreement contained in this subparagraph
(a) will not apply
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<PAGE>
to amounts paid to any claimant in settlement of any suit or claim unless such
payment is first approved by the Company, such approval not to be unreasonably
withheld.
(b) Each selling Warrantholder, as a condition of the Company's
registration obligation, will indemnify and hold harmless the Company, each of
its directors, each of its officers who have signed any registration statement
or other filing or any amendment or supplement thereto, and any person who
controls the Company within the meaning of the Act, against any losses, claims,
damages, or liabilities to which the Company or any such director, officer, or
controlling person may become subject under the Act or otherwise, and will
reimburse any legal or other expenses reasonably incurred by the Company or any
such director, officer, or controlling person in connection with investigating
or defending any such loss, claim, damage, liability, or action, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any untrue or alleged untrue statement of any material
fact contained in said registration statement, any preliminary or final
prospectus, or other filing, or any amendment or supplement thereto, or arise
out of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, but only to the extent that such untrue statement or
alleged untrue statement or omission or alleged omission was made in said
registration statement, preliminary or final prospectus, or other filing, or
amendment or supplement, in reliance upon and in conformity with written
information furnished by such Warrantholder for use in the preparation thereof;
provided, however, that the indemnity agreement contained in this subparagraph
(b) will not apply to amounts paid to any claimant in settlement of any suit or
claim unless such payment is first approved by the Warrantholder, such approval
not to be unreasonably withheld.
(c) Promptly after receipt by an indemnified party under subparagraphs
(a) or (b) above of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against an indemnifying
party, notify the indemnifying party of the commencement thereof; but the
omission to notify the indemnifying party will not relieve it from any liability
that it may have to any indemnified party otherwise than under subparagraphs (a)
and (b).
(d) If any such action is brought against any indemnified party and it
notifies an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel satisfactory to such indemnified party; and after
notice from the indemnifying party to such indemnified party of its election to
assume the defense thereof, the indemnifying party will not be liable to such
indemnified party for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation.
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<PAGE>
8. Restrictions on Transfer. This Warrant Certificate and the Warrant may
not be sold, transferred, assigned or hypothecated for a one-year period after
the Effective Date except to underwriters of the Offering or to individuals who
are either a partner or an officer of such an underwriter or by will or by
operation of law. The Warrant may be divided or combined, upon request to the
Company by the Warrantholder, into a certificate or certificates evidencing the
same aggregate number of Warrants.
9. No Rights as a Shareholder. Except as otherwise provided herein, the
Warrantholder will not, by virtue of ownership of the Warrant, be entitled to
any rights of a shareholder of the Company but will, upon written request to the
Company, be entitled to receive such quarterly or annual reports as the Company
distributes to its shareholders.
10. Notice. Any notices required or permitted to be given hereunder will be
in writing and may be served personally or by mail; and if served will be
addressed as follows:
If to the Company:
434 Olds Station Road
Wenatchee, Washington 98801
Attn: President
If to the Warrantholder:
at the address furnished by the
Warrantholder to the Company for
the purpose of notice.
Any notice so given by mail will be deemed effectively given 48 hours after
mailing when deposited in the United States mail, registered or certified mail,
return receipt requested, postage prepaid and addressed as specified above. Any
party may by written notice to the other specify a different address for notice
purposes.
11. Applicable Law. This Warrant Certificate will be governed by and
construed in accordance with the laws of the State of Oregon, without reference
to conflict of laws principles thereunder. All disputes relating to this Warrant
Certificate shall be tried before the courts of Oregon located in Multnomah
County, Oregon to the exclusion of all other courts that might have
jurisdiction.
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<PAGE>
Dated as of September 30, 1997.
PACIFIC AEROSPACE & ELECTRONICS, INC.
By: /s/ DONALD A. WRIGHT
-----------------------------------
Donald A. Wright
Its: President
Agreed and Accepted as of September 30, 1997.
By: /s/ M. LORRAINE MAXFIELD
-----------------------------------
M. Lorraine Maxfield
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EXHIBIT 4.15
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN AND WILL NOT BE, AS OF THE TIME OF ISSUANCE, REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAW, AND
MAY NOT BE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR ANY EXEMPTION
THEREFROM UNDER SUCH ACT. THIS WARRANT AND SUCH SHARES MAY BE TRANSFERRED ONLY
IN COMPLIANCE WITH THE CONDITIONS SPECIFIED IN THIS WARRANT.
PACIFIC AEROSPACE & ELECTRONICS, INC.
COMMON STOCK PURCHASE WARRANT
Expiring May 22, 2001
February 5, 1998
PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington corporation (the
"Company"), for value received, hereby certifies that ROBERT L. SMITH UNIFIED
CREDIT TRUST ("Holder"), is entitled to purchase THIRTY-SEVEN THOUSAND FIVE
HUNDRED (37,500) shares of the Company's voting common stock, par value $.001
per share (the "Warrant Stock"), at the times and according to the terms set
forth in this Warrant.
The Company's predecessor, PCT Holdings, Inc. ("PCTH") issued a Common
Stock Purchase Warrant to Robert L. Smith on May 22, 1996, which entitled the
holder to purchase 37,500 shares of PCTH's common stock for $4.80 per share (the
"PCTH Warrant"). As a result of the reincorporation merger of the Company and
PCTH on November 30, 1996, the right of the holder of the PCTH Warrant to
purchase shares of PCTH's common stock was converted automatically into the
right to purchase the same number of shares of the Company's common stock. This
Common Stock Purchase Warrant (the "Warrant") is otherwise in all respects the
same as the PCTH Warrant and is issued to replace the PCTH Warrant. Furthermore,
this Warrant is issued, pursuant to Section 8 of the PCTH Warrant, to evidence
the transfer of the PCTH Warrant from Robert L. Smith, who is now deceased, to
the Holder. This Warrant supersedes and replaces the PCTH Warrant in its
entirety, and the PCTH Warrant shall from the date hereof be null and void.
1. Terms of Warrant. This Warrant is being issued by the Company as a fee
in connection with and pursuant to that certain Amended and Restated Promissory
Note of even date herewith (the "Promissory Note") made by PCTH and payable to
Holder. This Warrant shall be exercisable at any time after the date hereof. The
exercise price (the "Exercise Price") of this Warrant shall be $4.80 per share
of the Warrant Stock acquired upon any such exercise.
2. Exercise of Warrant. The holder of this Warrant may exercise it during
normal business hours on any business day after the date hereof and before 5:00
p.m., P.S.T., on May
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<PAGE>
22, 2001, or if such date is a day on which federal or state chartered banking
institutions are authorized by law to close, then on the next succeeding day
which shall not be such a day, by surrendering this Warrant to the Company at
the Company's principal office, accompanied by an executed subscription
agreement in substantially the form annexed hereto as Exhibit "A" and by
payment, in cash or by certified or official bank check payable to the order of
the Company, or by any combination of such methods, in the amount obtained by
multiplying (a) the number of Warrant Stock designated in such subscription by
(b) the Exercise Price, whereupon such holder shall be entitled to receive the
number of duly authorized, validly issued, fully paid and nonassessable shares
of Warrant Stock as is indicated on the subscription.
3. Partial Exercise Allowed; Issuance of Substitute Warrant. This Warrant
is exercisable in whole or in part by Holder. In the event Holder exercises this
Warrant with respect to only a portion of the Warrant Stock that could be
acquired upon exercise, a replacement Warrant ("Replacement Warrant") with
identical terms except for a corresponding reduction of the number of shares of
Warrant Stock receivable upon exercise of the Replacement Warrant shall be
issued by the Company within three (3) business days after any such partial
exercise.
4. When Exercise Effective. The exercise of this Warrant shall be deemed to
have been effected immediately prior to the close of business on the business
day on which this Warrant shall have been surrendered to the Company as provided
in Section 2, and at such time the person or persons in whose name or names any
certificate or certificates for shares of Warrant Stock shall be issued upon
such exercise shall be deemed for all corporate purposes to have become the
holder of record thereof.
5. Delivery of Stock Certificates. As soon as practicable after the
exercise of this Warrant, and in any event within five (5) business days
thereafter, the Company at its expense (including the payment by it of any
applicable issue taxes) will cause to be issued in the name of and delivered to
Holder or to the person or entity such holder may direct (and upon payment by
such holder of any applicable transfer taxes), a certificate or certificates for
the number of duly authorized, validly issued, fully paid and nonassessable
shares of Warrant Stock to which the holder or its designee shall be entitled
upon such exercise.
6. Adjustment of Warrant Stock Issuable Upon Exercise. If the Company at
any time or from time to time after the date of this Warrant but before
expiration effects a split or subdivision of the outstanding shares of its then
outstanding common stock into a greater number of shares of common stock, or if
the Company effects a reverse split of the outstanding shares of its common
stock into a lesser number of shares of common stock, (by reclassification or
otherwise than by payment of a dividend in common stock), then, and in each such
case, the number of shares called for on the face of this Warrant (or the face
of any replacement Warrant issued upon partial exercise) shall be adjusted
proportionally, and the exercise price with respect to such adjusted number of
shares also shall be adjusted proportionally.
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<PAGE>
7. Reservation of Shares. The Company will at all times reserve and keep
available, solely for issuance and delivery upon the exercise of this Warrant,
the number of shares of common stock that would be issuable upon the exercise,
in whole, of this Warrant or any replacement Warrant. All such shares shall be
duly authorized and, when issued upon such exercise, shall be validly issued,
fully paid and nonassessable with no liability on the part of the holders
thereof.
8. Ownership, Transfer and Substitution of Warrant. The Company will treat
Holder as the owner and holder of this Warrant for all purposes, until the
Company receives notice to the contrary. This Warrant shall be transferable by
Holder, and the Company shall recognize on its books and records any lawful
transfer of this Warrant upon receipt of notice of such transfer by Holder. Upon
receipt of evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant and, in the case of any such loss,
theft of destruction of this Warrant, upon delivery of indemnity reasonably
satisfactory to the Company in form and amount or, in the case of any such
mutilation, upon surrender of such, the Company at its expense will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
9. No Rights or Liabilities as Stockholder. Nothing herein shall give or
shall be construed to give Holder any of the rights of a shareholder of the
Company including, without limitation, the right to vote on matters requiring
the vote of shareholders, the right to receive any dividend declared and payable
to the holders of common stock, and the right to a pro-rata distribution upon
the Company's dissolution.
10. Authorization; No Breach. The Company represents and warrants that (i)
the Company is duly organized, validly existing, and in good standing under the
laws of the State of Nevada, and has the requisite power and authority to issue
this Warrant and the Warrant Stock; (ii) the number of shares of Warrant Stock
issuable upon the entire exercise of this Warrant are presently authorized but
unissued; (iii) the issuance of this Warrant and the issuance of the Warrant
Stock issuable upon exercise of this Warrant have been authorized and approved
by all necessary corporate action; (iv) the execution, delivery and issuance of
this Warrant and the issuance of the Warrant Stock underlying this Warrant will
not violate any law, rule, regulation, order, writ, judgment, injunction, decree
or award binding on the Company or the provision or provisions of any agreement
to which the Company is a party or is subject, or by which any of the Company's
property is bound, or conflict with or constitute a material default thereunder,
or result in the creation or imposition of any lien pursuant to the terms of any
such agreement, or constitute a breach of any fiduciary duty owed by the Company
to any third party, or require the approval of any third party pursuant to any
contract, agreement, instrument, relationship or legal obligation to which the
Company is subject or to which any of its properties may be subject, except for
the approvals set forth on Exhibit A to the Promissory Note from the Company to
Holder of even date herewith; and (v) when issued, both this Warrant and the
Warrant Stock issuable upon exercise of this Warrant shall be duly and validly
issued, fully paid and nonassessable.
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<PAGE>
11. Registration Right. If the Company shall determine to register any of
its common stock either for its own account or the account of a security holder
or holders, other than a registration relating solely to (i) employee benefit
plans, or (ii) registration on any registration form that does not permit
secondary sales, the Company will: (a) promptly give written notice of the
proposed registration to the holder of any Warrant Stock issued or issuable upon
the exercise of this Warrant (which shall include a list of the jurisdictions in
which the Company intends to attempt to qualify such securities under applicable
blue sky laws); and (b) include in such registration (and any related
qualification or other compliance filing under applicable blue sky laws), and in
any underwriting involved therein, all or any portion of the Warrant Stock then
issued or issuable upon exercise of this Warrant as specified in a written
request made by such holders within thirty (30) days after receipt of the
written notice from the Company described in clause (a) above, provided,
however, that if the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise such holders as part of the written notice described in clause (a) above.
In such event, such holders' rights to registration pursuant to this Section 11
shall be conditioned upon participation in such underwriting and the inclusion
of stock in the underwriting to the extent provided herein. Such holders and the
Company (and any other security holders proposing to distribute their securities
through such underwriting) shall enter into an underwriting agreement in
customary form with the representatives of the underwriter or underwriters
selected for such underwriting by the Company. Notwithstanding any other
provisions of this Section 11, if the representatives of the underwriter or
underwriters determine in good faith that marketing factors make it advisable to
impose a limitation on the number of secondary shares to be underwritten, the
number of such secondary shares, if any, that may be included in the
registration and underwriting on behalf of such holders, and any other security
holders proposing to distribute their securities of the Company through such
underwriting shall be allocated in proportion, as nearly as practicable, to the
respective amounts of securities that they had requested to be included in such
registration at the time of filing the registration statement. If such holders
disapprove of the terms of any such underwriting, they may elect to withdraw
therefrom by written notice to the Company and the representatives of the
underwriter or underwriters.
11.1 Lock-up Agreement. Notwithstanding any other provision of this
Section 11, in the event that (A) the Company shall file any registration
statement within one hundred twenty (120) calendar days after the date hereof,
and (B) Holder otherwise would have the right to include securities in such
registration under this Section 11, Holder hereby agrees that, notwithstanding
the inclusion of any shares beneficially owned by Holder in such registration,
Holder will not sell any such registered securities for a period of one hundred
eighty (180) calendar days from the effective date of such registration
statement. The Company agrees that, in such event, the Company will take all
action necessary to cause such registration statement to remain effective for a
period of at least ninety (90) calendar days after the date that Holder first
becomes able to sell any securities included in the registration in light of the
contractual restriction set forth in this Section 11.1 or until Holder has
informed the Company in writing that the distribution of Holder's securities
included in the registration has been completed, and shall prepare and file with
the Securities and Exchange Commission such amendments and supplements, if any,
to such registration statement and the prospectus used in connection
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<PAGE>
therewith as may be necessary to keep such registration statement effective for
the period described in this Section 11.1.
12. Notices. All notices and other communications provided for herein shall
be delivered or mailed by first class mail, postage prepaid, addressed (a) if to
any holder of any Warrant or Warrant Stock, at the registered address of such
holder as set forth in the register kept at the principal office of the Company,
or (b) if to the Company, at its principal office, or to such other location as
the Company shall have furnished to each holder of any Warrants or Warrant Stock
in writing, provided that the exercise of any Warrants shall be effective only
in the manner provided in Section 2.
13. Miscellaneous. This Warrant embodies the entire agreement and
understanding between the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings relating to the
subject matter hereof. There are no unwritten oral agreements between the
parties with respect to the subject matter hereof. This Warrant and any term
hereof may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of such change, waiver,
discharge or termination is sought. This Warrant shall be governed by the laws
of the State of Washington. The headings of this Warrant are inserted for
convenience only and shall not be deemed to constitute a part hereof.
PACIFIC AEROSPACE & ELECTRONICS, INC.
By: /s/ DONALD A. WRIGHT
-------------------------------------
Donald A. Wright, President
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<PAGE>
Exhibit A
SUBSCRIPTION
------------
(To be executed by the holder of the Warrant to exercise the right to
purchase common stock evidenced by the Warrant)
To: Pacific Aerospace & Electronics, Inc.
434 Olds Station Road
Wenatchee, Washington 98801
The undersigned hereby irrevocably subscribes for ___________shares of the
common stock, par value $.001 per share, of Pacific Aerospace & Electronics,
Inc., a Washington corporation, pursuant to and in accordance with the terms and
conditions of a Warrant dated February 5, 1998 (the "Warrant"), and tenders with
the Warrant and this Subscription Agreement payment of $______________ as
payment for the shares, and requests that a certificate for such shares be
issued in the name of the undersigned and be delivered to the undersigned at the
address stated below.
----------------------------------
----------------------------------
----------------------------------
----------------------------------
The undersigned agrees that, upon issuance of the shares, the undersigned
will execute an investment letter in the form attached hereto as Exhibit 1, to
reflect that the shares are being acquired for investment purposes and not with
a view toward their resale or distribution to the public.
----------------------------------------------
Signed
----------------------------------------------
Dated
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<PAGE>
Exhibit 1
---------
Pacific Aerospace & Electronics, Inc.
434 Olds Station Road
Wenatchee, WA 98801
Re: ___________ shares of common stock, $.001 par value per
share, of Pacific Aerospace & Electronics, Inc. , a
Washington corporation (the "Shares")
Ladies and Gentlemen:
This letter is given to you in connection with the undersigned's
acquisition of the above described Shares.
1. The Shares are being acquired by the undersigned for investment for the
undersigned's own account and not on behalf of any other persons, and not with a
view to, or for resale or other distribution in connection with, any
distribution of all or any part of the Shares, unless pursuant to a transaction
exempt from the registration and prospectus delivery requirements of state and
federal securities laws.
2. You shall not be required to effect, permit or recognize any sale, offer
for sale, exchange, transfer, assignment or pledge of any or all of the Shares
unless they are registered under the Securities Act of 1933, and any applicable
state securities acts (collectively, the "Acts"), or unless you are furnished
with an attorney's opinion, reasonably acceptable to you, that such registration
is not required; and you shall be entitled to cause legends to this effect to be
endorsed on any certificates evidencing the Shares. Further, you shall have the
right to place a stop-transfer order with your Secretary or transfer agent
pursuant to which transfer of all or any portion of the Shares shall be
prohibited except upon a proper showing of compliance with this letter.
3. Except as to the undersigned's registration rights set forth in the
Common Stock Purchase Warrant dated February 5, 1998, the undersigned
understands that it must bear the economic risk of this investment for an
indefinite period of time because the Shares have not been registered under the
Acts, and consequently cannot be sold or otherwise transferred unless they are
subsequently registered under the Acts or exemptions from registration are
available.
Very truly yours,
Dated: _______________, 199__
-----------------------------------------
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EXHIBIT 4.19
SECURITIES PURCHASE AGREEMENT
This SECURITIES PURCHASE AGREEMENT (the "Agreement") is made as of May 15,
1998, by and among PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington
corporation (the "Company"), and each of the purchasers of shares of Series B
Convertible Preferred Stock and Warrants whose names are set forth on Exhibit A
hereto (each individually, a "Purchaser" and collectively, the "Purchasers").
The parties hereto agree as follows:
1. PURCHASE AND SALE OF PREFERRED STOCK AND WARRANTS
1.1 Purchase and Sale of StockUpon and subject to the terms and conditions
set forth in this Agreement, the Company agrees to issue and sell to the
Purchasers, and each Purchaser severally agrees to purchase from the Company,
the number of shares of the Company's Series B Convertible Preferred Stock, par
value $0.001 per share (the "Preferred Shares") set forth with respect to such
Purchaser on Exhibit A hereto, at a purchase price of $100 per share. The
designation, rights, preferences and other terms and provisions of the Series B
Convertible Preferred Stock, as of the Closing (as defined in Section 1.3), will
be as set forth in the Designation of Rights and Preferences of the Series B
Convertible Preferred Stock (the "Designation of Rights and Preferences")
contained in Exhibit B hereto.
1.2 Warrants. As additional inducement to enter into this Agreement, the
Company shall issue and deliver to the Purchasers Common Stock Purchase
Warrants, in substantially the form attached as Exhibit C hereto (the
"Warrants"), in an amount set forth with respect to such Purchaser on Exhibit A.
The Warrants shall grant the Purchaser the right to purchase shares of the
Company's common stock, par value $0.001 per share (the "Common Stock") equal to
10% of the shares issuable if the Preferred Shares converted into shares of
Common Stock at $7.20 per share. The Warrants shall have an exercise price of
$7.20 per share and shall be exercisable beginning one year, and expiring three
years, from the date of this Agreement.
1.3 The Conversion Shares; Warrant Shares. Prior to the Closing, the
Company shall have authorized and reserved, free of preemptive rights and other
similar contractual rights of stockholders, a sufficient number of authorized
but unissued shares of its Common Stock to satisfy the rights of (a) conversion
of the Preferred Shares, and (b) exercise of the Warrants. Any shares of Common
Stock issuable upon (i) conversion of the Preferred Shares (and such shares when
issued) are herein referred to as the "Conversion Shares," and (ii) exercise of
the Warrants (and such shares when issued) are herein referred to as the
"Warrant Shares." The Preferred Shares, the Conversion Shares and the Warrant
Shares are sometimes collectively referred to as the "Shares."
1.4 Closing. The closing of the purchase and sale of the Preferred Shares
to be acquired by the Purchasers from the Company under this Agreement shall
take place at the
1
<PAGE>
offices of Stoel Rives LLP, 3600 One Union Square, 600 University Street,
Seattle, WA 98101 at 10:00 a.m. P.D.T. on the date on which the last of the
closing conditions set forth in Section 4 hereof have been fulfilled or waived,
or at such other time, date and place as the Purchasers and the Company may
agree (the "Closing Date").
1.4.1 Deliveries. Subject to Section 1.4.2, on the Closing Date, the
Company shall deliver to each Purchaser certificates for the number of Preferred
Shares and the number of Warrants set forth opposite such Purchaser's name on
Exhibit A hereto, registered in such Purchaser's name (or the name of its
nominee), against delivery of a check or checks payable to the order of the
Company, or a transfer of funds to an account designated in writing by the
Company, representing the cash consideration set forth opposite each such
Purchaser's name on Exhibit A. In addition, each party shall deliver all
documents, instruments and writings required to be delivered by such party
pursuant to this Agreement at or prior to the Closing.
1.4.2 Escrow. Notwithstanding Section 1.4.1, $7,000,000 of the
purchase price of the Preferred Shares shall be deposited into escrow in an
interest-bearing account with Stoel Rives LLP (the "Escrowed Funds"), and the
certificates for the Preferred Shares purchased thereby, and the proportionate
number of Warrants shall also be held in such escrow. Notwithstanding anything
in this Agreement to the contrary, if the Company does not consummate the
acquisition pending in the United Kingdom as of the date of this Agreement, then
the Purchasers, at their sole election, may require the Company to return the
Escrowed Funds and all interest thereon to the Purchasers, and the escrowed
Preferred Shares and Warrants shall be cancelled.
2. REPRESENTATIONS AND WARRANTIES
2.1 Representation and Warranties of the Company. The Company hereby makes
the following representations and warranties to the Purchasers:
2.1.1 Organization, Good Standing and Power. The Company is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Washington and has the requisite corporate power to own,
lease and operate its properties and assets and to conduct its business as it is
now being conducted. The Company is duly qualified as a foreign corporation to
do business and is in good standing in every jurisdiction in which the nature of
the business conducted or property owned by it makes such qualification
necessary, except for any jurisdiction in which the failure to be so qualified
will not have a Material Adverse Effect (as defined in Section 2.1.6) on the
Company's financial condition.
2.1.2 Authorization; . The Company has the requisite corporate power
and authority to enter into this Agreement, the Warrants, and the Registration
Rights Agreement attached hereto as Exhibit D (the "Registration Rights
Agreement") and to perform its obligations hereunder and thereunder, including
without limitation to issue and sell the Shares and to issue the Warrants in
accordance with the terms of this Agreement. The execution and delivery of this
Agreement, the Warrants, and the Registration Rights Agreement, and the
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performance by the Company of its obligations hereunder and thereunder,
including the consummation by it of the transactions contemplated hereby and
thereby, have been duly authorized by all necessary corporate action, and no
further consent or authorization of the Company or its Board of Directors or
stockholders is required except as may be set forth in the Designation of Rights
and Preferences. This Agreement has been duly executed and delivered by the
Company. The Warrants and the Registration Rights Agreement will have been duly
executed and delivered by the Company at the Closing. This Agreement
constitutes, and the Registration Rights Agreement and the Warrants when
executed and delivered shall constitute, the valid and binding obligations of
the Company, enforceable against the Company in accordance with their terms,
except as the foregoing may be limited by bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium, or other similar laws relating to or
affecting generally the rights of creditors, or by equitable principles,
including those limiting the availability of specific performance, injunctive
relief, and other equitable remedies.
2.1.3 . The authorized capital stock of the Company and the shares
thereof issued and outstanding as of May 14, 1998, are set forth on Schedule
2.1.3 hereto. All of the outstanding shares of the Company's Common Stock have
been duly and validly authorized. Except as required by this Agreement, the
Registration Rights Agreement, the Warrants, or as described on Schedule 2.1.3
hereto, no shares of Common Stock are entitled to preemptive rights and there
are no outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character to issue, or securities or rights convertible into,
any shares of capital stock of the Company, or contracts, commitments,
understandings, or arrangements by which the Company is or may become bound to
issue additional shares of capital stock of the Company or options, securities
or rights convertible into shares of capital stock of the Company, or contracts,
commitments, understandings, or arrangements by which the Company is or may
become bound to issue additional shares of capital stock of the Company or
options, warrants, scrip, rights to subscribe to, or commitments to purchase or
acquire, any shares, or securities or rights convertible into shares, of capital
stock of the Company. Except as described on Schedule 2.1.3 hereto, the Company
is not a party to any agreement granting registration rights to any person with
respect to any of its equity or debt securities. The Company has furnished or
made available to the Purchasers true and correct copies of the Company's
Articles of Incorporation, as in effect on the date hereof (the "Articles"), and
the Company's Bylaws, as in effect on the date hereof (the "Bylaws").
2.1.4 Issuance. The Preferred Shares and Warrants to be issued at the
Closing have been duly authorized by all necessary corporate action and, when
paid for, issued and delivered in accordance with the terms hereof, the
Preferred Shares and Warrants shall be validly issued, fully paid and
non-assessable and entitled to the rights and preferences set forth in the
Designation of Rights and Preferences. When the Shares are issued, they will be
duly authorized by all necessary corporate action and validly issued, fully paid
and non-assessable, and the holders shall be entitled to all rights accorded to
holders of Common Stock.
2.1.5 Subsidiaries. Schedule 2.1.5 contains a complete list of each
subsidiary of the Company (the "Subsidiaries"). "Subsidiary" shall mean any
corporation or other entity
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of which at least a majority of the securities or other ownership interest
having ordinary voting power (absolutely or contingently) for the election of
directors or other persons performing similar functions are at the time owned
directly or indirectly by the Company and/or any of its other Subsidiaries. All
of the outstanding shares of capital stock of each Subsidiary have been duly
authorized and validly issued, and are fully paid and non-assessable. There are
no outstanding preemptive, conversion or other rights, options, warrants or
agreements granted or issued by or binding upon any Subsidiary for the purchase
or acquisition of any shares of capital stock of any Subsidiary or any other
securities convertible into, exchangeable for or evidencing the rights to
subscribe for any shares of such capital stock. Except as set forth on Schedule
2.1.5, neither the Company nor any Subsidiary is party to, or has any knowledge
of, any agreement restricting the voting or transfer of any shares of the
capital stock of any Subsidiary.
2.1.6 No Conflicts. Neither the execution or delivery of this
Agreement, the Warrants or the Registration Rights Agreement by the Company, nor
the performance by the Company of its obligations thereunder, will (a) result in
a violation of the Company's Articles or Bylaws, (b) violate, or constitute a
default (or an event that with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, mortgage, deed of trust,
indenture, note, bond, license, lease agreement or instrument or obligation to
which the Company is a party, (c) create or impose a lien, charge or encumbrance
on any property of the Company under any agreement or any commitment to which
the Company is a party or by which the Company or any of its properties or
assets are bound, (iv) result in a violation of any federal, state, local or
foreign statute, rule, regulation, order, judgment or decree (including federal
and state securities laws and regulations) applicable to the Company or any of
its Subsidiaries or by which any property or asset of the Company or any of its
Subsidiaries is bound or affected, except for violations, defaults,
terminations, amendments, acceleration, and cancellations that would not,
individually or in the aggregate, have a Material Adverse Effect. "Material
Adverse Effect" means any adverse effect on the business, operations,
properties, prospects, or condition (financial or otherwise) of the Company that
is material to the Company and the Subsidiaries taken as a whole. The business
of the Company and its Subsidiaries is not being conducted in violation of any
law, ordinance, rule or regulation of any governmental entity, except for
possible violations that singly or in the aggregate do not and will not have a
Material Adverse Effect. The Company is not required under federal, state or
local law, rule or regulation in the United States to obtain any consent,
authorization or order of, or make any filing or registration with, any court or
governmental agency for it to execute, deliver or perform any of its obligations
under this Agreement and the Registration Rights Agreement or issue and sell the
Shares in accordance with the terms hereof or thereof (other than the filing
with or delivery to the Securities and Exchange Commission (the "Commission"),
Nasdaq, NASD or state securities agencies of notices or filings that may be
required to be made by the Company prior to or subsequent to the Closing, any
registration statement that may be filed pursuant to the Registration Rights
Agreement and the filing of the Designation of Rights and Preferences with the
Secretary of State of the State of Washington); provided that, for purpose of
the representation made in this sentence, the Company is assuming and relying
upon the accuracy of the relevant representations and agreements of the
Purchasers herein.
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2.1.7 Commission Documents, Financial Statements. The Common Stock of
the Company is registered pursuant to Section 12(g) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). The Company has timely filed all
reports, schedules, forms, statements and other documents required to be filed
by it with the Commission pursuant to the reporting requirements of the Exchange
Act, including material filed pursuant to Section 13(a) or 15(b) for the period
of at least twelve calendar months prior to the date of this Agreement (all of
the foregoing, including filings incorporated by reference therein, being
referred to herein as the "Commission Documents"). The Company has delivered or
made available to each of the Purchasers true and complete copies of the
Commission Documents filed with the Commission since June 1, 1996. As of their
respective dates, the Company's Annual Report on Form 10-KSB for the year ended
May 31, 1997 (the "Form 10-KSB") and its Quarterly Reports on Form 10-QSB for
the periods ended August 31, 1997, November 30, 1997 and February 28, 1998 (the
"Forms 10-QSB") complied in all material respects with the applicable
requirements of the Exchange Act and the rules and regulations of the Commission
promulgated thereunder and other federal and state laws, rules and regulations
applicable thereto, and, as of their respective dates, none of the Form 10-KSB
and the Forms 10-QSB contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of the Company included
in the Form 10- KSB and the Forms 10-QSB comply as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the Commission. Such financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") applied on a
consistent basis during the periods involved (except (i) as may be otherwise
indicated in such financial statements or the notes thereto or (ii) in the case
of unaudited interim statements, to the extent they may not include footnotes or
may be condensed or summary statements) and fairly present in all material
respects the financial position of the Company as of the dates thereof and the
results of operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments).
2.1.8 No Material Adverse Effect. Except as disclosed on Schedule
2.1.8, since February 28, 1998, the end of the last quarter for which the
Company has prepared and filed a quarterly report on Form 10-QSB with the
Commission, a copy of which is included in the Commission Documents, the Company
has not experienced or suffered any Material Adverse Effect.
2.1.9 No Undisclosed Liabilities. Except as disclosed on Schedule
2.1.9 hereto, neither the Company nor any of its Subsidiaries has any
liabilities, obligations, claims or losses (whether liquidated or unliquidated,
secured or unsecured, absolute, accrued, contingent or otherwise) that would be
required to be disclosed on a consolidated balance sheet of the Company and its
Subsidiaries (including the notes thereto) prepared in conformity with GAAP that
are not disclosed in the Commission Documents, other than those incurred in the
ordinary course of business consistent with past practices since February 28,
1998 that, individually or
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in the aggregate, would not reasonably be expected to have a Material Adverse
Effect on the Company and its Subsidiaries taken as whole.
2.1.10 No Undisclosed Events or Circumstances. No event or
circumstance has occurred or exists with respect to the Company or its
Subsidiaries or their respective businesses, properties, prospects, operations
or condition (financial or otherwise), that, under applicable law, rule or
regulation, should have been publicly disclosed or announced by the Company
before the date of this Agreement but that has not been so publicly announced or
disclosed.
2.1.11 Indebtedness. Schedule 2.1.11 hereto sets forth as of the date
hereof all outstanding secured and unsecured Indebtedness of the Company or any
Subsidiary, or for which the Company or any Subsidiary has commitments that are
not disclosed in the Form 10- KSB or the Forms 10-QSB. "Indebtedness" shall
mean, in an amount in excess of $250,000, (i) any liability for borrowed money
or evidenced by a promissory note or similar written obligation given in
connection with the acquisition of any property or other assets (other than
trade accounts payable incurred in the ordinary course of business), (ii) all
guaranties, endorsements and other contingent obligations, in respect of
Indebtedness of others, whether or not the same are or should be reflected in
the Company's balance sheet (or the notes thereto), except guaranties by
endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business consistent with past practices,
and (iii) the present value of any lease payments due under leases required to
be capitalized in accordance with GAAP. Neither the Company nor any Subsidiary
is in default in any material respect with respect to any Indebtedness.
2.1.12 Title to Assets. Each of the Company and the Subsidiaries has
good and marketable title to all of the real and personal property owned by it,
free of any mortgages, pledges, charges, liens, security interests or other
encumbrances, except for those indicated on Schedule 2.1.12 hereto or in the
Form 10-KSB or Forms 10-QSB or such that would not reasonably be expected to
have a Material Adverse Effect. The Company and each of its Subsidiaries enjoy
peaceful and undisturbed possession under all leases under which they are
operating, and all said leases are valid and subsisting and in full force and
effect.
2.1.13 Actions Pending. There is no action, suit, claim, investigation
or proceeding pending or, to the knowledge of the Company threatened, against
the Company or any Subsidiary that questions the validity of this Agreement or
the Registration Rights Agreement or the transactions contemplated hereby or
thereby or any action taken or to be taken pursuant hereto or thereto. Except as
set forth on Schedule 2.1.13 hereto, there is no material action, suit,
investigation or proceeding pending or, to the knowledge of the Company
threatened, against or involving the Company, any Subsidiary or any of their
respective properties or assets. There are no material outstanding orders,
judgments, injunctions, awards or decrees of any court, arbitrator or
governmental or regulatory body against the Company or any Subsidiary.
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2.1.14 Compliance with Law. The business of the Company and the
Subsidiaries has been and is presently being conducted in compliance with all
applicable federal, state, and local governmental laws, rules, regulations and
ordinances, except as would not reasonably be expected to have a Material
Adverse Effect. Except as described on Schedule 2.1.14, the Company and each of
its Subsidiaries have all franchises, permits, licenses, consents and other
governmental or regulatory authorizations and approvals needed to conduct their
respective businesses as now being conducted by them unless the failure to
possess such franchises, permits, licenses, consents and other governmental or
regulatory authorizations and approvals, individually or in the aggregate, would
not reasonably be expected to have a Material Adverse Effect.
2.1.15 Taxes. The Company and, to the best of the Company's knowledge,
each of the Subsidiaries have accurately prepared and filed all federal, state,
local, foreign and other tax returns required by law to be filed by them and
have paid or made provisions for the payment of all taxes shown to be due and
all additional assessments, and adequate provisions have been and are reflected
in the financial statements of the Company and the Subsidiaries for all current
taxes to which the Company or any Subsidiary is subject and that are not
currently due and payable. The Company has no knowledge of any assessments,
adjustments or contingent tax liability (whether federal or state) pending or
threatened against the Company or any Subsidiary for any period, nor of any
reasonable basis for any such assessment, adjustment or contingency.
2.1.16 Certain Fees. Except with respect to fees payable by the
Company to Pacific Continental Securities, Inc. and Lysys AG at the Closing, no
brokers', finders' or financial advisory fees or commissions will be payable by
the Company, any Subsidiary or, to the Company's knowledge any Purchaser, with
respect to the transactions contemplated by this Agreement.
2.1.17 Disclosure. Neither this Agreement nor the Schedules hereto nor
any other document, certificate or instrument furnished to the Purchasers by or
on behalf of the Company or any Subsidiary in connection with the transactions
contemplated by this Agreement, when all of the foregoing are considered
together, contains any untrue statement of a material fact or omits to state a
material fact needed to make the statements made herein or therein, in the light
of the circumstances under which they were made, not misleading.
2.1.18 Operation of Business. The Company and the Subsidiaries own or
possess all material patents, trademarks, service marks, trade names,
copyrights, and licenses or all rights with respect to the foregoing, needed to
conduct their respective businesses as they are now conducted.
2.1.19 Environmental Compliance. Except as disclosed on Schedule
2.1.19 hereto, the Company and each of its Subsidiaries have obtained all
material approvals, certificates, consents, licenses, orders and permits or
other similar authorizations of all federal, state, and local authorities that
are required under any Environmental Laws. "Environmental
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Laws" shall mean all applicable federal, state, and local laws relating to the
protection of the environment including, without limitation, all requirements:
(i) pertaining to reporting, licensing, permitting, controlling, investigating
or remediating emissions, discharges, releases or threatened releases of
hazardous substances, chemical substances pollutants, contaminants or toxic
substances, materials or wastes, whether solid, liquid or gaseous in nature,
into the air, surface water, groundwater or land; or (ii) relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of hazardous substances, chemical substances, pollutants,
contaminants or toxic substances, material or wastes, whether solid, liquid or
gaseous in nature. Except as described on Schedule 2.1.19 hereto, and except for
such instances that would not reasonably be expected, individually or in the
aggregate, to have a Material Adverse Effect, the Company does not know of any
past or present events, conditions, circumstances, incidents, actions or
omissions relating to or in any way affecting the Company or its Subsidiaries
that would cause a violation of any Environmental Law after the Closing or that
may give rise to any material Environmental Liability, or otherwise form the
basis of any claim, action, demand, suit, proceeding, hearing, study or
investigation (i) under any Environmental Law, or (ii) based on or related to
the manufacture, processing, distribution, use, treatment, storage (including
without limitation underground storage tanks), disposal, transport or handling,
or the emission, discharge, release or threatened release of any hazardous
substance. "Environmental Liabilities" means all liabilities of the Company or
any of its Subsidiaries (whether such liabilities are owed by such person to
governmental authorities, third parties or otherwise), whether now in existence
or arising hereafter, that arise under or relate to any Environmental Law.
2.1.20 Books and Records. The records and documents of the Company and
the Subsidiaries accurately reflect in all material respects information
relating to the business of the Company and the Subsidiaries, the location and
collection of their assets, and the nature of all transactions giving rise to
the obligations or accounts receivable of the Company or any Subsidiary.
2.1.21 Material Agreements. Except as disclosed in the Commission
Documents (subject to any applicable confidential treatment granted by the
Commission) or on Schedule 2.1.21 hereto, neither the Company nor any Subsidiary
is a party to any written or oral contract, instrument, agreement, commitment,
obligation, plan or arrangement, a copy of which would be required to be filed
with the Commission as an exhibit to a registration statement on Form S-3 if the
Company or any subsidiary were registering securities on such form under the
Securities Act of 1933, as amended (the "Securities Act"). The Company, each
Subsidiary and, to the best of the Company's knowledge, each other party
thereto, have performed all the obligations required to be performed by them to
date under any leases, contracts, or other agreements of the Company or its
Subsidiaries, and the Company has not received any notice of default and is not
in default under any lease, contract or agreement now in effect to which the
Company or any Subsidiary is a party or by which it or its property may be
bound, the result of any of which could reasonably be expected to cause a
Material Adverse Effect.
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2.1.22 Transactions with Affiliates. Except as set forth in the
Commission Documents or on Schedule 2.1.22 hereto, there are no loans, leases,
agreements (other than employment contracts, stock options, or warrant
agreements), contracts, royalty agreements, management contracts or arrangements
or other continuing transactions involving amounts exceeding $250,000 between
(a) the Company, any Subsidiary or any of their respective customers or
suppliers on the one hand, and (b) any officer, employee, consultant or director
of the Company, or any member of the immediate family of any such officer,
employee, consultant, or director or any corporation or other entity controlled
by such officer, employee, consultant, or director or a member of their
immediate family on the other hand.
2.1.23 Securities Act. Assuming the truthfulness of all
representations made by the Purchasers in this Agreement, the Company has
complied and will comply in all material respects with all applicable federal
and state securities laws in connection with the offer, issuance and sale of the
Shares hereunder. Neither the Company nor anyone acting on its behalf, directly
or indirectly, has sold, offered to sell or solicited offers to buy, or will
sell, offer to sell or solicit offers to buy the Shares or similar securities to
any person, so as to require the registration of the Shares under the Securities
Act and applicable state securities laws, except in accordance with the
Registration Rights Agreement. None of the Company, nor any of its affiliates,
nor any person acting on its or their behalf, has engaged in any form of general
solicitation or general advertising (within the meaning of Regulation D under
the Securities Act) in connection with the offer or sale of the Shares.
2.1.24 Approvals. Except for the filing or delivery of any notices or
other documents prior or subsequent to the Closing that may be required under
applicable state or federal securities laws or by Nasdaq (which if required,
shall be filed on a timely basis), the filing of the Designation of Rights and
Preferences, or as set forth in Schedule 2.1.24, no authorization, consent,
approval, license, filing or registration with any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, or from any other third party, is or will be necessary for or in
connection with the execution or delivery of the Shares, or for the performance
by the Company of its obligations under this Agreement.
2.1.25 Employees. Neither the Company nor any Subsidiary has any
collective bargaining agreements covering any of its employees. To the best of
the Company's knowledge, no employee of the Company is in violation of any term
of any employment contract, patent or other proprietary information agreement or
any other contract or agreement relating to the right of any such employee to be
employed by the Company because of the nature of the business conducted or
proposed to be conducted by the Company or any other reason. Since November 30,
1996, no officer, consultant or key employee of the Company or any Subsidiary
whose termination, either individually or in the aggregate, could have a
Material Adverse Effect, has terminated or, to the knowledge of the Company has
any present intention of terminating, his or her employment or engagement with
the Company or any Subsidiary.
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2.1.26 Absence of Certain Developments. Except as provided in Schedule
2.1.26 hereto or as disclosed in the Commission Documents, since February 28,
1998, neither the Company nor any Subsidiary has:
(a) issued any stock, bonds or other corporate securities or any
rights, options or warrants with respect thereto;
(b) borrowed any amount in excess of $250,000 or incurred or
become subject to any material liabilities (absolute or contingent) except
liabilities incurred in the ordinary course of business consistent with
past practices;
(c) discharged or satisfied any material lien or encumbrance or
paid any material obligation or liability (absolute or contingent), other
than current liabilities paid in the ordinary course of business consistent
with past practices;
(d) declared or made any payment or distribution of cash or other
property to stockholders with respect to its stock, or purchased or
redeemed, or made any agreements to purchase or redeem, any shares of its
capital stock;
(e) sold, assigned or transferred any other tangible assets, or
cancelled any debts or claims, except in the ordinary course of business
consistent with past practices;
(f) sold, assigned or transferred any patent rights, trademarks,
trade names, copyrights, trade secrets or other intangible assets or
intellectual property rights, except in the ordinary course of business
consistent with past practices;
(g) suffered any substantial losses or waived any rights of
material value, whether or not in the ordinary course of business, or
suffered the loss of any material amount of existing business;
(h) made any changes in employee compensation except in the
ordinary course of business and consistent with past practices;
(i) made capital expenditures or commitments therefor that
aggregate in excess of $250,000;
(j) made charitable contributions or pledges in excess of $25,000
in total;
(k) suffered any material damage, destruction or casualty loss,
whether or not covered by insurance; or
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(l) experienced any material problems with labor or management in
connection with the terms and conditions of their employment.
2.1.27 Public Utility Holding Company Act and Investment Company Act
Status. The Company is not a "holding company" or a "public utility company" as
such terms are defined in the Public Utility Holding Company Act of 1935, as
amended. The Company is not, and as a result of and immediately after the
Closing will not be, an "investment company," or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
2.1.28 U.S. Real Property Holding Corporation. Neither the Company nor
any of its Subsidiaries is now, nor will it be immediately after the Closing, a
"United States Real Property Holding Corporation" as defined in section
897(c)(2) of the Internal Revenue Code of 1986, as amended (the "Code") and
section 1.897-2(b) of the Treasury Regulations.
2.2 Representations and Warranties of the Purchasers. Each of the
Purchasers hereby makes the following representations and warranties to the
Company with respect solely to itself and not with respect to any other
Purchaser:
2.2.1 Organization and Standing of the Purchasers. Such Purchaser is a
corporation or partnership duly incorporated or organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation or
organization.
2.2.2 Authorization; Power. Such Purchaser has the requisite power and
authority to enter into this Agreement and the Registration Rights Agreement and
to perform its obligations hereunder and thereunder, including without
limitation, to purchase the Shares being sold to it hereunder. The execution and
delivery of this Agreement and the Registration Rights Agreement by such
Purchaser, and the performance by the Purchaser of its obligations hereunder and
thereunder, including the consummation by it of the transactions contemplated
hereby and thereby, have been duly authorized by all necessary corporate or
partnership action, and no further consent or authorization of such Purchaser or
its Board of Directors, stockholders, or partners, as the case may be, is
required. This Agreement has been duly executed and delivered by such Purchaser.
The Registration Rights Agreement will have been duly executed and delivered by
such Purchaser at the Closing. Assuming the due authorization, execution and
delivery hereof and thereof by the other parties hereto and thereto, this
Agreement constitutes, and the Registration Rights Agreement shall constitute
when executed and delivered, a valid and binding obligation of the Purchaser
enforceable against such Purchaser in accordance with its terms, except as the
foregoing may be limited by applicable bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium, or other similar laws relating to or
affecting generally the rights of creditors or by other equitable principles
including those limiting the availability of specific performance, injunctive
relief, and other equitable remedies.
2.2.3 No Conflicts. Neither the execution or delivery of this
Agreement or the Registration Rights Agreement by the Purchaser, nor the
performance by such Purchaser of its
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obligations hereunder and thereunder, will (i) result in a violation of such
Purchaser's charter or other organizational documents or bylaws (ii) violate, or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of any agreement, indenture, note, bond,
license agreement, or instrument to which such Purchaser is a party, or (iii)
result in a violation of any federal, state, local or foreign statute, rule,
regulation, order, judgment or decree applicable to such Purchaser or its
properties or by which any property or asset of such Purchaser is bound or
affected (except in the case of each of clauses (i), (ii) and (iii) for
conflicts, defaults and violations that would not, individually or in the
aggregate have a Material Adverse Effect on such Purchaser). Such Purchaser is
not required to obtain any consent, authorization or order of, or make any
filing or registration with, any court or governmental agency for it to execute,
deliver or perform any of its obligations under this Agreement or the
Registration Rights Agreement or purchase the Shares in accordance with the
terms hereof, provided that for purposes of the representation made in this
sentence, such Purchaser is assuming and relying upon the accuracy of the
relevant representations and agreements of the Company herein.
2.2.4 Acquisition for Investment. Such Purchaser is purchasing the
Preferred Shares and the Warrants solely for its own account for the purpose of
investment or as a nominee or agent solely for the entities named on the
signature pages hereto and not with a view to or for sale in connection with any
distribution. Such Purchaser does not have a present intention to sell the
Preferred Shares, the Warrants or the Shares, nor a present contract,
undertaking, agreement or arrangement (whether or not legally binding) to any
person, and the Purchaser, does not have any present intention to effect any
distribution of the Preferred Shares, the Warrants or the Shares, to or through
any person or entity other than the entities, if any, for which such Purchaser
is acting as nominee as set forth on the signature pages hereto; provided,
however, that by making the representations herein, such Purchaser does not
agree to hold the Preferred Shares, the Warrants or the Shares for any minimum
or other specific term and reserves the right to dispose of the Preferred
Shares, the Warrants and the Shares at any time in accordance with federal and
state securities laws applicable to such disposition. Such Purchaser is not a
broker-dealer. Such Purchaser acknowledges that it is able to bear the financial
risks associated with an investment in the Preferred Shares, the Warrants and
the Shares, and that it can bear the loss of its entire investment. Such
Purchaser represents that it was not organized solely for the purpose of making
an investment in the Company. Such Purchaser acknowledges that it has been given
full access to such records of the Company and the Subsidiaries and to the
officers of the Company and the Subsidiaries as it has deemed necessary and
appropriate to conduct and complete its due diligence investigation.
2.2.5 Accredited Purchasers. Such Purchaser, or each of the entities
set forth on the signature pages hereto for which such Purchaser is acting as
nominee, is an "accredited investor" as defined in Regulation D promulgated
under the Securities Act.
2.2.6 Rule 144. Such Purchaser understands that the Shares must be
held indefinitely unless such Shares are registered under the Securities Act or
an exemption from
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registration is available. Such Purchaser acknowledges that it is familiar with
Rule 144 of the rules and regulations of the Commission, as amended, promulgated
pursuant to the Securities Act ("Rule 144"), and that it has been advised that
Rule 144 permits, only under certain circumstances, the resale of restricted
securities such as the Preferred Shares, the Warrants and the Shares, but that
Rule 144 is not now available to permit resales by such person of any of the
Preferred Shares, the Warrants or the Shares.
2.2.7 Reliance. Each Purchaser understands that the Shares are being
offered and sold in reliance on exemptions from the registration requirements of
federal and state securities laws and that the Company is relying upon the truth
and accuracy of the representations, warranties, agreements, acknowledgments and
understandings of the Purchasers set forth herein to determine the applicability
of such exemptions and the suitability of such Purchasers to acquire the Shares.
2.2.8 No Brokers. No brokers', finders' or financial advisory fees or
commissions will be payable by the Purchaser with respect to the transactions
contemplated by this Agreement.
2.2.9 Disclosure. Neither this Agreement nor any other document,
certificate or instrument furnished to the Company by or on behalf of the
Purchaser in connection with the transactions contemplated by this Agreement,
contains any untrue statement of a material fact or omits to state a material
fact needed to make the statements made herein or therein, in the light of the
circumstances under which they were made, not misleading.
3. COVENANTS
3.1 By the Company. The Company covenants with each of the Purchasers as
follows:
3.1.1 Securities Compliance. The Company shall notify the Commission
and Nasdaq, if applicable, in accordance with their requirements, of the
transactions contemplated by this Agreement and the Registration Rights
Agreement, and shall take any other action required by applicable law, rule or
regulation for the legal and valid issuance of the Shares to the Purchasers.
3.1.2 Conversion Notice. If the Company receives a Conversion Notice
in the form attached as Exhibit E duly executed by a holder of Preferred Shares
then entitled to convert such shares to Common Stock and accompanied by the
certificate or certificates representing such Preferred Shares and such other
documents as may be required by the Company in accordance with the Designation
of Rights and Preferences, then, unless the Preferred Shares are redeemed by the
Company pursuant to the Designation of Rights and Preferences, the Company shall
cause its transfer agent to issue certificates for the Conversion Shares to the
holder within five business days after such receipt.
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3.1.3 Registration and Listing. The Company will cause its Common
Stock to continue to be registered under Sections 12(b) or 12(g) of the Exchange
Act, will comply in all respects with its reporting and filing obligations under
the Exchange Act, will comply with all requirements related to any registration
statement filed pursuant to the Registration Rights Agreement and will not take
any action or file any document (whether or not permitted by the Securities Act
or the rules promulgated thereunder) to terminate or suspend such registration
or to terminate or suspend its reporting and filing obligations under said Acts,
except as permitted herein. The Company will take all action necessary to
continue the quotation or trading of its Common Stock on the Nasdaq system and
will comply in all material respects with the Company's reporting, filing and
other obligations under the bylaws or rules of the NASD and the Nasdaq system.
3.1.4 Inspection Rights. The Company shall permit, during normal
business hours and upon no less than 5 days' written notice, each Purchaser or
any employees, agents or representatives thereof, so long as such Purchaser
shall be obliged hereunder to purchase the Preferred Shares or shall
beneficially own Preferred Shares, Warrants or Shares that, in the aggregate,
represent more than 5% of the total combined voting power of all voting
securities then outstanding, to visit and inspect the properties, assets,
operations and business of the Company and any Subsidiary, and to discuss the
affairs, finances and accounts of the Company and any Subsidiary with any of its
officers, consultants, directors, and key employees, subject to appropriate
confidentiality obligations.
3.1.5 Reporting Requirements. The Company shall furnish the following
to each Purchaser so long as such Purchaser shall be obliged hereunder to
purchase the Preferred Shares or shall beneficially own Preferred Shares:
(a) Quarterly Reports filed with the Commission on Form 10-Q or
Form 10-QSB, as the case may be, as soon as available, and in any event
within 50 days after the end of each of the first three fiscal quarters of
the Company; and
(b) Annual Reports filed with the Commission on Form 10-K or Form
10-KSB, as the case may be, as soon as available, and in any event within
95 days after the end of each fiscal year of the Company.
3.1.6 Other Agreements. The Company shall not enter into any agreement
that would materially restrict or materially impair the rights of the Purchasers
under this Agreement, the Registration Rights Agreement or the Articles, except
as otherwise permitted in such agreements and the Articles.
3.1.7 Rule 144A. The Company covenants and agrees that if the Company
fails to register the Conversion Shares by one year from the date of this
Agreement under the terms and conditions of the Registration Rights Agreement
that, for so long as any of the Shares remain outstanding and continue to be
"restricted securities" within the meaning of Rule 144 under the Securities Act,
the Company shall make available to any Purchaser, or entity set forth
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on the signature pages hereto for which such Purchaser is acting as nominee, who
is a "qualified institutional buyer" within the meaning set forth in Rule
144A(a) under the Securities Act, in connection with any sale thereof, the
information required by Rule 144A(d)(4) under the Securities Act to permit
resales of the Conversion Shares pursuant to Rule 144A.
3.1.8 Use of Proceeds. The proceeds from the sale of the Preferred
Shares will be used by the Company and its Subsidiaries primarily for potential
future acquisitions.
3.1.9 Right of First Refusal. The Company agrees that, for a period of
one year from the date of this Agreement, it will not issue in any
capital-raising transaction any series of preferred shares having rights senior
to or equal to the Preferred Shares with respect to the distribution of assets
on liquidation, dissolution, or winding up (including any shares of the
Company's Series A Convertible Preferred Stock) without giving each Purchaser at
least twenty days' prior notice of such issuance. For ten days after the receipt
of such notice, each Purchaser shall have a right of first refusal, exercisable
by written notice to the Company, to purchase in such offering that number of
such shares, at a purchase price per share equal to the proposed purchase price
in such offering, that have a total purchase price up to the purchase price paid
by such Purchaser for the Preferred Shares purchased by it hereunder. This right
of first refusal shall otherwise be subject to all of the same terms and
conditions of such offering. If a Purchaser does not timely give notice of its
intent to exercise such right of first refusal, the Purchaser's right of first
refusal shall be deemed to have terminated and Company may proceed to issue all
such shares to other purchasers, free and clear of such right of first refusal,
at a price not less than that offered to the Purchaser. However, this right of
first refusal shall not apply to the issuance by the Company in a public or
private offering of shares of (i) common stock; (ii) nonconvertible debt
securities; or (iii) the first issuance by the Company after the Closing of
preferred stock in an amount yielding gross proceeds to the Company of at least
$17,000,000.
3.1.10 U.S. Real Property Holding Corporation. The Company covenants
that it will operate in a manner such that it will not become a "United States
real property holding corporation" as that term is defined in section 897(c)(2)
of the Code ("USRPHC"), and the regulations thereunder. The Company agrees to
make determinations as to its status as a USRPHC, and will file statements
concerning those determinations with the Internal Revenue Service, in a manner
and at the times required under section 1.897-2(h) of the Treasury Regulations,
or any supplementary or successor provision thereto. Within 30 days of a request
from a holder, the Company will inform the requesting party, in the manner set
forth in section 1.897-2(h) Treasury Regulations or any supplementary or
successor provision thereto, whether that party's interest in the Company
constitutes a United States real property interest (within the meaning of
section 897(c)(1) of the Code and the regulations thereunder) and whether the
Company has provided to the Internal Revenue Service all required notices as to
its USRPHC status.
3.1.11 Structure of Voluntary Redemption. During the 20-day period
after receiving notice of a Voluntary Redemption (as such term is defined in the
Rights and Preferences), by the Company under Section 6(a) of the Rights and
Preferences, the Company
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shall, at any Holder's (as such term is defined in the Rights and Preferences)
request, engage in good faith negotiations with such Holder, to structure the
Voluntary Redemption so that such redemption will be characterized as a sale or
exchange within the meaning of Section 1001 of the Code, and not as a
distribution within the meaning of Section 302 of the Code.
3.2 By the Purchasers. The Purchasers each covenant with the Company that
they shall not sell or agree to sell any Shares before they are the holder
thereof.
3.3 By All Parties. The Company and the Purchasers each agree to treat the
Preferred Stock as stock that is not "preferred stock" for all U.S. income tax
purposes, including for purposes of Section 305 of the Code and the regulations
thereunder, unless they are required to treat the Preferred Stock otherwise
pursuant to a "determination" within the meaning of Section 1313(a) of the Code;
provided that the Purchasers (x) have received prompt notice of any tax
assessment, deficiency, audit or judicial proceeding that relates to the
taxation of the Preferred Stock, (y) are given the opportunity to participate in
all proceedings that affect the taxation of Preferred Stock, and (z) have
consented to any closing or other agreement with or final disposition of a claim
for refund by the IRS that affects the taxation of the Preferred Stock. In the
event of a change of law regarding this treatment of the Preferred Stock, the
Company and the Purchasers agree to determine a position in such regard that is
reasonably acceptable to each of them.
4. CONDITIONS
4.1 Conditions Precedent to the Obligation of the Company to Sell the
Preferred Shares. The obligation hereunder of the Company to issue and/or sell
the Preferred Shares to the Purchasers is subject to the satisfaction or waiver,
at or before the Closing, of each of the conditions set forth below. These
conditions are for the Company's sole benefit and may be waived by the Company
at any time in its sole discretion.
4.1.1 Accuracy of the Purchasers' Representations and Warranties. Each
of the representations and warranties of the Purchasers shall be true and
correct in all material respects as of the date made and as of the Closing as
though made at that time, and the Company shall have received a certificate from
each Purchaser to that effect.
4.1.2 Performance by the Purchasers. Each Purchaser shall have
performed, satisfied and complied in all material respects with all material
covenants, agreements and conditions required by this Agreement to be performed,
satisfied or complied with by such Purchaser at or prior to the Closing and the
Company shall have received a certificate from each Purchaser to that effect.
4.1.3 No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction that
prohibits the consummation of any of the transactions contemplated by this
Agreement, the Warrants, or the Registration Rights Agreement.
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4.1.4 No Proceedings or Litigation. No action, suit, investigation or
proceeding before or by any arbitrator or any governmental authority shall have
been commenced or threatened against the Company or any Subsidiary, or any of
the officers, directors or affiliates of the Company or any Subsidiary, seeking
to restrain, prevent or change the transactions contemplated by this Agreement,
the Warrants, or the Registration Rights Agreement, or seeking damages in
connection with such transactions.
4.1.5 Opinion of Counsel; Closing Documents. At the Closing, the
Company shall have received an opinion of counsel to each of the Purchasers, in
the form of Exhibit G hereto and such other certificates and documents as the
Company and its counsel shall reasonably require incident to the Closing.
4.1.6 Purchase Price. At the Closing, the Company shall have received
payment of the purchase price for the Preferred Shares.
4.1.7 Registration Rights Agreement. At the Closing, the Purchasers
shall have executed and delivered the Registration Rights Agreement to the
Company.
4.2 Conditions Precedent to the Obligation of the Purchasers to Purchase
the Preferred Shares. The obligation hereunder of each Purchaser to acquire and
pay for the Preferred Shares is subject to the satisfaction or waiver, at or
before the Closing, of each of the conditions set forth below. These conditions
are for each Purchaser's sole benefit and may be waived by such Purchaser at any
time in its sole discretion.
4.2.1 Accuracy of the Company's Representations and Warranties. Each
of the representations and warranties of the Company shall be true and correct
in all material respects as of the date made and as of the Closing as though
made at that time (except for representations and warranties that speak as of a
particular date), and the Purchasers shall have received a certificate from the
Company to that effect.
4.2.2 Performance by the Company. The Company shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by this Agreement to be performed, satisfied or complied
with by the Company at or prior to the Closing, and the Purchasers shall have
received a certificate from the Company to that effect.
4.2.3 No Suspension, etc. From the date hereof to the Closing Date,
trading in the Company's Common Stock shall not have been suspended by the
Commission or Nasdaq (except for any suspension of trading of limited duration
agreed to by the Company, which suspension shall be terminated prior to
Closing), and, at any time from the date hereof to the Closing, trading in
securities generally as reported by Nasdaq shall not have been suspended or
limited or minimum prices shall not have been established on securities whose
trades are reported by Nasdaq, nor shall trading in securities on the New York
Stock Exchange have been
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suspended nor minimum prices established on the New York Stock Exchange, nor
shall a banking moratorium have been declared either by the United States or New
York State authorities, nor shall there have occurred any material outbreak or
escalation of hostilities or other national or international calamity or crisis
of such magnitude in its effect on, or any material adverse change in, any
financial market that, in each case, in the reasonable judgment of such
Purchaser, makes it impracticable or inadvisable to purchase the Shares.
4.2.4 No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction that
prohibits the consummation of any of the transactions contemplated by this
Agreement or the Registration Rights Agreement.
4.2.5 No Proceedings or Litigation. No action, suit, investigation or
proceeding before or by any arbitrator or any governmental authority shall have
been commenced or threatened against the Company or any Subsidiary, or any of
the officers, directors or affiliates of the Company or any Subsidiary, seeking
to restrain, prevent or change the transactions contemplated by this Agreement
or the Registration Rights Agreement, or seeking damages in connection with such
transactions.
4.2.6 Designation of Rights and Preferences. The Amendment to the
Articles containing the Designation of Rights and Preferences shall have been
filed with the Secretary of State of Washington.
4.2.7 Opinion of Counsel; Closing Documents. At the Closing, the
Purchasers shall have received an opinion of Stoel Rives LLP, counsel to the
Company, dated the date of Closing, in the form of Exhibit H hereto and such
other certificates and documents as the Purchasers and their counsel shall
reasonably require incident to the Closing.
4.2.8 Registration Rights Agreement. At the Closing the Company shall
have executed and delivered the Registration Rights Agreement to each Purchaser.
5. [INTENTIONALLY OMITTED]
6. STOCK CERTIFICATE LEGEND
Each certificate representing the Shares, and, if appropriate, any
securities issued upon conversion thereof, shall be stamped or otherwise
imprinted with a legend substantially in the following form (in addition to any
legend required by applicable state securities or "blue sky" or other laws):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE "SECURITIES") HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS
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REGISTERED UNDER THAT ACT AND UNDER APPLICABLE STATE SECURITIES LAWS,
OR IN THE OPINION OF COUNSEL TO PACIFIC AEROSPACE & ELECTRONICS, INC.
(THE "COMPANY") THAT REGISTRATION OF SUCH SECURITIES UNDER THE
SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES
LAWS IS NOT REQUIRED.
The Company agrees to cause its transfer agent to reissue certificates
representing the Shares, without the legend set forth above, if prior to making
any transfer of any Shares, the holder thereof shall give written notice to the
Company describing the manner and terms of the proposed transfer and providing
the Company with such other information as the Company may reasonably request
and: (a) the Company has notified such holder that either (i) in the opinion of
Company counsel, the registration of such Shares under the Securities Act is not
required in connection with such proposed transfer; or (ii) a registration
statement under the Securities Act covering such proposed disposition has been
filed by the Company with the Commission and has become effective under the
Securities Act; and (b) the Company has notified such holder that either: (i) in
the opinion of Company counsel, the registration or qualification under the
securities of "blue sky" laws of any state is not required in connection with
such proposed disposition; or (ii) compliance with applicable state securities
or "blue sky" laws has been effected. The Company will use its best efforts to
respond to any such notice from a holder within five (5) business days. In the
case of any proposed transfer under this Article VI, the Company will use
reasonable efforts to comply with any such applicable state securities or "blue
sky" laws, but shall in no event be required, in connection therewith, to
qualify to do business in any state where it is not then qualified or to take
any action that would subject it to tax or to the general service of process in
any state where it is not then subject. The restrictions on transfer contained
in this Section 6 shall be in addition to, and not by way of limitation of, any
other restrictions on transfer contained in any other section of this Agreement.
7. TERMINATION
7.1 Termination by Mutual Consent. This Agreement may be terminated at any
time prior to the Closing by the mutual written consent of the Company and the
Purchasers.
7.2 Other Termination. This Agreement may be terminated by the action of
the Board of Directors of the Company or by any one or more of the Purchasers at
any time, prior to the Closing if the Closing shall not have been consummated
within 30 days after execution of this Agreement.
7.3 Effect of Termination. In the event of termination by the Company or
any one or more of the Purchasers, written notice thereof shall forthwith be
given to the other parties and the transactions contemplated by this Agreement
and the Registration Rights Agreement shall be terminated, without further
action by either party. If this Agreement is terminated as provided in Sections
7.1 or 7.2 this Agreement shall become void and of no further force and effect,
except for Sections 9.1, 9.2 and Article 8.
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8. INDEMNIFICATION
8.1 General Indemnity. The Company agrees to indemnify and hold harmless
the Purchasers and each entity named on the signature pages hereto for which
such Purchaser is acting as nominee (and their respective directors, officers,
partners, affiliates, agents, successors and assigns) from and against any and
all claims, losses, liabilities, deficiencies, costs, damages and expenses
(including, without limitation, reasonable attorneys' fees, charges and
disbursements) incurred by them as a result of any breach of the
representations, warranties or covenants made by the Company herein. Each
Purchaser severally but not jointly agrees to indemnify and hold harmless the
Company and its directors, officers, affiliates, agents, successors and assigns
from and against any and all losses, liabilities, deficiencies, costs, damages
and expenses (including, without limitation, reasonable attorneys' fees, charges
and disbursements) incurred by them as result of any material breach of the
representations, warranties or covenants made by such Purchaser herein.
8.2 Indemnification Procedure. Any party entitled to indemnification under
this Article 8 (an "indemnified party") will give written notice to the
indemnifying party of any matters giving rise to a claim for indemnification;
provided that the failure of any party entitled to indemnification hereunder to
give notice as provided herein shall not relieve the indemnifying party of its
obligations under this Article 8 except to the extent that the indemnifying
party is actually prejudiced by such failure to give notice. Notwithstanding
anything else in this paragraph, no party shall have a claim for indemnification
hereunder if the indemnifying party has not been given notice by the indemnified
party of the claim by the date that is one year after the earlier of (i) the
effective date of the registration statement filed by the Company pursuant to
the Registration Rights Agreement or (ii) the date that the party seeking
indemnification ceases to hold Preferred Shares or Conversion Shares. If any
action, proceeding or claim is brought against an indemnified party in respect
of which indemnification is sought hereunder, the indemnifying party shall be
entitled to participate in and, unless in the reasonable judgment of the
indemnified party a conflict of interest between it and the indemnifying party
may exist in respect of such action, proceeding or claim, to assume the defense
thereof, with counsel reasonably satisfactory to the indemnified party. If the
indemnifying party advises an indemnified party that it will contest such a
claim for indemnification hereunder, or fails, within thirty (30) days of
receipt of any indemnification notice to notify, in writing, such person of its
election to defend, settle or compromise, at its sole cost and expense, any
action, proceeding or claim (or discontinues its defense at any time after it
commences such defense), then the indemnified party may, at its option, defend,
settle or otherwise compromise or pay such action or claim. In any event, unless
and until the indemnifying party elects in writing to assume and does so assume
the defense of any such claim, proceeding or action, the indemnified party's
costs and expenses arising out of the defense, settlement or compromise of any
such action, claim or proceeding shall be losses subject to indemnification
hereunder. The indemnified party shall cooperate fully with the indemnifying
party in connection with any negotiation or defense of any such action or claim.
The indemnifying party shall furnish to the indemnifying party all information
reasonably available to the indemnified party that relates to such action or
claim. The indemnifying party shall keep the indemnified party fully apprised at
all times as to the
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status of the defense or any settlement negotiations with respect thereto. If
the indemnifying party elects to defend any such action or claim, then the
indemnified party shall be entitled to participate in such defense with counsel
of its choice at its sole cost and expense. Notwithstanding anything in this
Article 8 to the contrary, the indemnifying party shall not, without the
indemnified party's prior written consent, settle or compromise any claim or
consent to entry of any judgment in respect thereof that imposes any future
obligation on the indemnified party or that does not include, as an
unconditional term thereof, the giving by the claimant or the plaintiff to the
indemnified party, a release from all liability in respect of such claim. The
indemnification required by this Article 8 shall be made by periodic payments of
the amount thereof during the course of investigation or defense, as and when
bills are received or expense, loss, damage or liability is incurred so long as
the indemnified party irrevocably agrees to refund such moneys if it is
ultimately determined by a court of competent jurisdiction that such party was
not entitled to indemnification. The indemnity agreements contained herein shall
be in addition to (a) any cause of action or similar rights of the indemnified
party against the indemnifying party or others, and (b) any liabilities the
indemnifying party may be subject to pursuant to the law.
9. MISCELLANEOUS
9.1 Fees and Expenses. Except as otherwise set forth in the Registration
Rights Agreement or the Designation of Rights and Preferences, each party shall
pay the fees and expenses of its advisers, counsel, accountants and other
experts, if any, and all other expenses incurred by such party incident to the
negotiation, preparation, execution, delivery and performance of this Agreement,
provided that the Company shall pay, at the Closing, (a) all of the Purchasers
out-of-pocket expenses associated with the offering of the Preferred Shares,
whether or not the transactions contemplated under this Agreement are
consummated, in an amount not to exceed $20,000.
9.2 Specific Enforcement, Consent to Jurisdiction.
9.2.1 The Company and the Purchasers acknowledge and agree that
irreparable damage would occur if any of the provisions of this Agreement or the
Registration Rights Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent or cure
material breaches of the provisions of this Agreement or the Registration Rights
Agreement and to enforce specifically the terms and provisions hereof or
thereof, this being in addition to any other remedy to which any of them may be
entitled by law or equity.
9.2.2 Each of the Company and the Purchasers (i) hereby irrevocably
submits to the jurisdiction of the United States District Court and other courts
of the United States sitting in King County, Washington for the purposes of any
suit, action or proceeding arising out of or relating to this Agreement or the
Registration Rights Agreement and (ii) hereby waives, and agrees not to assert
in any such suit, action or proceeding, any claim that it is not personally
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subject to the jurisdiction of such court, that the suit, action or proceeding
is brought in an inconvenient forum or that the venue of the suit, action or
proceeding is improper.
9.3 This Agreement (including the Exhibits and Schedules hereto) contains
the entire understanding of the parties with respect to the matters covered
hereby and, except as specifically set forth herein (including the Exhibits and
Schedules hereto) or in the Registration Rights Agreement, the Designation of
Rights and Preferences, or the Warrants, neither the Company nor any of the
Purchasers makes any representation, warranty, covenant or undertaking with
respect to such matters. No provision of this Agreement may be waived or amended
other than by a written instrument signed by (i) the Company, if enforcement of
any such amendment or waiver is sought against the Company; (ii) an individual
Purchaser, if enforcement of an amendment or waiver is sought solely with
respect to such Purchaser; or (iii) the Purchasers of two-thirds of all of the
Preferred Stock, if enforcement of an amendment or waiver is sought with respect
to all of the Purchasers.
9.4 Any notice, demand, request, waiver or other communication required to
permitted to be given hereunder shall be in writing and shall be effective (a)
upon hand delivery or by confirmed facsimile transmission at the address or
number designated below (if delivered on a business day during normal business
hours where such notice is to be received), or the first business day following
such delivery (if delivered other than on a business day during normal business
hours where such notice is to be received), or (b) on the second business day
following the date of mailing by express courier service, fully prepaid,
addressed to such address, or upon actual receipt of such mailing, whichever
shall first occur, or (c) three days after mailed by certified or registered
U.S. mail. The addresses for such communications shall be:
If to the Company: Sheryl A. Symonds
Vice President Administration & General Counsel
Pacific Aerospace & Electronics, Inc.
24000 - 35th Ave. SE, Suite 200
Bothell, WA 98021
Facsimile: (425) 354-1632
with copies to: Eugenie D. Mansfield
Stoel Rives LLP
One Union Square
600 University Street, Suite 3600
Seattle, Washington 98101-3197
Fax: (206) 386-7500
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If to any Purchasers: Gary Wolf
Angelo Gordon & Co.
245 Park Ave., 25th Floor
New York, New York 10167
Facsimile: (212) 867-6449
With copies to: Stephen M. Vine
Akin Gump Strauss Hauer & Feld
590 Madison Avenue
New York, New York 10022
Facsimile: (212) 872-1002
Any party hereto may from time to time change its address for notices by
giving at least five (5) days' written notice of such changed address to the
other party hereto.
9.5 No waiver by either party of any default with respect to any provision,
condition or requirement of this Agreement shall be deemed to be a continuing
waiver in the future or a waiver of any other provision, condition or
requirement hereof, nor shall any delay or omission of any party to exercise any
right hereunder in any manner impair the exercise of any such right accruing to
it thereafter.
9.6 The article, section and subsection headings in this Agreement are for
convenience only and shall not constitute a part of this Agreement for any other
purpose and shall not be deemed to limit or affect any of the provisions hereof.
9.7 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties and their successors and assigns. After Closing,
the assignment by a party to this Agreement of any rights hereunder shall not
affect the obligations of such party under this Agreement.
9.8 No Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns and is not for the benefit of, nor may any provision hereof be enforced
by any other person.
9.9 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF WASHINGTON, WITHOUT GIVING
EFFECT TO THE CHOICE OF LAW PROVISIONS.
9.10 Survival. The representations and warranties of the Company and the
Purchasers contained in Section 2 shall survive the execution and delivery
hereof and the Closing until the date that is one year from the earlier of (i)
the effective date of the registration statement filed by the Company pursuant
to the Registration Rights Agreement or (ii) the date that the party seeking
indemnification ceases to hold Preferred Shares, Warrants or Shares. The
agreements and covenants set forth in Sections 1, 3, 5 and 8 of this Agreement
shall survive the execution
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and delivery hereof and the Closing hereunder until any registration statement
required by the Registration Rights Agreement is no longer required to be
effective under its terms and conditions.
9.11 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and shall become effective when counterparts have been signed by each
party and delivered to the other parties hereto, it being understood that all
parties need not sign the same counterpart. If any signature is delivered by
facsimile transmission, the party using such means of delivery shall cause four
additional executed signature pages to be physically delivered to the other
parties within five days after the execution and delivery hereof; provided that
failure to transmit such original signature pages shall not invalidate that
party's signature.
9.12 The Company agrees that, without the consent of each Purchaser, it
will not disclose, and will not include in any public announcement, the name of
such Purchaser, unless and until such disclosure is required by law or
applicable regulation, and then only to the extent of such requirement.
9.13 Severability. The provisions of this Agreement, the Designation of
Rights and Preferences and the Registration Rights Agreement are severable and,
if any court of competent jurisdiction shall determine that any one or more of
the provisions or part of a provision contained in this Agreement, the
Designation of Rights and Preferences or the Registration Rights Agreement
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision or part of a provision of this Agreement, the Designation of
Rights and Preferences or the Registration Rights Agreement shall be reformed
and construed as if such invalid or illegal or unenforceable provision, or part
of a provision, had never been contained herein, and such provisions or part
reformed so that it would be valid, legal and enforceable to the maximum extent
possible.
9.14 From and after the date of this Agreement, upon the request of any
Purchaser or the Company, each of the Company and the Purchasers shall execute
and deliver such instrument, documents and other writings as may be reasonably
necessary or desirable to confirm and carry out and to effectuate fully the
intent and purposes of this Agreement.
24
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officer or other agent as of the
date hereof.
THE COMPANY:
PACIFIC AEROSPACE &
ELECTRONICS, INC.
By: /s/ DONALD A. WRIGHT
------------------------------
Donald A. Wright
President
THE PURCHASERS:
AGR HALIFAX FUND, LTD.
SILVER OAK CAPITAL, L.L.C.
As Nominee for the following entities:
AG Arb Partners, L.P.
AG Super Fund, L.P.
AG Long Term Super Fund, L.P. By: /s/ JEFFREY M. SOLOMON
Nutmeg Partners, L.P. --------------------------------
Northern Trust Company as Master Name: Jeffrey M. Solomon,
Trustee of the Teachers Retirement Managing Officer of Ag Ramius, LLC
System of the State of Illinois Its: Investment Advisor
PHS Bay Colony Fund, L.P.
PHS Patriot Fund, L.P.
AG MM, L.P.
Medici Partners, L.P.
Triarc Companies, Inc.
Ramius, L.P.
Baldwin Enterprises, Inc.
GAM Arbitrage Investments, Inc.
AG Super Fund International Partners,
L.P.
Ramius Fund, Ltd.
Leonardo, L.P.
By: /s/ MICHAEL L. GORDON
------------------------------
Michael L. Gordon
Manager
25
EXHIBIT 10.3
PLACEMENT AGREEMENT
March 25, 1998
Re: Proposed Private Placement of Common Stock
Pacific Aerospace & Electronics, Inc., a Washington corporation (the
"Company"), proposes to offer to sell up to 2,750,000 shares (the "Shares") of
its common stock, $.001 par value (the "Common Stock") to certain investors to
be identified by Lysys Ltd. The Common Stock would be offered at a per share
price (the "Purchase Price") that is 5% less than the average fair market value
of the Common Stock on the Nasdaq National Market System, based on the average
closing sale price of the Common Stock for the five trading days immediately
preceding the closing date of the Offering. Based on the current market value of
the Company's Common Stock, we estimate that the total Purchase Price would be
approximately $18 million.
The proposed offering of Common Stock (the "Offering") would be made only
to institutional or other accredited investors, in reliance on Rule 506 under
Regulation D ("Regulation D") promulgated under the United States Securities Act
of 1933, as amended (the "Securities Act"). This Agreement sets forth the
agreement between the Company and Lysys Ltd. with regard to the Offering.
1. THE OFFERING.
(a) Appointment as Placement Agent. The Company appoints Lysys Ltd. as
the Company's placement agent (the "Placement Agent") with regard to the
Offering, and the Placement Agent accepts such appointment. The Company grants
to the Placement Agent the non-exclusive right, on the Company's behalf, to
solicit offers from Investors to purchase Shares, at the Purchase Price, or at
such other price as may be satisfactory to the Company in its sole discretion,
in compliance with the provisions of Regulation D. The Company expressly
acknowledges and agrees that the execution of this Agreement is not a commitment
by the Placement Agent to purchase any Shares and does not ensure the successful
completion of the Offering or any portion thereof.
(b) Placement of Shares. It shall be the Placement Agent's sole
responsibility to ensure that offers are made only to accredited investors, as
defined in Regulation D, and to ensure that all potential Investors receive
copies of the Company's Annual Report on Form 10- KSB for the Company's fiscal
year ended May 31, 1997, the Company's Quarterly Report on Form 1O-QSB for the
quarter ended November 30, 1997 (or, if it becomes available prior to the time
Shares are offered, the Company's Quarterly Report on Form 10-QSB for the
quarter ended February 28, 1998), and any other disclosure documents deemed to
be necessary or appropriate by the Company and its counsel (the "Offering
Materials"). The Placement Agent shall promptly notify the Company as any and
all commitments in the Offering are received.
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<PAGE>
The Offering shall be made directly by the Company under the terms of a
subscription agreement, in a form to be provided by the Company (the "Purchase
Agreement").
2. COMPENSATION. As consideration for the Placement Agent's services under
this Agreement, the Company shall pay to the Placement Agent a commission of 5%
of fair market value of the Shares sold in the Offering, based on the average
closing sale price of the Common Stock for the five trading days immediately
preceding the closing date of the Offering. Payment of the commission shall be
made within five business days after the closing of the Offering.
3. TERMINATION OF AGREEMENT.
(a) Automatic Termination. This Agreement shall automatically
terminate on the earlier of (i) the date on which the Company has sold 2,750,000
Shares in the Offering, or (ii) May 1, 1998, unless extended by mutual written
agreement.
(b) Voluntary Termination. Either party may voluntarily terminate this
Agreement if (i) any of the other party's representations or warranties
contained in this Agreement are found to be incorrect or misleading in any
material respect, or (ii) the other party fails, refuses, or is unable to
perform in any material respect any of its covenants or agreements under this
Agreement, after notice and reasonable opportunity to cure.
(c) Survival. Notwithstanding Sections 3(a) and 3(b), all of the
representations, warranties, and agreements contained in this Agreement,
including, without limitation, the provisions of Sections 2 and 5, shall remain
operative and in fun force and effect regardless of any investigation made by or
on behalf of the Placement Agent or the Company, and shall survive delivery of
the Shares or termination of this Agreement.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS.
(a) By the Company. The Company represents, warrants and covenants to
the Placement Agent as follows:
i. Corporate Organization; Authorization. The Company is duly
incorporated, validly existing and in good standing as a corporation under the
laws of the State of Washington and has full corporate power and corporate
authority to conduct all of the activities conducted by it as contemplated by
this Agreement. This Agreement has been duly authorized, executed, and delivered
by the Company and constitutes a valid and binding agreement of the Company
enforceable in accordance with its terms.
ii. Capital Stock. The Company has authorized capital stock
consisting of 100,000,000 shares of Common Stock and 5,000,000 shares of
Preferred Stock. As of March 24, 1998, the Company had outstanding 14,390,566
shares of Common Stock and 1,000 shares of Series A Convertible Preferred Stock.
The Shares, when issued, will be duly and validly issued, fully paid and
nonassessable.
-2-
<PAGE>
iii. Compliance with Securities Laws. The Company will not take
any action that would cause the Offering to fail to be exempt from registration
under Regulation D. The Company shall take (or shall refrain from taking) such
actions as the Placement Agent may reasonably request in order to ensure the
availability of such exemption.
iv. Accuracy of Offering Materials. The Offering Materials fairly
present the financial condition of the Company as of the dates of any financial
statements contained therein, and did not or will not, as of their dates,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated or necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading. However,
this representation and warranty does not apply to any statements or omissions
in the Offering Materials made in reliance upon, and in conformity with,
information given to the Company by or on behalf of the Placement Agent.
(b) By the Placement Agent. The Placement Agent represents, warrants,
and covenants to the Company as follows:
i. Corporate Organization; Authorization. The Placement Agent is
a __________________ company, duly organized, validly existing, and in good
standing under the laws of the jurisdiction in which it is organized, and has
full power and authority to conduct all of the activities to be conducted by it
as contemplated by this Agreement. This Agreement has been duly authorized,
executed, and delivered by the Placement Agent and constitutes a valid and
binding agreement of the Placement Agent enforceable in accordance with its
terms.
ii. Placement Agent Registration. The Placement Agent is duly
licensed or qualified to do business, and in good standing as a foreign
corporation and as a licensed or registered broker/dealer, in all jurisdictions
in which the nature of the activities conducted or contemplated by it or the
character of the assets owned or leased by it makes such license or registration
necessary, or where the failure to be so licensed or registered would have a
material adverse effect on its ability to carry out its obligations under this
Agreement.
iii. Compliance with Securities Laws. The Placement Agent will
not take any action that would cause the Offering to fail to be exempt from
registration under Regulation D. The Placement Agent shall take (or shall
refrain from taking) such actions as the Company may reasonably request in order
to ensure the availability of such exemption. Without limiting the foregoing,
the Placement Agent will offer Shares only to accredited investors, as such term
is defined in Regulation D, and will promptly notify the Company if the
Placement Agent at any time before closing of the Offering no longer reasonably
believes that an Investor is an accredited investor. The Placement Agent will
advise each Investor prior to the sale of any Shares to that Investor that the
Shares will not be registered under the Securities Act and that the Investor win
not be entitled to sell or otherwise transfer the Shares unless the Shares are
so registered or an exemption from registration is available.
5. INDEMNIFICATION AND CONTRIBUTION.
(a) Indemnification by Company.
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<PAGE>
i. Scope of Indemnity. The Company agrees to indemnify, defend,
and hold harmless the Placement Agent and its officers, directors, managers,
agents, and employees against any losses, claims, damages or liabilities, joint
or several, to which the Placement Agent may become subject under the Securities
Act or otherwise, that arise out of or are based upon (a) any untrue statement
or alleged untrue statement of any material fact made by the Company in this
Agreement, the Offering Materials, or any reporting document filed subsequently
by the Company with the SEC (each a "Report'), or (b) the omission or alleged
omission of any material fact from the Offering Materials or any such Report
which is required to be stated or necessary to make the statements therein not
misleading.
ii. Exclusions. Notwithstanding the above indemnity, the Company
will not be liable under this Section 5(a) for any loss, claim, damage, or
liability that: (a) arises out of statements or omissions made in the Offering
Materials or any Report in reliance upon and in conformity with information
given to the Company by the Placement Agent; (b) constitutes or arises out of a
breach of any of the Placement Agent's representations, warranties, and
agreements contained in this Agreement; (c) results directly from the Placement
Agent's gross negligence or willful misconduct in the performance of its
services under this Agreement; (d) relates directly to information provided by
the Placement Agent to Investors that is not contained in the Offering Materials
and has not been approved in writing for distribution by the Company; or (e)
exceeds the amount of the compensation paid to the Placement Agent under this
Agreement.
(b) Indemnification by Placement Agent. The Placement Agent agrees to
indemnify and hold harmless the Company, its officers, directors, managers,
agents, and employees, against any losses, claims, damages, or liabilities,
joint or several, to which the Company or any such person may become subject
under the Securities Act or otherwise insofar as such losses, claims, damages,
or liabilities (or actions in respect thereof) arise out of or are based upon:
(i) the breach by the Placement Agent of its representations, warranties, or
agreements contained in this Agreement; (ii) the gross negligence or willful
misconduct of the Placement Agent; or (iii) information provided by the
Placement Agent to Investors that is not contained in the Offering Materials and
has not been approved in writing for distribution by the Company.
6. MISCELLANEOUS.
(a) Notices. All communications under this Agreement shall be in
writing and shall be delivered in person, by overnight courier, first-class
postage prepaid mail, or by facsimile transmission, to such address as the
parties shall designate in writing. Notices shall be deemed to have been given
only upon receipt.
(b) Assignment; Successors. This Agreement shall not be assigned by
any party without the prior written consent of the other party. Subject to the
above, this Agreement shall be binding upon, and shall inure solely to the
benefit of, the parties and their respective successors-in-interest. No other
person shall have or be construed to have any legal or equitable right, remedy,
or claim under, or in respect or by virtue of, this Agreement.
-4-
<PAGE>
(c) Translations. If this Agreement is translated into a language
other than English and there are discrepancies or differences between the
English language version of the text and the foreign language version, the
English language version shall prevail.
(d) Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Washington, without giving effect to
rules regarding conflicts of laws.
(e) Entire Agreement; Severability. This Agreement constitutes the
entire agreement of the parties, and supersedes all prior oral and written
agreements, as to the subject matter hereof. This Agreement may not be modified
except in writing signed by both parties. If any provision of this Agreement is
found by a court of competent Jurisdiction not to be enforceable, the remainder
of this Agreement shall continue in full force and effect to the extent
possible.
(f) Counterparts. This Agreement may be executed in counterparts, each of
which shall be an original, and which together shall constitute but one and the
same instrument.
If the foregoing correctly sets forth the understanding between the
Company and the Placement Agent, please sign the confirmation provided below for
that purpose. Upon the Company's receipt of such confirmation, this Agreement
shall constitute the binding agreement of the parties as of the date first above
written.
Very truly yours,
PACIFIC AEROSPACE & ELECTRONICS, INC.
By /s/ DONALD A. WRIGHT
--------------------------------------
Donald A. Wright
President & CEO
Accepted and agreed to as of the date first above written:
LYSYS LTD.
By /s/ URS DIEBOLD
-------------------------------
Its:
--------------------------
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<PAGE>
AMENDMENT OF PLACEMENT AGREEMENT
This Amendment is entered as of May 15, 1998, between LYSYS LTD.
("Placement Agent") and PACIFIC AEROSPACE & ELECTRONICS, INC. (the "Company"),
in order to amend the Placement Agreement (the "Agreement") executed by the
parties on March 25, 1998.
1. Amendment.
a. All references to the "Offering" in the Agreement shall be deemed to
refer to the offering by the Company of up to 170,000 shares of its
Series B Convertible Preferred Stock for $100 per share.
b. Section 2 of the Agreement is deleted and replaced with the following:
2. COMPENSATION. As consideration for the Placement Agent's
services under this Agreement, the Company shall pay to the
Placement Agent a commission of 2.5% of gross sales price of the
Shares sold in the Offering. Payment of the commission shall be
made within five business days after the closing of the Offering.
The Placement Agent consents to the payment of a 2.5% commission
by the Company to Pacific Continental Securities, in connection
with its services rendered in the Offering.
2. Scope.This Amendment amends the Agreement only to the extent specifically
set forth herein. All other terms and conditions of the agreement remain in
full force and effect as written.
Executed as of the date first written above.
PLACEMENT AGENT: COMPANY:
Lysys Ltd. Pacific Aerospace & Electronics, Inc.
By: By: /s/ DONALD A. WRIGHT
------------------------------ ------------------------------
Marcel Huber Donald A. Wright
Its: President and CEO
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EXHIBIT 10.18
BARCLAYS Sorting Code:
BARCLAYS BANK PLC 20-00-00
International Corporate Team - North America
P.O. Box 544, 54 Lombard Street, London EC3V 9EX
Telephone: (0171) 699-5000
The Directors Your Ref:
Aeromet International PLC Our Ref: Culff/NACT
Eurolink Way Direct Line: 2361
Sittingbourne
Kent
ME10 3RN
30th July 1998
Dear Sirs
We are pleased to advise you that Barclays Bank PLC ("the Bank") has agreed to
provide aggregate short term facilities of up to Li.4,500,000 (Four Million Five
Hundred Thousand Pounds Sterling) or its currency equivalent (the "Facility") to
Aeromet International PLC ("the Borrower") as detailed below.
The Bank is also prepared to make available a Bankers Automated Clearing System
Facility (the "BACS") of up to Li.2,000,000 (Two Million). Utilisation of the
BACS will be in accordance with the terms and conditions previously agreed.
The Bank is also prepared to provide the Borrower with a Business Master II
facility of up to Li.102,000 (One Hundred & Two Thousand Pounds Sterling) (the
"BusinessMaster"). Utilisation under the BusinessMaster shall be in accordance
with Schedule C attached hereto.
The Schedules attached hereto form part of the terms and conditions of this
letter.
Following completion of the acceptance formalities detailed below, the Facility
and the BACS and the BusinessMaster will be available for drawing by the
Borrower, subject to the following terms and conditions:
1. Options Available Within and Utilisation of the Facility
The Facility may be utilised by way of the following options and in accordance
with the provisions of the Schedules related thereto:
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<PAGE>
Sterling Overdraft (see Schedule A) and/or
Foreign Currency Overdraft (see Schedule A) and/or
Ancillary Facilities (see Schedule B).
Facsimile: (0171) 699 2298 Telex: 418139 Answerback: BARCGB G
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<PAGE>
Within the Facility the aggregate of the liabilities due, owing or incurred
thereunder shall not at any time exceed US$7,500,000 (Seven Million Five Hundred
Thousand United States Dollars) or its currency equivalent.
The Dollar equivalent of the currencies utilised or available to be utilised
under the Facility be calculated by the Bank at any time by reference to the
Bank's spot rate of exchange in the London Exchange Market for the sale of the
relevant currency or currencies for Sterling.
2. Availability
All monies owing under the Facility and the BACS and the BusinessMaster are
repayable upon written demand by the Bank and/or any undrawn portion of the
Facility and the BACS and the BusinessMaster may be cancelled by the Bank, at
any time. Following demand and/or cancellation, no further utilisation may be
made under the Facility and the BACS and the BusinessMaster. The Bank may, at
any time after such demand and/or cancellation call for payment of full cash
cover for the full amount of all liabilities outstanding under the Ancillary
Facilities, and/or
The Bank may require the Borrower to give security over cash cover paid to the
Bank (together with interest accruing thereon) in form and substance
satisfactory to the Bank to secure the Borrower's liabilities to the Bank under
the Facility and the BACS and the BusinessMaster.
The Borrower shall indemnify the bank on demand against any loss, liability or
expense which the Bank may reasonably sustain or incur as a consequence of
making such demand or as a consequence of non-performance by the borrower of any
obligation under this letter.
Any monies not paid following a demand under this clause shall continue to bear
interest and in respect of the Sterling Overdraft, the Foreign Currency
Overdraft as calculated in the respective Schedules.
Following any payments made by the Bank on behalf of the Borrower under the BACS
and the BusinessMaster and the Ancillary Facilities, will, except for those
amounts where cash cover has been made by the Borrower as for above, continue to
bear interest at 2% per annum over the Bank's Base Rate current from time to
time until payment is made. Interest shall, if unpaid, be compounded on the
Bank's usual charging dates. Interest will continue to be charged and compounded
on this basis after as well as before demand or judgment.
The Bank reserves the right, at any time following a demand under this clause,
to purchase with Sterling any currency necessary to convert any amounts
outstanding under the Facility, together with interest accrued thereon, to
Sterling, whereupon the Borrower shall then
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<PAGE>
become liable to pay the Bank forthwith the relevant Sterling amounts, together
with all costs and expenses incurred by the bank. Interest will continue to be
charged as detailed above.
In the absence of demand or cancellation by the Bank, the Facility and the BACS
and the BusinessMaster are available for utilisation until the 30th July 1999
and no liability or liabilities incurred may extend more than three months
beyond the above mentioned expiry date. However, the Bank will be pleased to
discuss the Borrower's future requirements shortly before that date.
3. Security and/or Guarantees
The Borrowers obligations hereunder will be secured by a charge over debtors on
the Bank's standard form.
This security together with any other security which is now held, or hereafter
may be held, by the Bank to secure all moneys and liabilities which shall from
time to time be due, owing or incurred to the Bank by the Borrower, whether
actually or contingently.
4. Fees
A negotiation fee of Li.15,000 (plus VAT, if any) will be payable by the
Borrower to the Bank on acceptance of this offer.
5. Information
The Borrower undertakes to provide the Bank with copies of its audited
Consolidated Profit and Loss account and Balance Sheet as soon as they are
available and not later than 180 days from the end of each accounting reference
period, together with monthly Management Accounts and debtor listing within 30
days of each month end. In addition the Borrower undertakes to provide the Bank
with copies of Pacific Aerospace & Electronics, Inc (the "Parent") audited
Consolidated Profit and Loss account and Balance Sheet and Form 10K as soon as
they are available and not later than 180 days from the end of each accounting
reference period, together with a copy of the Form 10Q within 60 days of the
quarter end together with any other information which the Bank may reasonably
request from time to time.
6. Change in Circumstances
In the event of any change in applicable law or regulation or the existing
requirements of, or any new requirements being imposed by, the Bank of England
or other regulatory authority the result of which, in the sole opinion of the
Bank, is to increase the cost of it of funding, maintaining or making available
the Facility and the BACS and the BusinessMaster(or any
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<PAGE>
undrawn amount thereof) or to reduce the effective return to the Bank, then the
Borrower shall pay to the Bank such sum as may be certified by the Bank to the
Borrower as shall compensate the Bank for such increased cost or such reduction.
7. Set-Off
Any sum of money at any time standing to the credit of the Borrower with the
Bank in any currency upon any account or otherwise (whether or not any such
account is held in the Borrower's name) or provided to the Bank as cash cover
for any outstanding liabilities under the BACS and the BusinessMaster and the
Ancillary Facilities, may be applied by the Bank at any time (without notice to
the Borrower) in or towards the discharge of any money or liabilities now or
hereafter due, owing or incurred to the Bank by the Borrower hereunder (whether
presently payable or not).
8. Currency Indemnity
If, for any reason, any amount payable to the Bank is received or recovered in a
currency other than the contractual currency in which it is due, then, to the
extent that the amount actually received or recovered by the Bank (when
converted by the Bank into the contractual currency at the applicable rate of
exchange) falls short of the amount due in the contractual currency, the
Borrower shall, as a separate and independent obligation, reimburse the Bank on
demand (on a full indemnity basis) for the amount of such shortfall.
9. Negative pledge
Neither the borrower nor any of its subsidiaries will create or permit to
subsist (other than in favour of the Bank) any lien (except a lien arising
solely by operation of law), mortgage, guarantee or charge or other encumbrance,
except encumbrances in existence at the date of this offer and full details of
which were disclosed in writing to the Bank prior to that date provided that the
amount secured by any such encumbrance is not at any time increased.
10. Default Clause
If any indebtedness of the Parent or any of its Subsidiaries becomes immediately
due and payable, or capable of being declared so due and payable, prior to its
stated maturity, by reason of default on the part of any person, or the Parent
or any of its Subsidiaries failing to discharge any indebtedness on its due date
(other than a liability which the Parent or any of its Subsidiaries shall then
be contesting in good faith) then the Bank's commitment to advance the Facility
or any balance thereof shall cease and the whole amount of the outstanding
Facility and all accrued interest and other amounts owing hereunder will become
repayable forthwith on demand in writing made by the Bank at any time.
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<PAGE>
11. Applicable Law
This letter shall be governed by, construed and take effect in accordance with
English Law.
12. Acceptance
Prior to the Facility and the BACS and the BusinessMaster being utilised, the
Borrower shall provide the 54 Lombard Street Branch of the Bank (the "Branch")
with the following:
(a) the enclosed duplicate of this letter duly signed on the Borrower's behalf
as evidence of acceptance of the terms and conditions stated herein,
(b) a certified true copy of a resolution of the Borrower's Board of Directors:
(i) accepting the Facility and the BACS and the BusinessMaster on the
terms and conditions stated herein,
(ii) authorising, a specified person, or persons, to sign and return to the
Bank the duplicate of this letter,
(iii) authorising the Bank to accept instructions and confirmations in
connection with the Facility and the BACS and the BusinessMaster
signed in accordance with the Bank's signing mandate current from time
to time.
(c) confirmed specimens of the signature of those officers referred to in
(b)(ii) above.
(d) the executed charge over debtors.
This offer will remain available for a period of one month from the date of this
letter after which it will lapse if not accepted.
Yours faithfully,
for and on behalf of
BARCLAYS BANK PLC
/s/ W. J. BLACKLEDGE
- ----------------------------------
W J Blackledge
Associate Director
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<PAGE>
Accepted on the terms and conditions stated herein, pursuant to a resolution of
the Board of Directors (a certified true copy of which is attached hereto).
For and on behalf of
AEROMET INTERNATIONAL PLC
/s/ DON A. WRIGHT :DIRECTOR /s/ NICK A. GERDE :DIRECTOR
- ----------------------------- ---------------------------
DATE: 7-31-98
-----------
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<PAGE>
SCHEDULE A
Sterling Overdraft
The sterling overdraft will be available on the Borrower's current account at
this branch of the Bank (the "Branch") with interest charged at a rate of 2% per
annum over the Bank's Base Rate current from time to time. Interest together
with other charges will be debited to the Borrower's current account at the
Branch quarterly in arrears in March, June, September and December each year or
at such other times as may be determined by the Bank, and such interest will be
calculated on the basis of actual days elapsed over 365 day year.
Foreign Currency Overdraft
The Foreign Currency Overdraft will be made available in any currency (other
than sterling) as previously agreed by and arranged with the Bank, and which
currency is freely transferable and available to the Bank in the normal course
of business.
The Foreign Currency Overdraft will be available in any currency account at the
Branch with interest charged at 2% per annum over the Bank's call loan rate
current from time to time. Interest together with other charges will be debited
to the Borrower's foreign currency account at the Branch quarterly in arrears in
March, June, September and December each year or at such other times as may be
determined by the Bank, and such interest will be calculated on the basis of
actual days elapsed over a 360 day year.
SCHEDULE B
ANCILLARY FACILITIES
Documentary Letters of Credit
The Bank is prepared to open Documentary Letters of Credit on instructions from
the Borrower to provide for the purchase of commodities as may be agreed by the
Bank from time to time. All Documentary Letters of Credit are issued subject to
the terms and conditions set out in the Bank's standard form for opening
Documentary Letters of Credit and are also subject to the "Uniform Customs and
Practice for Documentary Credits 500", or any subsequent revision as issued by
the International chamber of Commerce. Pricing will be decided on a case by case
basis.
Guarantees, Bonds and Indemnities
The Bank is prepared to consider issuing guarantees, bonds and indemnities on
behalf of the Borrower in respect of normally accepted and commercial
transactions, subject to prior
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<PAGE>
agreement with the Bank and receipt of the necessary counter indemnities.
Pricing will be decided on a case by case basis.
Negotiation of Sterling/Foreign Currency Cheques and Bills of Exchange Payable
Abroad
The Bank will purchase, with recourse, suitable foreign currency and sterling
cheques payable abroad and/or approved foreign currency or sterling bills of
exchange payable abroad. The suitability of those cheques and bills of exchange
which the Bank is prepared to purchase is entirely at the discretion of the
Bank, and is subject to the Uniform Rules for the Collection of Commercial Paper
(1995 Revision). Pricing will be decided on a case by case basis.
SCHEDULE C
The BusinessMaster II
The BusinessMaster II shall be used in accordance with the terms and conditions
that have already been agreed.
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CHARGE OVER DEBTORS
- -------------------
DEED OF CHARGE
- --------------
1. AEROMET INTERNATIONAL PLC (hereinafter called "the Company") whose
registered office is at EUROLINK WAY, SITTINGBOURNE, KENT ME10 3RN will on
demand in writing made to the Company pay or discharge to Barclays Bank PLC
(hereinafter called "the Bank") all moneys and liabilities which shall for
the time being (and whether on or at any time after such demand) be due
owing or incurred to the Bank by the Company whether actually or
contingently and whether solely or jointly with any other person and
whether as principal or surety and including interest discount commission
or other lawful charges and expenses which the Bank may in the course of
its business charge in respect of any of the matters aforesaid or for
keeping the Company's account and so that interest shall be computed and
compounded according to the usual mode of the Bank as well after as before
any demand made or judgement obtained hereunder.
2. A demand for payment or any other demand or notice under this security may
be made or given by any manager or officer of the Bank or of any branch
thereof by letter addressed to the Company and sent by post to or left at
the registered office of the Company or its last known place of business
and if sent by post shall be deemed to have been made or given at noon on
the day following the day the letter was posted.
3. The Company with full title guarantee hereby charges with the payment or
discharge of all moneys and liabilities hereby covenanted to be paid or
discharged by the Company by way of first fixed charge all book debts and
other debts now and from time to time due or owing to the Company.
4. This security shall be continuing security to the Bank notwithstanding any
settlement of account or other matter or thing whatsoever and shall be
without prejudice and in addition to any other security whether by way of
mortgage equitable charge or otherwise howsoever which the Bank may now or
any time hereafter hold on the property of the Company or any part thereof
for or in respect of the moneys hereby secured or any of them or any part
thereof respectively.
5. During the continuance of this security the Company:-
(a) shall furnish to the Bank copies of the trading and profit and loss
account and audited balance sheet in respect of each financial year of the
Company and of every
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<PAGE>
subsidiary thereof forthwith upon the same becoming available and not in
any event later than the expiration of three months from the end of such
financial year and also from time to time such other financial statements
and information respecting the assets and liabilities of the Company as the
Bank may reasonably require;
(b) shall maintain the aggregate value of the Company's book debts
(excluding debts owing by any subsidiary of the Company) at a sum to be
fixed by the Bank from time to time and whenever required by the Bank
obtain from the Managing Director of the Company for the time being or if
there shall be no Managing Director then from one of the Directors of the
Company and furnish to the Bank a certificate showing the said aggregate
value;
c) shall pay into the Company's account with the Bank all moneys which it
may receive in respect of the book debts and other debts hereby charged and
shall not without the prior consent of the Bank in writing purport to
charge or assign, the same in favour of any other person and shall if
called upon to do so by the Bank execute a legal assignment of such book
debts and other debts to the Bank.
6. (a) At any time after the Bank shall have demanded payment of any moneys
hereby secured or if requested by the Company the Bank may appoint by
writing any person or persons (whether an officer of the Bank or not) to be
a receiver and manager or receivers and managers (hereinafter called "the
Receiver" which expression shall where the context so admits include the
plural and any substituted receiver and manager or receivers and managers)
of all or any part of the property hereby charged;
(b) Where two or more persons are appointed to be the Receiver any act
required or authorised under any enactment, this Charge (including the
power of attorney contained in Clause 7 hereof) or otherwise to be done by
the Receiver may be done by any one or more of them unless the Bank shall
in such appointment specify to the contrary;
(c) The Bank may from time to time determine the remuneration of the
Receiver and may remove the Receiver and appoint another in his place;
(d) The Receiver shall be the agent of the Company (which subject to the
provisions of the Insolvency Act 1986 shall alone be personally liable for
his acts defaults and remuneration) and shall have-and be entitled to
exercise all powers conferred by the Law of Property Act 1925 in the same
way as if the Receiver had been duly appointed thereunder and in particular
by way of addition to but without hereby limiting any general powers
hereinbefore referred to (and without prejudice to
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<PAGE>
the Bank's Power of sale) the Receiver shall have power to do the following
things namely:-
(i) to take possession of collect and get in all or any part of the
property hereby charged and for that purpose to take any proceedings
in the name of the Company or otherwise as he shall think fit:
(ii) to raise money from the Bank or others on the security of any debtor
debts hereby charged:
(iii) to factor or concur in factoring and to release any of the debts
hereby charged in such manner and generally on such terms and
conditions as he shall think fit and to carry any such transactions
into effect in the name of and on behalf of the Company:
(iv) to make any arrangement or compromise which the Bank or he shall think
fit:
(v) to appoint managers officers and agents for the aforesaid purposes at
such salaries as he may determine:
(vi) to do all such other acts and things as may be considered to be
incidental or conducive to any of the matters or powers aforesaid and
which he lawfully may or can do:
(vii) to obtain access to and take copies of or extracts from any of the
books and other records of the Company and for that purpose to go on
or into any of the Company's land or buildings or any other land or
buildings in or on which the Company's books and other records are for
the time being held or deposited;
(e) All powers of the Receiver hereunder may be exercised by the Bank
whether as Attorney of the Company or otherwise.
7. The Company hereby irrevocably appoints the Bank and the Receiver jointly
and also severally the Attorney and Attorneys of the Company for the
Company and in its name and on its behalf and as its act and deed or
otherwise to seal and deliver and otherwise perfect any deed assurance
agreement instrument or act which may be required or may be deemed proper
for any of the purposes aforesaid and to take any action or proceedings in
connection with any, debt or debts hereby charged wheresoever situate.
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<PAGE>
8. Any moneys received under the powers hereby conferred shall subject to the
repayment of any claims having priority to this security be paid or applied
in the following order of priority:-
(a) in satisfaction of all costs charges and expenses properly incurred and
payments properly made by the Bank or the Receiver and of the remuneration
of the Receiver;
(b) in or towards satisfaction of the moneys outstanding and secured by
this security;
(c) as to the surplus (if any) to the person or persons entitled thereto.
9. Section 103 of the Law of Property Act 1925 shall not apply to this
security but the statutory power of sale shall as between the Bank and a
purchaser from the Bank be exercisable at any time after the execution of
this security provided that the Bank shall not exercise the said power of
sale until payment of the moneys hereby secured has been demanded or the
Receiver has been appointed but this proviso shall not affect a purchaser
or put him upon inquiry whether such demand or appointment has been made.
10. All costs charges and expenses incurred hereunder by the Bank and all other
moneys paid by the Bank or by the Receiver in perfecting or otherwise in
connection with this security or in respect of the property hereby charged
and all costs of the Bank of all proceedings for the enforcement of the
security hereby constituted or for obtaining payment of the moneys hereby
secured or arising out of or in connection with the acts authorised by
Clause 6 hereof (and so that any taxation of the Bank's costs charges and
expenses shall be on a full indemnity basis) shall be recoverable from the
Company as a debt and may be debited to any account of the Company and
shall bear interest accordingly and shall be charged on the premises
comprised herein and the charge hereby conferred shall be in addition and
without prejudice to any and every other remedy lien or security which the
Bank may or but for the said charge would have for the moneys hereby
secured or any part thereof.
11. In this security where the context so admits the expression "the bank"
shall include persons deriving title under the Bank and any reference
herein to any statute or any section of any statute shall be deemed to
include reference to any statutory modification or re-enactment thereof for
the time being in force.
IN WITNESS WHEREOF the company has executed these presents as a deed this
day of 199 .
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<PAGE>
Executed and delivered
as a deed by AEROMET INTERNATIONAL PLC
/s/ D.A. WRIGHT DIRECTOR
- ---------------------------------------
/s/ NICK A. GERDE DIRECTOR
- ---------------------------------------
Company's Registered Number 1626585
-------
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EXHIBIT 10.20
SUBLEASE
--------
THIS SUBLEASE is entered into as of April 27, 1998 by and between PACIFIC
AEROSPACE & ELECTRONICS, INC., a Washington corporation ("PA&E"), and ORCA
TECHNOLOGIES, INC., a Utah corporation ("Orca").
RECITALS
A. PA&E is the current lessee under that certain lease (the "Lease") dated
October 7, 1997, with Creekside Building LLC, a Washington limited liability
company ("Landlord"), for the real property commonly known as the Creekside
Building, 24000 - 35th Ave. SE, Suite 200, Bothell, WA 98021 (together with all
improvements on and appurtenances to such property, the "Leased Area"), which is
located on the real property more particularly described as follows:
Lot 6 of the Plat of Quadrant Monte Villa Center, recorded on Volume 54 of
Plats, pages 165-169, inclusive, records of Snohomish County, Washington,
under Auditors No. 9212225007
B. PA&E currently occupies the three offices and conference room located on
the west side of the south window wall of the Premises, and the workroom across
the hall to the north of such offices (the "PA&E Area"). PA&E desires to
sublease to Orca the remainder of the Leased Area (the "Premises"), and Orca
desires to sublease the Premises, subject to the Lease and on the terms and
conditions set forth in this Sublease.
C. All capitalized terms not otherwise defined in this Sublease shall have
the meanings set forth in the Lease.
AGREEMENT
For good and valuable consideration, the receipt and sufficiency of which
is acknowledged, the parties agree as follows:
1. Sublease. Effective as of November 15, 1997, PA&E hereby subleases the
Premises to Orca, and Orca hereby subleases the Premises from PA&E, all subject
to the terms, covenants and conditions contained in this Sublease and the Lease.
However, PA&E reserves the right to use the conference room, reception area,
lunch room, lavatories, hallways and other common areas located in the Premises.
Orca acknowledges having received a complete copy of the Lease from PA&E.
2. Sublease Term. The term of this Sublease commenced as of November 15,
1997, and, subject to Section 19 of this Sublease, shall terminate upon earlier
of (a) the date that the Lease terminates for any reason, or (b) upon 60-days
written notice by either party.
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<PAGE>
3. Rent. Orca shall pay all the Base Rent and Additional Rent ("Rent") due
under the Lease, less the $2,000 per month paid by PA&E for the PA&E Area,
directly to the Landlord on or before the date such Rent is due. Orca shall
provide PA&E with evidence of all such payments immediately upon making any Rent
payment.
4. Expansion of Premises. Orca agrees that if PA&E vacates the PA&E Area,
then the Premises will automatically, without further action by the parties, be
increased to 100% of the Leased Area and Orca shall pay 100% of all Rent due
under the Lease. In such event, all references to the Premises contained in this
Sublease shall refer to the entire Leased Area.
5. Reimbursements. Orca agrees that if PA&E incurs any cost or expense as a
result of Orca's use of the Premises or any other portion of the Leased Area,
including any additional charges for utilities and the like, Orca shall
reimburse PA&E for the same immediately upon PA&E's demand. Any sums not paid
within five days following such demand shall bear interest thereafter at the
rate of 12% per annum until paid.
6. Condition of Premises. Orca accepts the Premises "as-is" in their
current condition. Orca agrees to surrender the Premises to PA&E at the end of
the term of this Sublease in substantially the same condition existing as of the
first date of such term, ordinary wear and tear and damage due to casualty or
condemnation excepted.
7. Alterations. Orca may not place any signs or other means of
identification on or about the Premises or in any common areas of the building
in which they are located (the "Building") without the prior written consent of
the Landlord to the extent required by the Lease. Orca may not make any
alterations, or additions or substitutions to the Premises or attach any
fixtures thereto without the prior written consent of PA&E and the Landlord.
8. Use of Premises. Orca agrees that it shall use the Premises solely for
general office purposes which are consistent with the permitted uses under the
Lease.
9. Compliance with Laws. Orca shall comply with all statutes, laws and
ordinances relating to the Premises and Orca's use thereof.
10. Compliance with Rules and Regulations. Orca shall comply with all rules
and regulations which are currently or hereafter in effect with respect to the
Building, including, without limitation, such rules and regulations as pertain
to the use of lavatories, parking spaces and common areas, and all nonsmoking
policies.
11. Security Requirements. Orca agrees to maintain the security of the
Premises and Leased Area at all times, including locking the doors from the
reception area when the Premises are not occupied by Orca.
12. Confidentiality. Orca and PA&E acknowledge that the their respective
businesses require maintaining the confidentiality of information,
correspondence and records pertaining to
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<PAGE>
such businesses. Orca and PA&E agree to cause their respective employees and
persons visiting the Premises to respect such confidentiality at all times.
13. PA&E's Rights of Inspection. PA&E shall have the right to enter upon
and inspect the Premises at all reasonable times.
14. Orca's Property. PA&E shall not be responsible for loss or damage to
the personal property of Orca, its employees, agents or invitees.
15. Utilities. All utilities, including, without limitation, electrical,
heating, water, sewer and trash removal services, shall be furnished in
accordance with the terms of, and subject to the limitations contained in, the
Lease. Orca shall have the right, at its expense, to install its own telephones
and telephone lines to the extent conforming to the requirements of the Lease.
16. Destruction or Damage to Premises. In the event of any damage or
destruction to the Premises by fire or other casualty, Orca's right to use the
Premises shall be subject to the Landlord's rights under the Lease.
17. Insurance. Upon the request of PA&E, Orca shall carry and pay for
public liability insurance in a responsible insurance company licensed to do
business in Washington during the entire term of this Sublease, in the amounts
of coverage set forth in Section 14.4 of the Lease, arising from any claim made
against the Landlord, PA&E or Orca for injury to persons or damage to property
and which is related to the Premises or their use.
18. Subrogation. As a part of the consideration of this Sublease, each of
the parties releases the other and the Landlord from all liability for damage
due to any act or neglect of the other party to property owned by said parties
which is the result of fire or other casualty covered by insurance carried at
the time of such casualty by either party or the Landlord. However, the releases
contained in this section shall not apply to loss or damage resulting from the
willful or premeditated acts of either of the parties, their agents or
employees; and provided further, nothing in this paragraph shall be interpreted
or have the effect of relieving or modifying any obligation of any insurance
company.
19. Indemnity. Orca shall defend, indemnify and save PA&E harmless from and
against all liability of, and claims and allegations asserted against, PA&E by
the Landlord or any other person by reason of any failure of Orca to pay any
Rent or other amounts due under the Lease when due, or any other action or
failure to act by Orca, its agents, employees, invitees and licensees.
20. Default. If Orca defaults in the performance or observance of any
covenant or condition applicable to it under the terms of this Sublease or the
Lease, PA&E shall have the right to (a) cancel the tenancy created by this
Sublease, (b) recover its damages caused by such default, and (c) pursue such
other remedies as may be available to PA&E at law or in equity. PA&E `s waiver
of any default by Orca under any covenant or condition contained in this
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<PAGE>
Sublease or the Lease shall not operate as a waiver of any subsequent breach of
the same or any other covenant or condition.
21. General Provisions.
(a) Assignment and Subleasing. Orca may not assign or transfer all or
part of this Sublease, or further sublet any portion of the Premises, without
the prior written consent of the Landlord and PA&E in each instance. Subject to
the foregoing, this Sublease shall bind and benefit of the parties and their
respective successors and permitted assigns.
(b) Notices. Any and all notices given under this Sublease or the
Lease shall be in writing and delivered to PA&E at the Premises and to Orca at
the Premises, or at such other address as a party may specify in writing. Orca
also agrees to promptly give PA&E true and correct copies of any notices
received by Orca from the Landlord.
(c) Legal Relationship of the Parties. This Sublease shall not be
interpreted or construed as establishing a partnership or joint venture between
PA&E and Orca, and neither party shall have the right to make any
representations or incur any debts on behalf of the other. Orca further agrees
that it may not use or refer to PA&E's name, business or any employee of PA&E
with respect to any business or activity of Orca.
(d) Further Assurances. Each of the parties shall execute such
documents and other papers and take such further actions as may be reasonably
required or desirable to carry out the provisions of this Sublease and the
transactions contemplated hereby.
(e) Attorneys' Fees. The prevailing party in any arbitration or
litigation concerning this Sublease is entitled to reimbursement of its court
costs and attorneys' fees by the non-prevailing party, including such costs and
fees as may be incurred on appeal or in a bankruptcy proceeding.
(f) Severability. If any portion of this Sublease is held to be
invalid by a court of competent jurisdiction, the remaining terms of this
Sublease shall remain in full force and effect to the extent possible.
(g) Independent Counsel. Orca acknowledges that Stoel Rives LLP has
represented PA&E in this transaction, not Orca, and that Orca has been
represented by Durham Evans Jones and Pinegar.
(h) Entire Agreement. This Sublease and the Lease contain the entire
agreement between Orca and PA&E with regard to the Leased Area, and no
modification of this Sublease shall be binding upon the parties unless evidenced
by a subsequent written agreement signed by PA&E and Orca.
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<PAGE>
(i) Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall constitute but one and the same instrument.
(j) Lease Controlling. This Sublease is subject to the terms,
covenants and conditions of the Lease, and neither the Lease nor the rights of
the Landlord shall be affected by this Sublease. This Sublease shall not become
effective until executed by PA&E and Orca and approved by the Landlord as
indicated below.
Executed as of the first date written above.
PACIFIC AEROSPACE & ELECTRONICS, INC.
By /s/ DONALD A. WRIGHT
--------------------------------------
Donald A. Wright
Its President
ORCA TECHNOLOGIES, INC.
By /s/ ROGER VALLO
-------------------------------
Roger Vallo
Its President
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<PAGE>
PA&E'S ACKNOWLEDGMENT
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this April 29, 1998, before me personally appeared DONALD A. WRIGHT, to
me known to be the PRESIDENT of PACIFIC AEROSPACE & ELECTRONICS, INC., the
corporation that executed the within and foregoing instrument, and acknowledged
said instru ment to be the free and voluntary act and deed of said corporation,
for the uses and purposes therein mentioned, and on oath stated that he was
authorized to execute said instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year first above written.
/s/ ARTHUR H. KEMBALL
-----------------------------------------
Name (Printed):Arthur H. Kemball
NOTARY PUBLIC in and for the
State of Washington, residing at Wenatchee.
My appointment expires: 1-23-29.
ORCA'S ACKNOWLEDGMENT
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this June 3, 1998, before me personally appeared ROGER VALLO to me known
to be the PRESIDENT of ORCA TECHNOLOGIES, INC., the corporation that executed
the within and foregoing instrument, and acknowledged said instrument to be the
free and volun tary act and deed of said corporation, for the uses and purposes
therein mentioned, and on oath stated that he was authorized to execute said
instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year first above written.
/s/ CAROLE A. WILSON
-----------------------------------------
Name (Printed): Carole A. Wilson
NOTARY PUBLIC in and for the
State of Washington, residing at Marysville.
My appointment expires: 4/1/02.
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EXHIBIT 10.29
GENERAL TERMS AGREEMENT
between
THE BOEING COMPANY
and
CASHMERE MANUFACTURING
Number BCA-65311-0140
<PAGE>
i
GENERAL TERMS AGREEMENT
TABLE OF CONTENTS
SECTION TITLE
- ------- -----
1.0 DEFINITIONS
2.0 ISSUANCE OF PURCHASE ORDERS AND
APPLICABLE TERMS
2.1 Issuance of Purchase Orders
2.2 Acceptance of Purchase Orders
2.3 Written Authorization to Proceed
2.4 Rejection of Purchase Orders
3.0 TITLE AND RISK OF LOSS
4.0 DELIVERY
4.1 Requirements
4.2 Delay
4.3 Notice of Labor Disputes
5.0 ON-SITE REVIEW AND RESIDENT
REPRESENTATIVES
5.1 Review
5.2 Resident Representatives
6.0 INVOICE AND PAYMENT
7.0 PACKING AND SHIPPING
8.0 QUALITY ASSURANCE, INSPECTION REJECTION
AND ACCEPTANCE
8.1 Controlling Document
8.2 Seller's Inspection
8.3 Boeing's Inspection and Rejection
<PAGE>
ii
SECTION TITLE
- ------- -----
8.4 Federal Aviation Administration or Equivalent
Government Agency Inspection
8.5 Retention of Records
8.6 Source Inspection
8.7 Language for Technical Information
9.0 EXAMINATION OF RECORDS
10.0 CHANGES
10.1 General
10.2 Model Mix
11.0 PRODUCT ASSURANCE
12.0 TERMINATION FOR CONVENIENCE
13.0 EVENTS OF DEFAULT AND REMEDIES
14.0 EXCUSABLE DELAY
15.0 SUSPENSION OF WORK
16.0 TERMINATION OR CANCELLATION: INDEMNITY
AGAINST SUBCONTRACTOR'S CLAIMS
17.0 ASSURANCE OF PERFORMANCE
18.0 RESPONSIBILITY FOR PROPERTY
19.0 LIMITATION OF SELLER'S RIGHT TO ENCUMBER
ASSETS
20.0 PROPRIETARY INFORMATION AND ITEMS
21.0 COMPLIANCE WITH LAWS
22.0 INTEGRITY IN PROCUREMENT
23.0 INFRINGEMENT
24.0 BOEING'S RIGHTS IN SELLER'S PATENTS,
COPYRIGHTS, TRADE SECRETS AND TOOLING
<PAGE>
iii
SECTION TITLE
- ------- -----
25.0 NOTICES
25.1 Addresses
25.2 Effective Date
25.3 Approval or Consent
26.0 PUBLICITY
27.0 PROPERTY INSURANCE
27.1 Insurance
27.2 Certificate of Insurance
27.3 Notice of Damage or Loss
28.0 RESPONSIBILITY FOR PERFORMANCE
28.1 Subcontracting
28.2 Reliance
28.3 Assignment
29.0 NON-WAIVER
30.0 HEADINGS
31.0 PARTIAL INVALIDITY
32.0 APPLICABLE LAW
33.0 AMENDMENT
34.0 LIMITATION
35.0 TAXES
35.1 Inclusion of Taxes in Price
35.2 Litigation
35.3 Rebates
36.0 FOREIGN PROCUREMENT OFFSET
37.0 ENTIRE AGREEMENT/ORDER OF PRECEDENCE
<PAGE>
iv
SECTION TITLE
- ------- -----
37.1 Entire Agreement
37.2 Incorporated by Reference
37.3 Order of Precedence
37.4 Disclaimer
<PAGE>
v
AMENDMENT
AMEND
NUMBER DESCRIPTION DATE APPROVAL,
------ ----------- ---- ---------
<PAGE>
1
GENERAL TERMS AGREEMENT
RELATING TO
BOEING PRODUCTS
THIS GENERAL TERMS AGREEMENT is entered into as of 06-11-97, by and between
Cashmere Manufacturing, a (Washington) corporation, with its principal office in
Wenatchee, Washington, STATE, ("Seller"), and The Boeing Company, a Delaware
corporation with its principal office in Seattle, Washington acting by and
through its division the Boeing Commercial Airplane Group ("Boeing").
RECITALS
A. Boeing produces commercial airplanes.
B. Seller manufactures and sells certain goods and services for use in the
production and support of such aircraft.
C. Seller desires to sell and Boeing desires to purchase certain of Seller's
goods and services in accordance with the terms set forth in this
Agreement.
Now therefore, in consideration of the mutual covenants set forth herein,
the parties agree as follows:
<PAGE>
2
AGREEMENTS
1.0 DEFINITIONS
The definitions set forth below shall apply to the following terms as they
are used in this Agreements, any Order, or any related Special Business
Provisions ("SBP"). Words importing the singular number shall also include
the plural number and vice versa.
(a) "Customer" means any owner, operator or user of Products and any other
individual, partnership, corporation or entity which has or acquires
any interest in the Products from, through or under Boeing.
(b) "Derivative" means any new model airplane designated by Boeing as a
derivative of an existing Model airplane and which: (1) has the same
number of engines as the existing model airplane; (2) utilizes
essentially the same aerodynamic and propulsion design, major assembly
components, and systems as the existing model airplane and (3)
achieves other payload/range combinations by changes in body length,
engine thrust, or variations in certified gross weight.
(c) "Drawing' means an automated or manual depiction of graphics or
technical information representing a Product or any part thereof add
which includes the parts list and specifications relating thereto.
(d) "End Item Assembly" means any Product which is described by a single
part number and which is comprised of more than one component part.
(e) "FAA" means the United States Federal Aviation Administration or any
successor agency thereto.
(f) "FAR" means the Federal Acquisition Regulations in effect on the date
of this Agreement.
(g) "Materiel Representative" means the individual designated from time to
time, by Boeing as being primarily responsible for interacting with
Seller regarding this Agreement and any Order.
(h) "Order" means each purchase order issued by Boeing and accepted by
Seller under the terms of this Agreement. Each Order is a contract
between Boeing and Seller.
<PAGE>
3
(i) "Product" means goods, including components and parts thereof,
services, documents, data, software, software documentation and other
information or items furnished or to be furnished to Boeing under any
Order, including Tooling except for Rotating Use Tools.
(j) "Purchased on Assembly Production Detail Part (POA)" means a component
part of an End Item Assembly.
(k) "Shipset" means the total quantity of a given part number or material
necessary for production of one airplane.
(l) "Spare" means any Product, regardless of whether the Product is an End
Item Assembly or a Purchased on Assembly Production Detail Part, which
is intended for use or sale as a spare part or a production
replacement.
(m) "Tooling" means all tooling, as defined in Boeing Document M31-24,
"Boeing Suppliers Tooling Manual," and/or described on any Order,
including but not limited to Boeing-Use Tooling, Supplier-Use Tooling
and Common-Use Tooling as defined in Boeing Document D6-49004,
"Operations General Requirements for Suppliers," and Rotating-Use
Tooling as defined in Boeing Document M31-13, "Accountability of
Inplant/Outplant Special (Contract) Tools." For purposes of this
Agreement, in the documents named in this subparagraph, the term
"Supplier Use Tooling" shall be changed to Seller Use Tooling.
2.0 ISSUANCE OF ORDERS AND APPLICABLE TERMS
2.1 Issuance of Orders
Boeing may issue Orders to Seller from time to time. Each Order shall
contain a description of the Products ordered, a reference to the
applicable specifications and Drawings, the quantities and prices, the
delivery schedule, the terms and place of delivery and any special
conditions.
Each Order which incorporates this Agreement shall be governed by and be
deemed to include the provisions of this Agreement. Purchase Order Terms
and Conditions, Form D1-4100-4045, Form P252T and any other purchase order
terms and conditions which may conflict with this Agreement, do not apply
to the Orders.
2.2 Acceptance of Orders
<PAGE>
4
Each Order is Boeing's offer to Seller and acceptance is strictly limited
to its terms. Boeing will not be bound by and specifically objects to any
term or condition which is different from or in addition to the provisions
of the Order, whether or not such term or condition will materially alter
the Order. Seller's commencement of performance or acceptance of the Order
in any manner shall conclusively evidence Seller's acceptance of the Order
as written. Boeing may revoke any Order prior to Boeing's receipt of
Seller's written acceptance or Seller's commencement of performance.
2.3 Written Authorization to Proceed
Boeing's Materiel Representative may give written authorization to Seller
to commence performance before Boeing issues an Order. If Boeing in its
written authorization specifies that an Order will be issued, Boeing and
Seller shall proceed as if an Order had been issued. This Agreement, the
applicable SBP and the terms stated in the written authorization shall be
deemed to be a part of Boeing's offer and the parties shall promptly agree
on any open Order terms. If Boeing does not specify in its written
authorization that an Order shall be issued, Boeing's obligation is
strictly limited to the terms of the written authorization. For purposes of
this Section 2.3 only, written authorization includes electronic
transmission chosen by Boeing.
If Seller commences performance before an Order is issued or without
receiving Boeing's prior authorization to proceed, such performance shall
be at Seller's expense.
2.4 Rejection of Purchase Order
Any rejection by Seller of an Order shall specify the reasons for rejection
and any changes or additions that would make the Order acceptable to
Seller; provided, however, that Seller may not reject any Order for reasons
inconsistent with the provisions of this Agreement or the applicable SBP.
3.0 TITLE AND RISK OF LOSS
Title to and risk of any loss of or damage to the Products shall pass from
Seller to Boeing at the F.O.B. point as specified in the applicable Order,
except for loss or damage thereto resulting from Seller's fault or
negligence. Passage of title on delivery does not constitute Boeing's
acceptance of Products.
4.0 DELIVERY
4.1 Requirements
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Deliveries shall be strictly in accordance with the quantities, the
schedule and other requirements specified in the applicable Order. Seller
may not make early or partial deliveries without Boeing's prior written
authorization. Deliveries which fail to meet Order requirements may be
returned to Seller at Seller's expense.
4.2 Delay
Seller shall notify Boeing immediately, of any circumstances that may cause
a delay in delivery, stating the estimated period of delay and the reasons
therefor. If requested by Boeing, Seller shall use additional effort,
including premium effort, and shall ship via air or other expedited routing
to avoid or minimize delay to the maximum extent possible. All additional
costs resulting from such premium effort or premium transportation shall be
borne by Seller with the exception of such costs attributable to delays
caused directly by Boeing. Nothing herein shall prejudice any of the rights
or remedies provided to Boeing in the applicable Order or by law.
4.3 Notice of Labor Disputes
Seller shall immediately notify Boeing of any actual or potential labor
dispute that may disrupt the timely performance of an Order. Seller shall
include the substance of this Section 4.3, including this sentence, in any
subcontract relating to an Order if a labor dispute involving the
subcontractor would have the potential to delay the timely performance of
such Order. Each subcontractor, however, shall only be required to give the
necessary notice and information to its next higher-tier subcontractor.
5.0 ON-SITE REVIEW AND RESIDENT REPRESENTATIVES
5.1 Review
At Boeing's request, Seller shall provide at Boeing's facility or at a
place designated by Boeing, a review explaining the status of the Order,
actions taken or planned relating to the Order and any other relevant
information. Nothing herein may be construed as a waiver of Boeing's rights
to proceed against Seller because of any delinquency.
Boeing's authorized representatives may enter Seller's plant at all
reasonable times to conduct preliminary inspections and tests of the
Products and work-in-process. Seller shall include in its subcontracts
issued in connection with an Order a like provision giving Boeing the right
to enter the premises of Seller's subcontractors. When requested by Boeing,
Seller shall accompany Boeing to Seller's subcontractors.
5.2 Resident Representatives
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Boeing may in its discretion and for such periods as it deems necessary
assign resident personnel at Seller's facilities. Seller shall furnish,
free of charge, all office space, secretarial service and other Facilities
and assistance reasonably required by Boeing's representatives at Seller's
plant. The resident team will function under the guidance of Boeing's
manager. The resident team will provide communication and coordination to
ensure timely performance of the Order. Boeing's resident team shall be
allowed access to all work areas, Order status reports and management
review necessary to assure timely performance and conformance with the
requirements of each Order. Notwithstanding such assistance, Seller remains
solely responsible for performing in accordance with each Order.
6.0 INVOICE AND PAYMENT
Unless otherwise provided in the applicable Order, invoicing and payment
shall be in accordance with SBP Section 7.0.
7.0 PACKING AND SHIPPING
Seller shall (a) prepare for shipment and suitably pack all Products to
prevent damage or deterioration, (b) where Boeing has not identified a
carrier, secure lowest transportation rates, (c) comply with the
appropriate carrier tariff for the mode of transportation specified by
Boeing and (d) comply with any special instructions stated in the
applicable Order.
Boeing shall pay no charges for preparation, packing, crating or cartage
unless stated in the applicable Order. Unless otherwise directed by Boeing,
all standard routing shipments forwarded on one day must be consolidated.
Each container must be consecutively numbered and marked as set forth
below. Container and Order numbers must be indicated on the applicable bill
of lading. Two copies of the packing sheets must be attached to the No. 1
container of each shipment and one copy in each individual container. Each
pack sheet must include as a minimum the following: a) Seller's name,
address and phone number; b) Order and item number; c) ship date for the
Products; d) total quantity shipped and quantity in each container, if
applicable; e) legible pack slip number; f) nomenclature; g) unit of
measure; h) slip to if other than Boeing; i) warranty data and
certification, as applicable; j) rejection tag, if applicable; k) Seller's
certification that Products comply with Order requirements; and, 1)
identification of optional material used, if applicable. Products sold
F.O.B. place of shipment must be forwarded collect. Seller may not make any
declaration concerning the value of the Products shipped, except on
Products where the tariff rating or rate depends on the released or
declared value, and in such event the value shall be released or declared
at the maximum value for the lowest tariff rating or rate.
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The following markings shall be included on each unit container: a)
Seller's name; b) Seller's part number, if applicable; c) Boeing part
number, if applicable; d) part nomenclature; e) Order number; f) quantity
of Products in container; g) unit of measure; h) serial number, if
applicable; i) date (quarter/year) identified as assembly or rubber cure
date, if applicable; j) precautionary handling instructions or marking as
required.
In addition, the following markings/labels shall be included on each
shipping container: a) Name and address of consignee; b) Name and address
of consigner; c) Order number; d) Part number as shown on the Order; e)
Quantity of Products in container; f) Unit of measure; g) Box number; h)
Total number of boxes in shipment; and, i) Precautionary handling, labeling
or marking as required.
8.0 QUALITY ASSURANCE, INSPECTION, REJECTION, & ACCEPTANCE
8.1 Controlling Document
The controlling quality assurance document for Orders shall be as set
forth in the SBP Section 4.0.
8.2 Seller's Inspection
Seller shall inspect or otherwise verify that all Products and components
thereof, including those procured from or cashed by subcontractors or
Boeing, comply with the requirements of the Order prior to shipment to
Boeing or Customer. Seller shall be responsible for all tests and
inspections of the Product and any component thereof during receiving,
manufacture and Seller's final inspection. Seller shall include on each
packing sheet a certification that the Products comply with the
requirements of the Order.
8.2.1 Sellers Disclosure
Seller will immediately notify Boeing when discrepancies in Seller's
processes or Product are discovered or suspected for Products Seller has
delivered.
8.3 Boeing's Inspection and Rejection
Unless otherwise specified on an Order, Products shall be subject to final
inspection and acceptance by Boeing at destination, notwithstanding any
payment or prior inspection. Boeing may reject any Product which does not
strictly conform to the requirements of the applicable Order. Boeing shall
by notice, rejection tag or other communication notify Seller of such
rejection. Whenever possible, Boeing may
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coordinate with Seller prior to disposition of the rejected Product(s),
however, Boeing shall retain final disposition authority with respect to
all rejections. At Seller's risk and expense, all such Products will be
returned to Seller for immediate repair, replacement or other correction
and redelivery to Boeing; provided, however, that with respect to any or
all of such Products and at Boeing's election and at Seller's risk and
expense, Boeing may: (a) hold, retain, or return such Products without
permitting any repair, replacement or other correction by Seller; (b) hold
or retain such Products for repair by Seller or, at Boeing's election, for
repair by Boeing with such assistance from Seller as Boeing may require;
(c) hold such Products until Seller has delivered conforming replacements
for such Products; (d) hold such Products until conforming replacements are
obtained from a third party; (e) return such Products with instructions to
Seller as to whether the Products shall be repaired or replaced and as to
the manner of redelivery or (f) return such Products with instructions that
they be scrapped. Upon final disposition by Boeing that the non-conforming
Product(s) are not subject to repair and prior to the Products being
scrapped, Seller shall render the Product(s) unusable. Seller shall also
maintain, pursuant to their quality assurance system, records certifying
destruction of the applicable Products. Said certification shall state the
method and date of mutilation and destruction of the subject Product(s).
Boeing shall have the right to review and inspect these records at any time
it deems necessary. Failure to comply with these requirements shall be a
material breach of this Agreement and grounds for default pursuant to GTA
Section 13.0. All repair, replacement and other corrections and redelivery
shall be completed within such time as Boeing may require. All costs and
expenses, loss of value and any other damages incurred as a result of or in
connection with nonconformance and repair, replacement or other correction
may be recovered from Seller by an equitable price reduction, set-off or
credit against any amounts that may be owed to Seller under the applicable
Order or otherwise.
Boeing may revoke its acceptance of any Products and have the same rights
with regard to the Products involved as if it had originally rejected them.
8.4 Federal Aviation Administration or Equivalent Government Agency Inspection
Representatives of Boeing, the FAA or any equivalent government agency may
inspect and evaluate Seller's plant including but not limited to, Seller's
and subcontractor's facilities, systems, data, equipment, inventory holding
areas, procedures, personnel, testing and all work-in-process and completed
Products. For purposes of this Section 8.4, equivalent government agency
shall mean those governmental agencies so designated by the FAA or those
agencies within individual countries which maintain responsibility for
assuring aircraft airworthiness.
8.5 Retention of Records
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Quality assurance records shall be maintained on file at Seller's facility
and available to Boeing's authorized representatives. Seller shall retain
such records for a period of not less than seven (7) years from the date of
final payment under the applicable Order.
8.6 Source Inspection
If an Order contains a notation that "100% Source Inspection" is required,
the Products shall not be packed for shipment until they have been
submitted to Boeing's quality assurance representative for inspection. Both
the packing list and Seller's invoice must reflect evidence of this
inspection.
8.7 Language for Technical Information
All reports, drawings and other technical information submitted to Boeing
for review or approval shall be in English and shall employ the units of
measure customarily used by Boeing in the U.S.A.
9.0 EXAMINATION OF RECORDS
Seller shall maintain complete and accurate records showing the sales
volume of all Products. Such records shall support all services performed,
allowances claimed and costs incurred by Seller in the performance of each
Order, including but not limited to those factors which comprise or affect
direct labor hours, direct labor rates, material costs, burden rates and
subcontracts. Such records and other data shall be capable of verification
through audit and analysis by Boeing and be available to Boeing at Seller's
facility for Boeing's examination and audit at all reasonable times from
the date of the applicable Order until three (3) years after final payment
under such Order. Seller shall provide assistance to interpret such data if
requested by Boeing. Such examination shall provide Boeing with complete
information regarding Seller's performance for use in price negotiations
with Seller relating to existing or future orders for Products, including
but not limited to negotiation of equitable adjustments for changes and
termination/obsolescence claims pursuant to GTA Section 10.0. Boeing shall
treat all information disclosed under this Section as confidential.
10.0 CHANGES
10.1 General
Boeing's Materiel Representative may at any time by written change order
make changes within the general scope of an Order in any one or more of the
following: drawings, designs, specifications, shipping, packing, place of
inspection, place of
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delivery place of acceptance, adjustments in quantities, adjustments in
delivery schedules, or the amount of Boeing furnished material. Seller
shall proceed immediately to perform the Order as changed. If any such
change causes an increase or decrease in the cost of or the time required
for the performance of any part of the work, whether changed or not changed
by the change order, an equitable adjustment shall be made in the price of
or the delivery schedule for those Products affected, and the applicable
Order shall be modified in writing accordingly. Any claim by Seller for
adjustment under this Section 10.1 must be received by Boeing in writing no
later than (60) days from the date of receipt by Seller of the written
change order or within such other time as the parties may agree in writing
or such claim shall be deemed waived. Nothing in this Section 10.1 shall
excuse Seller from proceeding with an Order as changed, including failure
of the parties to agree on any adjustment to be made under this Section
10.1.
If Seller considers that the conduct of any of Boeing's employees has
constituted a change hereunder, Seller shall immediately notify Boeing's
Materiel Representative in writing as to the nature of such conduct and its
effect on Seller's performance. Pending direction from Boeing's Materiel
Representative, Seller shall take no action to implement any such change.
10.2 Model Mix
In the event any Derivative aircraft(s) is introduced by Boeing, Boeing may
(but is not obligated to) direct Seller within the scope of the applicable
Order and in accordance with the provisions of GTA Section 10.0 to supply
Boeing's requirements for Products for such Derivative aircraft(s) which
correspond to those Products being produced under the applicable Order.
11.0 PRODUCT ASSURANCE
Boeing's acceptance of any Product does not alter or affect the obligations
of Seller or the rights of Boeing and its customers under the document
referenced in the SBP Section 6.0 or as provided by law.
12.0 TERMINATION FOR CONVENIENCE
12.1 Basis for Termination; Notice
Boeing may, from time to time and at Boeing's sole discretion, terminate
all or part of any Order issued hereunder, by written notice to Seller. Any
such written notice of termination shall specify the effective date and the
extent of any such termination.
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12.2 Termination Instructions
On receipt of a written notice of termination pursuant to GTA Section 12.1,
unless otherwise directed by Boeing, Seller shall:
A. Immediately stop work as specified in the notice;
B. Immediately terminate its subcontracts and purchase orders relating to
work terminated;
C. Settle any termination claims made by its subcontractors or suppliers;
provided, that Boeing shall have approved the amount of such
termination claims prior to such settlement;
D. Preserve and protect all terminated inventory and Products;
E. At Boeing's request, transfer title (to the extent not previously
transferred) and deliver to Boeing or Boeing's designee all supplies
and materials, work-in-process, Tooling and manufacturing drawings and
data produced or acquired by Seller for the performance of this
Agreement and any Order, all in accordance with the terms of such
request;
F. Take all reasonable steps required to return, or at Boeing's option
and with prior written approval to destroy, all Boeing Proprietary
Information and Items in the possession, custody or control of Seller;
G. Take such other action as, in Boeing's reasonable opinion, may be
necessary, and as Boeing shall direct in writing, to facilitate
termination of this Order; and
H. Complete performance of the work not terminated.
12.3 Seller's Claim
If Boeing terminates an Order in whole or in part pursuant to Section 12.1
above, Seller shall have the right to submit a written termination claim to
Boeing in accordance with the terms of this Section 12.3. Such termination
claim shall be submitted to Boeing not later than six (6) months after
Seller's receipt of the termination notice and shall be in the form
prescribed by Boeing. Such claim must contain sufficient detail to explain
the amount claimed, including detailed inventory schedules and a detailed
breakdown of all costs claimed separated into categories
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(e.g., materials, purchased parts, finished components, labor, burden,
general and administrative), and to explain the basis for allocation of all
other costs. Seller shall be entitled to be compensated in accordance with
and to the extent allowed under the terms of FAR 52-249-2(e)-(m) excluding
(i), (as published in 48 CFR ss. 52.249-2) which is incorporated herein by
this reference except "Government" and "Contracting Officer" shall mean
Boeing, "Contractor" shall mean Seller and "Contract" shall mean Order.
12.4 Failure to Submit a Claim
Notwithstanding any other provision of this Section 12.0, if Seller fails
to submit a termination claim within the time period set forth above,
Seller shall be barred from submitting a claim and Boeing shall have no
obligation for payment to Seller under this Section 12.0 except for those
Products previously delivered and accepted by Boeing.
12.5 Partial Termination
Any partial termination of an Order shall not alter or affect the terms and
conditions of the Order or any Order with respect to Products not
terminated.
12.6 Product Price
Termination under any of the above paragraphs shall not result in any
change to unit prices for Products not terminated.
12.7 Exclusions or Deductions
The following items shall be excluded or deducted from any claim submitted
by Seller:
A. All unliquidated advances or other payments made by Boeing to Seller
pursuant to terminated Order;
B. Any claim which Boeing has against Seller;
C. The agreed price for scrap allowance;
D. Except for normal spoilage and any risk of loss assumed by Boeing, the
agreed fair value of property that is lost, destroyed, stolen or
damaged.
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12.8 Partial Payment/Payment
Payment, if any, to be paid under this Section 12.0 shall be made thirty
(30) days after settlement between the parties or as otherwise agreed to
between the parties. Boeing may make partial payments and payments against
costs incurred by Seller for the terminated portion of the Order, if the
total of such payments does not exceed the amount to which Seller would be
otherwise entitled. If the total payments exceed the final amount
determined to be due, Seller shall repay the excess to Boeing upon demand.
12.9 Seller's Accounting Practices
Boeing and Seller agree that Seller's "normal accounting practices" used in
developing the price of the Product(s) shall also be used in determining
the allocable costs at termination. For purposes of this Section 12.9,
Seller's "normal accounting practices" refers to Seller's method of
charging costs as either a direct charge, overhead expense, general
administrative expense, etc.
12.10 Records
Unless otherwise provided in this Agreement or by law, Seller shall
maintain all records and documents relating to the terminated portion of
the Order for three (3) years after final settlement of Seller's
termination claim.
13.0 EVENTS OF DEFAULT AND REMEDIES
13.1 Events of Default
The occurrence of any one or more of the following events shall constitute
an "Event of Default":
A. Any failure by Seller to deliver, when and as required by this
Agreement or any Order, any Product, except as provided in GTA Section
14.0; or
B. Any failure by Seller to provide an acceptable Assurance of
Performance within the time specified in GTA Section 17.0, or
otherwise in accordance with applicable law; or,
C. Any failure by Seller to perform or comply with any obligation set
forth in GTA Section 20.0; or
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D. Seller is or has participated in the sale, purchase or manufacture of
airplane parts without the required approval of the FAA.
E. Any failure by Seller to perform or comply with any obligation (other
than as described in the foregoing Sections 13.1.A, 13.1.B, 13.1.C and
13.1.D) set forth in this Agreement and such failure shall continue
unremedied for a period of thirty (30) days or more following receipt
by Seller of notice from Boeing specifying such failure; or
F. (a) the suspension, dissolution or winding-up of Seller's business,
(b) Seller's insolvency, or its inability to pay debts, or its
nonpayment of debts, as they become due, (c) the institution of
reorganization, liquidation or other such proceedings by or against
Seller or the appointment of a custodian, trustee, receiver or similar
person for Seller's properties or business, (d) an assignment by
Seller for the benefit of its creditors, or (e) any action of Seller
for the purpose of effecting or facilitating any of the foregoing.
13.2 Remedies
If any Event of Default shall occur:
A. Cancellation
Boeing may, by giving written notice to Seller, immediately cancel
this Agreement and/or any Order, in whole or in part, and Boeing shall
not be required after such notice to accept the tender by Seller of
any Products with respect to which Boeing has elected to cancel this
Agreement.
B. Cover
Boeing may manufacture, produce or provide, or may engage any other
persons to manufacture, produce or provide, any Products in
substitution for the Products to be delivered or provided by Seller
hereunder with respect to which this Agreement or any Order has been
cancelled and, in addition to any other remedies or damages available
to Boeing hereunder or at law or in equity, Boeing may recover from
Seller the difference between the price for each such Product and the
aggregate expense, including, without Stations administrative and
other indirect costs, paid or incurred by Boeing to manufacture,
produce or provide, or engage other persons to manufacture, produce or
provide, each such Product.
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C. Rework or Repair
Boeing may rework or repair any Product in accordance with GTA Section
8.3.
D. Setoff
Boeing shall, at its option, have the right to set off against and
apply to the payment or performance of any obligation sum or amount
owing at any time to Boeing hereunder or under any Order, all
deposits, amounts or balances held by Boeing for the account of Seller
and any amounts owed by Boeing to Seller, regardless of whether any
such deposit, amount, balance or other amount or payment is then due
and owing.
E. Tooling and Other Materials
As compensation for the additional costs which Boeing will incur as a
result of the actual physical transfer of production capabilities from
Seller to Boeing or Boeing's designee, Seller shall upon the request
of Boeing, transfer and deliver to Boeing or Boeing's designee title
to any or all (i) Tooling, (ii) Boeing-furnished material, (iii) raw
materials, parts, work-in-process, incomplete or completed assemblies,
and all other Products or parts thereof in the possession or under the
effective control of Seller or any of its subcontractors (iv)
Proprietary Information and Materials of Boeing including without
limitation planning data, drawings and other Proprietary Information
and Materials relating to the design, production, maintenance, repair
and use of Tooling, in the possession or under the effective control
of Seller or any of its subcontractors, in each case free and clear of
all liens, claims or other rights of any person.
Seller shall be entitled to receive from Boeing reasonable
compensation for any item accepted by Boeing which has been
transferred to Boeing pursuant to this Section 13.2.E (except for any
item the price of which shall have been paid to Seller prior to such
transfer); provided, however, that such compensation shall not be paid
directly to Seller, but shall be accounted for as a setoff against any
damages payable by Seller to Boeing as a result of any Event of
Default.
F. Remedies Generally
No failure on the part of Boeing in exercising any right or remedy
hereunder, or as provided by law or in equity, shall impair, prejudice
or constitute a waiver of any such right or remedy, or shall be
construed as a waiver of any
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Event of Default or as an acquiescence therein. No single or partial
exercise of any such right or remedy shall preclude any other or
further exercise thereof or the exercise of any other right or remedy.
No acceptance of partial payment or performance of any of Seller's
obligations hereunder shall constitute a waiver of any Event of
Default or a waiver or release of payment or performance in full by
Seller of any such obligation. All rights and remedies of Boeing
hereunder and at law and in equity shall be cumulative and not
mutually exclusive and the exercise of one shall not be deemed a
waiver of the right to exercise any other. Nothing contained in this
Agreement shall be construed to limit any right or remedy of Boeing
now or hereafter existing at law or in equity.
14.0 EXCUSABLE DELAY
If delivery of any Product is delayed by unforeseeable circumstances beyond
the control and without the fault or negligence of Seller or of its
suppliers or subcontractors (any such delay being hereinafter referred to
as "Excusable Delay"), the delivery of such Product shall be extended for a
period to be determined by Boeing after an assessment by Boeing of
alternate work methods. Excusable Delays may include, but are not limited
to, acts of God, war, riots, acts of government, fires, floods, epidemics,
quarantine restrictions, freight embargoes, strikes or unusually severe
weather, but shall exclude Seller's noncompliance with any rule, regulation
or order promulgated by any governmental agency for or with respect to
environmental protection. However, the above notwithstanding, Boeing
expects Seller to continue production, recover lost time and support all
schedules as established under this Agreement or any Order. Therefore, it
is understood and agreed that (i) delays of less than two (2) days'
duration shall not be considered to be Excusable Delays unless such delays
shall occur within thirty (30) days preceding the scheduled delivery date
of any Product and (ii) if delay in delivery of any Product is caused by
the default of any of Seller's subcontractors or suppliers, such delay
shall not be considered an Excusable Delay unless the supplies or services
to be provided by such subcontractor or supplier are not obtainable from
other sources in sufficient time to permit Seller to meet the applicable
delivery schedules. If delivery of any Product is delayed by any Excusable
Delay for more than three (3) months, Boeing may, without any additional
extension, cancel all or part of any Order with respect to the delayed
Products, and exercise any of its remedies in accordance with GTA Section
13.2 provided however, that Boeing shall not be entitled to monetary
damages or specific performance to the extent Seller's breach is the result
of an Excusable Delay.
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15.0 SUSPENSION OF WORK
Boeing may at any time, by written order to Seller, require Seller to stop
all or any part of the work called for by this Agreement hereafter referred
to as a "Stop Work Order" issued pursuant to this Section 15.0. On receipt
of a Stop Work Order, Seller shall promptly comply with its terms and take
all reasonable steps to minimize the occurrence of costs arising from the
work covered by the Stop Work Order during the period of work stoppage.
Within the period covered by the Stop Work Order (including any extension
thereof) Boeing shall either (i) cancel the Stop Work Order or (ii)
terminate or cancel the work covered by the Stop Work Order in accordance
with the provisions of GTA Section 12.0 or 13.0. In the event the Stop Work
Order is cancelled by Boeing or the period of the Stop Work Order
(including any extension thereof) expires, Seller shall promptly resume
work in accordance with the terms of this Agreement or any applicable
Order.
16.0 TERMINATION OR CANCELLATION AND INDEMNITY AGAINST SUBCONTRACTOR CLAIMS
Boeing shall not be liable for any loss or damage resulting from any
termination pursuant to GTA Section 12.1, except as expressly provided in
GTA Section 12.3 or any cancellation under GTA Section 13.0 except to the
extent that such cancellation shall have been determined by Boeing and
Seller to have been wrongful, in which case such wrongful cancellation
shall be deemed a termination pursuant to GTA Section 12.1 and therefore
shall be limited to the payment to Seller of the amount or amounts
identified in GTA Section 12.3. As subcontractor claims are included in
Seller's termination claim pursuant to GTA Section 12.3, Seller shall
indemnify Boeing and hold Boeing harmless from and against (i) any and all
claims, suits and proceedings against Boeing by any subcontractor or
supplier of Seller in respect of any such termination and (ii) and any and
all costs, expenses, losses and damages incurred by Boeing in connection
with any such claim, suit or proceeding.
17.0 ASSURANCE OF PERFORMANCE
A. Seller to Provide Assurance
If Boeing determines, at any time or from time to time, that it is not
sufficiently assured of Seller's full, timely and continuing
performance hereunder, or if for any other reason Boeing has
reasonable grounds for insecurity, Boeing may request, by notice to
Seller, written assurance (hereafter an "Assurance of Performance")
with respect to any specific matters affecting Seller's performance
hereunder, that Seller is able to perform all of its respective
obligations under this Agreement when and as specified herein.
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Each Assurance of Performance shall be delivered by Seller to Boeing
as promptly as possible, but in any event no later than 15 calendar
days following Boeing's request therefore and each Assurance of
Performance shall be accompanied by any information, reports or other
materials, prepared by Seller, as Boeing may reasonably request.
Boeing may suspend all or any part of Boeing's performance hereunder
until Boeing receives an Assurance of Performance from Seller
satisfactory in form and substance to Boeing.
B. Meetings and Information
Boeing may request one or more meetings with senior management or
other employees of Seller for the purpose of discussing any request by
Boeing for Assurance of Performance or any Assurance of Performance
provided by Seller. Seller shall make such persons available to meet
with representatives of Boeing as soon as may be practicable following
a request for any such meeting by Boeing and Seller shall make
available to Boeing any additional information, reports or other
materials in connection therewith as Boeing may reasonably request.
18.0 RESPONSIBILITY FOR PROPERTY
On delivery to Seller or manufacture or acquisition by it of any materials,
parts, Tooling or other property, title to any of which is in Boeing,
Seller shall assume the risk of and shall be responsible for any loss
thereof or damage thereto. In accordance with the provisions of an Order,
but in any event on completion thereof, Seller shall return such property
to Boeing in the condition in which it was received except for reasonable
wear and tear and except to the extent that such property has been
incorporated in Products delivered under such Order or has been consumed in
the normal performance of work under such Order.
19.0 LIMITATION OF SELLER'S RIGHT TO ENCUMBER ASSETS
Seller warrants to Boeing that it has good title to all inventory,
work-in-process, tooling and materials to be supplied by Seller in the
performance of its obligations under any Order ("Inventory"), and that
pursuant to the provisions of such Order, it will transfer to Boeing title
to such Inventory, whether transferred separately or as part of any Product
delivered under the Order, free of any liens, charges, encumbrances or
rights of others.
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19
20.0 PROPRIETARY INFORMATION AND ITEMS
Boeing and Seller shall each keep confidential and protect from disclosure
all (a) confidential proprietary, and/or trade secret information; (b)
tangible items containing, conveying, or embodying such information; and
(c) tooling obtained from and/or belonging to the other in connection with
this Agreement or any Order (collectively referred to as "Proprietary
Information and Materials"). Boeing and Seller shall each use Proprietary
Information and Materials of the other only in the performance of and for
the purpose of this Agreement and/or any Order. Provided, however, that
despite any other obligations or restrictions imposed by this Section 20.0,
Boeing shall have the right to use and disclose of Seller's Proprietary
Information and Materials for the purposes of testing, certification, use,
sale, or support of any item delivered under this Agreement, an Order, or
any airplane including such an item; and any such disclosure by Boeing
shall, whenever appropriate, include a restrictive legend suitable to the
particular circumstances. The restrictions on disclosure or use of
Proprietary Information and Materials by Seller shall apply to all
materials derived by Seller or others from Boeing's Proprietary Information
and Materials. Upon Boeing's request at any time, and in any event upon the
completion, termination or cancellation of this Agreement, Seller shall
return all of Boeing's Proprietary Information and Materials, and all
materials derived from Boeing's Proprietary Information and Materials to
Boeing unless specifically directed otherwise in writing by Boeing. Seller
shall not, without the prior written authorization of Boeing, sell or
otherwise dispose of (as scrap or otherwise) any parts or other materials
containing, conveying, embodying, or made in accordance with or by
reference to any Proprietary Information and Materials of Boeing. Prior to
disposing of such parts or materials as scrap, Seller shall render them
unusable. Boeing shall have the right to audit Seller's compliance with
this Section 20.0. Seller may disclose Proprietary Information and
Materials of Boeing to its subcontractors as required for the performance
of an Order, provided that each such subcontractor first assumes, by
written agreement, the same obligations imposed upon Seller under this
Section 20.0 relating to Proprietary Information and Materials; and Seller
shall be liable to Boeing for any breach of such obligation by such
subcontractor. The provisions of this Section 20.0 are effective in lieu
of, and will apply notwithstanding the absence of, any restrictive legends
or notices applied to Proprietary Information and Materials; and the
provisions of this Section 20.0 shall survive the performance, completion,
termination or cancellation of this Agreement or any Order. This Section
20.0 supersedes and replaces any and all other prior agreements or
understandings between the parties to the extent that such agreements or
understandings relate to Boeing's obligations relative to confidential,
proprietary, and/or trade secret information, or tangible items containing,
conveying, or embodying such information, obtained from Seller and related
to any Product, regardless of whether disclosed to the receiving party
before or after the effective date of this Agreement.
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20
21.0 COMPLIANCE WITH LAWS
21.1 Seller's Obligation
Seller shall be responsible for complying with all laws, including, but not
limited to, any statute, rule, regulation, judgment, decree, order, or
permit applicable to its performance under this Agreement. Seller further
agrees (1) to notify Boeing of any obligation under this Agreement which is
prohibited under applicable environmental law, at the earliest opportunity
but in all events sufficiently in advance of Seller's performance of such
obligation so as to enable the identification of alternative methods of
performance, and (2) to notify Boeing at the earliest possible opportunity
of any aspect of its performance which becomes subject to additional
environmental regulation or which Seller reasonably believes will become
subject to additional regulation during the performance of this Agreement.
21.2 Government Requirements
If any of the work to be performed under this Agreement is performed in the
United States, Seller shall, via invoice or other form satisfactory to
Boeing, certify that the Products covered by the Order were produced in
compliance with Sections 6, 7, and 12 of the Fair Labor Standards Act (29
U. S. C. 201-291), as amended, and the regulations and orders of the U. S.
Department of Labor issued thereunder. In addition, the following Federal
Acquisition Regulations are incorporated herein by this reference except
"Contractor" shall mean "Seller":
FAR 52.222-26 "Equal Opportunity"
FAR 52.222-35 "Affirmative Action for Special Disabled and Vietnam
Era Veterans"
FAR 52.222-36 "Affirmative Action for Handicapped Workers".
22.0 INTEGRITY IN PROCUREMENT
Boeing's policy is to maintain high standards of integrity in procurement.
Boeing's employees must ensure that no favorable treatment compromises
their impartiality in the procurement process. Accordingly, Boeing's
employees must strictly refrain from soliciting or accepting any payment,
gift, favor or thing of value which could improperly influence their
judgement with respect to either issuing a Order or administering this
Agreement. Consistent with this policy, Seller agrees not to provide or
offer to provide any employees of Boeing any payment, gift, favor or thing
of value for the purposes of improperly obtaining or rewarding favorable
treatment in connection with any Order or this Agreement. Seller shall
conduct its own and shall ensure that its suppliers conduct their
procurement these standards. If Seller has
<PAGE>
21
reasonable grounds to believe been violated, Seller shall immediately
report such possible violation to the appropriate Director of Materiel or
Ethics Advisor of Boeing.
23.0 INFRINGEMENT
Seller shall indemnify, defend, and save Boeing and Customers harmless from
all claims, suits, actions, awards (including but not limited to awards
based on intentional infringement of patents known to Seller at the time of
such infringement, exceeding actual damages, and/or including attorneys'
fees and/or costs), liabilities, damages, costs and attorneys' fees related
to the actual or alleged infringement of any United States or foreign
intellectual property right (including but not limited to any right in a
patent, copyright, industrial design or semiconductor mask work, or based
on misappropriation or wrongful use of information or documents) and
arising out of the manufacture, sale or use of Products by Boeing or
Customers. Boeing and/or Customers shall duly notify Seller of any such
claim, suit or action; and Seller shall, at its own expense, fully defend
such claim, suit or action on behalf of Boeing and/or Customers. Seller
shall have no obligation under this Section 23.0 with regard to any
infringement arising from: (i) Seller's compliance with formal
specifications issued by Boeing where infringement could not be avoided in
complying with such specifications or (ii) use or sale of Products in
combination with other items when such infringement would not have occurred
from the use or sale of those Products solely for the purpose for which
they were designed or sold by Seller. For purposes of this Section 23.0
only, the term Customer shall not include the United States Government; and
the term Boeing shall include The Boeing Company (Boeing) and all Boeing
subsidiaries and all officers, agents, and employees of Boeing or any
Boeing subsidiary.
24.0 BOEING'S RIGHTS IN SELLER'S PATENTS, COPYRIGHTS, TRADE SECRETS, AND TOOLING
Seller hereby grants to Boeing an irrevocable, nonexclusive, paid-up
worldwide license to practice and/or use, and license others to practice
and/or use on Boeing's behalf, all of Seller's patents, copyrights, trade
secrets (including, without limitation, designs, processes, drawings,
technical data and tooling), industrial designs, semiconductor mask works,
and tooling (collectively hereinafter referred to as "Licensed Property")
related to the development, production, maintenance or repair of Products.
Boeing hereafter retains all of the aforementioned license rights in
Licensed Property, but Boeing hereby covenants not to exercise such rights
except in connection with the making, having made, using and selling of
Products or products of the same kind, and then only in the event of any of
the following:
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22
a. Seller discontinues or suspends business operations or the production
of any or all of the Products;
b. Seller is acquired by or transfers any or all of its rights to
manufacture any product to any third party, whether or not related;
c. Boeing cancels this Agreement or any Order for cause pursuant to GTA
Section 13.0 herein;
d. In Boeing's judgement it becomes necessary, in order for Seller to
comply with the terms of this Agreement or any Order, for Boeing to
provide support to Seller (in the form of design, manufacturing, or
on-site personnel assistance) substantially in excess of that which
Boeing normally provides to its suppliers;
e. Seller's trustee in bankruptcy (or Seller as debtor in possession)
fails to assume this Agreement and all Orders by formal entry of an
order in the bankruptcy court within sixty (60) days after entry of an
order for relief in a bankruptcy case of the Seller, or Boeing elects
to retain its rights to Licensed Property under the bankruptcy laws;
f. Seller is at any time insolvent (whether measured under a balance
sheet test or by the failure to pay debts as they come due) or the
subject of any insolvency or debt assignment proceeding under state or
nonbankruptcy law; or
g. Seller voluntarily becomes a debtor in. any case under bankruptcy law
or, in the event an involuntary bankruptcy petition is filed against
Seller, such petition is not dismissed within thirty (30) days.
As a part of the license granted under this Section 24.0. Seller shall, at the
written request of Boeing and at no additional cost to Boeing, promptly deliver
to Boeing any and all Licensed Property considered by Boeing to be necessary to
satisfy Boeing's requirements for Products and their substitutes.
25.0 NOTICES
25.1 Addresses
Notices and other communications shall be given in writing by personal
delivery, mail, telex, teletype, telegram, facsimile, cable or other
electronic transmission addressed to the respective party as set forth in
the SBP Section 9.0.
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23
25.2 Effective Date
The date on which any such communication is received by the addressee date
of such communication.
25.3 Approval or Consent
With respect to all matters subject to the approval or consent of either
party, such approval or consent shall be requested in writing and is not
effective until given in writing. With respect to Boeing, authority to
grant approval or consent is limited to Boeing's Materiel Representative.
26.0 PUBLICITY
Seller will not, and will require that its subcontractors and suppliers of
any tier will not, (i) cause or permit to be released any publicity,
advertisement, news release, public announcement, or denial or confirmation
of the same, in whatever form, regarding any Order or Products, or the
program to which they may pertain, or (ii) use, or cause or permit to be
used, the Boeing name or any Boeing trademark in any form of promotion or
publicity without Boeing's prior written approval.
27.0 PROPERTY INSURANCE
27.1 Insurance
Seller shall maintain continuously in effect a property insurance policy
covering loss or destruction of or damage to all property in which Boeing
does or could have an insurable interest pursuant to this Agreement,
including but not limited to Tooling, Boeing-furnished property, raw
materials, parts, work-in process, incomplete or completed assemblies and
all other products or parts thereof, and all drawings, specifications, data
and other materials relating to any of the foregoing in each case to the
extent in the possession or under the effective care, custody or control of
Seller, in the amount of full replacement value thereof providing
protection against all perils normally covered in an "all risk" property
insurance policy (including without limitation fire, windstorm, explosion,
riot, civil commotion, aircraft, earthquake, flood or other acts of God).
Any such policy shall be in the form and with insurers acceptable to Boeing
and shall (i) provide for payment of loss thereunder to Boeing, as loss
payee, as its interests may appear and (ii) contain a waiver of any rights
of subrogation against Boeing, its subsidiaries, and their respective
directors, officers, employees and agents.
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24
27.2 Certificate of Insurance
Prior to commencement of this Agreement, Seller shall provide to Boeing's
Materiel Representative, for Boeing's review and approval, certificates of
insurance reflecting full compliance with the requirements set forth in GTA
Section 27.1. Such certificates shall be kept current and in compliance
throughout the period of this Agreement and shall provide for thirty (30)
days advanced written notice to Boeing's Materiel Representative in the
event of cancellation, non-renewal or material change adversely affecting
the interests of Boeing.
27.3 Notice of Damage or Loss
Seller shall give prompt written notice to Boeing's Materiel Representative
of the occurrence of any damage or loss to any property required to be
insured herein. If any such property shall be damaged or destroyed, in
whole or in part, by an insured peril or otherwise, and if no Event of
Default shall have occurred and be continuing, then Seller may, upon
written notice to Boeing, settle, adjust, or compromise any and all such
loss or damage not in excess of Two Hundred Fifty Thousand Dollars
($250,000) in any one occurrence and Five Hundred Thousand Dollars
($500,000) in the aggregate. Seller may settle, adjust or compromise any
other claim by Seller only after Boeing has given written approval, which
approval shall not be unreasonably withheld.
28.0 RESPONSIBILITY FOR PERFORMANCE
Seller shall be responsible for the requirements of this Agreement and any
Order referencing this Agreement. Seller shall bear all risks of providing
adequate facilities and equipment to perform each Order in accordance with
the terms thereof Seller shall include as part of its subcontracts those
elements of the Agreement which protect Boeing's rights including but not
limited to right of entry provisions, proprietary information and rights
provisions and quality control provisions. In addition, Seller shall
provide to its subcontractors sufficient information to clearly document
that the work being performed by Seller's subcontractor is to facilitate
performance under this Agreement or any Order. Sufficient information may
include but is not limited to Order number, GTA number or the name of
Boeing's Materiel Representative. No subcontracting by Seller shall relieve
Seller of its obligation under the applicable Order.
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25
28.1 Subcontracting
Seller may not procure any Product, as defined in the applicable Order,
from a third party in a completed or a substantially completed form without
Boeing's prior written consent.
Where required by the requirements of the Order, no raw material and/or
material process may be incorporated in a Product unless: (a) Seller uses
an approved source or (b) Boeing has surveyed and qualified Seller's
receiving inspection personnel and laboratories to test the specified raw
materials an/or material process. No waiver of survey and qualification
requirements will be effective unless granted by Boeing's Engineering and
Quality Control Departments. Utilization of a Boeing-approved raw material
source does not constitute a waiver of Seller's responsibility to meet all
specification requirements.
28.2 Reliance
Boeing's entering into this Agreement is in part based upon Boeing's
reliance on Seller's ability, expertise and awareness of the intended use
of the Products. Seller agrees that Boeing and Boeing's customers may rely
on Seller as an expert, and Seller will not deny any responsibility or
obligation hereunder to Boeing or Boeing's customers on the grounds that
Boeing or Boeing's customers provided recommendations or assistance in any
phase of the work involved in producing or supporting the Products,
including but not limited to Boeing's acceptance of specifications, test
data or the Products.
28.3 Assignment
Each Order shall inure to the benefit of and be binding on each of the
parties hereto and their respective successors and assigns, provided
however, that no assignment of any rights or delegation of any duties under
such Order is binding on Boeing unless Boeing's written consent has first
been obtained. Notwithstanding the above, Seller may assign claims for
monies due or to become due under any Order provided that Boeing may recoup
or setoff any amounts covered by any such assignment against any
indebtedness of Seller to Boeing, whether arising before or after the date
of the assignment or the date of this Agreement, and whether arising out of
any such Order or any other agreement between the parties.
Boeing may settle all claims arising out of any Order, including
termination claims, directly with Seller. Boeing may unilaterally assign
any rights or title to property under the Order to any wholly-owned
subsidiary of The Boeing Company.
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26
29.0 NON-WAIVER
Boeing's failure at any time to enforce any provision of an Order does not
constitute a waiver of such provision or prejudice Boeing's right to
enforce such provision at any subsequent time.
30.0 HEADINGS
Section headings used in this Agreement are for convenient reference only
and do not affect the interpretation of the Agreement.
31.0 PARTIAL INVALIDITY
If any provision of any Order is or becomes void or unenforceable by force
or operation of law, the other provisions shall remain valid and
enforceable.
32.0 APPLICABLE LAW; JURISDICTION
Each Order, including all matters of construction, validity and
performance, shall in all respects be governed by, and construed and
enforced in accordance with, the law as set forth in SBP Section 5.0.
33.0 AMENDMENT
Oral statements and understandings are not valid or binding. Except as
otherwise provided in GTA Section 10.0 and SBP Section 12.0, no Order may
be changed or modified except by a writing signed by Seller and Boeing's
Materiel Representative.
34.0 LIMITATION
Seller may not (except to provide an inventory of Products to support
delivery acceleration and to satisfy reasonable replacement and Spares
requirements) manufacture or fabricate Products or procure any goods in
advance of the reasonable flow time required to comply with the delivery
schedule in the applicable Order. Notwithstanding any other provision of an
Order, Seller is not entitled to any equitable adjustment or other
modification of such Order for any manufacture, fabrication, or procurement
of Products not in conformity with the requirements of the Order, unless
Boeing's written consent has first been obtained. Nothing in this Section
34.0 shall be construed as relieving Seller of any of its obligations under
the Order.
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27
35.0 TAXES
35.1 Inclusion of Taxes in Price
All taxes, including but not limited to federal, state and local income
taxes, value added taxes, gross receipt taxes, property taxes, and custom
duties taxes are deemed to be included in the Order price, except
applicable sales or use taxes on sales to Boeing ("Sales Taxes") for which
Boeing has not supplied a valid exemption certificate or unless otherwise
indicated on the applicable Order.
35.2 Litigation
In the event that any taxing authority has claimed or does claim payment
for Sales Taxes, Seller shall promptly notify Boeing, and Seller shall take
such action as Boeing may direct to pay or protest such taxes or to defend
against such claim. The actual and direct expenses, without the addition of
profit and overhead, of such defense and the amount of such taxes as
ultimately determined as due and payable shall be paid directly by Boeing
or reimbursed to Seller. If Seller or Boeing is successful in defending
such claim, the amount of such taxes recovered by Seller, which had
previously been paid by Seller and reimbursed by Boeing or paid directly by
Boeing, shall be immediately refunded to Boeing.
35.3 Rebates
If any taxes paid by Boeing are subject to rebate or reimbursement, Seller
shall take the necessary actions to secure such rebates or reimbursement
and shall promptly refund to Boeing any amount recovered.
36.0 FOREIGN PROCUREMENT OFFSET
With respect to work covered by the Order, Seller shall use its best
efforts to cooperate with Boeing in the fulfillment of any foreign offset
program obligation that Boeing may have accepted as a condition of the sale
of Boeing's products. In the event that Seller solicits bids or proposals
for, or procures or offers to procure any goods or services relating to the
work covered by an Order from any source outside of the United States,
Boeing shall be entitled, to the exclusion of all others, to all industrial
benefits and other "offset" credits which may result from such
solicitations, procurements or offers to procure. Seller agrees to take any
actions that may be required on its part to assure that Boeing receives
such credits.
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28
37.0 ENTIRE AGREEMENT/ORDER OF PRECEDENCE
37.1 Entire Agreement
The Order sets forth the entire agreement, and supersedes any and all other
prior agreements, understandings and communications between Boeing and
Seller related to the subject matter of an Order. The rights and remedies
afforded to Boeing or Customers pursuant to any provisions of an Order are
in addition to any other rights and remedies afforded by any other
provisions of this Order, by law or otherwise.
37.2 Incorporated by Reference
In addition to the documents previously incorporated herein by reference,
the documents listed below are by this reference made a part of this
Agreement:
A. Engineering Drawing by Part Number and Related Outside Production
Specification Plan (OPSP).
B. Any other exhibits or documents agreed to by the parties to be a part
of this Agreement.
37.3 Order of Precedence
In the event of a conflict or inconsistency between any of the terms of the
following documents, the following order of precedence shall control:
A. SBP (excluding the Administrative Agreement identified in E below)
B. This General Terms Agreement (excluding the documents identified in D
and F below)
C. Order (excluding the documents identified in A and B above)
D. Engineering Drawing by Part Number and, if applicable, related Outside
Production Specification Plan (OPSP)
E. Administrative Agreement (If Applicable)
F. Any other exhibits or documents the parties agree shall be part of the
Agreement.
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29
37.4 Disclaimer
Unless otherwise specified on the face of the applicable Order, any CATIA
Dataset or translation thereof (each or collectively "Data") furnished by
Boeing is furnished as an accommodation to Seller. It is the Seller's
responsibility to compare such Data to the comparable two dimensional
computer aided design drawing to confirm the accuracy of the Data.
BOEING HEREBY DISCLAIMS, AND SELLER HEREBY WAIVES, ALL WARRANTIES AND
LIABILITIES OF BOEING AND ALL CLAIMS AND REMEDIES OF SELLER, EXPRESS OR
IMPLIED, ARISING BY LAW OR OTHERWISE, WITH RESPECT TO ANY DEFECT IN ANY
CATIA DATASET OR TRANSLATION THEREOF, INCLUDING, WITHOUT LIMITATION, ANY
(A) IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR USE OR FOR A
PARTICULAR PURPOSE, (B) ANY IMPLIED WARRANTY ARISING FROM COURSE OF DEALING
OR PERFORMANCE OR USAGE OF TRADE, (C) RECOVERY BASED UPON TORT, WHETHER OR
NOT ARISING FROM BOEING'S NEGLIGENCE, AND (D) ANY RECOVERY BASED UPON
DAMAGED PROPERTY, OR OTHERWISE BASED UPON DAMAGED PROPERTY, OR OTHERWISE
BASED UPON LOSS OF USE OR PROFIT OR OTHER INCIDENTAL OR CONSEQUENTIAL
DAMAGES.
EXECUTED in duplicate as of the date and year first written above by the duly
authorized representatives of the parties.
THE BOEING COMPANY CASHMERE MANUFACTURING
AEROSPACE
by and through its division
Boeing Commercial Airplane Group
Name: /s/ Name: /s/ GARRY VANDEKIEFT
---------------------------- ----------------------------
Title: Buyer Title: President
--------------------------- ---------------------------
Date: 6-12-97 Date: 6-12-97
---------------------------- ----------------------------
EXHIBIT 10.30
POP
SPECIAL BUSINESS PROVISIONS
between
THE BOEING COMPANY
and
CASHMERE MANUFACTURING
6-5311-0143
<PAGE>
SPECIAL BUSINESS PROVISIONS
TABLE OF CONTENTS
1.0 DEFINITIONS.............................................................1
2.0 PURCHASE ORDER NOTE.....................................................1
3.0 PRICES..................................................................2
3.1 Produce Pricing..................................................2
3.2 Manufacturing Configuration Baseline.............................2
3.3 Packaging........................................................2
4.0 GOVERNING QUALITY ASSURANCE REQUIREMENT.................................3
5.0 APPLICABLE LAW JURISDICTION.............................................3
6.0 PRODUCT ASSURANCE.......................................................3
6.1 Governing Document...............................................3
7.0 PAYMENT.................................................................4
7.1 Recurring Price..................................................4
7.2 Non-Recurring Price/Special Charges..............................4
8.0 ACCELERATION/DECELERATION AT NO COST....................................4
9.0 NOTICES.................................................................4
9.1 Addresses........................................................4
10.0 OBLIGATION TO PURCHASE AND SELL.........................................5
11.0 COST AND FINANCIAL PERFORMANCE VISIBILITY...............................6
11.1 Quarterly Reviews................................................6
11.2 Cost Performance Reviews (CPR)...................................6
12.0 CHANGES.................................................................7
12.1 Changes to the Statement of Work.................................7
12.2 Computation of Equitable Adjustment..............................7
12.3 Obsolescence.....................................................7
12.4 Change Absorption................................................7
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12.5 Planning Schedule................................................8
12.6 Value Engineering................................................9
12.7 Reduction in Quantity to be Delivered...........................12
13.0 SPARES AND OTHER PRICING...............................................12
13.1 Spares..........................................................12
13.2 Short Flow Production Requirements..............................15
13.3 Tooling.........................................................15
13.4 Pricing of Boeing's Supporting Requirements.....................16
13.5 Pricing of Requirements for Modification or Retrofit............16
13.6 Similar Pricing.................................................16
14.0 STATUS REPORTS/REVIEW..................................................16
15.0 PROVISIONS FOR OFFSET/BUSINESS STRATEGIES
FOREIGN PROCUREMENT REPORT.............................................16
16.0 BOEING FURNISHED MATERIAL..............................................17
17.0 ASSIGNMENT.............................................................17
18.0 INVENTORY AT CONTRACT COMPLETION.......................................18
19.0 OWNERSHIP OF INTELLECTUAL PROPERTY.....................................18
19.1 Technical Work Product..........................................18
19.2 Inventions and Patents..........................................18
19.3 Works of Authorship and Copyrights..............................18
19.4 Pre-Existing Inventions and Works of Authorship.................18
20.0 ADMINISTRATIVE AGREEMENTS..............................................18
21.0 GUARANTEED WEIGHT REQUIREMENTS.........................................18
22.0 SUPPLIER DATA REQUIREMENTS.............................................18
23.0 DEFERRED PAYMENT.......................................................18
24.0 SOFTWARE PROPRIETARY INFORMATION RIGHTS................................19
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AMENDMENTS
AMEND
NUMBER DESCRIPTION DATE APPROVAL
1 Buyer Name Change 2-20-98
1 Addition of Paragraphs 2-20-98
11.1 and 11.2
(Qrtly Cost Performance Review)
1 Revised Rates & Factors 2-20-98
Attachmate 3
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<PAGE>
SPECIAL BUSINESS PROVISIONS
THESE SPECIAL BUSINESS PROVISIONS are entered into as of 06-11-97, by and
between Cashmere Manufacturing, a (Washington) corporation, with its principal
office in Wenatchee, Washington ("Seller"), and The Boeing Company, a Delaware
corporation with an office in Lynnwood, Washington acting by and through its
division the Boeing Commercial Airplane Group ("Boeing").
RECITALS
A. Boeing and Seller entered into a General Terms Agreement GTA #
BCA-65311-0140 dated 06-11-97 (the "Agreement") which is incorporated
herein and made a part hereof by this reference, for the sale by Seller and
purchase by Boeing of Products.
B. Boeing and Seller desire to include these Special Business Provisions
("SBP") relating to the sale by Seller and purchase by Boeing of Products.
Now, therefore, in consideration of the mutual covenants set forth herein, the
parties agree as follows:
PROVISIONS
1.0 DEFINITIONS
The definitions used herein shall be the same as used in the Agreement.
2.0 PURCHASE ORDER NOTE
The following note shall be contained in any Order to which these SBP are
applicable:
This Order is subject to and incorporates by this reference SBP number
6-5311-0143 between The Boeing Company and Cashmere Manufacturing dated
06-11-97.
Each Order bearing such note shall be governed by and be deemed to include
the provisions of these SBP.
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3.0 PRICES
3.1 Produce Pricing
The prices and applicable period of performance of Products scheduled for
delivery under this SBP are set forth in Attachment 1. Prices are in
United States dollars, F.O.B. Seller's Plant.
3.1.1 Option Pricing
Seller irrevocably grants to Boeing the option to purchase additional
quantities of Products on the terms and conditions set forth in this SBP
at the prices set forth herein, increased or decreased by any equitable
adjustments provided herein.
3.1.2 Exercise of Option
Boeing may exercise such option by written notice to Seller at any time
prior to the last delivery of the Product(s) to Boeing; provided however,
that such option must be exercised in sufficient time to permit Seller to
support Boeing's required deliveries. Seller agrees to provide Boeing with
written notice at least sixty (60) days prior to the date when, in
Seller's opinion, the option must be exercised. Boeing may extend the
option exercise date by purchasing long lead materials, or authorizing
Seller to purchase such materials on terms acceptable to Boeing, if such
purchase would have the effect of extending the date for assuring
production continuity.
Boeing reserves the right to (a) not exercise the option and commence new
negotiations with Seller for additional quantities of Products; or (b)
purchase such additional quantities of Products from third parties. The
purchase of such additional quantities of Products from third parties
shall not abrogate any of Seller's obligations to Boeing pursuant to the
Agreement.
3.2 Manufacturing Configuration Baseline
Unit pricing for each Product or part number shown in Attachment 1 is
based on the latest revisions of the engineering drawings or
specifications at the time of the signing of this SBP.
3.3 Packaging
The prices shown in Attachment 1 include packaging costs and all materials
and labor required to package Products identified in Attachment 1.
Packaging shall be
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furnished by the Seller in accordance with Document M6-1025, Volume II,
"Supplier Part Protection Guide" or Document D200-10038-2 "Supplier
Packaging Requirements" as applicable. In the case of Products to be
shipped directly to Customers, A.T.A. Specification 300 "Specification for
Packaging of Airline Supplies" shall apply unless otherwise directed by
Boeing.
4.0 GOVERNING QUALITY ASSURANCE REQUIREMENT
All work performed under this SBP shall be in accordance with the
following document which is incorporated herein and made a part hereof by
this reference:
Document D1-9000, Revision A. "Advanced Quality System for Boeing
Suppliers," as amended from time to time.
5.0 APPLICABLE LAW JURISDICTION
Each Order, including all matters of construction, validity and
performance, shall in all respects be governed by, and construed and
enforced in accordance only with the law of the State of Washington as
applicable to contracts entered into and to be performed wholly within
such State between citizens of such State, without reference to any rules
governing conflicts of law. Seller hereby irrevocably consents to and
submits itself exclusively to the jurisdiction of the applicable courts of
the State and the federal courts therein for the purpose of any suit,
action or other judicial proceeding arising out of or connected with any
Order or the performance or subject matter thereof. Seller hereby waives
and agrees not to assert by way of motion, as a defense, or otherwise, in
any such suit, action or proceeding, any claim that (a) Seller is not
personally subject to the jurisdiction of the above-named courts, (b) the
suit, action or proceeding is brought in an inconvenient forum or (c) the
venue of the suit, action or proceeding is improper.
6.0 PRODUCT ASSURANCE
6.1 Governing Document
Seller acknowledges that Boeing and Customers must be able to rely on each
Product performing as specified and that Seller will provide all required
support. Accordingly, the following provisions and document(s) are
incorporated herein and made a part hereof:
"Boeing Designed, Sub-Contracted Products Manufacturers Warranty" Boeing
Document M6-1124-3.
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7.0 PAYMENT
7.1 Recurring Price
Unless otherwise provided in the applicable Order, payment of the
recurring price shall be made in accordance with Form X-27981 "Pay From
Receipt - Additional Terms and Conditions Regarding Invoicing and
Payment." Payment terms shall be net thirty (30) days except as otherwise
agreed to by the parties. All payments are subject to adjustment for
shortages, credits and rejections.
7.2 Non-Recurring Price/Special Charges
Unless otherwise provided in the applicable Order, any non-recurring price
payable by Boeing under Attachment 1 shall be paid within the term
discount period or thirty (30) calendar days (whichever is later) after
receipt by Boeing of both acceptable Products and a correct invoice.
8.0 ACCELERATION/DECELERATION AT NO COST
Notwithstanding GTA Section 10.0, Boeing may make changes in the delivery
schedule without additional cost or change to the unit price stated in the
applicable Order if (a) the delivery date of the Product under such Order
is on or before the last date of contract, if applicable, and (b) Boeing
provides Seller with written notice of such changes.
9.0 NOTICES
9.0.1 Notification of Capacity/Raw Material Constraints
Seller shall provide Boeing with written notification of potential delays
to Seller's manufacturing start schedule, at least two weeks prior to
Seller's manufacturing start schedule.
Seller agrees to provide Boeing with weekly status/milestone charts
tracking the progress to the Boeing load date.
9.1 Addresses
Notices and other communications shall be given in writing by personal
delivery, United States mail, telex, teletype, telegram, facsimile, cable
or electronic transmission addressed to the respective party as follows:
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To Boeing: Attention: Mark Kieffer, Buyer: M/S 38-LH
BOEING COMMERCIAL AIRPLANE GROUP
MATERIEL DIVISION
P.O. Box 3707
Seattle, Washington 98124-2207
To Seller: Attention: Garry Vandekieft
CASHMERE MANUFACTURING
432 Olds Station Road
Wenatchee, Washington 98801
10.0 OBLIGATION TO PURCHASE AND SELL
Boeing and Seller agree that in consideration of the prices set forth
under Attachment 1, Boeing shall issue Orders for Products from time to
time to Seller for Boeing's requirements. Such Products shall be shipped
at any scheduled rate of delivery, as determined by Boeing, and Seller
shall sell to Boeing Boeing's requirements of such Products, provided
that, without limitation on Boeing's right to determine its requirements,
Boeing shall not be obligated to issue any Orders for any given Product
if:
A. Any of Boeing's customers specify an alternate product;
B. Such Product is, in Boeing's reasonable judgment, not
technologically competitive at any time, for reasons including but
not limited to the availability of significant changes in
technology, design, materials, specifications, or manufacturing
processes which result in a reduced price or weight or improved
appearance, functionality, maintainability or reliability;
C. Boeing gives reasonable notice to Seller of a change in any of
Boeing's aircraft which will result in Boeing no longer requiring
such Product for such aircraft;
D. Seller has materially defaulted in any of its obligations under any
Order, whether or not Boeing has issued a notice of default to
Seller pursuant to GTA Section 13.0; or,
E. Boeing reasonably determines that Seller cannot support Boeing's
requirements for Products in the amounts and within the delivery
schedules Boeing requires.
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11.0 COST AND FINANCIAL PERFORMANCE VISIBILITY
Seller shall provide all necessary cost support data, source documents for
direct and indirect costs, and assistance at the Seller's facility for
cost performance reviews performed by Boeing pursuant to any Order.
Furthermore, Seller shall provide financial data, on a quarterly basis, or
as requested, to Boeing's Credit Office for credit and financial condition
reviews. Said data shall include but not be limited to balance sheets,
schedule of accounts payable and receivable, major lines of credit,
creditors, income statements (profit and loss), cash flow statements, firm
backlog, and headcounts. Copies of such data are to be made available
within 72 hours of any written request by Boeing. This data is required in
addition to the cost data provided pursuant to GTA Section 9.0. All such
information shall be treated as confidential in accordance with GTA
Section 20.0.
11.1 Quarterly Reviews
Quarterly Program Reviews will be held between the parties, alternating
between Boeing and supplier locations at a mutually agreed upon time. The
topics of these reviews may include raw material and component part
status, production status, Boeing supplied components inventory, Boeing
requirements, changes, forecasts and other issues pertinent to the
program. Reviews will allow formal presentation and discussion of Status
Reports, as set forth above.
In addition to the quarterly reviews, monthly conference calls will occur.
These calls will take place on the first Wednesday of every month at a
mutually agreeable time. Monthly Seller/Boeing teleconference minutes are
to be supplied to Boeing by Seller no later than one week after the
teleconference has taken place.
11.2 Cost Performance Reviews (CPR)
Boeing/Seller will conduct Cost Performance Reviews as a part of the
Quarterly Review. The purpose of the CPR is to identify and implement cost
improvement initiatives pursuant to SBP Section 12.6. Areas of improvement
of cost (hereafter "Work Packages") will be identified and agreed to by
the parties. CPR meeting minutes and action items as part of the minutes
are to be supplied to the Boeing Buyer by Seller no later than one week
after a CPR has taken place.
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12.0 CHANGES
12.1 Changes to the Statement of Work
Boeing may direct Seller within the scope of the applicable Order and in
accordance with the provisions of GTA Section 10.0, to increase or
decrease the work to be performed by the Seller in the manufacture of any
Product.
12.2 Computation of Equitable Adjustment
The Rates and Factors set forth in Attachment 3, which by this reference
is incorporated herein, shall be used to determine the equitable
adjustment, if any, (including equitable adjustments, if any, in the
prices of Products to be incorporated in Derivative Aircraft), to be paid
by Boeing pursuant to SBP Section 12.1 and GTA Section 10.0 for each
individual change.
12.3 Obsolescence
Claims for obsolete or surplus material and work-in-process created by
change orders issued pursuant to this Section shall be subject to the
procedures set forth in GTA Section 12.0, except that Seller may not
submit a claim for obsolete or surplus material resulting from an
individual change order that has a total claim value of Twenty Five
Hundred Dollars ($2,500.00) or less. Payment for obsolete or surplus
materials shall be made by check deposited as first class mail to the
address designated by Seller in SBP Section 9.1. Payment will be made on
the tenth (10th) day of the month following the month of the obsolescence
claim settlement.
12.4 Change Absorption
12.4.1 Prior to 100% Engineering Release (Drawing Revision Level New)
12.4.1.1 Generally
Notwithstanding the provisions of GTA Section 10.0 and SBP Section 12.1,
no equitable adjustment in the prices or schedules of any Order shall be
made for any change initiated by Boeing made prior to the date on which
all engineering drawings that change the technical requirements,
descriptions, specifications, statement of work, drawing or designs
("Technical Change(s)") have been released by Boeing ("100% Engineering
Release") provided, that an equitable adjustment shall be made for:
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a. Any Technical Change which is a change between raw material
classifications such as a change from to steel or titanium to
plastic. Included as a Technical Change for purposes of this
Section are changes within any raw material classifications
such as a change in alloy or temper.
b. Any Technical Change which adds or deletes a process
specification including but not limited to chem milling,
chrome plating, anodizing, painting, priming and heat
treating.
12.4.1.2 Claims
Claims for equitable adjustment for Technical Changes shall be submitted
in writing within thirty (30) days after 100% Engineering Release.
12.4.2 Subsequent to 100% Engineering Release
12.4.2.1 Generally
Notwithstanding the provisions of GTA Section 10.0 and SBP Section 12.1,
no equitable adjustment shall be made to the recurring or non-recurring
prices after the date of 100% Engineering Release for any change initiated
by Boeing unless the value of such change (debit or credit) is greater
than or equal to two percent (2%) of the then current unit price for the
Product (recurring) or is greater than or equal to two percent (2%) of the
total then current nonrecurring price as set forth in Attachment 1. For
purposes of this Section, the then current unit price or total
nonrecurring price shall be the price identified in Attachment 1 plus any
and all price adjustments agreed to previously by the parties.
12.4.2.2 Claims
Claims shall be made individually for each Product and for each change.
Each claim shall be considered separately for application of the two
percent (2%) threshold. Changes may not be combined for the purposes of
exceeding the two percent (2%) threshold set forth herein within reason.
12.5 Planning Schedule
Any planning schedule or quantity estimate provided by Boeing shall be
used solely for production planning. Boeing may purchase Products in
different quantities and specify different delivery dates as necessary to
meet Boeing's requirements.
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Such planning schedule and quantity estimate shall be subject to
adjustment from time to time. Any such adjustment is not a change under
GTA Section 10.0.
12.6 Value Engineering
Seller may from time to time submit proposals to Boeing to change
drawings, designs, specifications or other requirements that:
a. decrease Seller's performance costs; or
b. produce a net reduction in the cost to Boeing of installation,
operation, maintenance or production of the Product.
Provided, that such change shall not impair any essential functions or
characteristics of the Products or Tooling.
12.6.1 Submission of Proposal
Proposals shall be submitted to Boeing's Materiel Representative. Boeing
shall not be liable for any delay in acting upon a proposal. Boeing's
decision to accept or reject any proposal shall be final. If there is a
delay and the net result in savings no longer justifies the investment,
Seller will not be obligated to proceed with the change. Seller has the
right to withdraw, in whole or in part, any proposal not accepted by
Boeing within the time period specified in the proposal. Seller shall
submit, as a minimum, the following information with the proposal:
a. description of the difference between the existing requirement and
the proposed change, and the comparative advantages and
disadvantages of each;
b. the specific requirements which must be changed if the proposal is
adopted;
c. the cost savings and Seller's implementation costs;
d. Each proposal shall include the need dates for engineering release
and the time by which a proposal must be approved so as to obtain
the maximum cost reduction.
12.6.2 Acceptance and Cost Sharing
Boeing may accept, in whole or in part, any proposal by issuing a change
order. Until such change has been issued, Seller shall remain obligated to
perform in
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accordance with the terms and requirements of the original Order as
written. Boeing and Seller shall share the savings as follows:
(50%) savings to Boeing;
(50%) savings to Seller.
Seller shall include with each proposal verifiable cost records and other
data as required by Boeing for proposal review and analysis.
Each party shall be responsible for its own implementation costs,
including but not limited to non-recurring costs.
12.6.3 Cost Savings Computation
A change order shall be issued by Boeing and the unit price shall be
reduced in an amount equal to the savings portion attributable to Boeing
as set forth above. The applicable unit price as set forth in Attachment 1
Statement of Work shall be amended to reflect such change.
EXAMPLE
Current Price: $600.00
Proposed Cost Savings: $100.00/unit
Boeing's Percentage: 50.0%
Seller's Percentage: 50.0%
Step by Step Computation:
1. $100.00 unit savings x 50.0% Boeing's percentage of savings =
$50.00 Boeing savings.
2. $100.00 unit savings x 50.0% Seller's percentage of savings =
$50.00 Seller savings.
3. Net affect to the unit cost = $50.00
New Unit Price For Units = $550.00
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12.6.4 Weight Reduction Proposals
Seller is encouraged to submit proposals to Boeing that reduce the
Product's weight without impairing any essential functions or
characteristics of the Product.
Seller shall submit such proposals in accordance with SBP Section 12.6.1
above. The amount of any costs or savings that result from a weight
reduction proposal shall be agreed by Boeing and Seller. Seller shall
include with each proposal verifiable cost records and other data as
required by Boeing for proposal review and analysis.
Boeing may accept in whole or in part, any such proposal by issuing a
change order to the applicable Order.
12.6.5 Process Improvement
Boeing and Seller agree to work together to identify areas of improvement
which affect the manufacturing and assembly process at Seller's facility,
Sellers's subcontractor's facilities and Boeing's Facilities.
Manufacturing and assembly process improvements include but are not
limited to inventory turn rates, lead time reductions, contracting
strategies, set up reductions, and lot size reduction. Boeing and Seller
agree to use the following metrics to evaluate improvement.
1. Inventory Turns
Defined as: Annual costs of Goods Sold/Inventory Value
2. Productivity
Defined as: Annual Sales/Average Employee Count
3. Asset Utilization
Defined as: Total Assets/Annual Sales
Additional metrics may be added and evaluated as agreed to by the parties.
Where Boeing and Seller can identify areas of improvement, the parties
will determine the amount of savings which will result from the
improvements and share the savings as set forth in 12.6.2 above. Where
savings are beyond any anticipated Lean Manufacturing improvements
reflected in the current contract price, identified and documented, the
parties agree to reduce the Product(s) unit price by the amount
apportioned to Boeing as identified above.
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12.6.6 Raw Material Cost Improvements
Boeing is currently in the process of reviewing raw material costs and the
impacts on the subcontractor base. It is Boeing's intention of
implementing a program or programs which will help address raw material
issues affecting the subcontractor base. Seller agrees to support Boeing
in its efforts to identify and address the issues affecting raw material.
Where Boeing and Seller can identify areas of improvement, the parties
will determine the amount of savings which will result from the
improvement and reduce the product's unit price accordingly.
12.7 Reduction in Quantity to be Delivered
NOT APPLICABLE
13.0 SPARES AND OTHER PRICING
13.0.1 Purchase orders released inside of normal lead time
Purchase orders issued from Boeing to Seller within the normal lead time
necessary to produce the product, will be reviewed after Seller notifies
Boeing in writing of production delays. Seller may submit a proposal
outlining costs for production parts in which lead times are less than
mutually upon between Seller and Boeing. Seller and Boeing agree to
coordinate activities to reduce or eliminate the need for special charges.
13.1 Spares
For purposes of this Section, the following definitions shall apply:
A. AIRCRAFT ON GROUND (AOG) - means the highest Spares priority. Seller
will expend best efforts to provide the earliest possible delivery
of any Spare designated AOG by Boeing. Such effort includes but is
not limited to working twenty-four (24) hours a day, seven days a
week and use of premium transportation. Seller shall specify the
delivery date and time of any such AOG Spare within two (2) hours of
receipt of an AOG Spare request.
B. CRITICAL - means an imminent AOG work stoppage. Seller will expend
best efforts to provide the earliest possible delivery of any Spare
designated Critical by Boeing. Such effort includes but is not
limited to working two (2) shifts a day, five (5) days a week and
use of premium transportation. Seller shall
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specify the delivery date and time of any such Critical Spare within
the same working day of receipt of a Critical Spare request.
C. EXPEDITE (CLASS I) - means a Spare required in less than Seller's
normal lead time. Seller will expend best efforts to meet the
requested delivery date. Such effort includes but is not limited to
working overtime and use of premium transportation.
D. ROUTINE (CLASS III) - means a Spare required in Seller's normal lead
time.
E. POA REQUIREMENT (POA) - means any detail component needed to replace
a component on an End Item Assembly currently in Boeing's assembly
line process. Seller shall expend best efforts feasible to provide
the earliest possible delivery of any Spare designated as POA by
Boeing. Such effort includes but is not limited to working
twenty-four (24) hours a day, seven days a week and use of premium
transportation. Seller shall specify the delivery date and time of
any such POA within two (2) hours of an AOG Spare request.
F. IN-PRODUCTION - means any Spare with a designation of AOG, Critical,
Expedite, Routine, POA or End Item Assembly which is in the current
engineering configuration for the Product and is used on a model
aircraft currently being manufactured by Boeing.
G. NON-PRODUCTION REQUIREMENTS - means any Spare with a designation of
AOG, Critical, Expedite and Routine requirements which is used on
model aircraft no longer being manufactured by Boeing (Post
Production) or is in a non-current engineering configuration for the
Product (Out of Production).
H. BOEING PROPRIETARY SPARE - means any Spare which is manufactured (i)
by Boeing or (ii) to Boeing's detailed designs with Boeing's
authorization or (iii) in whole or in part using Boeing's
Proprietary Materials.
13.1.1 Spares Support
Seller shall provide Boeing with a written Spares support process
describing Seller's plan for supporting AOG and Critical commitments and
manufacturing support. The process must provide Boeing with the name and
number of a twenty-four (24) hour contact for coordination of AOG and
Critical requirements. Such contact shall be equivalent to the coverage
provided by Boeing to its Customers as outlined in Attachment 4 "Boeing
AOG Coverage" which is incorporated herein and made a part hereof by this
reference.
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Seller shall notify Boeing as soon as possible via fax, telecon, or as
otherwise agreed to by the parties of each AOG and Critical requirement
shipment using the form identified in Attachment 5 "Boeing AOG and
Critical Shipping Notification." Such notification shall include time and
date shipped, quantity shipped, Order, pack slip, method of transportation
and air bill if applicable. Seller shall also notify Boeing immediately
upon the discovery of any delays in shipment of any requirement and
identify the earliest revised shipment possible.
13.1.2 Reclassification or Re-exercises
Boeing may on occasion, instruct Seller to re-prioritize or reclassify an
existing requirement in order to improve or otherwise change the
established shipping schedule. Seller shall expend the effort required to
meet the revised requirement as set forth above in the definitions of the
requirements. Seller's commitment of a delivery schedule shall be given in
accordance with that set forth above for the applicable classification but
in no case shall it exceed twenty-four (24) hours from notification by
Boeing.
13.1.3 Spare Pricing
Except as set forth in subsections 13.1.3.1 and 13.1.3.2 below, the price
for {{Boeing Proprietary}} Spare(s) shall be the same as the production
price for the Products as listed on Attachment 1, in effect at the time
the Spare(s) are ordered. POA parts shall be priced so that the sum of the
prices for all POA parts of an End Item Assembly equals the applicable
recurring portion of the End Item Assembly.
13.1.3.1 Aircraft On Ground (AOG), Critical Spares and POA Requirement
The price for AOG and Critical Spares and POA requirements shall be the
price for such Products listed on Attachment 1 in effect when such Spares
are ordered multiplied by a factor of 1.07.
13.1.3.2 Expedite Spare (Class 1)
The price for Expedite Spares shall be the price for such Products listed
on Attachment 1 in effect when such Spares are ordered multiplied by a
factor of 1.05.
13.1.4 Special Handling
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The price for all effort associated with the handling and delivery of
Spare(s) is deemed to be included in the price for such Spare(s).
Provided, that if Boeing directs delivery of Spares to an F.O.B. point
other than Seller's plant, Boeing shall reimburse Seller for shipping
charges, including insurance, paid by Seller from the plant to the
designated F.O.B. point. Such charges shall be shown separately on all
invoices.
13.2 Short Flow Production Requirements
Expedite charges, if any, to be paid for short flow production
requirements shall not exceed the amount payable under SBP Section
13.1.3.1 above for that portion of the Order which is released short flow
except as otherwise agreed to in writing by Boeing. In the event Boeing
agrees to pay an amount in excess of that set forth in SBP Section
13.1.3.1 above, Seller shall provide data to verify expedite charges
requested. For purposes of this Section, "Short Flow Production" shall be
defined as any requirement released less than Seller's current Re-Order
Lead time (ROLT). If Seller fails to meet the required delivery, Boeing
shall not be obligated to pay the agreed upon amount.
13.3 Tooling
13.3.1 Responsible Party
Where Boeing agrees to pay to Seller for Tooling to support the
manufacture and delivery of applicable Product(s) identified herein, the
amount shall be set forth in Attachment 1. The costs of necessary repair
and maintenance to the Tooling is included in such amount. In addition to
the requirements set forth in SBP Section 7.2 of this SBP, the Seller
shall comply with the Terms and Conditions applicable to the Blanket
Tooling Purchase Control Order established with Seller who possess or
controls Tooling. Furthermore, Seller must include a properly prepared
certified tool list, where applicable, as specified in the M31-24
Document, "Boeing Supplier Tooling Manual." Invoices received with
incorrect, improperly prepared or incomplete certified tool lists will be
returned for correction prior to payment. Invoices shall be dated
concurrent with, or subsequent to, shipment of the Products.
13.3.2 Boeing Furnished Tooling
In the event Boeing furnishes Tooling to Seller to support the delivery of
Product(s), Seller shall comply with the Terms and Conditions applicable
to the Blanket Tooling Purchase Control Order established with Seller who
possess or controls Tooling. No repair, replacement or rework required
shall be performed without Boeing's prior
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written consent. Boeing shall notify Seller of, what if any, action shall
be required for all discrepant Tooling.
13.4 Pricing of Boeing's Supporting Requirements
Any Products required to assist Boeing's supporting requirements,
including but not limited to requirements for color and appearance
samples, Boeing-owned simulators, test requirements, factory support,
flight test spares will be provided for not more than the applicable price
as set forth in Attachment 1.
13.5 Pricing of Requirements for Modification or Retrofit
Any Products required by Boeing to support a modification or retrofit
program shall be provided for not more than the applicable price as set
forth in Attachment 1.
13.6 Similar Pricing
New Products ordered by Boeing that are similar to or within Product
families of Products currently being manufactured by Seller shall be
priced using the same methodology or basis as that used to price the
existing Product(s).
14.0 STATUS REPORTS/REVIEW
When requested by Boeing, Seller shall update and submit, as a minimum,
monthly status reports on data requested by Boeing using a method mutually
agreed upon by Boeing and Seller.
When requested by Boeing, Seller shall provide to Boeing, a manufacturing
milestone chart identifying the major purchasing, planning and
manufacturing operations for the applicable Product(s).
Upon request by Boeing, a program review may be held between the parties.
The location agreed to by the parties. The purpose of the review is to
improve communication and understanding between the parties to ensure
program success.
15.0 PROVISIONS FOR OFFSET/BUSINESS STRATEGIES FOREIGN PROCUREMENT REPORT
Seller agrees to cooperate with Boeing in identifying possible
subcontractors for work under any Order that support Boeing's offset or
business strategies. Prior to
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releasing any request for proposal to a subcontractor to support Boeing's
offset or business strategy, Seller shall coordinate with Boeing.
Seller shall document on Attachment 2 all offers to contract and executed
contracts with such subcontractors including the dollars contracted.
Seller shall provide to Boeing with an updated copy of Attachment 2 for
the six-month periods ending June 30 and December 31 of each year. The
reports shall be submitted on the 1st of August and the 1st of February
respectively.
Furthermore, Boeing and Seller agree that in the event it becomes
necessary for Boeing to purchase Products from a third party(s) to
facilitate an offset commitment or business strategy, Boeing and Seller
agree to work together to develop and implement a plan for the removal of
such Product or Products from this SBP. Upon settlement of this plan,
Boeing shall not be obligated to buy from Seller and Seller shall not be
obligated to sell to Boeing the applicable Product(s) notwithstanding SBP
Section 10.0.
16.0 BOEING FURNISHED MATERIAL
Material, including but not limited to raw material, standards, detail
components and assemblies, furnished to Seller by Boeing shall be
administered in accordance with a bonded stores agreement between Boeing
and Seller.
Seller shall provide Boeing with required on-dock dates for all material.
Seller's notice shall provide Boeing with required on dock dates for
material within two (2) days after the issuance of the purchase order.
17.0 ASSIGNMENT
Boeing and Seller agree that Boeing may, in its discretion, assign, in
part or in whole, its purchasing obligations under the Agreement or any
Order, as applicable, at the prices set forth in Attachment 1 thereof.
Boeing reserves the right to rescind its assignment at anytime.
Boeing's assignment of purchasing obligation includes scheduling, issuance
of Order(s), receival and inspection of Products, acceptance or rejection
of Products, payment for accepted Products, and ensuring conformance to
the quality assurance system requirements.
Boeing shall retain all other rights and obligations pursuant to the
applicable terms and conditions. In addition, Boeing reserves the right,
where necessary, to
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coordinate with and mediate between Seller and any assignee regarding such
assignment.
18.0 INVENTORY AT CONTRACT COMPLETION
Subsequent to Seller's last delivery of Product(s), Products which
contain, convey, embody or were manufactured in accordance with or by
reference to Boeing's Proprietary Materials including but not limited to
finished goods, work-in-process and detail components (hereafter
"Inventory") which are in excess of Order quantity shall be made available
to Boeing for purchase. In the event Boeing, in its sole discretion,
elects not to purchase the Inventory, Seller may scrap the Inventory.
Prior to scrapping the Inventory, Seller shall mutilate and/or render it
unusable. Seller shall maintain, pursuant to their quality assurance
system, records certifying destruction of the applicable Inventory. Said
certification shall state the method and date of mutilation and
destruction of the subject Inventory. Boeing shall have the right to
review and inspect these records at any time it deems necessary. In the
event Seller elects to maintain the Inventory, Seller shall not sell or
provide the Inventory to any third party without prior specific written
authorization from Boeing. Failure to comply with these requirements shall
be a material breach and grounds for default pursuant to GTA Section 13.0.
19.0 OWNERSHIP OF INTELLECTUAL PROPERTY
19.1 Technical Work Product
NOT APPLICABLE
19.2 Inventions and Patents
NOT APPLICABLE
19.3 Works of Authorship and Copyrights
NOT APPLICABLE
19.4 Pre-Existing Inventions and Works of Authorship
NOT APPLICABLE
20.0 ADMINISTRATIVE AGREEMENTS
NOT APPLICABLE
21.0 GUARANTEED WEIGHT REQUIREMENTS
NOT APPLICABLE
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22.0 SUPPLIER DATA REQUIREMENTS
NOT APPLICABLE
23.0 DEFERRED PAYMENT
NOT APPLICABLE
24.0 SOFTWARE PROPRIETARY INFORMATION RIGHTS
NOT APPLICABLE
EXECUTED in duplicate as of the date and year first set forth above by the duly
authorized representatives of the parties.
THE BOEING COMPANY CASHMERE MANUFACTURING
By and Through Its Division
Boeing Commercial Airplane Group
Name: /s/ Name: /s/ GARRY VANDEKIEFT
---------------------------- ----------------------------
Title: Buyer Title: President
--------------------------- ---------------------------
Date: 6-12-97 Date: 6-12-97
---------------------------- ----------------------------
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AMENDMENT 1
EXECUTED in duplicate as of the date and year first set forth above by the duly
authorized representatives of the parties.
THE BOEING COMPANY CASHMERE MANUFACTURING
CORPORATION
By and Through Its Division
Boeing Commercial Airplane Group
/s/ BONNIE FREDERICK /s/ GARRY VANDEKIEFT
- ---------------------------------- ----------------------------------
Boeing, Contract Administrator President
February 20, 1998 February 20, 1998
- ---------------------------------- ----------------------------------
Date Date
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ATTACHMENT 1 TO
SPECIAL BUSINESS PROVISIONS
WORK STATEMENT AND PRICING
INTENTIONALLY OMITTED - CONFIDENTIAL TREATMENT REQUESTED
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ATTACHMENT 2 TO
SPECIAL BUSINESS PROVISIONS
FOREIGN PROCUREMENT REPORT FORM
(Seller to Submit)
(Reference Section 15.0)
COMMODITY/ BID CONTRACTED
SUPPLIER NAME COUNTRY NOMENCLATURE DOLLARS DOLLARS
- ------------- ------- ------------ ------- ----------
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ATTACHMENT 3 TO
SPECIAL BUSINESS PROVISIONS
RATES AND FACTORS
INTENTIONALLY OMITTED - CONFIDENTIAL TREATMENT REQUESTED
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ATTACHMENT 4 TO
SPECIAL BUSINESS PROVISIONS
BOEING AOG COVERAGE
o NORMAL HOURS BOEING'S MATERIEL REPRESENTATIVE (MATERIEL DIVISION)
Approximately 5:30 a.m. - 6:00 p.m.
o Performs all functions of procurement process.
o Manages formal communication with Seller.
o SECOND SHIFT - AOG PROCUREMENT SUPPORT (MATERIEL DIVISION)
3:00 p.m. - 11:00 p.m.
o May place order and assist with commitment and shipping information,
working with several suppliers on a priority basis.
o Provides a communication link between Seller and Boeing.
o 24 HOUR AOG SERVICE - AOG CUSTOMER REPRESENTATIVE (CUSTOMER SERVICE
DIVISION) 544-9000
o Support commitment information particularly with urgent orders.
o Customer Service Representative needs (if available):
o Part Number
o Boeing Purchase Order
o Airline Customer & customer purchase order number
o Boeing S.I.S. #
If Seller is unable to contact any of the above, please provide AOG/Critical
shipping information notification via FAX using Boeing AOG/Critical shipping
notification form (Attachment 5).
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ATTACHMENT 5 TO
SPECIAL BUSINESS PROVISIONS
BOEING
AOG/CRITICAL
SHIPPING NOTIFICATION
- --------------------------------------------------------------------------------
To: FAX: (206) 544-9261 or 544-9262 Phone: (206) 544-9296
------------------------------ -------------------------
Buyer Name: Phone:
------------------------------ -------------------------
From: Today's Date:
------------------------------ ------------------
- --------------------------------------------------------------------------------
Part Number: Customer PO:
------------------------------ -------------------
Customer: Ship Date:
--------------------------------- ---------------------
Qty Shipped: *SIS Number:
------------------------------ -------------------
Boeing PO: Pack Sheet or
-------------------------------- Invoice:
-----------------------
*Airway Bill: *Flight #:
----------------------------- ---------------------
Carrier:
---------------------------------- ---------------------
Freight
Forwarder:
--------------------------------
*If Applicable:
Shipped To: (Check One) Boeing
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Direct Ship
to Customer
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Direct Ship
to Supplier
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Remarks:
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IF UNABLE TO CONTACT BUYER,
PLEASE USE THIS FORM TO FAX SHIPPING INFORMATION
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EXHIBIT 10.31
LONG TERM AGREEMENT
NUMBER 0108098
-------
THIS AGREEMENT is made and entered into as of the date last executed by and
between NORTHROP GRUMMAN CORPORATION, a Delaware Corporation, as represented by
it's Commercial Aircraft Division, with a place of business at One Northrop
Avenue, Hawthorne, California, 90250 (hereinafter call "Buyer"), and CASHMERE
MANUFACTURING COMPANY INC. with its principle place of business at 432 Olds
Station Road, Wenatchee, WA, 98801 (hereinafter called "Supplier").
1. DEFINITIONS AND EXPLANATIONS
The following definitions shall apply to the following terms as they are used
herein, (unless another meaning is clearly indicated by the context in which
such term is used):
"Purchase Order" or "Change Order" (hereinafter call "Order") means the
instrument used by the Buyer in implementing the Long Term Agreement for the
procurement from the Supplier of those products, services and data as described
herein and to modify or amend such existing Order.
"Day" shall mean a calendar day as opposed to working day or manufacturing
calendar day unless otherwise specified.
"Parties" shall mean the Buyer and Supplier collectively.
"Products" shall mean all goods, supplies, material, raw or processed items,
hardware, parts, systems, equipment, components, accessories, including spare
products (Spares) and all property except data, real property and interests in
real property.
"Services" shall mean Supplier's time and effort as distinguished from the
purchase of products and data. All dollar amounts specified in this Long Term
Agreement and all Orders hereto are stated in then-year dollars unless otherwise
indicated.
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2. IMPLEMENTING ORDERS
Orders for the product to be purchased under this Agreement shall be issued at
any time during the three (3) year term of this Long Term Agreement on Buyer's
standard Purchase Order/ Change Order form. Each Purchase Order/Change Order
form shall reference this agreement and itemize the quantities, descriptions,
prices and delivery schedule. To be valid, any order must be in writing from the
Buyer to the Supplier, to be followed by a Purchase Order/Change Order. An order
placed electronically is deemed to be in writing for the purpose of this
Agreement.
3. OBLIGATIONS
This Agreement together with the Exhibits and Attachments referenced below
(which by this reference are hereby incorporated into and are part of this
Agreement, and the implementing orders) establish the respective rights and
obligations of the parties.
Exhibit 1.0 Statement of Work
Exhibit 2.0 Pricing
Exhibit 3.0 Schedule
Exhibit 4.0 Terms and Conditions
Exhibit 5.0 Special Provisions
Exhibit 6.0 Quality Assurance Provisions
Exhibit 7.0 Tooling
Attachment A Conventional/AFA Parts Pricing Matrix
4. ORDER OF PRECEDENCE
In the event of any inconsistency of conflict between any parts or sections of
this Agreement, the inconsistency shall be resolved by giving precedence to the
following order:
4.1 Implementing Order(s) issued by Buyer
4.2 Long Term Agreement
4.3 Terms and Conditions
4.4 Special Provisions
5. PERIOD OF PERFORMANCE
The period of performance of this Agreement shall be from January 1, 1998
through December 31,1998 with two one year options of January 1, 1999 through
December 31, 1999 and January 1, 2000 through December 31, 2000. Buyer shall
have the right to exercise the options under this Agreement concurrently or
consecutively by giving written notice to Seller of it's election to exercise
such option(s) at least thirty (30) days prior to the
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end of the performance period. Such exercise of option(s) may be transmitted by
facsimile (FAX) or electronically.
6. PAYMENT TERMS
Payment Terms shall be Net 30 days.
7. RELIANCE
Supplier acknowledges that it is, and that Buyer relies upon Supplier as, an
expert fully competent in furnishing and supporting the Products purchased
hereunder. In this context, Supplier agrees that it will not deny responsibility
or obligation to Buyer on the grounds that Buyer approved any specification,
drawings, plan or other documentation prepared by Supplier, or that Buyer
provided recommendations or assistance in furnishing or supporting the products.
8. SECTION AND PARAGRAPH HEADINGS
The sections and paragraph heading herein are for convenience only, and shall
not be interpreted to limit or effect in anyway, the meaning of the language
contained in such paragraphs.
EXHIBIT 1.0
STATEMENT OF WORK
1.1 Introduction
Supplier to fabricate and deliver parts as specified in Attachment A and in
accordance with the prices and leadtimes set forth herein with applicable
drawings and processes. Attachment A lists Buyer's anticipated parts; however,
Buyer does not guarantee, represent or warrant that Buyer's actual requirements
will contain these parts. Buyer is making no firm commitment and assumes no
liability, financial or otherwise, except for the parts actually ordered.
1.2 REVIEWS AND REPORTING
The reviews and reporting requirements shall provide the Buyer opportunity to
examine and analyze Supplier's progress and results to assure they are achieving
the requirements of this procurement.
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1.2.1 STATUS REPORTING
1.2.2 PROGRAM REVIEWS
Supplier shall assist the Buyer in the conduct of periodic program
reviews through first article and initial production and as requested
thereafter. The program review shall be conducted at the Supplier's
or Buyer's facility. An agenda will be prepared by the Buyer.
1.2.3 FIELD REPRESENTATIVE/QUALITY SOURCE INSPECTOR
Supplier shall provide access to Buyer's field and procurement
representatives during normal business hours (unless special
arrangements are made) to all administrative and manufacturing areas
where work is being performed to verify/monitor work in process,
review delivery schedule, expedite current orders, provide technical
support and perform source inspection. Buyer's representatives to
comply with Supplier's general company policy, rules and regulations.
1.3 TOOLING (NEW
The Seller's manufactured tooling shall be capable of producing a minimum of 7
shipsets of parts per month, and must be capable of producing a total of
800-1000 shipsets.
1.4 BLUE STREAK OR DROP-INS PROVISIONS
1.4.1 DELIVERY - BLUE STREAK
Supplier agrees to deliver any existing or new "similar" part number
on a expedite basis ( $200.00 per part number) within three (3)
calendar weeks after receipt of Buyer's order, C995 Notes (C-Notes) &
Mylars, in sufficient quantity to support Buyer's shipset
requirements during Supplier's transition to normal production.
1.4.2 DELIVERY - DROP-INS
Supplier agrees to deliver any existing part numbers currently on
contract on a expedite basis ( $200.00 per part number) within (3)
calendar weeks after notification in writing and receipt of C995
(C-Notes) & Mylars, in sufficient quantity to support Buyer's shipset
requirements.
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1.4.3 EMERGENCY DELIVERY
When Buyer specifies a delivery as an emergency (i.e. line stop),
Supplier shall expend all effort on a 24 hour basis to support
Buyer's requirement. Charges will be negotiated with Buyer at time of
requirement on a case by case basis.
1.5 AIRPLANE ON GROUND (AOG) ORDERS
1. Supplier will provide an "AOG" on call personnel list to be contacted
on a 24 hour day basis, 365 days a year.
2. Supplier will provide "AOG" delivery commitments to Buyer within
three (3) hours of receipt of requirement notification. Based on
production support on a 24 hour day basis, 365 days a year. Charges
will be negotiated with buyer at time of requirement on a case by
case basis.
1.6 DELIVERY SCHEDULE CHANGES
Note No. 11R
(18 Mar 98)
Adjustment of Schedules.
1. At its sole discretion, Buyer may from time to time change PO Shipping
schedules and notify Supplier of shipping schedule changes using:
a) Buyer's automated PO reschedule system on the Internet, or any other
electronic notice mutually agreed to by Buyer and Supplier; and/or
b) Written communications transmitted by Facsimile, Wire, U.S. Mail,
Courier, or any other non-automated method.
2. Subject to subparagraph 3 below, upon receipt of a change in schedule,
Supplier shall:
a) Immediately adjust PO shipping schedules to conform with the changes
received from Buyer at no increase in price to Buyer;
b) Make all shipments strictly in accordance with the applicable
shipping schedules as changed.
c) Confirm its ability to meet a changed shipping schedule by:
1) Placing a "Y" for "Yes" in the Accept Flag Field prior to 4:00
p.m., central time, each Friday, for changes transmitted by
Buyer's Automated PO Reschedule System;
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2. Notifying Buyer in writing (by Facsimile, Wire, U.S. Mail,
Courier, or other method agreed to by the parties) within 96
hours (four days) for changes transmitted by any other method.
d) Notify Buyer that although Supplier is taking actions required to
proceed with the order as changed Supplier is unable to meet a
shipping schedule change, as follows:
1. For changes transmitted by Buyer's Automated PO Reschedule
System, send a response prior to 4:00 p.m., central time, Friday
each week, by placing an "N" for "No" in the Accept Flag Field
and an explanation, in the appropriate field, why Supplier is
unable to support Buyer's need date; or
2. For changes in shipping schedule transmitted through any method
other than the automated PO Reschedule System, notify Buyer, in
writing (by Facsimile, Wire, U.S. Mail, Courier, or other
method agreed to by the parties), within 96 hours (four days) of
receipt of the notice, and provide a written explanation why
seller is unable to support Buyer's need date.
3. Supplier may only request an equitable price adjustment pursuant
to this clause when Supplier determines that compliance with the
Shipping schedule change will require Supplier or any of
Supplier's subtiers or subcontractors to remove any item from
on-going production or assembly operations; or to use overtime
hours or premium or expedited specific, prior written
authorization for Supplier to take such action.
4. Nothing in this clause shall excuse Supplier from immediately
proceeding with all reasonable actions to comply with the order
as changed, including Supplier providing the notice specified in
2.D above and failure of the parties to agree upon any
adjustment to be made under this clause."
1.7 MANUFACTURING LEADTIME
Supplier's lead time for all H-clip material part numbers is eight (8) weeks.
Lead-time for the majority of the UNC offload and other remaining part numbers
is (10) weeks. Buyer and Supplier agree there will be a small percentage of
items with longer leadtimes. Lead-times for all items will be referenced on
pricing matrix Attachment A. All the above are ARO Buyer's order, mylars and
C-notes provided material is available within four (4) weeks ARO Buyer's order.
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EXHIBIT 2.0
PRICING
2.1 The prices set forth in Attachment A are firm fixed price for recurring
unit cost only for the initial procurement and options 1 and 2.
2.2 Minimum quantity runs for all parts will be ten (10) pieces per purchase
order line item.
2.3 Expedite pricing for Blue Streak and Drop-ins shall be recurring cost of
$200.00 per part number per specific ship quantity. Expedite pricing to
include Supplier's in-house administrative/ manufacturing disruption and
expedite as well as all outside processing expedite.
EXHIBIT 3.0
SCHEDULE
--------
3.1 IMPLEMENTING PURCHASE ORDERS
3.1.1 Buyer will issue implementing Purchase Order with scheduled
delivery dates due during the Period of Performance of this
agreement.
3.1.2 All parts and quantities are ordered pursuant to the implementation
Purchase Order due in accordance with negotiated lead times for the
initial procurement and options.
EXHIBIT 4.0
TERMS AND CONDITIONS
--------------------
All terms and conditions of this Agreement shall apply to each Buyer's
implementing Purchase Order and amendment issued hereunder to the same extent as
though set forth in full in each Buyer's purchase order and amendment.
The Purchase Order shall be subject to T-2 (R. 11-95), and T-2 (R. 11-95)
Exhibit B, and T 55 (R. 11-95), which are contained in the Northrop Corporation
Terms and Conditions Booklet, dated April 1996, incorporated herein by
reference. It is also agreed that Seller will accept any additions, changes,
deletions, adjustments and modifications to the terms and conditions resulting
from Buyer's customer. Any resulting cost impact will be subject to negotiation.
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EXHIBIT 5.0
SPECIAL PROVISIONS
------------------
5.1 Buyer is making no firm commitment and assumes no liability, financial or
otherwise, except for the Product actually ordered.
5.2 All material will be supplied by the Supplier, unless the purchase order
states otherwise and then cost will be negotiated.
5.3 Release by Buyer to Supplier of an implementing order is conditioned upon
Supplier's maintenance of its quality system approval, maintaining 95% on
time delivery and 98% hardware quality in accordance with Supplier
Performance Rating System (SPRS), satisfactory financial rating and Buyer's
sole satisfaction of all performance requirements specified in Buyer's
order.
5.4 If Supplier is unable to deliver the quantities ordered, and/or meet the
specified delivery schedule in the Purchase Order/Change Order, Buyer shall
have the right to cancel the Order or any portion thereof without
liability.
5.5 In the event of 5.4 (above), Buyer may also, at its election, purchase all
or any part of the requirements specified in the Purchase Order from
another source without any liability and/or termination of this Agreement.
Buyer reserves its rights to any and all other remedies for such
non-delivery.
5.6 If Supplier is unable to meet the performance requirements specified in 5.4
and 5.5 (above) or any conditions of Article 17 of Terms T-2 or if Buyer
concludes, based on available data, that delivery of any product is delayed
more than two (2) months from the date of schedule delivery by
circumstances beyond Supplier's control, Force Majeure, Buyer has the right
to terminate this Agreement, or any portion thereof in accordance with T-2
Termination for Cause. In such an event Supplier grants to Buyer an
irrevocable, non-exclusive, free, paid up license to use and have others
use to complete Supplier's obligation; hereunder, all Supplier's tools,
dies, jig fixtures, shop aids and any other information to the products
hereinafter involved. Additionally, Supplier grants the Buyer the right to
purchase at a pro-rated value, any work-in process, parts or materials
acquired by Supplier. Payment of complete parts shall be at the Agreement
price. Supplier, upon request, shall deliver such data in a manner that
will support Buyer's production.
5.7 Whenever the Supplier has knowledge that any present or potential labor
dispute, or other matter or circumstances, is delaying or threatens to
delay the timely performance of this Agreement, Supplier shall within 30
days give written notice
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there of, including all information relevant there to the Buyer. The
substance of this Article shall be inserted in any lower-tier purchase
order issued by Supplier.
5.8 The FAA or its representatives shall, at no charge to Buyer, Boeing or to
the FAA, be entitled to inspect and evaluate Supplier's plant, including,
but not limited to, Supplier's facilities, systems data, equipment,
personnel, testing and all work-in progress and completed products
manufactured for installation on any Program Airplane. The costs and fees
for such inspection and evaluation are included in the prices paid
hereunder.
5.9 Upon receipt of notice from the FAA or Boeing that a conformity inspection
shall be required with respect to any first Production Article or any other
Production Article following a change in the configuration thereof,
Contractor shall coordinate with regional FAA personnel to develop and
implement a plan to bring such Production Article into compliance with FAA
requirements prior to the delivery.
5.10 TERMINATION
Buyer may terminate all or part of this Agreement including any Order issued
hereunder, by written notice for Buyer's convenience at any time. Any such
written notice of termination shall specify the effective date and the extent of
any such termination. On receipt of a written notice of termination Supplier
shall immediately:
1. Stop work on any undelivered products.
2. Terminate its subcontracts and purchase orders relating to undelivered
Products.
3. Settle any termination claims made by its subcontracts or suppliers,
(provided Buyer shall have approved the amount of such termination
claims prior to such settlement of undelivered products).
4. Transfer title (to the extent not previously transferred) and deliver
to Buyer all supplies and materials, work-in-process, tooling and
manufacturing drawings and data produced or acquired by supplier for
the performance of this Master Agreement and any implementing order
hereunder.
5. Take such other action, in Buyer's reasonable opinion, as may be
necessary, and as Buyer shall direct in writing to facilitate
termination of this Agreement.
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If Buyer terminates this Agreement in whole or in part, Supplier shall be paid
for parts completed at time of notice of such termination's and a pro rated
amount for parts partially completed so long as such parts have not been
fabricated in advanced of the stated leadtime.
If Buyer terminates this Agreement in whole or in part, Supplier shall have a
right to submit a termination claim and entitled to be compensated in the manner
set forth in Article 13 of the Terms T-2. However, the agreed amount, may not
exceed the total amount payable under any terminated implementing order(s) to
this Agreement reduced by (1) the amount of payments previously made and (2) the
price of work not terminated.
If Supplier and Buyer fail to agree on the whole amount to be paid because of
the termination of work, Buyer shall pay Supplier the amounts determined by
Buyer as follows, but without duplication of any amounts previously agreed upon:
- The price for completed supplier services accepted by Buyer not
previously paid for, adjusted for any saving of freight and other
charges.
The total of:
a. The costs incurred in the performance of the work terminated.
b. The cost of settling and paying termination settlement proposals under
terminated subcontracts that are properly chargeable to the terminated
portion of this Agreement.
c. A sum, as profit on paragraph (a) above, determined to be fair and
reasonable.
The reasonable costs of settlement of the work terminated, including:
a. Accounting, legal, clerical, and other expenses reasonable necessary
for the preparation of the termination clause and supporting data.
b. The termination and settlement of subcontracts (excluding the amounts
of such settlements); and
c. Storage, transportation, and other costs incurred, reasonable
necessary for the preservation, protection, or disposition of the
terminated inventory.
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EXHIBIT 6.0
QUALITY ASSURANCE PROVISIONS
----------------------------
6.1 Supplier is responsible for performing inspection to ensure all parts are
in compliance with Purchase Order requirements. Northrop Source Inspection is
required.
6.2 Supplier is responsible for compliance to applicable Quality Assurance
Documents which are listed below and are hereby incorporated into and made a
part of this Agreement:
DOCUMENT TITLE
SQR-001 "Supplier Quality System Requirements"
Dated November 1996
SQR-002 "Supplier Advanced Quality
Dated May 1996 Requirements"
SQR-003 "Non conformance Reference
Dated November 1996 Handbook for Suppliers
SQR-004 "Supplier Quality Requirements-
Dated June 1996 Control and use of Digital Datasets"
SQR-006 "Forms Control Requirements Supplier
Dated November 1996 Documentation"
6.3 Supplier is responsible for compliance with Drawing No. 233000, Revision
"C" for the storage, maintenance and inspection of mylars.
6.4 Supplier shall implement and maintain a Statistical Process Control (SPC)
program that meets the intent of Dl-9000, Advanced Quality System for Boeing
Suppliers and satisfy the following minimum requirements; (Verification of
Supplier's SPC program shall be performed by Buyer's Quality personnel):
6.4.1 Demonstrate process/part control and capability.
6.4.2 Calculation of capability ratios (CPK's) for key process parameters
and/or part key characteristics and charting of the CPK's on a
monthly basis.
6.4.3 Make all SPC data and charts available for review by Northrop Quality
Assurance personnel.
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6.4.4 Preparation of process flow diagrams which identify key process
operations, inspection points and data collection points for key
process parameters and and/or part key characteristics on
manufacturing shop paperwork. Plans and/or diagrams must address the
following:
- What are the quality requirements?
- How are the quality requirements satisfied?
- What is the verification that quality requirements were met?
6.5 First Article verification will be required on all parts and following a
major design change.
6.5.1 Prepare and obtain Buyer concurrence on a schedule for verification.
6.5.2 Provide required surface table and set-up and inspection tools.
6.5.3 Have a Buyer Quality Representative present during the verification
process.
- One part complete, less processing, that has been fabricated
utilizing the Supplier's planned production process.
- "Should be" and "actual" dimension on first article verification
sheet.
- Applicable blueprints and specification.
- Application Mylars.
- Purchase Orders.
- Shop Paperwork.
- Any other relevant data.
6.6 Supplier shall utilize approved process sources as listed in Dl-4426,
Boeing Approved Process Sources. Supplier shall submit a certification of
compliance form in accordance with SQR 001 on each shipment of parts.
6.7 The Inspection Notes shall be incorporated in the implementing order.
FAI is the responsibility of the supplier. One piece from the first production
lot shall be designated as first article. The fabrication of the First Article
part must utilize the equipment and complete complement of planned tools and
processes and in the same sequence as will be used in production.
Supplier must prepare, and obtain concurrence from Supplier Quality Support, a
schedule for First Article verification.
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NOTE: First Article verification of parts to undimensioned drawings will require
overlay of the part to a PCM (Photo Contact Master) commonly referred to as a
full size mylar. It should be noted that the center of the lines defining parts
as drawn on the PCM are considered nominal. When using PCM'S for First Article
verification it is important to check the accuracy of the PCM using the grid
lines. PCM grid accuracy shall be in accordance with BDS-1090. PCM'S not meeting
the Grid accuracy may not be used for part acceptance and should be returned for
replacement. FAI reports provided by supplier to Northrop Quality representative
should reference PCM accuracy as a dimensional callout, part acceptance for
undimensioned characteristics can be recorded as attribute data (i.e., Periphery
measured by overlay to PCM).
A detailed First Article Inspection report signed by the supplier's Quality
Assurance representative shall be provided to Northrop Grumman Quality Assurance
representative for review. The report, as a minimum, shall contain the following
items, and shall be kept at supplier's facility as a part of permanent records
for seven years:
1. Purchase Order Number, drawing revision, process specification including
revision and PSD (Process Spec Departure) used.
2. Verification of each dimension/characteristics to the
engineering/specification and recording of actual measurement/results.
3. Verification of manufacturing plan, tooling and processes.
4. Inspection and calibration of check fixture, if applicable.
Acceptance of First Article does not relieve supplier of its obligation to
manufacture all subsequent products in accordance with applicable descriptions,
specifications, drawings and work statements. Part requiring "Production Prove"
shall be noted on purchase order and will require, in addition to normal
identification required by drawing, the work "Production Prove" applied to all
parts.
Manufacturing Plan - Supplier shall develop a manufacturing plan and inspection
plan which includes all sequential operations and processes needed to
manufacture, assemble, and inspect parts called out on the purchase order. The
plan shall include references to process specifications, inspection steps,
measurement points for key characteristics and major manufacturing process. The
plan shall contain sufficient detail for Supplier to be able to provide adequate
objective evidence of purchase order compliance and shall be reviewed by
Northrop Grumman Quality field representative on an audit basis.
Supplier Certification - Supplier must certify to all material and process
requirements designated by reference in specification noted on the engineering
drawing. Processes for
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specification designated in Boeing document Dl-4426 shall be performed by
suppliers or sources approved in accordance with Dl-4426. When required by
specification, quantitative test reports will be traceable to the lot(s) being
manufactured. All quality records will be maintained for a minimum of seven
years at supplier's facility and will be subject to examination by Northrop.
Certificate of Conformance form (previously 31-500 now superseded by CD-4020) is
not required with each shipment after First Article approval. Reference Cashmere
MFG. CO exemption memorandum 56OM/95/QS/034 dated 21 February 1995 from Buyer's
Quality Assurance Representative. Buyer may reincorporate this requirement if
Supplier's system to maintain certification for traceability is deemed to be
undisciplined. Also, the supplier shall assure that all personnel/equipment meet
qualification/certifications as required by process specification.
Purchase Order Review - Supplier shall, after receipt of an order and prior to
beginning work, contact the Northrop quality assurance representative to review
the requirements of the purchase order, if necessary. This review is intended to
develop communication with the QA representative and the Supplier to facilitate
the understanding of purchase order quality requirements.
Drawing Revision - Drawings and ADCN'S listed on the purchase order and the
attached planing sheet are updated only when there is a change to the
configuration of the noted part number. Part configuration is defined by the
C995 notes on the planning control sheet. Supplier is authorized to work to the
drawing revision level noted on the purchase order or to a higher revision
drawing supplied by Northrop. If any ADCN'S or drawing revisions change the
configuration of the part and are not called out on purchase order or planning
control sheet, the Buyer should be notified immediately for written
authorization.
Synthetic Part Numbers per C995 Notes - Any basic number -XXX-01 is the same as
the basic number -XXX, Except as noted in the C995 manufacturing notes. The
basic number -XXX-01 is a NGCAD internal planning control number, which is not
shown on the engineering drawing parts list.
Note No. 50A
(2 Jul 97) 2
Supplier's Quality System shall comply with Buyer's Supplier Quality System
requirements documents as identified below:
Supplier Type Applicable Requirements Document
------------- --------------------------------
Value Added Distributor SQR-001
Manufacturer SQR-001
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Note No. 50B
(1 Apr 96) 2 (G471)
Buyer Source Inspection/Acceptance is required prior to shipment. Supplier's
quality organization shall contact Buyer's supplier quality regional office to
coordinate scheduling of source support. Supplier shall contact Buyer's office
at least 48 hours in advance of shipment.
Note: Documents required with Source Inspected/Accepted Shipments: Shipping
Document; Certificate of Compliance; and first page of First Article report
(first shipment only).
Note No. 51J
(14 Sep 96) 2
Note 50B (Source Inspection) Referenced herein is hereby suspended except when
one or more of the following apply:
1. First Article Inspection is required.
2. Items are being shipped directly to Buyer's customer; and/or
3. Order is for "Critical" Parts (i.e. Fracture Critical, Boeing
Designated Parts)
Otherwise, Supplier is authorized to perform delegated acceptance and use Buyer
furnished stamps as directed. (DAP approved Supplier's)
Note No. 50C
(10 Feb 97) 2
First Article inspection shall be performed in accordance with Buyer's form
2-42706, or equivalent. This First Article inspection shall be performed on the
first production lot of a specific part number prior to shipment. Any changes to
the process which affect the original First Article inspection, including a
break in production of eighteen (18) months or more, require a new/revised First
Article inspection. The First Article inspection report shall accompany the
first shipment.
Note No. 50D
(28 Nov 95) 2 (G525)
A Certificate of Compliance in accordance with the requirements of CD-4020 or
equivalent shall be provided. This Certificate of Compliance shall accompany all
shipments.
Note No. 5OF
(22 Sep 97)2
The original mill or foundry chemical and mechanical test reports for material
used in fulfilling orders must be maintained on file for the period specified in
SQR-001. The heat
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lot number of each test report must be traceable to the raw material. Any
reprocessed raw material must be traceable to the original mill test report and
must include objective evidence (e.g., mechanical test results) of compliance to
the material's reprocessed condition.
Two copies of the above test reports must be submitted with each shipment except
as noted below:
1. Do not include copies of test reports with shipments when Source Inspection
is performed (STD. Note 50B). However, these test repots must be available for
review by the Source Representative.
2. Do not include copies of test reports with Delegated Acceptance Program
(DAP) shipments (STD Note 51J).
3. When material is provided by Buyer, Supplier must ensure the material
release document number is included on the shipment Certificate of Conformance,
Form CD-4020, in place of the test reports.
Note No. 50E
(10 Feb 97) 2
Manufacturing and inspection shall be performed to the latest engineering and/or
planning requirements specified or provided herein.
Drawings revisions and advance drawing change notices listed on the purchase
order and/or the attached planning are updated only when there is a change to
the configuration of the noted part number. Part configuration is defined by the
notes on the planning. Supplier is authorized to work to the drawing revision
level noted on the planning or to a higher revision drawing supplied by Buyer.
If any advance drawing change notices or drawings revisions change the
configuration of the part and are not called out on the purchase order or
planning control sheet; Buyer should be notified immediately for written
authorization. Any conflicting provisions of these requirements shall be
identified to Buyer for clarification.
Note No. 50H
(25 Jun 96) 2
Boeing - Special processes specified on Boeing prints must be performed by
sources listed in the Boeing approved Process Source document Dl-4426.
McDonnell Douglas - Special processes specified on Douglas Aircraft Company (DC)
prints as identified in McDonnell Douglas CQAR-5 must be performed by sources
listed in Buyer's Approved Processor List (APL-1), C-17 Section, for the
specific process being performed, subject to the conditions listed in APL-1.
-16-
<PAGE>
Buyer - Special processes specified on Buyer prints must be performed by sources
listed in the Approved Processor List (APL-1).
Note No. 50K
(3 Oct 96) 2
This order includes requirements to control key characteristics in compliance
with Buyer's SQR-002 document (Supplier Advanced Quality Requirements). Key
characteristics are identified in the attached flowdown document and/or in
subcontract planning, drawings, and specifications.
Packaging to be in accordance with P7000.
Alteration of Material is prohibited unless specifically noted in this purchase
order.
Your packing sheet must be placed on the outside of the container and must
reflect Northrop Purchase Order Number.
Note No. 71U
(2 Sep 97)2
Supplier Requested Information - Form 31-99 Supplier Information Request (SIR)
is the document used to provide information in response to inquires from
suppliers. Supplier requests concerning clarification/interpretation of
drawings, tooling, processing, manufacturing/planning, materials, parts, and any
other types of technical questions are submitted through procurement buyer using
the SIR. SIR forms are available by contacting your buyer or follow-up
personnel.
EXHIBIT 7.0
TOOLING
7.1 All tools furnished by Buyer are accountable in accordance with T-55 and
Boeing Documents M31-24.
7.2 Buyer furnished tools made available to the Supplier for use under this
Agreement are supplied in a "where is" "as is" condition. It is the Suppliers
responsibility to perform tooling verification to ensure that Buyer furnished
tools will produce parts which conform to the engineering drawings and
specifications called out in the Purchase Order/Change Order.
7.3 Control, transfer, storage, routine maintenance and replacement of all
contract and reference tooling (fabricated, purchase or Buyer supplied) will be
the responsibility of the Supplier and will be performed per Purchase Order
terms and conditions T-55.
-17-
<PAGE>
7.4 Supplier shall be responsible to perform tooling verification of Buyer
furnished tools to Engineering drawings and purchase order requirements prior to
fabrication of parts.
7.5 All tooling rework or new tools, determined to be Buyer responsibility will
be negotiated on a separate purchase order.
ENTIRE AGREEMENT
- ----------------
This Agreement including all Purchase Orders/Change Orders and
exhibits/attachments hereto shall constitute the entire Agreement between the
Parties with respect to the subject matter hereof and supersedes any prior or
written agreements, commitments, drafts of agreements, understandings,
memorandum, or other communications with respect to the subject matter of this
Agreement.
Effective for Buyer and Supplier as of the date in paragraph 5, (Period of
Performance) signed by respective representatives who are duly authorized to
execute this Agreement.
NORTHROP GRUMMAN CORPORATION CASHMERE MANUFACTURING
COMMERCIAL AIRCRAFT DIVISION COMPANY INCORPORATED
NAME: /s/ NAME: /s/ GARRY VANDEKIEFT
---------------------------- ----------------------------
TITLE: Sr. Buyer TITLE: President
--------------------------- ---------------------------
DATE: 4/6/98 DATE: 4/8/98
---------------------------- ----------------------------
-18-
<PAGE>
ATTACHMENT A
------------
NORTHROP GRUMMAN CONTRACT PRICE LIST (1998-2000)
INTENTIONALLY OMITTED - CONFIDENTIAL TREATMENT REQUESTED
-19-
EXHIBIT 10.32
AGREEMENT
This Agreement is entered into as of August 27, 1998, among PACIFIC
AEROSPACE & ELECTRONICS, INC., a Washington corporation (the "Company"),
LIVIAKIS FINANCIAL COMMUNICATIONS, INC., a California corporation (the
"Liviakis"), and Robert B. Prag, an individual ("Mr. Prag"). Liviakis and Mr.
Prag are sometimes referred to together as the "Consultants."
RECITALS
A. The Company and Liviakis are parties to a Consulting Agreement dated as
of February 3, 1998, relating to the provision of financial consulting services
to the Company by Liviakis (the "Consulting Agreement"). Mr. Prag is a principal
of Liviakis.
B. In Section 5 of the Consulting Agreement, the Company agreed to pay a
finder's fee to Liviakis under certain specified circumstances. The parties have
differing opinions as to whether such a finder's fee may be currently due in
connection with the Company's engagement of Friedman, Billings & Ramsey Co.,
Inc. in the Company's recent offering of senior subordinated notes, and desire
to enter into this Agreement in order to amicably resolve the issue.
AGREEMENT
For good and valuable consideration, the receipt and sufficiency of which
is acknowledged, the parties agree as follows:
1. Consideration. In order to resolve the Finder's Fee Claim (as defined
herein), relating to events occurring prior to the date of this Agreement, the
parties agree as follows:
1.1 Issuance of Shares. In consideration of the release contained in
Section 1.2, the Company shall issue and deliver 590,000 shares of the Company's
newly-issued common stock (the "Shares"), allocated as follows: (a) 395,000 of
the Shares to Liviakis, and (b) 195,000 of the Shares to Mr. Prag. The Shares
shall be subject to the following agreements, representations and warranties:
1.1.1 Liviakis and Mr. Prag shall not transfer their respective Shares
to any person until the expiration of the term of the Consulting Agreement,
including any extension of such term (the "Lock-up Period"). Upon expiration of
the Lock-up Period, the Shares may be transferred only in compliance with Rule
144 of the Securities Act of 1933, as amended (the "Act"), or any other
available exemption, unless registered for resale pursuant to Section 1.1.7.
1.1.2 The Shares, when issued and delivered, shall be fully paid and
non-assessable. If the Company decides to terminate the Consulting Agreement
prior to February 3, 1999 for any reason whatsoever, it is agreed and understood
that neither Liviakis nor Mr. Prag will be requested or demanded by the Company
to return any of the Shares.
1
<PAGE>
1.1.3 Liviakis and Mr. Prag each acknowledge that the Shares have not
been registered under the Act, and accordingly are "restricted securities"
within the meaning of Rule 144 of the Act. As such, the Shares may not be resold
or transferred unless (a) the Company receives, should it so require, an opinion
of counsel reasonably satisfactory to the Company that such resale or transfer
is exempt from the registration requirements of the Act, or (b) the Shares have
been registered for resale pursuant to Section 1.1.7.
1.1.4 In connection with the acquisition of the Shares, Liviakis and
Mr. Prag represent and warrant to the Company as follows:
(a) Liviakis and Mr. Prag each acknowledge that Liviakis and Mr.
Prag have each been afforded the opportunity to ask questions of and
receive answers from duly authorized officers or other representatives of
the Company concerning an investment in the Shares, and have received any
additional information requested by either of them.
(b) Liviakis' and Mr. Prag's investment in the Shares is
reasonable in relation to their respective net worths, which are in excess
of ten (10) times their respective cost basis in the Shares. Liviakis and
Mr. Prag have had experience in investments in restricted and publicly
traded securities, and have had experience in investments in speculative
securities and other investments which involve the risk of loss of
investment. Liviakis and Mr. Prag acknowledge that an investment in the
Shares is speculative and involves the risk of loss. Liviakis and Mr. Prag
have the requisite knowledge to assess the relative merits and risks of
this investment without the necessity of relying upon other advisors, and
Liviakis and Mr. Prag can afford the risk of loss of their entire
investment in the Shares. Liviakis and Mr. Prag are (i) accredited
investors, as that term is defined in Regulation D promulgated under the
Act, and (ii) purchasers as described in Section 25102(f)(2) of the
California Corporate Securities Law of 1968, as amended.
(c) Liviakis and Mr. Prag are acquiring the Shares for their own
account for long-term investment and not with a view toward resale or
distribution thereof except in accordance with applicable securities laws.
1.1.5 Upon receipt of the original Warrants pursuant to Section 2, the
Company shall direct its transfer agent to issue and deliver certificates
representing the Shares to Liviakis and Mr. Prag, as allocated pursuant to this
Section 1.
1.1.6 Liviakis and Mr. Prag acknowledge that the certificates
representing the Shares will bear substantially the following legend unless the
Shares are registered pursuant to Section 1.1.7, or such legend can be removed
under applicable securities laws:
2
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND WERE
OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENT OF
THE ACT AND SUCH LAWS. THESE SECURITIES HAVE NOT BEEN APPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR OTHER REGULATORY
AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE
MERITS OF THESE SECURITIES. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THESE SECURITIES CANNOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF TO ANY
PERSON OR ENTITY UNLESS SUBSEQUENTLY REGISTERED UNDER THE ACT, AND/OR THE LAWS
OF CERTAIN STATES, OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE
AND, IF REQUIRED BY THE COMPANY, THE HOLDER HAS PROVIDED THE COMPANY WITH A
LEGAL OPINION ACCEPTABLE TO THE COMPANY TO THAT EFFECT.
While registered pursuant to Section 1.1.7, Liviakis and Mr. Prag
acknowledge that the certificates representing the Shares will bear
substantially the following legend until the Shares are sold to a third party,
and the Company has been provided confirmation of sale and prospectus delivery
in a form reasonably acceptable to the Company:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE THE SUBJECT OF A REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES
ACT OF 1933. SUCH SHARES MAY BE TRANSFERRED ONLY: (A) (1) IF SUCH REGISTRATION
IS EFFECTIVE AS OF THE DATE OF TRANSFER, AND (2) UPON DELIVERY OF CONFIRMATION
TO THE COMPANY, IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT SUCH SALE
WAS MADE IN COMPLIANCE WITH THE PROSPECTUS DELIVERY REQUIREMENTS OF RULES
PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION; OR (B) UPON THE COMPANY'S
RECEIPT OF AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION
AND/OR PROSPECTUS DELIVERY IS NOT REQUIRED.
1.1.7 If the Company shall determine to register any of its common
stock either for its own account or for the account of a security holder or
holders prior to August 21, 2000, other than a registration relating solely to
employee benefit plans, or registration on any registration form that does not
permit secondary sales, the Company will (a) promptly give written notice of the
proposed registration to each of the Consultants (the "Registration Notice");
and (b) include in such registration (and any related qualification or other
compliance filing under applicable blue sky laws), and in any underwriting
involved therein, all or any portion of the Shares for resale, as specified in a
written request by either of the Consultants, which is received by the Company
within 30 days after delivery of the Registration Notice to the Consultants.
(a) If the registration described in the Registration Notice
involves an underwriting, the Company shall so state in the Registration
Notice. In such event, the Consultants' rights to registration pursuant to
this Section 1.1.7 shall be conditioned upon their participation in the
underwriting and the inclusion of Shares in the underwriting to the extent
provided herein. The Consultants and the Company (and any other security
holders proposing to distribute their securities through the underwriting)
shall enter into an underwriting agreement in customary form with the
representatives of the underwriter or underwriters selected for such
underwriting by the Company.
3
<PAGE>
(b) Notwithstanding any other provisions of this Section 1.1.7,
if the representatives of the underwriter or underwriters determine in good
faith that marketing factors make it advisable to impose a limitation on
the number of secondary shares to be included in the registration, the
number of such secondary shares, if any, that may be included in the
registration and underwriting on behalf of such holders, and any other
security holders proposing to distribute their securities of the Company
through such underwriting shall be allocated in proportion, as nearly as
practicable, to the respective amounts of securities that they had
requested to be included in such registration at the time of filing the
registration statement. If the Consultants disapprove of the terms of any
such underwriting, they may elect to withdraw therefrom by written notice
to the Company and the representatives of the underwriter or underwriters.
(c) If representatives of the underwriter or underwriters exclude
any of the Shares from the underwritten offering, then the Consultants
shall not offer or sell any of the Shares for the earlier of (i) a period
ending 180 days following the effective date of such registered public
offering, or (ii) the date that the underwriter agrees that an offering or
sale of the Shares by the Consultants may proceed.
(d) The Company agrees to indemnify and hold harmless the
Consultants from and against any and all losses, claims, damages,
liabilities, judgments or expenses (including reasonable attorneys' fees
and costs) actually incurred by them, arising under either Section 15 of
the Securities Act or Section 20 of the Exchange Act as the result of (i)
any untrue statement or alleged untrue statement of a material fact
contained in any registration statement or prospectus in which Shares are
included (or any amendment or supplement thereto), except as is furnished
in writing to the Company by or on behalf of the Consultants, or (ii) any
omission or alleged omission by the Company to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading.
(e) The Consultants agree to indemnify and hold harmless the
Company from and against any and all losses, claims, damages, liabilities,
judgments or expenses (including reasonable attorneys' fees and costs)
actually incurred by it, arising under either Section 15 of the Securities
Act or Section 20 of the Exchange Act as the result of (i) any untrue
statement or alleged untrue statement of a material fact contained in any
registration statement or prospectus in which Shares are included (or any
amendment or supplement thereto), which was furnished in writing to the
Company by or on behalf of the Consultants, or (ii) any omission or alleged
omission by the Consultants to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading.
1.2 Release. In exchange for issuance of the Shares, Liviakis and Mr.
Prag forever release and discharge the Company from any and all claims, causes
of action, rights and damages (including attorneys fees and costs) (individually
and collectively, "Claims"), (a) that either Liviakis or Mr. Prag have or may
have, whether known or unknown, with regard to any finder's fee claims that
either arise under Section 5 of the Consulting Agreement or arising in any other
manner, (i) based on events prior to the date of this Agreement, including but
not limited to those Claims relating in any way to the Company's issuance of
senior subordinated
4
<PAGE>
notes in July 1998 (the "Finder's Fee Claim"), or any Claims relating to the
Company's acquisition of Aeromet International plc, or (ii) that Liviakis or Mr.
Prag now or hereafter may have with respect to any financing or any acquisition
candidate that in the past or in the future is provided directly or indirectly
to the Company by Friedman, Billings, Ramsey & Co., Inc. or by BancBoston
Securities Inc., or (b) that either Liviakis or Mr. Prag have or may have,
whether known or unknown, in any way arising out of or in connection with the
Warrants ("Warrant Claims"). Liviakis and Mr. Prag agree to indemnify, defend
and hold the Company harmless against all Claims released in this Section 1.2
that any third party may assert against the Company. Liviakis and Mr. Prag each
covenant not to bring or voluntarily aid in any claim, suit, civil action,
complaint, arbitration, or administrative action in any court, agency or
arbitration with respect to any such released Claims.
1.3 No Admissions. This Agreement and all documents executed in order to
effect its terms shall not be construed as an admission or evidence of liability
by the Company with respect to any Claims released in Section 1.2.
2. Cancellation of Warrants. Liviakis and Mr. Prag shall return to the Company
for cancellation as soon as possible after the execution of this Agreement, the
originals of the Common Stock Purchase Warrants, dated as of February 10, 1998
and covering an aggregate of 1,290,000 shares of the Company's common stock,
which were issued in connection with the Consulting Agreement (the "Warrants").
The Warrants were issued as follows: (1) to Liviakis for 967,500 shares of the
Company's common stock (the "Liviakis Warrant"), and (2) to Mr. Prag for 322,500
shares of the Company's common stock (the "Prag Warrant"). Liviakis and Mr. Prag
agree and acknowledge that immediately upon execution of this Agreement, (a) the
Warrants shall be null and void, and of no further effect, without further
action by the Company, and (b) neither Liviakis nor Mr. Prag shall have any
further rights, and the Company shall have no further obligations, under the
Warrants or under Section 4.1 of the Consulting Agreement. Each of Liviakis and
Mr. Prag represent and warrant to the Company as follows:
2.1 Liviakis Warrant. Liviakis (a) owns the Liviakis Warrant as its sole
property, (b) has and is conveying to the Company good, clear and marketable
title to the Liviakis Warrant, free and clear of any liens, restrictions, claims
or other encumbrances, (c) owns no other shares of the Company's capital stock,
and (d) other than as set forth in this Agreement, has no outstanding options,
warrants, rights, conversion privileges or other agreements or instruments
obligating the Company to issue Liviakis any additional shares of capital stock
or any other security of the Company.
2.2 Prag Warrant. Mr. Prag (a) owns the Prag Warrants as his separate
personal property, (b) has and is conveying to the Company good, clear and
marketable title to the Prag Warrant, free and clear of any interest of Mr.
Prag's marital community, liens, restrictions, claims or other encumbrances, (c)
owns no other shares of the Company's capital stock, and (d) other than as set
forth in this Agreement, has no outstanding options, warrants, rights,
conversion privileges or other agreements or instruments obligating the Company
to issue any additional shares of capital stock or any other security of the
Company.
5
<PAGE>
3. Authority and Validity. The parties each represent and warrant that they have
all requisite power and authority to (a) execute and deliver this Agreement and
all other documents to be executed and delivered by them in connection with this
Agreement, and (b) to consummate the transactions contemplated by this
Agreement. This Agreement has been duly executed and delivered by the parties,
and constitutes the valid and binding obligation of each of them enforceable in
accordance with its terms, except as enforcement may be limited by bankruptcy,
insolvency or other similar laws affecting the enforcement of creditors' rights
generally. The execution and delivery of this Agreement will not conflict with,
result in a violation of, or constitute a default under any agreement, note,
lease, instrument, permit, license, judgment, order, decree, statute, law, rule
or regulation applicable to the parties or their respective properties or
assets.
4. Scope. This Agreement modifies the Consulting Agreement only to the extent
specifically set forth in this Agreement. All other terms and conditions of the
Consulting Agreement remain in full force and effect as written.
Executed as of the first date written above.
Company:
PACIFIC AEROSPACE & ELECTRONICS , INC.
By: /s/ DONALD W. WRIGHT
-------------------------------------
Donald A. Wright
President and Chief Executive Officer
Liviakis:
LIVIAKIS FINANCIAL COMMUNICATIONS,
INC.
By: /s/ JOHN M. LIVIAKIS
-------------------------------------
John M. Liviakis
President
Mr. Prag:
By: /s/ ROBERT B. PRAG
-------------------------------------
Robert B. Prag
6
EXHIBIT 21.1
List of Subsidiaries
Electronics Group
1. Pacific Coast Technologies, Inc.
2. Ceramic Devices, Inc.
3. Northwest Technical Industries, Inc.
4. Balo Precision Parts, Inc.
5. Electronic Specialty Corporation
Aerospace Group
1. Cashmere Manufacturing Co., Inc.
2. Morel Industries, Inc.
3. Seismic Safety Products, Inc.
Aeromet Group
1. PA&E International, Inc.
Subsidiary: Pacific A&E Limited
Subsidiary: Pacific Aerospace & Electronics (UK) Limited
Subsidiary: Aeromet International plc
Frank Ford (Aircraft Components) Limited
Kent Aerospace Limited
TKR Aerospace Limited
TKR Group Limited
TKR International Limited
Truflo Gas Turbines Limited
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this Annual Report on Form 10-K of Pacific
Aerospace and Electronics, Inc. for the year ended May 31, 1998 and to the
incorporation by reference in Registration Statement Numbers 333-29007 and
333-39799 of Pacific Aerospace and Electronics, Inc. on Forms S-8, and 333-25177
and 333-41407 of Pacific Aerospace and Electronics, Inc. on Forms S-3, of our
report dated July 2, 1997.
/s/ MOSS ADAMS LLP
Seattle, Washington
August 28, 1998
EXHIBIT 23.2
Board of Directors
Pacific Aerospace & Electronics, Inc.
August 28, 1998
We consent to incorporation by reference in registration statement numbers
333-29007 and 333-39799 on Forms S-8 and registration statement numbers
333-25177 and 333-41407 on Forms S-3 of Pacific Aerospace & Electronics, Inc. of
our report dated June 30, 1998, relating to the consolidated balance sheet of
Pacific Aerospace and Electronics, Inc. as of May 31, 1998 and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
the year then ended, which report appears in the May 31, 1998 annual report on
Form 10-K of Pacific Aerospace & Electronics, Inc.
/s/ KPMG PEAT MARWICK LLP
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> MAY-31-1997 MAY-31-1998
<PERIOD-END> MAY-31-1997 MAY-31-1998
<CASH> 3,048,000 11,461,000
<SECURITIES> 0 0
<RECEIVABLES> 5,702,000 9,505,000
<ALLOWANCES> 247,000 130,000
<INVENTORY> 9,082,000 16,184,000
<CURRENT-ASSETS> 18,939,000 37,678,000
<PP&E> 16,499,000 31,443,000
<DEPRECIATION> 3,309,000 5,108,000
<TOTAL-ASSETS> 35,752,000 75,580,000
<CURRENT-LIABILITIES> 5,849,000 12,079,000
<BONDS> 3,236,000 10,000,000
0 0
0 0
<COMMON> 10,000 15,000
<OTHER-SE> 25,609,000 56,127,000
<TOTAL-LIABILITY-AND-EQUITY> 35,752,000 78,580,000
<SALES> 34,175,000 54,099,000
<TOTAL-REVENUES> 34,175,000 54,099,000
<CGS> 25,969,000 39,487,000
<TOTAL-COSTS> 32,228,000 49,359,000
<OTHER-EXPENSES> 215,000 1,608,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 1,732,000 3,132,000
<INCOME-TAX> 50,000 (482,000)
<INCOME-CONTINUING> 1,682,000 3,614,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,682,000 3,614,000
<EPS-PRIMARY> 0.18 0.29
<EPS-DILUTED> 0.17 0.27
</TABLE>
