SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended August 31, 1999
[ ] 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 incorporation (I.R.S. Employer Identification
or organization) No.)
430 Olds Station Road, Wenatchee, Third Floor, Washington 98801
(Address of Principal Executive Offices; Zip Code)
Registrant's telephone number, including area code: (509) 667-9600
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years:
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes____ No____
Applicable only to corporate issuers:
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: As of October 5, 1999, there were
19,695,070 shares outstanding of the Company's Common Stock, par value $.001 per
share.
-1-
<PAGE>
PART I - FINANCIAL INFORMATION
---------------------
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets - August 31, 1999 and May 31, 1999
Consolidated Statements of Operations - First Quarters Ended August 31, 1999 and
1998
Consolidated Statements of Cash Flows - First Quarters Ended August 31, 1999 and
1998
Management's Statement and Notes to Unaudited Consolidated Financial Statements
- - First Quarter Ended August 31, 1999
-2-
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 31, 1999 and May 31, 1999
August 31, May 31,
1999 1999
ASSETS (Unaudited) (Audited)
- ------------------------------------------------------------ ------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 2,608,000 $ 8,134,000
Accounts receivable, net 24,316,000 24,992,000
Inventories 26,493,000 24,616,000
Deferred income taxes 880,000 880,000
Prepaid expense and other 2,174,000 2,316,000
------------- -------------
Total Current Assets 56,471,000 60,938,000
------------- -------------
PROPERTY AND EQUIPMENT, NET 46,289,000 45,279,000
------------- -------------
OTHER ASSETS
Note receivable, net 2,100,000 1,458,000
Investment, net 19,000 72,000
Costs in excess of net book value of acquired subsidiaries, net 42,434,000 41,052,000
Patents, net 1,233,000 1,255,000
Deferred income taxes 3,123,000 3,395,000
Deferred financing costs, net 4,824,000 5,029,000
Other assets 347,000 249,000
------------- -------------
Total Other Assets 54,080,000 52,510,000
------------- -------------
TOTAL ASSETS $ 156,840,000 $ 158,727,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 9,889,000 $ 10,484,000
Accrued liabilities 6,469,000 5,615,000
Accrued interest 727,000 2,813,000
Current portion of long-term debt 1,121,000 1,278,000
Current portion of capital lease obligations 211,000 297,000
Line of credit 2,600,000 0
Other current liabilities 1,206,000 2,122,000
------------- -------------
Total Current Liabilities 22,223,000 22,609,000
LONG-TERM LIABILITIES
Long-term debt, net of current portion 4,987,000 5,220,000
Capital lease obligations, net of current portion 1,783,000 1,615,000
Senior subordinated notes payable 75,000,000 75,000,000
Deferred rent and other 305,000 264,000
------------- -------------
Total Long-Term Liabilities 82,075,000 82,099,000
------------- -------------
Total Liabilities 104,298,000 104,708,000
------------- -------------
STOCKHOLDERS' EQUITY
Convertible preferred tock - -
Common stock 19,000 19,000
Additional paid in capital 69,305,000 69,276,000
Accumulated other comprehensive loss (1,138,000) (1,140,000)
Accumulated deficit (15,644,000) (14,136,000)
------------- -------------
Total Stockholders' Equity 52,542,000 54,019,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 156,840,000 $ 158,727,000
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
First Quarters Ended August 31, 1999 and 1998
Quarters Ended
----------------------------------
August 31, August 31,
1999 1998
(Unaudited) (Unaudited)
------------ ------------
<S> <C> <C>
NET SALES $ 28,571,000 $ 19,178,000
COST OF SALES 22,011,000 14,504,000
------------ ------------
GROSS PROFIT 6,560,000 4,674,000
OPERATING EXPENSES 5,104,000 3,776,000
------------ ------------
INCOME FROM OPERATIONS 1,456,000 898,000
------------ ------------
OTHER INCOME (EXPENSE)
Interest Income 48,000 226,000
Interest Expense (2,548,000) (1,069,000)
Other, net 3,000 (6,721,000)
------------ ------------
(2,497,000) (7,564,000)
------------ ------------
NET LOSS BEFORE INCOME TAX (1,041,000) (6,666,000)
PROVISION FOR INCOME TAXES (465,000) 2,255,000
------------ ------------
NET LOSS (1,506,000) (4,411,000)
------------ ------------
OTHER COMPREHENSIVE INCOME LOSS:
Foreign currency translation 3,000 1,714,000
Income tax benefit (1,000) (583,000)
Valuation of available for sale securities - 436,000
------------ ------------
2,000 1,567,000
------------ ------------
COMPREHENSIVE LOSS $ (1,504,000) $ (2,844,000)
============ ============
NET LOSS PER SHARE:
BASIC $ (0.08) $ (0.29)
DILUTED $ (0.08) $ (0.29)
SHARES USED IN COMPUTATION OF
NET LOSS PER SHARE:
BASIC 19,107,521 15,421,375
DILUTED 19,107,521 15,421,375
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
First Quarters Ended August 31, 1999 and 1998
Quarters Ended
---------------------------------------
August 31, August 31,
1999 1998
(Unaudited) (Unaudited)
------------ ------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net cash provided by (used in) operating activities $ (2,959,000) $ 1,001,000
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,200,000) (1,635,000)
Acquisition of subsidiaries (1,282,000) (69,092,000)
Increase in notes receivable (1,365,000) -
------------ ------------
Net cash used in investing activities (3,847,000) (70,727,000)
------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES
Net borrowings (repayments) under line of credit 2,600,000 (608,000)
Proceeds from long-term debt - 71,363,000
Payments on long-term debt and capital leases (1,209,000) (374,000)
Sale of preferred stock, net of issuance costs - 6,792,000
Sale of common stock, net of issuance costs 27,000 -
------------ ------------
Net cash from financing activities 1,418,000 77,173,000
------------ ------------
NET CHANGE IN CASH (5,388,000) 7,447,000
CASH AT BEGINNING OF PERIOD 8,134,000 11,461,000
EFFECT OF EXCHANGE RATES ON CASH (138,000) 90,000
------------ ------------
CASH AT END OF PERIOD $ 2,608,000 $ 18,998,000
============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Property, plant and equipment included in accounts payable $ - $ 500,000
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-5-
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
MANAGEMENT'S STATEMENT AND
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
First Quarter Ended August 31, 1999
Management's Statement
The accompanying unaudited consolidated financial statements have been prepared
in accordance with Form 10-Q instructions and, in the opinion of management,
contain all adjustments necessary to present fairly the Company's consolidated
financial position as of August 31, 1999 and May 31, 1999, the consolidated
results of operations for the quarters ended August 31, 1999 and 1998, and the
consolidated statements of cash flows for the quarters ended August 31, 1999 and
1998. All significant intercompany transactions have been eliminated in the
consolidation process. These results have been determined on the basis of
generally accepted accounting principles and practices applied consistently with
those used in the preparation of the Company's annual and quarterly reports
under the Securities Exchange Act of 1934, as amended.
Certain information and footnote disclosures normally included in audited
financial statements presented in accordance with generally accepted accounting
principles have been condensed or omitted. The consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto for the years ended May 31, 1999 and 1998.
The results of operations for the quarters ended August 31, 1999 and 1998 are
not necessarily indicative of the results to be expected or anticipated for the
full fiscal year.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Note 1: Net Income (Loss) Per Share:
Basic income (loss) per share is computed using the weighted average number of
common shares outstanding during the period. Diluted income (loss) 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.
As the Company had a net loss for the periods ended August 31, 1999 and 1998,
basic and diluted net loss per share are the same.
Note 2: Inventories
Components of inventories are as follows:
August 31, May 31,
1999 1999
------------ -----------
Raw materials $ 6,789,000 $ 7,374,000
Work in progress 13,587,000 11,478,000
Finished goods 6,117,000 5,764,000
------------ -----------
Total $26,493,000 $24,616,000
============ ===========
-6-
<PAGE>
Note 3: Investment
At May 31, 1999 and August 31, 1999, the Company had an investment in the common
stock, registered and unregistered shares, of a public company of less than 20%.
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 temporary unrealized gains and losses excluded from the statements of
operations and reported as a separate component of stockholders' equity.
Unrealized losses which are determined to be other-than-temporary are included
in other income or expense in the statements of operations. Fair value of the
registered shares of common stock at May 31, 1999 and August 31, 1999 is
determined as the quoted value of the stock in the over-the-counter market,
without any discounts for large blocks or unregistered shares. Fair value of the
unregistered shares at May 31, 1999 and August 31, 1999 is determined based on
expected net realizable value. There is no assurance that such values will be
realizable upon liquidation or sale.
Note 4: Consolidating Condensed Financial Statements
The following financial statements present consolidating condensed financial
information of the Company for the indicated periods. The Company's senior
subordinated notes, which were used to finance the Aeromet acquisition in July
1998, have been guaranteed by all of the Company's U.S. wholly owned
subsidiaries. The guarantor subsidiaries have fully and unconditionally
guaranteed this debt on a joint and several basis. This debt is not guaranteed
by the Company's foreign subsidiaries, which consist of Aeromet and two related
holding companies. There are no significant contractual restrictions on the
distribution of funds from the guarantor subsidiaries to the parent corporation.
The consolidating condensed financial information is presented in lieu of
separate financial statements and other disclosures of the guarantor
subsidiaries, as management has determined that such information is not material
to investors.
-7-
<PAGE>
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Balance Sheet
August 31, 1999
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash $ (782,000) $ (33,000) $ 3,423,000 $ - $ 2,608,000
Accounts receivable, net - 8,633,000 15,913,000 (230,000) 24,316,000
Inventories - 14,805,000 11,688,000 - 26,493,000
Other 2,226,000 1,356,000 557,000 (1,085,000) 3,054,000
------------- ------------- ------------- ------------- -------------
Total current assets 1,444,000 24,761,000 31,581,000 (1,315,000) 56,471,000
PROPERTY, PLANT, AND EQUIPMENT, net 6,373,000 22,885,000 17,031,000 - 46,289,000
OTHER ASSETS
Costs in excess of net book value
of acquired subsidiaries, net - 4,313,000 38,121,000 - 42,434,000
Investment, net 19,000 - - - 19,000
Investment in and loans to subsidiaries 117,872,000 72,618,000 - (190,490,000) -
Other 8,390,000 3,402,000 (165,000) - 11,627,000
------------- ------------- ------------- ------------- -------------
Total other assets 126,281,000 80,333,000 37,956,000 (190,490,000) 54,080,000
------------- ------------- ------------- ------------- -------------
TOTAL ASSETS $ 134,098,000 $ 127,979,000 $ 86,568,000 $(191,805,000) 156,840,000
============= ============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Accounts payable $ 383,000 $ 2,521,000 $ 7,215,000 $ (230,000) $ 9,889,000
Current portion of long-term debt 149,000 972,000 - - 1,121,000
Line of credit 2,600,000 - - - 2,600,000
Other 1,997,000 2,315,000 5,386,000 (1,085,000) 8,613,000
------------- ------------- ------------- ------------- -------------
Total current liabilities 5,129,000 5,808,000 12,601,000 (1,315,000) 22,223,000
LONG-TERM LIABILITIES
Long-term debt, net of current portion 76,358,000 3,629,000 - - 79,987,000
Intercompany note and loan payable - 64,670,000 38,957,000 (103,627,000) -
Other 69,000 1,288,000 731,000 - 2,088,000
------------- ------------- ------------- ------------- -------------
Total long-term liabilities 76,427,000 69,587,000 39,688,000 (103,627,000) 82,075,000
STOCKHOLDERS' EQUITY
Convertible preferred stock - - - - -
Common stock 19,000 56,139,000 33,710,000 (89,849,000) 19,000
Additional paid-in capital 69,305,000 - - - 69,305,000
Accumulated other comprehensive loss (1,138,000) - (1,138,000) 1,138,000 (1,138,000)
Retained earnings (accumulated deficit) (15,644,000) (3,555,000) 1,707,000 1,848,000 (15,644,000)
------------- ------------- ------------- ------------- -------------
Total stockholders' equity 52,542,000 52,584,000 34,279,000 (86,863,000) 52,542,000
------------- ------------- ------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 134,098,000 $ 127,979,000 $ 86,568,000 $(191,805,000) $ 156,840,000
============= ============= ============= ============= =============
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Balance Sheet
May 31, 1999
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash $ 1,798,000 $ 39,000 $ 6,297,000 - $ 8,134,000
Accounts receivable, net - 8,723,000 16,661,000 (392,000) 24,992,000
Inventories - 13,564,000 11,052,000 24,616,000
Other 4,535,000 1,517,000 660,000 (3,516,000) 3,196,000
------------- ------------- ------------- ------------- -------------
Total current assets 6,333,000 23,843,000 34,670,000 (3,908,000) 60,938,000
PROPERTY, PLANT, AND EQUIPMENT, net 6,151,000 21,930,000 17,198,000 - 45,279,000
OTHER ASSETS
Costs in excess of net book value
of acquired subsidiaries, net - 2,717,000 38,335,000 - 41,052,000
Investment, net 72,000 - - - 72,000
Investment in and loans to subsidiaries 115,099,000 75,000,000 85,000 (190,184,000) -
Other 8,254,000 3,295,000 (163,000) - 11,386,000
------------- ------------- ------------- ------------- -------------
Total other assets 123,425,000 81,012,000 38,257,000 (190,184,000) 52,510,000
------------- ------------- ------------- ------------- -------------
TOTAL ASSETS $ 135,909,000 $ 126,785,000 $ 90,125,000 $(194,092,000) $ 158,727,000
============= ============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Accounts payable $ 180,000 $ 2,542,000 $ 8,154,000 $ (392,000) $ 10,484,000
Current portion of long-term debt 138,000 1,140,000 - - 1,278,000
Other 5,084,000 1,597,000 7,682,000 (3,516,000) 10,847,000
------------- ------------- ------------- ------------- -------------
Total current liabilities 5,402,000 5,279,000 15,836,000 (3,908,000) 22,609,000
LONG-TERM LIABILITIES
Long-term debt, net of current portion 76,375,000 3,845,000 - - 80,220,000
Intercompany note and loan payable 85,000 61,869,000 37,500,000 (99,454,000) -
Other 28,000 1,105,000 746,000 - 1,879,000
------------- ------------- ------------- ------------- -------------
Total long-term liabilities 76,488,000 66,819,000 38,246,000 (99,454,000) 82,099,000
STOCKHOLDERS' EQUITY
Convertible preferred stock - - - - -
Common stock 19,000 58,641,000 35,117,000 (93,758,000) 19,000
Additional paid-in capital 69,276,000 - - - 69,276,000
Accumulated other comprehensive loss (1,140,000) - (1,136,000) 1,136,000 (1,140,000)
Retained earnings (accumulated deficit) (14,136,000) (3,954,000) 2,062,000 1,892,000 (14,136,000)
------------- ------------- ------------- ------------- -------------
Total stockholders' equity 54,019,000 54,687,000 36,043,000 (90,730,000) 54,019,000
------------- ------------- ------------- ------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 135,909,000 $ 126,785,000 $ 90,125,000 $(194,092,000) $ 158,727,000
============= ============= ============== ============= =============
</TABLE>
-9-
<PAGE>
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Operations
For the Quarter Ended August 31, 1999
+ NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Sales $ - $ 14,511,000 $ 14,373,000 $ (313,000) $ 28,571,000
Cost of Sales - 10,573,000 11,751,000 (313,000) 22,011,000
------------- ------------- ------------- ------------- -------------
Gross profit - 3,938,000 2,622,000 - 6,560,000
Operating expenses 1,567,000 3,202,000 1,655,000 (1,320,000) 5,104,000
------------- ------------- ------------- ------------- -------------
Income (loss) from operations (1,567,000) 736,000 967,000 1,320,000 1,456,000
------------- ------------- ------------- ------------- -------------
Other income (expense)
Parent's share of subsidiaries net loss (73,000) - - 73,000 -
Interest expense (2,390,000) (1,228,000) (1,100,000) 2,170,000 (2,548,000)
Other 2,413,000 1,098,000 30,000 (3,490,000) 51,000
------------- ------------- ------------- ------------- -------------
Total other income (expense) (50,000) (130,000) (1,070,000) (1,247,000) (2,497,000)
------------- ------------- ------------- -------------- -------------
Income (loss) before income taxes (1,617,000) 606,000 (103,000) 73,000 (1,041,000)
Provision for income taxes (6,000) (207,000) (252,000) - (465,000)
------------- ------------- ------------- ------------- -------------
Net income (loss) (1,623,000) 399,000 (355,000) 73,000 (1,506,000)
Other comprehensive income (loss)
Foreign currency translation, net of tax 4,000 - (2,000) - 2,000
Adjustment for unrealized loss on
investment - - - - -
------------- ------------- ------------- ------------- -------------
Total other comprehensive income (loss) 4,000 - (2,000) - 2,000
------------- ------------- ------------- ------------- -------------
Comprehensive income (loss) $ (1,619,000) $ 399,000 $ (357,000) $ 73,000 $ (1,504,000)
============= ============= ============= ============= =============
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Operations
For the Quarter Ended August 31, 1998
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Sales $ - $ 15,281,000 $ 4,461,000 $ (564,000) $ 19,178,000
Cost of Sales - 11,404,000 3,664,000 (564,000) 14,504,000
------------- ------------- ------------- ------------- -------------
Gross profit - 3,877,000 797,000 - 4,674,000
Operating expenses 733,000 3,137,000 473,000 (567,000) 3,776,000
------------- ------------- ------------- ------------- -------------
Income (loss) from operations (733,000) 740,000 324,000 567,000 898,000
------------- ------------- ------------- ------------- -------------
Other income (expense)
Parent's share of subsidiaries net loss (1,764,000) - - 1,764,000 -
Interest expense (886,000) (183,000) - - (1,069,000)
Other (2,433,000) (3,504,000) 9,000 (567,000) (6,495,000)
------------- ------------- ------------- ------------- -------------
Total other income (expense) (5,083,000) (3,687,000) 9,000 1,197,000 (7,564,000)
------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes (5,816,000) (2,947,000) 333,000 1,764,000 (6,666,000)
Provision for income taxes 1,398,000 1,002,000 (145,000) - 2,255,000
------------- -------------- ------------- ------------- -------------
Net income (loss) (4,418,000) (1,945,000) 188,000 1,764,000 (4,411,000)
Other comprehensive income (loss)
Foreign currency translation, net of tax - - 1,131,000 - 1,131,000
Adjustment for unrealized loss on investment 436,000 - - - 436,000
------------- ------------- ------------- ------------- -------------
Total other comprehensive income (loss) 436,000 - 1,131,000 - 1,567,000
------------- ------------- ------------- ------------- -------------
Comprehensive income (loss) $ (3,982,000) $ (1,945,000) $ 1,319,000 $ 1,764,000 $ (2,844,000)
=============== ============= ============= ============= =============
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Cash Flows
For the Quarter Ended August 31, 1999
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net cash provided by (used in)
operating activities $ (1,614,000) $ 938,000 $ (2,356,000) $ 73,000 $ (2,959,000)
------------- ------------- ------------- ------------- -------------
CASH FLOW FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (330,000) (369,000) (501,000) - (1,200,000)
Acquisition of subsidiaries (1,282,000) - - - (1,282,000)
Other changes, net (1,890,000) - 85,000 440,000 (1,365,000)
------------- ------------- ------------- ------------- -------------
Net cash used in investing activities (3,502,000) (369,000) (416,000) 440,000 (3,847,000)
------------- ------------- ------------- ------------- -------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net borrowings under line of credit 2,600,000 - - - 2,600,000
Payments on long-term debt and capital leases (6,000) (1,189,000) (14,000) - (1,209,000)
Proceeds from sale of common stock, net 27,000 - - - 27,000
Other changes, net (85,000) 548,000 50,000 (513,000) -
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
financing activities 2,536,000 (641,000) 36,000 (513,000) 1,418,000
------------- ------------- ------------- ------------- -------------
NET CHANGE IN CASH (2,580,000) (72,000) (2,736,000) - (5,388,000)
CASH AT BEGINNING OF PERIOD 1,798,000 39,000 6,297,000 - 8,134,000
EFFECT OF EXCHANGE RATES ON CASH - - (138,000) - (138,000)
------------- ------------- ------------- ------------- -------------
CASH AT END OF PERIOD $ (782,000) $ (33,000) $ 3,423,000 $ - $ 2,608,000
============= ============= ============= ============= =============
SUPPLEMENTAL CASH FLOW:
Noncash operating expenses related to:
Depreciation $ 107,000 $ 759,000 $ 682,000 $ - $ 1,548,000
Amortization - 102,000 243,000 - 345,000
Cash paid during the period for:
Interest 4,368,000 144,000 3,527,000 (3,510,000) 4,529,000
Income taxes - - - - -
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Cash Flows
For the Quarter Ended August 31, 1998
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net cash provided by (used in)
operating activities $ (1,773,000) $ 839,000 $ 16,000 $ 1,919,000 $ 1,001,000
------------- ------------- ------------- ------------- -------------
CASH FLOW FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipmen (109,000) (1,526,000) - - (1,635,000)
Investment in and loans to subsidiaries (69,092,000) (75,000,000) (75,000,000) 150,000,000 (69,092,000)
Other changes, net (3,682,000) - - 3,682,000 -
------------- ------------- ------------- ------------- -------------
Net cash used in investing activities (72,883,000) (76,526,000) (75,000,000) 153,682,000 (70,727,000)
------------- ------------- ------------- ------------- -------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net repayments under line of credit - (608,000) - - (608,000)
Payments on long-term debt and capital
leases (12,000) (362,000) - - (374,000)
Proceeds from long-term debt 71,363,000 38,908,000 38,908,000 (77,816,000) 71,363,000
Proceeds from sale of common stock, net - 36,092,000 36,092,000 (72,184,000) -
Proceeds from sale of preferred stock, net 6,792,000 - - - 6,792,000
Other changes, net - 1,826,000 3,775,000 (5,601,000) -
------------- ------------- ------------- ------------- -------------
Net cash provided by financing
activities 78,143,000 75,856,000 78,775,000 (155,601,000) 77,173,000
------------- ------------- ------------- ------------- -------------
NET CHANGE IN CASH 3,487,000 169,000 3,791,000 - 7,447,000
CASH AT BEGINNING OF PERIOD 9,398,000 2,063,000 - - 11,461,000
EFFECT OF EXCHANGE RATES ON CASH - - 90,000 - 90,000
------------- ------------ ------------- ------------- -------------
CASH AT END OF PERIOD $ 12,885,000 $ 2,232,000 $ 3,881,000 $ - $ 18,998,000
============= ============= ============= ============= =============
SUPPLEMENTAL CASH FLOW:
Noncash operating expenses related to:
Depreciation $ 17,000 $ 679,000 $ 225,000 $ - $ 921,000
Amortization - 148,000 83,000 - 231,000
Cash paid during the period for:
Interest $ 81,000 $ 184,000 $ 6,000 $ - $ 271,000
</TABLE>
-13-
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Preliminary Note Regarding Forward-Looking Statements
This report contains "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and is subject to the safe harbor created by those sections. Actual
results could differ materially from those projected in the forward-looking
statements set forth in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Overview
The Company has been an active consolidator of companies, and our results of
operations have been substantially affected by acquisitions. These acquisitions,
as well as internal growth in our existing and acquired businesses, have
resulted in substantial increases in net sales. Our operating expenses, margins
and other expenses have also been affected by certain expenses directly
associated with the acquisitions and related capital raising transactions. We
have experienced substantial increases in all other expense categories as a
result of the increases in operations. A portion of these expenses is
attributable to the assimilation of acquired operations into our existing
businesses.
In July 1998, we acquired Aeromet International PLC ("Aeromet"), a British
limited company. Aeromet, which comprises our European Aerospace Group, is a
manufacturer of magnesium and aluminum precision sand and investment castings,
and of titanium and aluminum formed sheet products, with five locations in
England. The Aeromet acquisition has and will have a significant effect on our
future operations and on comparisons of income, expense and balance sheet items
in periods after fiscal 1998. Our financial results for the three months ended
August 31, 1998 include only one month of Aeromet operations.
Substantially all of our revenue is generated by sales to customers in the
commercial aerospace, defense, electronics and transportation industries, with
commercial aerospace and defense industry sales being the most significant. The
electronics, defense, and commercial aerospace industries are cyclical in nature
and subject to changes based on general economic conditions and commercial
airline industry, defense and government spending.
Our operations focus on developing, manufacturing and marketing high performance
electronics and metal components and assemblies. Our electronics products are
characterized by relatively low volumes and high margins. In comparison, volumes
have historically been higher and margins lower for our metals products. We
believe that margins will remain higher for electronic products than for metals
products. We also believe that assembled products incorporating both electronics
and metal parts will generate margins closer to, but not as high as, electronics
product margins. As a result of margin differences, changes in product mix among
our electronics, assembled and metals products can be expected to affect overall
margins.
Our 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
-14-
<PAGE>
may vary materially due to the number of working days available in any period.
We believe that our operations for the periods discussed have not been adversely
affected by inflation.
Results of Operations
Quarter Ended August 31, 1999 Compared to Quarter Ended August 31, 1998
Net Sales. Net sales increased by $9.4 million, or 49.0%, to $28.6 million for
the quarter ended August 31, 1999, from $19.2 million for the quarter ended
August 31, 1998. This increase in net sales was due to including three months of
operations of our European Aerospace Group. The European Aerospace Group
contributed $14.4 million, up $9.9 million from the $4.5 million contributed
from one month of operations during the quarter ended August 31, 1998. The
increase in the European Aerospace Group net sales was partially offset by a
decrease in net sales of $1.2 million from the U.S. Aerospace Group, which
contributed $7.9 million during the quarter ended August 31, 1999, versus $9.1
million contributed during the quarter ended August 31, 1998. Our U.S. Aerospace
Group experienced a decrease in order backlog and corresponding slowdown of
product deliveries to Boeing during fiscal 1999. This situation has continued
into the first quarter of fiscal 2000. We expect that our U.S. Aerospace Group
will continue to experience declining sales volume during the second quarter of
fiscal 2000. Our U.S. Electronics Group contributed $6.3 million to net sales
during the quarter ended August 31, 1999, up $0.7 million from $5.6 million
contributed during the quarter ended August 31, 1998. This increase was
primarily attributable to additional sales of products for communications,
aerospace, satellite and weapons systems. We expect sales volume in our U.S.
Electronics Group to continue to increase throughout the year.
Gross Profit. Gross profit increased by $1.9 million, or 40.4%, to $6.6 million
for the quarter ended August 31, 1999, from $4.7 million for the quarter ended
August 31, 1998. As a percentage of net sales, however, gross profit decreased
to 23.1% for the quarter ended August 31, 1999, from 24.5% for the quarter ended
August 31, 1998. This decrease was attributable in part to including three
months of European Aerospace Group operations. The European Aerospace Group
typically has lower average margins than our U.S. groups. The decrease was also
due to a decrease in margins associated with the U.S. Aerospace Group's decline
in commercial aircraft revenue from Boeing during the quarter.
Operating Expenses. Operating expenses increased by $1.3 million, or 34.2%, to
$5.1 million for the quarter ended August 31, 1999, from $3.8 million for the
quarter ended August 31, 1998. This increase was primarily due to increased
levels of operations in the first quarter of fiscal 2000. As a percentage of net
sales, operating expenses decreased 2.0%, to 17.8% for the quarter ended August
31, 1999, from 19.8% for the quarter ended August 31, 1998. This decrease is
primarily attributable to the acquisition of our European Aerospace Group, which
has comparatively lower operating expenses in relation to net sales.
Interest Expense. Interest expense increased by $1.4 million, or 127.3%, to $2.5
million for the quarter ended August 31, 1999, from $1.1 million for the quarter
ended August 31, 1998. This increase was primarily due to the $75 million of
debt that we incurred to finance the Aeromet acquisition in July 1998.
Other Income (Expense). Other income (expense) represents non-recurring and
non-operational income and expense for the period. Other expense decreased by
$6.7 million for the quarter ended
-15-
<PAGE>
August 31, 1999. Other expense during the quarter ended August 31, 1998 included
non-recurring charges of $3.6 million and $3.1 million related to goodwill and
investment valuation allowances.
Provision for Income Tax Benefit (Expense). Income tax benefit (expense) for the
periods primarily represent changes in the valuation allowance to adjust
deferred income tax assets to amounts determined to be realizable. At August 31,
1999, we had net operating loss (NOLs) carryforwards for federal income tax
purposes of approximately $14.0 million, the benefits of which expire in the tax
year 2001 through the tax year 2019. The NOLs created by our 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 $1.5 million of the $14.0 million of NOLs will never become
available. At August 31, 1999 we had net deferred tax assets of $4.0 million,
the realization of which is dependent on material increase over present levels
of pre-tax income primarily in the United States. We expect to achieve these
increases through continued integration, cross-selling, and operational
efficiencies in our businesses. We anticipate that our effective income tax rate
will continue to approach and may exceed, the statutory rate in the future. In
addition, undistributed earnings of our foreign subsidiaries, for which no U.S.
income taxes have been provided, aggregated approximately $3.7 million at May
31, 1999. No provision for foreign withholding or U.S. federal income taxes was
made for the undistributed earnings, as it is our intention that such earnings
will be reinvested indefinitely in foreign operations or will be remitted
substantially free of additional taxes. Subsequent to May 31, 1999, a provision
for foreign withholding and U.S. federal income taxes was made for the
undistributed earnings since May 31, 1999.
Net Income (Loss). Net loss decreased by $2.9 million, or 65.9%, to a net loss
of $1.5 million for the quarter ended August 31, 1999, from a net loss of $4.4
million for the quarter ended August 31, 1998, due to the factors listed above.
Liquidity and Capital Resources
Financing. Our primary banking relationships include a revolving line of credit
up to $6.3 million for our U.S. operations and a revolving line of credit up to
approximately $7.2 million ((pound)4.5 million) for our European operations. We
renewed the U.S. line of credit as of October 6, 1999, and we are in the process
of renewing the European line of credit. As of August 31, 1999, we had drawn
$2.6 million on our U.S. line of credit, and our European line of credit was
unused.
Capital Expenditures. We made capital expenditures of $1.2 million during the
first quarter of fiscal 2000. The expenditures were primarily for manufacturing
equipment and building improvements. We have started to expand the manufacturing
facility that is used by two divisions of our U.S. Electronic Group. This
expansion is expected to be completed during the second or third quarter of
fiscal 2000, for a total cost of approximately $800,000.
We have also entered into a stock purchase agreement for the proposed
acquisition of Nova-Tech Engineering, Inc. ("Nova-Tech"). The purchase price
will consist of approximately $1.5 million in cash, and we will pay certain
outstanding debt of Nova-Tech at closing. The stock purchase agreement contains
conditions to closing, including receipt of a letter ruling from the Internal
Revenue Service that is necessary to permit Nova-Tech's Employee Stock Ownership
Plan to sell its Nova-Tech stock on the agreed terms. We are currently providing
services to Nova-Tech under an Operating Agreement dated April 23, 1999. As of
August 31, 1999, we had loaned $2.1 million to Nova-Tech for working capital.
These loans have been made under the terms of two demand notes
-16-
<PAGE>
dated April 26, 1999 and August 5, 1999, each of which is secured by
substantially all of the assets of Nova-Tech. As of August 31, 1999, we had no
other material commitments outstanding for the purchases of additional capital
assets.
Orca Technologies, Inc. In July 1997 we guaranteed a $1.3 million line of credit
between Orca Technologies, Inc. and its principal lender. In June 1999, as
guarantor of Orca's line of credit, we advanced $300,000 for a partial repayment
of the line of credit required by the lender. In October 1999, we advanced an
additional $522,000 for another partial repayment required by the lender. During
the second and third quarters of fiscal 2000, we expect to advance another
approximately $600,000, which will completely pay off the guaranteed debt. These
advances are secured by a security interest in substantially all of Orca's
assets. We have also entered into an agreement with Orca regarding these
advances that restricts Orca's ability to take certain actions without our
consent. During fiscal 1999, we recorded in other expense an allowance for
certain expenses and the guarantee of Orca's line of credit totaling
approximately $2.0 million. This allowance had the effect of writing off the
entire amount of our guarantee obligation. As of August 31, 1999, Orca was
thirteen months delinquent to us in interest payments on a $950,000 promissory
note. We reserved the entire amount of this note in other expense during fiscal
1998 and fiscal 1999. We are currently negotiating with a potential investor in
Orca for the possible sale by the Company of certain of Orca's debt obligations
to the Company for a deeply discounted price. We cannot provide any assurance
that such a sale will occur. As of August 31, 1999, Orca was also thirteen
months delinquent on lease payments for premises that it subleases from us. We
have retained a real estate broker, and we are actively negotiating to have a
third party take over the underlying lease.
Working Capital. The Company's working capital, as of August 31, 1999, was $34.2
million, with a current ratio of 2.5 to 1. We believe that our working capital
and unused lines of credit are sufficient to maintain current operating levels
throughout fiscal 2000. However, if our cash liquidity were to become strained,
we may have to reduce accounts receivable and inventories. There is no assurance
that the carrying values of accounts receivable and inventories will be
realizable upon liquidation outside of the ordinary course of business.
Future Capital Requirements. We believe that the current cash balances and
credit facilities and cash from future operations will be sufficient to meet our
operating cash requirements and to fund budgeted capital expenditures and
interest payments for fiscal 2000. However, we may need to issue more equity in
the future to fund capital expenditures after fiscal 2000, to fund possible
acquisition opportunities, or to fund the eventual redemption of the notes used
to finance the Aeromet acquisition. Our inability to obtain additional capital
if and when needed may have a material adverse effect on our financial
performance.
Foreign Currency Translation. With the acquisition of our European Aerospace
Group, whose functional currency is the British Pound Sterling, we translate the
activity of the European Aerospace Group into U.S. Dollars on a monthly basis.
The balance sheet of the European Aerospace Group is translated using the
exchange rate as of the date of the balance sheet. For purposes of the statement
of operations and statement of cash flows, we use the weighted average exchange
rate for the period. The value of our assets, liabilities, revenues, and
expenses may vary materially from one reporting period to the next solely as a
result of varying exchange rates. We are in the process of developing a
comprehensive foreign currency hedging policy, but we have not entered into any
hedging activity as of August 31, 1999.
-17-
<PAGE>
We have not experienced, and do not expect to experience, any material changes
in the results of operations or in operating procedures due to the conversion to
the "Euro" by eleven countries in the European Union on January 1, 1999. We
expect to continue to transact business using primarily the U.S. Dollar and the
British Pound Sterling.
Significant Events During The Quarter
Acquisition of Skagit Engineering & Manufacturing, Inc. On June 1, 1999, the
Company acquired all of the stock of Skagit Engineering & Manufacturing, Inc.
("Skagit") for $1.3 million in cash. Skagit is a full service fabricator of
high-performance components, assemblies, complete structures and tooling. Skagit
is a division of our U.S. Aerospace Group.
Year 2000
We are developing and carrying out a comprehensive strategy for updating our
information management and manufacturing systems for Year 2000, or Y2K,
compliance. Our information technology ("IT") systems include customized and
standard software purchased from outside vendors. All software has been
identified and is being assessed to determine the extent of renovations required
in order to be Y2K compliant. We have identified significant non-IT systems that
may be impacted by the Y2K problem, including those relating to production,
processing and communication equipment, and we are continuing the process of
determining through inquiries of equipment suppliers, as well as testing of such
equipment, the extent of renovations required, if any. We believe that necessary
renovations and validations have been implemented for all critical systems, and
we are continuing to monitor any additional changes that may be required and to
address any deficiencies we find. We are updating and validating non-critical
systems, and we expect to continue to do so throughout calendar 1999 and into
calendar 2000. We have identified third parties with which we have a significant
relationship that, in the event of a Y2K failure, could have a material impact
on our financial position or operating results. These third parties include
energy and utility suppliers, creditors, material and product suppliers,
communication vendors and significant customers. These relationships, especially
those associated with certain suppliers and customers, are material to us, and a
Y2K failure by one or more of these parties could result in a material adverse
effect on our operating results and financial position. We have made inquiries
of these third parties to assess their Y2K readiness. We expect, throughout the
remainder of calendar 1999, to continue to monitor responses from these third
parties and to address any issues that arise. We expect that costs to address
Y2K issues will total approximately $250,000, of which approximately $125,000
was spent in fiscal 1999, with the remainder being spent during fiscal 2000.
Costs include salary and fringe benefits for personnel, hardware and software
costs, and consulting and travel expenses associated, directly or indirectly,
with addressing Y2K issues. Y2K issues have received a high priority and, as a
result, certain other IT projects have been delayed. While such non-Y2K projects
are expected to enhance operational efficiencies and improve the quality of
information available to us, the delay of such projects is not expected to have
a material adverse impact on our operations. Worst case Y2K scenarios could be
as insignificant as a minor interruption in production or shipping resulting
from unanticipated problems encountered in our IT systems or in the IT systems
of any of the significant third parties with whom we do business. The
pervasiveness of the Y2K issue makes it likely that previously unidentified
issues will require remediation during the normal course of business. In such a
case, we anticipate that we can process transactions manually while we repair IT
and other systems. We expect that such interruptions would have a minor effect
on our operations. On the other hand, a worst case Y2K scenario could
-18-
<PAGE>
be as catastrophic as an extended loss of utility service resulting from
interruptions at the point of power generation, long-line transmission, or local
distribution to our production facilities. Such an interruption could result in
an inability to provide products to our customers, resulting in a material
adverse effect on our operating results and financial position. We believe that
we have established all critical contingency plans that may be necessary, and we
will be working throughout the remainder of calendar 1999 to update our
contingency plans and to adopt any additional contingency plans that we believe
are necessary.
New Accounting Pronouncements
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-5, Reporting on the Costs of Start-Up Activities. This accounting
standard, which is effective for fiscal years beginning after December 15, 1998,
requires that certain costs of start-up activities and organization costs be
expensed as incurred. The adoption of SOP 98-5 is not expected to have a
material effect on the Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
requires the recognition of all derivatives in the consolidated balance sheet as
either assets or liabilities measured at fair value. SFAS No. 133 was effective
for fiscal years beginning after June 15, 1999. In June 1999, the FASB issued
SFAS No. 137, which delays implementation of SFAS No. 133 until fiscal years
beginning after June 15, 2000. The adoption of SFAS No. 133 is not expected to
have a material effect on the Company's financial position.
-20-
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has financial instruments that are subject to interest rate risk,
primarily debt obligations issued at a fixed rate. However, fixed-rate debt
obligations issued by the Company are generally not callable until maturity. The
fair value of such instruments approximates their face value except for the
Senior Subordinated Notes which, as of August 31, 1999, were trading on the open
market for approximately 70% of face value. The Company does not consider the
market risk exposure for interest rates to be material.
The Company is subject to foreign currency exchange rate risk relating to
receipts from and payments to suppliers in foreign currencies. Since
approximately 50% of the Company transactions are conducted in foreign currency,
the exchange rate risk could be material. The Company is in the process of
developing a comprehensive foreign currency hedging policy but has not entered
into any hedging activity as of August 31, 1999.
The Company is exposed to commodity price fluctuations through purchases of
aluminum and other raw materials. The Company enters into certain supplier
agreements that guarantee quantity and price of the applicable commodity to
limit the exposure to commodity price fluctuations and availability concerns. At
August 31, 1999, the Company had purchase commitments for raw materials
aggregating approximately $4,000,000.
The Company holds an investment in the common stock of a public company. The
Company is exposed to risks associated with the quoted equity price of the
common stock. At August 31, 1999, the reported value of the investment was
$19,000.
-20-
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is involved in legal proceedings relating to
claims arising out of operations in the normal course of business. The Company
is not aware of any material legal proceedings pending or threatened against the
Company or any of its properties.
ITEM 2. CHANGES IN SECURITIES
(a) None.
(b) Dividend Payment Restrictions
In connection with the issuance of its 11 1/4% Senior Subordinated Notes due
2005, which have been exchanged for 11 1/4% Series B Senior Subordinated Notes
due 2005, the Company is subject to an Indenture that limits the Company's
ability to pay dividends, repurchase its equity securities, make certain other
kinds of restricted payments, and incur certain indebtedness. The Company has
never declared or paid cash dividends on the Common Stock. The Company currently
anticipates that it will retain all future earnings to fund the operation of its
business and does not anticipate paying dividends on the Common Stock in the
foreseeable future.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
-21-
<PAGE>
ITEM 6. EXHIBITS; REPORTS ON FORM 8-K
(a) Exhibits.
The following documents are filed as exhibits to this Quarterly Report:
Exhibit
Number Description
2.1 Stock Purchase Agreement, dated October 11, 1999, between Pacific
Aerospace & Electronics, Inc. and the Shareholders of Nova-Tech
Engineering, Inc.(29)
3.1 Articles of Incorporation of Pacific Aerospace & Electronics,
Inc.(6)
3.2 Amendment to Articles of Incorporation containing Designation of
Rights and Preferences of Series A Convertible Preferred Stock,
as corrected. (8)
3.3 Amendment to Articles of Incorporation containing Designation of
Rights and Preferences of Series B Convertible Preferred Stock.
(20)
3.4 Bylaws of Pacific Aerospace & Electronics, Inc.(6)
10.1 Amended and Restated Stock Incentive Plan.(5)
10.2 Amendment No. 1 to the Amended and Restated Stock Incentive Plan.
(19)
10.3 Amended and Restated Independent Director Stock Plan.(21)
10.4 1997 Employee Stock Purchase Plan.(11)
10.5 Employment Agreement, dated June 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Donald A. Wright.(9)
10.6 Amendment No. 1 to Employment Agreement, dated January 29, 1999,
between Pacific Aerospace & Electronics, Inc. and Donald A.
Wright.(27)
10.7 Employment Agreement, dated March 1, 1999, between Pacific
Aerospace & Electronics, Inc. and Werner Hafelfinger. (27)
10.8 Employment Agreement, dated June 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Nick A. Gerde.(9)
10.9 Employment Agreement, dated September 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Sheryl A. Symonds.(12)
10.10 Debt Restructuring Agreement, dated April 6, 1998, between
Pacific Aerospace & Electronics, Inc., Orca Technologies, Inc.,
Televar, Inc. and MONITRx, Inc.(15)
10.11 Commercial Guaranty, dated July 16, 1997, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association.(13)
10.12 Sublease between Pacific Aerospace & Electronics, Inc. and Orca
Technologies, Inc. dated April 27, 1998.(20)
10.13 Demand Promissory Note, dated June 29, 1999, from Orca
Technologies, Inc. to Pacific Aerospace & Electronics, Inc.(29)
10.14 Security Agreement, dated June 29, 1999, from Orca Technologies,
Inc. to Pacific Aerospace & Electronics, Inc.(29)
10.15 Demand Promissory Note, dated October 5, 1999, from Orca
Technologies, Inc. to Pacific Aerospace & Electronics, Inc.(29)
10.16 Agreement Regarding Repayment Under Guarantee, dated October 5,
1999, between Pacific Aerospace & Electronics, Inc. and Orca
Technologies, Inc. (29)
10.17 Promissory Note, dated March 18, 1998, from Pacific Aerospace &
Electronics, Inc. to KeyBank National Association.(15)
-22-
<PAGE>
10.18 Security Agreement, dated March 18, 1998, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association.(15)
10.19 Facility Letter, dated July 30, 1998, from Barclays Bank plc to
Aeromet International plc.(20)
10.20 Loan Agreement, dated September 7, 1999, between Pacific
Aerospace & Electronics, Inc. and KeyBank National Association.
(29)
10.21 Promissory Note, dated September 22, 1998, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association.(22)
10.22 Modification and/or Extension Agreement, dated October 6, 1999,
between Pacific Aerospace & Electronics, Inc. and KeyBank
National Association.(29)
10.23 Commercial Security Agreement, dated September 7, 1999, between
Pacific Aerospace & Electronics, Inc. and KeyBank National
Association.(29)
10.24 Promissory Note, dated September 30, 1998, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association.(22)
10.25 Deed of Trust, dated September 30, 1998, between Pacific
Aerospace & Electronics, Inc., KeyBank National Association and
Land Title Company, Chelan-Douglas County, Inc.(22)
10.26 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.(3)
10.27 Special Business Provisions No. L-890821-8140N between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
December 18, 1992.(1)(3)
10.28 Special Business Provisions No. L-500660-8134N between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
December 31, 1991.(1)(3)
10.29 Special Business Provisions No. L-435579-8180N between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
August 11, 1994.(1)(3)
10.30 Special Business Provisions No. PLR-950A between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
February 5, 1990.(1)(3)
10.31 Administrative Agreement No. L-435579-8180N between Cashmere
Manufacturing Co., Inc. and Boeing Commercial Airplane Group
effective as of August 11, 1994.(3)
10.32 Special Business Provisions No. POP-65311-0047 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
February 26, 1996.(1)(3)
10.33 General Terms Agreement No. BCA-65311-0044 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
February 26, 1996.(3)
10.34 General Terms Agreement No. BCA-65311-0140 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of June
11, 1997.(20)
10.35 Special Business Provisions No. POP-65311-0143 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of June
11, 1997.(1)(20)
10.36 Long Term Agreement No. 0108098 between Northrop Grumman
Corporation and Cashmere Manufacturing Co., Inc. effective as of
April 6, 1998.(1)(20)
10.37 Option to Purchase, dated January 29, 1999, between Pacific
Aerospace & Electronics, Inc. and Donald A. Wright. (27)
10.38 Real Estate Agreement, dated January 15, 1999, between Pacific
Aerospace & Electronics, Inc. and the Port of Chelan County. (27)
10.39 Operating Agreement, dated as of April 23, 1999, between Pacific
Aerospace & Electronics, Inc. and Nova-Tech Engineering, Inc.(28)
10.40 Demand Promissory Note, dated April 26, 1999 from Nova-Tech
Engineering, Inc. to Pacific Aerospace & Electronics, Inc. (28)
-23-
<PAGE>
10.41 Demand Promissory Note, dated August 5, 1999, from Nova-Tech
Engineering, Inc. to Pacific Aerospace & Electronics, Inc. (28)
10.42 Security Agreement, dated April 26, 1999, from Nova-Tech
Engineering, Inc. to Pacific Aerospace & Electronics, Inc. (28)
27 Financial Data Schedule. (29)
- ---------------
(1) Subject to confidential treatment. Omitted confidential information was
filed separately with the Securities and Exchange Commission.
(2) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended May 31, 1995.
(3) Incorporated by reference to Amendment No. 1 to the Company's Registration
Statement on Form SB-2 filed on June 19, 1996.
(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) Incorporated by reference to 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) Incorporated by reference to the Company's Definitive Proxy Statement for
its 1997 Annual Shareholders Meeting, filed on August 28, 1997.
(12) Incorporated by reference to the Post-Effective Amendment No. 1 to Form
SB-2, filed on November 3, 1997.
(13) Incorporated by reference to 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) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarterly period ending February 28, 1998.
(16) Incorporated by reference to the Company's Current Report on Form 8-K/A,
filed on May 1, 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) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ending May 31, 1998.
(21) Incorporated by reference to the Company's Definitive Proxy Statement filed
on September 1, 1998.
-24-
<PAGE>
(22) Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
and Form 10-Q/A, for the quarterly period ending August 31, 1998.
(23) Incorporated by reference to the Company's Registration Statement on Form
S-1 filed on October 30, 1998.
(24) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ending November 30, 1998.
(25) Incorporated by reference to Registration Statement on Form S-4 filed on
November 25, 1998.
(26) Incorporated by reference to Amendment No. 1 to Registration Statement on
Form S-4 filed on January 20, 1999.
(27) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ending February 28, 1999.
(28) Incorporated by reference to the Company's Annual Report on Form 10-K filed
on August 30, 1999.
(29) Filed with this report.
(b) Reports on Form 8-K.
None.
-25-
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
PACIFIC AEROSPACE & ELECTRONICS, INC.
Date: October 11, 1999 /S/ DONALD A. WRIGHT
----------------------------------------
Donald A. Wright
President, Chief Executive Officer, and
Chairman of the Board
(Principal Executive Officer)
Date: October 11, 1999 /S/ NICK A. GERDE
----------------------------------------
Nick A. Gerde
Vice President Finance, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting
Officer)
-26-
<PAGE>
EXHIBIT INDEX
The following documents are filed as exhibits to this Quarterly Report:
Exhibit
Number Description
2.1 Stock Purchase Agreement, dated October 11, 1999, between Pacific
Aerospace & Electronics, Inc. and the Shareholders of Nova-Tech
Engineering, Inc.(29)
3.1 Articles of Incorporation of Pacific Aerospace & Electronics,
Inc.(6)
3.2 Amendment to Articles of Incorporation containing Designation of
Rights and Preferences of Series A Convertible Preferred Stock,
as corrected. (8)
3.3 Amendment to Articles of Incorporation containing Designation of
Rights and Preferences of Series B Convertible Preferred Stock.
(20)
3.4 Bylaws of Pacific Aerospace & Electronics, Inc.(6)
10.1 Amended and Restated Stock Incentive Plan.(5)
10.2 Amendment No. 1 to the Amended and Restated Stock Incentive Plan.
(19)
10.3 Amended and Restated Independent Director Stock Plan.(21)
10.4 1997 Employee Stock Purchase Plan.(11)
10.5 Employment Agreement, dated June 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Donald A. Wright.(9)
10.6 Amendment No. 1 to Employment Agreement, dated January 29, 1999,
between Pacific Aerospace & Electronics, Inc. and Donald A.
Wright.(27)
10.7 Employment Agreement, dated March 1, 1999, between Pacific
Aerospace & Electronics, Inc. and Werner Hafelfinger. (27)
10.8 Employment Agreement, dated June 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Nick A. Gerde.(9)
10.9 Employment Agreement, dated September 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Sheryl A. Symonds.(12)
10.10 Debt Restructuring Agreement, dated April 6, 1998, between
Pacific Aerospace & Electronics, Inc., Orca Technologies, Inc.,
Televar, Inc. and MONITRx, Inc.(15)
10.11 Commercial Guaranty, dated July 16, 1997, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association.(13)
10.12 Sublease between Pacific Aerospace & Electronics, Inc. and Orca
Technologies, Inc. dated April 27, 1998.(20)
10.13 Demand Promissory Note, dated June 29, 1999, from Orca
Technologies, Inc. to Pacific Aerospace & Electronics, Inc.(29)
10.14 Security Agreement, dated June 29, 1999, from Orca Technologies,
Inc. to Pacific Aerospace & Electronics, Inc.(29)
10.15 Demand Promissory Note, dated October 5, 1999, from Orca
Technologies, Inc. to Pacific Aerospace & Electronics, Inc.(29)
10.16 Agreement Regarding Repayment Under Guarantee, dated October 5,
1999, between Pacific Aerospace & Electronics, Inc. and Orca
Technologies, Inc. (29)
10.17 Promissory Note, dated March 18, 1998, from Pacific Aerospace &
Electronics, Inc. to KeyBank National Association.(15)
-27-
<PAGE>
10.18 Security Agreement, dated March 18, 1998, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association.(15)
10.19 Facility Letter, dated July 30, 1998, from Barclays Bank plc to
Aeromet International plc.(20)
10.20 Loan Agreement, dated September 7, 1999, between Pacific
Aerospace & Electronics, Inc. and KeyBank National Association.
(29)
10.21 Promissory Note, dated September 22, 1998, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association.(22)
10.22 Modification and/or Extension Agreement, dated October 6, 1999,
between Pacific Aerospace & Electronics, Inc. and KeyBank
National Association.(29)
10.23 Commercial Security Agreement, dated September 7, 1999, between
Pacific Aerospace & Electronics, Inc. and KeyBank National
Association.(29)
10.24 Promissory Note, dated September 30, 1998, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association.(22)
10.25 Deed of Trust, dated September 30, 1998, between Pacific
Aerospace & Electronics, Inc., KeyBank National Association and
Land Title Company, Chelan-Douglas County, Inc.(22)
10.26 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.(3)
10.27 Special Business Provisions No. L-890821-8140N between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
December 18, 1992.(1)(3)
10.28 Special Business Provisions No. L-500660-8134N between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
December 31, 1991.(1)(3)
10.29 Special Business Provisions No. L-435579-8180N between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
August 11, 1994.(1)(3)
10.30 Special Business Provisions No. PLR-950A between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
February 5, 1990.(1)(3)
10.31 Administrative Agreement No. L-435579-8180N between Cashmere
Manufacturing Co., Inc. and Boeing Commercial Airplane Group
effective as of August 11, 1994.(3)
10.32 Special Business Provisions No. POP-65311-0047 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
February 26, 1996.(1)(3)
10.33 General Terms Agreement No. BCA-65311-0044 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
February 26, 1996.(3)
10.34 General Terms Agreement No. BCA-65311-0140 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of June
11, 1997.(20)
10.35 Special Business Provisions No. POP-65311-0143 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of June
11, 1997.(1)(20)
10.36 Long Term Agreement No. 0108098 between Northrop Grumman
Corporation and Cashmere Manufacturing Co., Inc. effective as of
April 6, 1998.(1)(20)
10.37 Option to Purchase, dated January 29, 1999, between Pacific
Aerospace & Electronics, Inc. and Donald A. Wright. (27)
10.38 Real Estate Agreement, dated January 15, 1999, between Pacific
Aerospace & Electronics, Inc. and the Port of Chelan County. (27)
10.39 Operating Agreement, dated as of April 23, 1999, between Pacific
Aerospace & Electronics, Inc. and Nova-Tech Engineering, Inc.(28)
10.40 Demand Promissory Note, dated April 26, 1999 from Nova-Tech
Engineering, Inc. to Pacific Aerospace & Electronics, Inc. (28)
-28-
<PAGE>
10.41 Demand Promissory Note, dated August 5, 1999, from Nova-Tech
Engineering, Inc. to Pacific Aerospace & Electronics, Inc. (28)
10.42 Security Agreement, dated April 26, 1999, from Nova-Tech
Engineering, Inc. to Pacific Aerospace & Electronics, Inc. (28)
27 Financial Data Schedule. (29)
- ---------------
(1) Subject to confidential treatment. Omitted confidential information was
filed separately with the Securities and Exchange Commission.
(2) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended May 31, 1995.
(3) Incorporated by reference to Amendment No. 1 to the Company's Registration
Statement on Form SB-2 filed on June 19, 1996.
(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) Incorporated by reference to 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) Incorporated by reference to the Company's Definitive Proxy Statement for
its 1997 Annual Shareholders Meeting, filed on August 28, 1997.
(12) Incorporated by reference to the Post-Effective Amendment No. 1 to Form
SB-2, filed on November 3, 1997.
(13) Incorporated by reference to 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) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarterly period ending February 28, 1998.
(16) Incorporated by reference to the Company's Current Report on Form 8-K/A,
filed on May 1, 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) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ending May 31, 1998.
(21) Incorporated by reference to the Company's Definitive Proxy Statement filed
on September 1, 1998.
-29-
<PAGE>
(22) Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
and Form 10-Q/A, for the quarterly period ending August 31, 1998.
(23) Incorporated by reference to the Company's Registration Statement on Form
S-1 filed on October 30, 1998.
(24) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ending November 30, 1998.
(25) Incorporated by reference to Registration Statement on Form S-4 filed on
November 25, 1998.
(26) Incorporated by reference to Amendment No. 1 to Registration Statement on
Form S-4 filed on January 20, 1999.
(27) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ending February 28, 1999.
(28) Incorporated by reference to the Company's Annual Report on Form 10-K filed
on August 30, 1999.
(29) Filed with this report.
-30-
STOCK PURCHASE AGREEMENT
between
Pacific Aerospace & Electronics, Inc.
and
the Shareholders of NOVA-TECH Engineering, Inc.
Dated as of October 11, 1999
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1. STOCK PURCHASE.................................................... 1
1.1 Stock Purchase.................................................... 1
1.2 Certain Definitions............................................... 1
1.2.1 Agreement Amendments...................................... 1
1.2.2 Articles Amendments....................................... 2
1.2.3 Class A Common............................................ 2
1.2.4 Class B Common............................................ 2
1.2.5 Code...................................................... 2
1.2.6 Company Common Stock...................................... 2
1.2.7 Consideration............................................. 2
1.2.8 ESOP Debt................................................. 2
1.2.9 ESOP Shares............................................... 2
1.2.10 ESOP Valuation............................................ 2
1.2.11 Excise Tax................................................ 2
1.2.12 IRS Ruling................................................ 2
1.2.13 Knowledge................................................. 3
1.2.14 Material Adverse Change................................... 3
1.2.15 Material Adverse Effect................................... 3
1.2.16 ML Debt................................................... 3
1.2.17 Operating Agreement....................................... 3
1.2.18 Pledge Agreement.......................................... 3
1.3 Consideration for ESOP Shares..................................... 3
1.3.1 Cash Equal to the ESOP Debt............................... 3
1.3.2 Additional Cash to the ESOP............................... 3
1.4 Consideration to Class A Shareholders............................. 4
1.5 Delivery of Certificates.......................................... 4
1.6 Closing........................................................... 4
1.7 Subsequent Actions................................................ 4
ARTICLE 2. REPRESENTATIONS AND WARRANTIES.................................... 4
2.1 Representations and Warranties of the Individual Shareholders..... 4
2.1.1 Incorporation; Articles and Bylaws........................ 4
2.1.2 Capitalization and Outstanding Capital Stock.............. 5
2.1.3 No Subsidiaries........................................... 5
2.1.4 Authority; Noncontravention............................... 5
2.1.5 Financial Matters......................................... 6
2.1.6 Litigation................................................ 7
2.1.7 Absence of Changes........................................ 7
2.1.8 Taxes..................................................... 9
2.1.9 Compliance with Laws......................................10
2.1.10 Contracts.................................................10
2.1.11 Intellectual Property.....................................11
ii
<PAGE>
2.1.12 Insurance.................................................11
2.1.13 Environmental Matters.....................................12
2.1.14 Labor Matters.............................................13
2.1.15 Employee Benefit Matters..................................13
2.1.16 Other Employee Matters....................................15
2.1.17 Property..................................................15
2.1.18 Permits and Licenses......................................16
2.1.19 Certain Interests.........................................16
2.1.20 Certain Payments..........................................16
2.1.21 Consents and Approvals....................................17
2.1.22 Records...................................................17
2.1.23 Warranties................................................17
2.1.24 Brokers and Finders.......................................17
2.1.25 Restrictive Covenants.....................................17
2.1.26 Reliance..................................................17
2.2 Representations and Warranties of PA&E............................17
2.2.1 Incorporation; Articles and Bylaws........................17
2.2.2 Authority; Authorization..................................18
2.2.3 Noncontravention..........................................18
2.2.4 Financial Statements......................................18
2.2.5 Litigation................................................18
2.2.6 Consents and Approvals....................................19
2.2.7 Brokers and Finders.......................................19
2.3 Representations and Warranties of the ESOP Trustee................19
2.3.1 Authority.................................................19
2.3.2 Noncontravention..........................................19
ARTICLE 3. PRE-CLOSING CONDUCT AND AGREEMENTS................................20
3.1 Conduct of the Parties............................................20
3.2 Access to Properties, Books and Records...........................20
3.2.1 PA&E......................................................20
3.2.2 The Shareholders..........................................20
3.3 Confidentiality...................................................20
3.4 Conduct of the Company's Business.................................20
3.4.1 Properties and Assets.....................................21
3.4.2 Compensation..............................................21
3.4.3 Indebtedness..............................................21
3.4.4 Leases....................................................22
3.4.5 Payments..................................................22
3.4.6 Contracts and Agreements..................................22
3.4.7 Shipments.................................................22
3.4.8 Insurance.................................................22
3.4.9 Governing Documents.......................................22
3.4.10 Capital Stock.............................................22
3.5 Public Announcements..............................................23
3.6 Notice of Breach..................................................23
iii
<PAGE>
3.6.1 By the Shareholders.......................................23
3.6.2 By PA&E...................................................23
3.7 Company Shareholder Approval......................................23
3.8 Consents..........................................................23
3.9 Further Assurances................................................23
3.10 No Solicitation...................................................23
3.11 Updated ESOP Participant Information..............................24
ARTICLE 4. CONDITIONS TO CLOSING.............................................24
4.1 Conditions to the Obligations of PA&E.............................24
4.1.1 Corporate Actions. ......................................24
4.1.2 Representations and Warranties............................24
4.1.3 Performance of Obligations................................24
4.1.4 No Material Adverse Change................................25
4.1.5 Approvals; Consents.......................................25
4.1.6 Certificate...............................................25
4.1.7 Articles Amendments.......................................25
4.1.8 Audit.....................................................25
4.1.9 Environmental Assessment..................................25
4.1.10 Capital Stock.............................................25
4.1.11 IRS Letter Ruling.........................................25
4.1.12 Employment Agreements.....................................25
4.1.13 Lease Amendments..........................................26
4.1.14 Shareholders' Accounts....................................26
4.1.15 Agreement Amendments......................................26
4.1.16 ESOP Valuation............................................26
4.1.17 Further Documents.........................................26
4.2 Conditions to the Obligations of the Shareholders.................26
4.2.1 Corporate Actions. ......................................26
4.2.2 Representations and Warranties............................26
4.2.3 Performance of Obligations................................27
4.2.4 Certificate...............................................27
4.2.5 IRS Letter Ruling.........................................27
4.2.6 Employment Agreements.....................................27
4.2.7 Lease Amendments..........................................27
4.2.8 Further Documents.........................................27
4.3 Additional Condition to the Obligations of the ESOP...............27
4.3.1 ESOP Valuation............................................27
ARTICLE 5. INDEMNIFICATION...................................................27
5.1 Indemnification by the Individual Shareholders....................27
5.2 Indemnification by PA&E...........................................28
5.3 Limits on Indemnification.........................................28
5.3.1 Limits on Liability of the Individual Shareholders........28
5.3.2 Limits on Liability of PA&E...............................28
5.4 Indemnification Procedure.........................................29
iv
<PAGE>
5.4.1 Third Party Claims........................................29
5.4.2 Non-Third Party Claims....................................30
5.5 Exclusivity.......................................................30
5.6 Waiver of Certain Indemnity Rights................................30
5.7 Actual Knowledge..................................................30
5.8 Insurance Recoveries..............................................31
ARTICLE 6. TERMINATION.......................................................31
6.1 Right to Terminate................................................31
6.1.1 Mutual Consent............................................31
6.1.2 Delay.....................................................31
6.1.3 Breach by PA&E............................................31
6.1.4 Breach by the Individual Shareholders.....................31
6.1.5 Failure of the Company Shareholders to Approve............31
6.2 Certain Obligations to Cease......................................31
ARTICLE 7. MISCELLANEOUS PROVISIONS..........................................32
7.1 Survival..........................................................32
7.2 Exhibits; Schedules...............................................32
7.3 Notices...........................................................32
7.4 No Assignment.....................................................33
7.5 Titles and Captions...............................................33
7.6 Waiver............................................................33
7.7 Amendment.........................................................33
7.8 Severability......................................................33
7.9 Rights and Remedies...............................................33
7.10 Attorney Fees.....................................................33
7.11 Expenses..........................................................34
7.12 Governing Law.....................................................34
7.13 Counterparts......................................................34
7.14 Entire Agreement..................................................34
v
<PAGE>
EXHIBITS:
Exhibit A - Agreement Amendments
Exhibit B - Employment Agreements
SCHEDULES:
Schedule 2.1.2 Capitalization
Schedule 2.1.3 Interests in Other Entities
Schedule 2.1.5(b) Absence of Undisclosed Liabilities
Schedule 2.1.5(c) Accounts Receivable
Schedule 2.1.6 Litigation
Schedule 2.1.7 Absence of Changes
Schedule 2.1.8 Taxes
Schedule 2.1.9 Compliance With Laws
Schedule 2.1.10 Contracts
Schedule 2.1.11 Intellectual Property
Schedule 2.1.12 Insurance Policies
Schedule 2.1.13 Environmental Matters
Schedule 2.1.14 Labor Matters
Schedule 2.1.15 Employee Benefit Matters
Schedule 2.1.16 Employee Matters
Schedule 2.1.17(a) Real Property
Schedule 2.1.17(c) Tangible Personal Property
Schedule 2.1.18 Permits and Licenses
Schedule 2.1.19 Certain Interests
Schedule 2.1.21 Consents and Approvals (Company)
Schedule 2.1.23 Warranties
Schedule 2.2.6 Consents and Approvals (PA&E)
vi
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made and entered into
as of October 11, 1999, by and among PACIFIC AEROSPACE & ELECTRONICS, INC., a
Washington corporation ("PA&E"), Hans Herrmann and Karl Herrmann (together, the
"Individual Shareholders") and NOVA-TECH Engineering, Inc. Employee Stock
Ownership Plan and Trust (the "ESOP") (the Individual Shareholders and the ESOP
are collectively referred to herein as the "Shareholders").
RECITALS
A. NOVA-TECH Engineering, Inc., a Washington corporation (the "Company"),
is engaged in the business of professional engineering for the design and
manufacturing of highly specialized manufacturing equipment, primarily for the
aerospace industry.
B. The Individual Shareholders and the ESOP constitute all of the
shareholders of the Company.
C. PA&E is willing to purchase, and the Shareholders are willing to sell,
all of the outstanding stock of the Company on the terms and conditions set
forth in this Agreement.
AGREEMENT
For valuable consideration, the receipt and sufficiency of which the
parties acknowledge, the parties agree as follows:
ARTICLE 1.
STOCK PURCHASE
1.1 Stock Purchase. At the Closing (as defined in Section 1.6), PA&E agrees
to purchase, and the Shareholders agree to sell to PA&E, all of the outstanding
stock of the Company in exchange for the consideration provided in Sections 1.3
and 1.4, and upon the other terms and conditions set forth in this Agreement
(such transaction referred to herein as the "Stock Purchase").
1.2 Certain Definitions. The following terms shall have the respective
meanings set forth in this Section.
1.2.1 Agreement Amendments. The term "Agreement Amendments" shall mean
the amendments to and the waivers and consents under any agreements or documents
relating to the ESOP or to the ESOP Debt that are necessary to permit the
repayment of the ESOP Debt provided in Section 1.3.1 or any of the other
transactions contemplated by this Agreement. The
1
<PAGE>
Agreement Amendments shall be listed on Exhibit A and shall include an amendment
to Section 2.3 of the Pledge Agreement to permit the ESOP to use funds obtained
from PA&E pursuant to Section 1.3.1(i) herein to repay the ESOP Debt as required
by Section 1.3.1(ii) herein.
1.2.2 Articles Amendments. The term "Articles Amendment" shall mean
the following amendments to the Articles of Incorporation of the Company: (i) an
amendment to delete Section 2(g)(7) of Article IV; and (ii) an amendment to
delete Section 3 of Article IV.
1.2.3 Class A Common. The term "Class A Common" shall mean the shares
of Class A Common Stock, $.01 par value per share, of the Company, all of which
are owned beneficially and of record by the Individual Shareholders.
1.2.4 Class B Common. The term "Class B Common" shall mean the shares
of Class B Super Common Stock, $.01 par value per share, of the Company.
1.2.5 Code. The term "Code" shall mean the Internal Revenue Code of
1986, as amended.
1.2.6 Company Common Stock. The term "Company Common Stock" shall mean
all shares of Class A Common and Class B Common.
1.2.7 Consideration. The term "Consideration" shall mean the amounts
payable by PA&E pursuant to Sections 1.3 and 1.4.
1.2.8 ESOP Debt. The term "ESOP Debt" shall mean all indebtedness owed
by the ESOP to the Company as of any relevant date.
1.2.9 ESOP Shares. The term "ESOP Shares" shall mean the outstanding
shares of Class B Common, all of which are owned of record by the ESOP, and
shall include any and all shares of Class A Common into which the foregoing
shares of Class B Common are automatically converted under Section 2(g)(2) of
Article IV of the Articles of Incorporation of the Company upon the payment in
full of the ESOP Debt at the Closing pursuant to Section 1.3.1 of this
Agreement.
1.2.10 ESOP Valuation. The term "ESOP Valuation" shall mean the
valuation of the ESOP Shares to be obtained pursuant to Section 4.1.16.
1.2.11 Excise Tax. The term "Excise Tax" shall mean the excise tax
payable by the Company to the Internal Revenue Service upon the repayment in
full of the ESOP Debt, as required by Section 1.3.1.
1.2.12 IRS Ruling. The term "IRS Ruling" shall have the meaning set
forth in Section 4.1.11.
1.2.13 Knowledge. The term "knowledge," whether or not such term is
capitalized, when used in reference to an Individual Shareholder or the ESOP
Trustee shall mean
2
<PAGE>
such person's actual awareness of a fact after reasonable inquiry. Reasonable
inquiry by the Individual Shareholders shall be deemed to mean that the person
has made inquiry of Hans Herrmann, Karl Herrmann, Sylvia Drennan, Mike Bowler,
Steve Johnson, Nigel Izzard, Lee Hayes, and Terry Crippen (or such other persons
who may replace them in the event they leave the Company between the date of
this Agreement and the Closing Date) and nothing has come to the person's
attention in the course of such inquiry or otherwise that would cause such
person to believe that a representation might not be true.
1.2.14 Material Adverse Change. The term "Material Adverse Change"
shall mean a material adverse change in the business, results of operations,
financial condition, assets or prospects of the Company.
1.2.15 Material Adverse Effect. The term "Material Adverse Effect"
shall mean a material adverse effect upon the business, results of operations,
financial condition, assets or prospects of the Company.
1.2.16 ML Debt. The term "ML Debt" shall mean all indebtedness owed by
the Company to Merrill Lynch Business Financial Services, Inc., or its
affiliates (collectively, "Merrill Lynch"), as of any relevant date.
1.2.17 Operating Agreement. The term "Operating Agreement" shall mean
the Operating Agreement, dated as of April 23, 1999, between PA&E and the
Company, including any amendments thereto.
1.2.18 Pledge Agreement. The term "Pledge Agreement" shall mean the
Amended ESOP Loan and Pledge Agreement, dated June 26, 1997, between the Company
and the NOVA-TECH Engineering, Inc. Employee Stock Ownership Trust.
1.3 Consideration for ESOP Shares. At the Closing, PA&E shall pay the ESOP
as consideration for its ESOP Shares the following:
1.3.1 Cash Equal to the ESOP Debt. As part of the Closing and in
consideration for the ESOP Shares, (i) PA&E will transfer to the ESOP in cash
the amount necessary for the ESOP to repay in full the ESOP Debt, (ii) the ESOP
will transfer those funds to the Company to repay in full the ESOP Debt, and
(iii) the Company will transfer those funds to Merrill Lynch to repay in full
the ML Debt; and
1.3.2 Additional Cash to the ESOP. As part of the Closing and in
consideration for the ESOP Shares, PA&E will pay the ESOP an additional $670,000
in cash.
The cash amounts described in the preceding Sections 1.3.1 and 1.3.2 will be in
full payment of and in exchange for all Company Common Stock owned by the ESOP.
1.4 Consideration to Class A Shareholders. At the Closing and in
consideration for the Class A Common, PA&E will pay to the holders of Class A
Common (pro rata according to their respective holdings of Class A Common) an
amount in cash equal to $781,600.
3
<PAGE>
The consideration described in this Section 1.4 will be in full payment of
and in exchange for all shares of Company Common Stock outstanding on the
Closing Date (other than the shares owned by the ESOP).
1.5 Delivery of Certificates. At the Closing, each of the Shareholders
shall deliver to PA&E the certificates representing all of the Company Common
Stock owned by such Shareholder, duly indorsed to PA&E or in blank, in exchange
for the Consideration provided in this Agreement.
1.6 Closing. The closing of this transaction (the "Closing") shall take
place at the offices of Stoel Rives LLP, 3600 One Union Square, 600 University
Street, Seattle, Washington, 98101 on a date to be mutually agreed by PA&E and
the Shareholders that is promptly after the meeting or written consent of the
Shareholders to approve the Articles Amendment, and upon satisfaction or waiver
of each other condition to the Closing set forth in this Agreement, or on such
other date or at such other place and time as PA&E and the Shareholders may
agree (the "Closing Date").
1.7 Subsequent Actions. If, at any time after the Closing, PA&E shall
consider or be advised that any deeds, bills of sale, assignments, assurances or
any other actions or things are necessary or desirable to vest, perfect or
confirm of record or otherwise in PA&E its right, title or interest in, to, or
under any Company Common Stock or any of the rights, properties or assets of the
Company or otherwise to carry out this Agreement, the Shareholders agree to
execute and deliver, all such deeds, bills of sale, assignments and assurances,
and to take and do, in the name and on behalf of the Company, or otherwise, all
such other actions and things as may be necessary or desirable to vest, perfect
or confirm any and all right, title and interest in, to and under such rights,
properties or assets in PA&E or otherwise to carry out the purposes of this
Agreement.
ARTICLE 2.
REPRESENTATIONS AND WARRANTIES
2.1 Representations and Warranties of the Individual Shareholders. The
Individual Shareholders jointly and severally represent and warrant to PA&E
that:
2.1.1 Incorporation; Articles and Bylaws. The Company is a corporation
duly organized and validly existing under the laws of the State of Washington.
The Company has all necessary corporate power and authority to own, operate, and
lease its assets and properties and to carry on its business as it is now being
conducted and as proposed to be conducted. The Company is qualified and in good
standing as a foreign corporation in each jurisdiction where its properties
(whether owned, leased or operated) are located or its business is conducted and
in which the failure to so qualify would have a Material Adverse Effect. The
Company has delivered to PA&E complete and accurate copies of the Company's
Articles of Incorporation and Bylaws, each as amended to the date of this
Agreement.
2.1.2 Capitalization and Outstanding Capital Stock. The Company has
authorized capital stock consisting of ten million (10,000,000) shares of Class
A Common, and
4
<PAGE>
four million (4,000,000) shares of Class B Common. On the date of this
Agreement, 2,850,000 shares of the Class A Common are outstanding, and 1,520,000
shares of the Class B Common are outstanding. All of the outstanding shares of
capital stock of the Company have been duly authorized and are validly issued,
fully paid and nonassessable. No shares of capital stock of the Company have
been issued in violation of or are subject to any preemptive or similar rights
granted to any former or existing shareholder pursuant to law, the Company's
Articles of Incorporation, Bylaws, contract, federal or state securities laws,
or otherwise. Other than pursuant to this Agreement or as described in Schedule
2.1.2, (a) there is no subscription, option, warrant, call, right, agreement or
commitment granted or issued by or binding upon the Company or any shareholder
of the Company or any participant in the ESOP (i) relating to the issuance,
sale, delivery, voting, transfer, ownership or other rights to or affecting any
shares of the Company's capital stock or any other securities convertible into,
exchangeable for, or evidencing the right to subscribe for shares of the
Company's capital stock, or (ii) relating to the payment of amounts measured by
changes in the value or price of any capital stock of the Company, and (b) the
Company has no obligation of any kind to issue any additional securities. Except
as described on Schedule 2.1.2, the Company has no outstanding obligations to
repurchase, redeem or otherwise acquire any of its outstanding shares of capital
stock. Schedule 2.1.2 sets forth the amount of dividends required to be paid by
the Company on its Class B Common and the time when such dividends are required
to be paid. Schedule 2.1.2 sets forth (i) a complete and accurate list of all of
the shareholders of the Company as of the date hereof, indicating the number of
shares of the Company Common Stock held by each, and such shareholders shall
continue to be all of the shareholders of the Company until the Closing Date,
and (ii) a complete and accurate list of all participants in the ESOP, and a
complete and accurate summary of the account balance of each participant in the
ESOP, including the number of shares of Class B Common allocable to each such
account, such list and summary required by this subsection (ii) to be as of the
most recent date such information was prepared by the ESOP. Except as set forth
on Schedule 2.1.2, all of the outstanding shares of capital stock of the Company
are owned beneficially and of record as set forth on the Schedule 2.1.2, free
and clear of all pledges, security interests, liens, charges, encumbrances,
equities, claims, options or limitations.
2.1.3 No Subsidiaries. The Company does not own and has never owned,
directly or indirectly, any outstanding capital stock or other ownership
interest (or securities, rights or other interests convertible into capital
stock or other ownership interest) in any other entity, except as set forth on
Schedule 2.1.3.
2.1.4 Authority; Noncontravention.
a. Authority. Each Individual Shareholder has full power and
authority to execute and deliver this Agreement, to consummate the transactions
contemplated in this Agreement, and to carry out its obligations under this
Agreement. This Agreement has been duly and validly executed and delivered by
the Individual Shareholders. The Articles Amendments will be approved by the
Board of Directors of the Company and will be submitted to shareholders of the
Company for approval upon receipt of the IRS Ruling, and assuming that the
Articles Amendments are duly approved by the shareholders of the Company and
become effective, this Agreement constitutes the valid and binding obligation of
the Shareholders, enforceable in accordance with its terms, except as
enforcement may be limited by applicable bankruptcy,
5
<PAGE>
insolvency, reorganization, moratorium, or other laws of general application
affecting the enforcement of creditors' rights, and except that the availability
of the equitable remedies of specific performance and injunctive relief may be
subject to the discretion of the court before which any proceeding may be
brought. To the best knowledge of the Individual Shareholders, other than the
filing of the Articles Amendments with the Secretary of State, no declaration,
filing, or registration with, or notice to, or authorization, consent, or
approval of, any governmental or regulatory body or authority is necessary for
the execution and delivery of this Agreement by the Individual Shareholders or
the consummation by the Individual Shareholders of the transactions contemplated
by this Agreement.
b. Noncontravention. The execution and delivery of this Agreement
by the Individual Shareholders, and the consummation of the transactions
contemplated by this Agreement (i) will not conflict with the Articles of
Incorporation (after the filing and effectiveness of the Articles Amendments) or
the Bylaws of the Company, and (ii) except for consents required to be obtained
as set forth in Section 2.1.21, and after the effectiveness of the Agreement
Amendments, will not result in any violation of or a default or loss of a
material benefit under, or permit the acceleration of any obligation under any
mortgage, indenture, lease, agreement or other instrument, permit, concession,
grant, franchise, license, judgment, order, decree, statute, law, ordinance,
rule or regulation applicable to the Company or the Individual Shareholders or
their respective properties that would have a Material Adverse Effect.
2.1.5 Financial Matters.
a. Financial Statements. The Individual Shareholders have
provided to PA&E true, correct and complete copies of the Company's (a) compiled
balance sheet, statement of income and statement of cash flow for the fiscal
year ended October 31, 1996, 1997 and 1998, including the related notes
(collectively, the "Historical Financial Statements"), and (b) balance sheet as
of June 30, 1999 (the "Current Balance Sheet") and the related statement of
income and statement of cash flow for the period then ended (collectively, the
"Current Financial Statements"). The Historical Financial Statements and the
Current Financial Statements are collectively referred to as the "the Company
Financial Statements." The Company Financial Statements are complete and
accurate and present fairly the financial position, results of operations, and
changes in financial position of the Company as of the dates and for the periods
indicated therein in accordance with GAAP applied on a consistent basis
throughout the periods indicated, except as otherwise indicated therein or in
the notes to the Company Financial Statements.
b. Absence of Undisclosed Liabilities. Except as set forth on
Schedule 2.1.5(b), and except for current liabilities incurred after the date of
the Current Balance Sheet in the ordinary course of business and of a type and
in an amount consistent with past practices, the Company does not have any
material liability or obligation that is not accrued, reserved against, or
disclosed in the Company Financial Statements.
c. Accounts Receivable. Schedule 2.1.5(c) contains a complete and
accurate list of all of the receivables of the Company (including accounts
receivable, notes receivable and advances) that are reflected in the Current
Balance Sheet or that have been billed
6
<PAGE>
since the date of the Current Balance Sheet (collectively, the "Receivables").
Except as set forth on Schedule 2.1.5(c), all of the Receivables reflect actual
bona fide transactions and arose in the ordinary course of business. Each of the
Receivables can be fully collected when due and in any event within 120 days
after Closing, without resort to litigation and without offset, deduction or
counterclaim, except to the extent of the normal allowance for doubtful accounts
with respect to accounts receivable, consistent with the Company's prior
practices, as reflected in the Current Balance Sheet.
2.1.6 Litigation. Except as set forth on Schedule 2.1.6, there is no
claim, litigation, proceeding or investigation of any kind pending by the
Company or against the Company or the officers or directors of the Company in
their capacities as such, or against the properties or business of the Company,
and, to the knowledge of the Individual Shareholders, (i) no such claim,
litigation, proceeding or investigation has been threatened, and (ii) there is
no basis for any such claim, litigation, proceeding or investigation. There are
no actions, proceedings, suits, investigations, or inquiries pending, or to the
best knowledge of the Individual Shareholders, threatened, that question the
validity of this Agreement or any actions taken or to be taken pursuant to this
Agreement.
2.1.7 Absence of Changes. Except as set forth on Schedule 2.1.7, since
June 30, 1999, the Company has not:
a. Adverse Changes. Suffered or been threatened with any Material
Adverse Change;
b. Damage. Suffered any damage, destruction, requisition, taking
or casualty loss, whether or not covered by insurance, of or to any of its
assets or properties;
c. Dividends. Declared, set aside or paid any dividend or other
distribution (whether in cash, stock, property or any combination thereof) in
respect of its capital stock, or directly or indirectly repurchased, redeemed or
otherwise acquired any shares of its capital stock, or made any other payment to
or for the account of its shareholders;
d. Compensation. Increased the rate or terms of compensation
payable or to become payable to any director, officer or key employee; changed
the rate or terms of any bonus, insurance, pension or other employee benefit
plan, payment, severance or arrangement made to, for or with any employee; paid
any special bonus or remuneration; executed or amended any written employment
contract; or made any change in personnel policies;
e. Expenditures. Entered into any agreement, commitment or
transaction (including without limitation any borrowing, capital expenditure or
capital financing; any purchase, acquisition, sale or other disposition of
assets; any lease or sublease; any guaranty, assumption or endorsement of
payment or performance of any loan or obligation of another; or any amendment,
modification or termination of any existing agreement, commitment or
transaction), except agreements, commitments or transactions in the ordinary
course of business or as contemplated by this Agreement that will be performed
in less than one year and do not
7
<PAGE>
involve the payment of, or obligation to pay, an amount greater than $50,000 in
respect of any such agreement, commitment or transaction;
f. Accounting Changes. Made any change in accounting methods,
principles or practices;
g. Sales of Stock. Issued or sold any capital stock or issued or
granted any option, warrant or right to purchase any capital stock or any
security exercisable for the purchase of or convertible into capital stock or
relating to the payment of amounts measured by changes in the value or price of
any capital stock, or made any commitment to do any of the foregoing;
h. Articles and Bylaws. Amended its Articles of Incorporation or
Bylaws;
i. Business Not in the Ordinary Course. Conducted any business
which is outside the ordinary course of business or not in the manner that it
previously conducted its businesses to the extent such business has had or
reasonably could be expected to have a Material Adverse Effect;
j. Liabilities. Except as set forth on Schedules 2.1.5(b) and
2.1.6, incurred any liability which, either individually or in the aggregate, is
material to its business, results of operations, financial condition,
properties, assets or prospects.
k. Encumbrances. Encumbered or consented to the encumbrance of
any of its property or assets, except in the ordinary course of business;
l. Labor. Experienced pending or threatened labor disputes,
organizational activities or disturbances affecting in an adverse manner its
business, results of operations, financial condition, properties, assets or
prospects; or
m. Further Adverse Changes. Experienced or been threatened with
any change in its assets, liabilities, licenses, permits or franchises, or any
change in any agreement to which it is a party or is bound, which, either
individually or in the aggregate, has had or reasonably could be expected to
have a Material Adverse Effect.
2.1.8 Taxes.
a. Tax. "Tax" means any federal, state, local, or foreign income,
gross receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium, windfall profits, environmental (including taxes under Code
ss. 59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-on
minimum, estimated, or other tax of any kind whatsoever, including any interest,
penalty, or addition thereto, whether disputed or not.
8
<PAGE>
b. Tax Return. "Tax Return" means any return, declaration,
report, claim for refund, or information return or statement relating to Taxes,
including any schedule or attachment thereto, and including any amendment
thereof.
c. Tax Matters.
(1) The Company has filed all Tax Returns that it was
required to file, and all such Tax Returns were correct and complete. All Taxes
owed by the Company (whether or not shown on any Tax Return) have been paid. The
Company is not currently a beneficiary of any extension of time within which to
file any Tax Return. No claim has ever been made by a governmental authority in
a jurisdiction where the Company does not file Tax Returns that the Company is
or may be subject to taxation by that jurisdiction. There are no security
interests on any of the assets of the Company that arose in connection with any
failure (or alleged failure) to pay any Tax.
(2) The Company has withheld and paid all Taxes required to
have been withheld and paid in connection with amounts paid or owing to any
employee, independent contractor, creditor, shareholder, or other third party.
(3) No shareholder or director or officer (or employee
responsible for Tax matters) of the Company has any knowledge that any
governmental authority may assess, or has threatened to assess, any additional
Taxes for any period for which Tax Returns have been filed. There is no dispute
or claim concerning any Tax liability of the Company either (A) claimed or
raised by any governmental authority or (B) as to which any of the Individual
Shareholders or the directors and officers (or employees responsible for Tax
matters) of the Company has knowledge. Schedule 2.1.8 lists all federal, state,
local, and foreign income Tax Returns filed with respect to the Company for
taxable periods ended on or after November 1, 1995, indicates those Tax Returns
that have been audited, and indicates those Tax Returns that currently are the
subject of any audit. The Company has delivered to PA&E correct and complete
copies of all federal income Tax Returns, examination reports, and statements of
deficiencies assessed against or agreed to by any of the Company since November
1, 1995.
(4) The Company has not waived any statute of limitations in
respect of Taxes or agreed to any extension of time with respect to a Tax
assessment or deficiency.
(5) The Company: has not filed a consent under Codes ss.
341(f) concerning collapsible corporations; has not made any payments, is not
obligated to make any payments, and is not a party to any agreement that could
obligate it to make any payments that will not be deductible under Code ss.
280G; has not been a United States real property holding corporation within the
meaning of Code ss. 897(c)(2) during the applicable period specified in Code ss.
897(c)(1)(A)(ii). The Company is not a party to any Tax allocation or sharing
agreement. The Company (A) has not been a member of an Affiliated Group filing a
consolidated federal income Tax Return (other than a group the common parent of
which was the Company) and (B) has no liability for the Taxes of any person
under Reg. ss. 1.1502-6 (or any similar provision of state, local or foreign
law), as a transferee or successor, or by contract or otherwise.
9
<PAGE>
(6) Schedule 2.1.8 sets forth the following information with
respect to the Company as of the most recent practicable date (as well as on an
estimated pro forma basis as of the Closing giving effect to the consummation of
the transactions contemplated by this Agreement): (A) the basis of the Company
in its assets; and (B) the amount of any net operating loss, net capital loss,
unused investment or other credit, unused foreign tax, or excess charitable
contribution allocable to the Company.
(7) The unpaid Taxes of the Company do not, as of the close
of its October 31, 1998, taxable year, exceed the reserve for tax liability set
forth on the balance sheet dated October 31, 1998. The Company has paid or has
established a sufficient reserve for any Tax liability in respect of any fiscal
period which includes or ends on the Closing Date.
2.1.9 Compliance with Laws. Except as set forth on Schedule 2.1.9, the
Company has at all relevant times conducted its business in compliance in all
respects with the provisions of its Articles of Incorporation, Bylaws, and all
applicable laws and regulations to the extent that the failure to so comply
reasonably could be expected to have a Material Adverse Effect. The Company is
not in violation of any applicable laws or regulations in any material respect.
The Company is not subject to any outstanding judgment, order, writ, injunction
or decree and has not been charged with, or, to its knowledge, threatened with a
charge of, a violation of any provision of any applicable law or regulation.
2.1.10 Contracts.
a. Contracts and Commitments. Schedule 2.1.10 contains a list of
all of the contracts or agreements to which the Company is a party or by which
it or any of its property is subject or bound in the following categories: (i)
notes, mortgages, deeds of trust, loan agreements, security agreements,
guaranties, debentures, indentures, credit agreements and other evidences of
indebtedness with respect to any indebtedness the principal amount of which
exceeds $50,000; (ii) contracts or agreements with any director, officer or
shareholder of the Company; (iii) leases of real property and leases of
equipment or other personal property under which the Company is the lessee; (iv)
letters of intent, commitments, option agreements, earnest money agreements, or
other similar agreements pertaining to the lease, purchase or sale of any real
property; (v) licenses and sublicenses material to the Company; (vi) contracts
or agreements providing for payments to or by the Company in excess of $25,000
on an annual basis or any contract with a term exceeding one year; (vii)
contracts or agreements with agents, brokers, consignees, sales representatives
or distributors relating to the sale of products or services, and contracts or
agreements relating to the payment of any commission or finder's fee; (viii)
confidentiality or inventions assignment agreements with parties other than
employees of the Company; and (ix) any contract or agreement not falling within
any of the foregoing categories but nevertheless material to the Company
(collectively, the "Contracts").
b. Validity; Absence of Defaults. All of the Contracts are valid,
binding and enforceable in accordance with their terms. The Company is not in
default under or in violation of any provision of any Contract. No third party
has asserted any claim or engaged in any dispute or controversy with the Company
or withheld payments from or performance to the Company with respect to any
Contract that has not been resolved. The Company has received
10
<PAGE>
no notice or warning of alleged nonperformance or other noncompliance with
respect to its obligations under any Contract or any notice that any such
Contract may be totally or partially terminated or suspended by the other party
or parties thereto. Except for the consents and approvals specified in Schedule
2.1.21, neither the execution and delivery of this Agreement by the Company nor
the consummation by it of the transactions contemplated by this Agreement will
conflict with, violate, result in a breach of, or constitute a default under any
of the Contracts or result in the creation of any lien or encumbrance upon the
assets of the Company. Complete and accurate copies of all Contracts have been
delivered to PA&E.
2.1.11 Intellectual Property. The Company owns, or has a valid and
binding license or licenses (as to which there are no defaults by any of the
parties thereto) to use, all patents, trademarks, service marks, trade names,
copyrights, trade secrets, technology, know-how and other intellectual property
(the "Intellectual Property") necessary to or used in the conduct of the
Company's business as now conducted and as proposed to be conducted. Schedule
2.1.11 contains a complete and accurate list of all patents, patent
applications, trademarks and service marks and related applications, trade names
and copyrights owned by or licensed to the Company. There are no licenses or
other agreements under which the Company has sold or granted a right to use any
Intellectual Property. All Intellectual Property owned by the Company is owned
by it free and clear of all liens, claims, encumbrances or adverse claims of any
third party. The conduct of the business of the Company does not conflict with
or infringe upon any Intellectual Property rights of any other person, and no
claims of conflict or infringement are pending or threatened against the
Company. The Company has made all necessary filings and recordations and has
paid all required fees and Taxes to maintain its ownership of Intellectual
Property that is patented or registered in the United States Patent and
Trademark Office and has made all necessary filings and recordations and has
paid all required fees and Taxes to maintain its ownership of Intellectual
Property that is patented or registered with applicable foreign agencies.
2.1.12 Insurance. Schedule 2.1.12 contains a complete and accurate
list of all insurance policies maintained by the Company covering any property
or asset of, or otherwise insuring, the Company. All such policies are in full
force and effect, all premiums covering all periods up to and including the date
as of which this representation is being made have been paid, and no notice of
cancellation or termination has been received with respect to any such policy.
Such insurance policies are valid and currently in force. Such insurance
policies are sufficient for compliance with all requirements of law and
agreements to which the Company is a party. The Company has not been refused any
insurance with respect to its assets or operations or had its coverage limited
by any insurance carrier during the past three-year period. Complete and
accurate copies of all policies and endorsements thereto have been delivered to
PA&E.
2.1.13 Environmental Matters.
a. Definitions. "Environmental Law" means any federal, state or
local statute, regulation or ordinance pertaining to the protection of human
health or the environment and any applicable orders, judgments, decrees,
permits, licenses or other authorizations or mandates under such laws.
"Hazardous Substance" means any hazardous, toxic, radioactive or infectious
substance, material or waste as defined, listed or regulated under any
Environmental Law, and includes without limitation petroleum oil and its
fractions. "Asbestos-Containing
11
<PAGE>
Material" means any material containing more than one percent by weight of
asbestos. "Prior Property" means any real property previously owned, leased,
controlled, operated or occupied by the Company.
b. Hazardous Substances. Except as specifically described in
Schedule 2.1.13, no Hazardous Substance has been disposed of, spilled, leaked or
otherwise released in, on, under or from the Real Property (as defined in
Section 2.1.17(a) below) or the Prior Property by the Company, its employees or
agents, or to the knowledge of the Company, by any other party. Except as
described in Schedule 2.1.13, no Hazardous Substance (i) is or has been used,
treated, stored, generated, manufactured or otherwise handled on the Real
Property or the Prior Property, or (ii), to the knowledge of the Individual
Shareholders, has otherwise come to be located in, on or under the Real Property
or the Prior Property. To the knowledge of the Individual Shareholders, no
Hazardous Substance has been disposed of, spilled, leaked or otherwise released
in, on, under or from property adjacent to or in the immediate vicinity of the
Real Property or the Prior Property.
c. Asbestos; PCBs; Underground Storage Tanks. None of the
buildings, structures, fixtures or equipment on the Real Property contains any
Asbestos-Containing Material, urea formaldehyde foam insulation, polychlorinated
biphenyls in concentrations greater than 50 parts per million (including in any
electrical equipment located on the Real Property), or any other Hazardous
Substance which is prohibited or regulated when present in buildings,
structures, fixtures or equipment. Except as set forth on Schedule 2.1.13, there
are no underground storage tanks (whether or not excluded from regulation under
any Environmental Law) on the Real Property, including any underground storage
tanks in use, out of service, closed or decommissioned in place. Except as set
forth on Schedule 2.1.13, all underground storage tanks previously on the Real
Property or previously owned or operated by the Company have been properly
decommissioned in compliance with all applicable Environmental Laws.
d. Waste Disposal. All wastes generated by the business of the
Company have been properly transported off site and disposed of in compliance
with all applicable Environmental Laws. Except as described on Schedule 2.1.13,
the Company has not arranged for the disposal or treatment of Hazardous
Substances at, and has not transported or arranged for transportation on behalf
of itself or any third party any Hazardous Substances to, any facility listed or
proposed for listing on the National Priority List ("NPL") or the Comprehensive
Environmental Response, Compensation, Liability Information System list
("CERCLIS") compiled by the Environmental Protection Agency or any similar or
comparable list compiled or maintained by any state or local governmental
authority.
e. Site Lists. No portion of the Real Property or the Prior
Property is listed or proposed for listing on the CERCLIS or the NPL, or any
similar or comparable list compiled or maintained by any state or local
governmental authority. Except as described on Schedule 2.1.13, neither the
Company nor the Individual Shareholders have received notice, or have knowledge,
of any claim that the Company is a potentially responsible party under Section
107 of the Comprehensive Environmental Response, Compensation and Liability Act
or any similar or comparable state or local Environmental Law.
12
<PAGE>
f. Environmental Reports. The Company has disclosed and made
available to PA&E true, complete and correct copies or results of any reports,
studies, analyses, tests or monitoring in the possession of or initiated by the
Company pertaining to the existence of Hazardous Substances and any other
environmental concerns relating to any of the Real Property, the Prior Property
or the business of the Company.
2.1.14 Labor Matters. Except as set forth on Schedule 2.1.14, the
Company has no collective bargaining agreement with any labor union. There has
not been any strike, slowdown, picketing or work stoppage by employees of the
Company, and no unfair labor practice charge, complaint or proceeding has been
brought against the Company. To the knowledge of the Individual Shareholders,
the Company has complied with all laws relating to the employment of labor,
including, without limitation, any provisions thereof relating to wages, hours,
collective bargaining, employment termination, occupational safety, equal
opportunity and discrimination, plant closures and layoffs and notice thereof,
hiring of non-U.S. citizens and the payment of social security and similar
taxes, and no person has asserted, and to the knowledge of the Individual
Shareholders there is no basis for any person to assert, that the Company is
liable for any arrears of wages or any taxes or penalties for failure to comply
with any of the foregoing.
2.1.15 Employee Benefit Matters. With respect to the employees of the
Company:
a. Plans. Schedule 2.1.15 contains a true and complete list of
each bonus, deferred compensation, incentive compensation, stock purchase, stock
option, severance or termination pay, hospitalization or other medical, life or
other insurance, supplemental unemployment benefit, profit-sharing, savings,
pension, or retirement plan, program, agreement or arrangement (collectively,
the "Plans"), sponsored, maintained or contributed to or required to be
contributed to by the Company or by any subsidiary of the Company or trade or
business (whether or not incorporated) that is a member of a "controlled group"
of which the Company is a member or under "common control" with the Company
(within the meaning of Section 414(b) and (c) of the Code) (an "ERISA"
Affiliate") for the benefit of any employee or former employee, including any
"multiemployer plan" (as defined in Section 4001(a)(3) of ERISA) subject to
Title IV of ERISA (a "Multiemployer Plan") to which the Company or any ERISA
Affiliate contributes or is or was required to contribute;
b. Information Regarding Plans. With respect to each of the
Plans, the Company has heretofore delivered to PA&E true and complete copies of
each of the following documents: (i) a copy of such Plan (including all
amendments thereto); (ii) a copy of the annual report, if required under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), with
respect to such Plan for the last two years; (iii) a copy of the actuarial
report, if required under ERISA with respect to such Plan for the last two
years; (iv) a copy of the most recent Summary Plan Description, together with
each Summary of Material Modifications, if required under ERISA, with respect to
such Plan, and all material employee communications relating to such Plan; (v)
if such Plan is funded through a trust or any third party funding vehicle, a
copy of the trust or other funding agreement (including all amendments thereto)
and the latest financial statements thereof; (vi) all contracts relating to such
Plan, including without limitation service provider agreements, insurance
contracts, investment management agreements,
13
<PAGE>
subscription and participation agreements and record keeping agreements; and
(vii) the most recent determination letter received from the IRS with respect to
such Plan if it is intended to be qualified under Section 401 of the Code.
c. New Plans; Modifications. The Company has no plan or
commitment, whether legally binding or not, to create any additional employee
welfare benefit plan (as defined in Section 3(1) of ERISA) or employee pension
benefit plan (as defined in Section 3(2) of ERISA), and has no plan or
commitment to modify or change any existing pension plan or welfare benefit
plan, other than changes to comply with applicable law, that would affect any
employee of the Company;
d. Continuing Benefits. Except as may be required under COBRA, no
Plan provides death, medical or health benefits (whether or not insured) with
respect to current or former employees of the Company after any such employee's
retirement or other termination of service (other than (i) benefit coverage
mandated by applicable law, including, without limitation, coverage provided
pursuant to COBRA, (ii) death benefits or retirement benefits under any pension
plan, (iii) deferred compensation benefits accrued as liabilities on the books
of the Company, or (iv) benefits the full cost of which is borne by the current
or former employee (or the employee's beneficiary). "COBRA" means the
continuation coverage requirements of Section 4980B of the Code and Part 6 of
Title I of ERISA.
e. Determinations. Each Plan of the Company and of any ERISA
Affiliates that is intended to be "qualified" within the meaning of Section
401(a) of the Code has been determined by the IRS to be so qualified, and there
is no fact or circumstance that would adversely affect such qualification or
result in the imposition of any federal income tax liability or penalty on any
member of the Company or any ERISA Affiliate.
f. Compliance. Each of the Plans has been and is maintained,
operated and administered in compliance with its terms and any related documents
or agreements and in accordance with all applicable laws, including but not
limited to applicable provisions of ERISA and the Code. Neither the Company nor
any ERISA Affiliate has engaged in a "prohibited transaction" (as such term is
defined in Section 4975 of the Code and Section 406 of ERISA) in connection with
any Plan that is subject to ERISA for which an exemption is not available.
g. Claims. There are no claims (other than claims for benefits in
the normal course), actions or lawsuits asserted or instituted against, and
neither the Company nor the Shareholders are aware of any pending or threatened
assessment, complaint, proceeding, investigation, litigation or claims against
the assets of any Benefit Plan (other than a Multiemployer Plan) or against any
fiduciary of such Benefit Plan with respect to the operation of such Benefit
Plan, which, if adversely determined, could have a material adverse effect on
the business, results of operations, financial condition, assets or prospects of
the Company or any ERISA Affiliate taken as a whole.
h. Withdrawal Liability. Neither the Company nor any ERISA
Affiliate has incurred any withdrawal liability (and no event has occurred
which, with the giving of notice under Section 4219 of ERISA, would result in
such liability) under Section 4201 of ERISA as a
14
<PAGE>
result of a "complete withdrawal" or a "partial withdrawal" (within the meaning
of Section 4203 or 4205 of ERISA) from a Multiemployer Plan.
2.1.16 Other Employee Matters. Except as described on Schedule 2.1.16,
the Company is not bound by or subject to (and none of its properties is bound
by or subject to) any written or oral, express or implied, employment contract,
commitment or arrangement with any employee, including, without limitation any
"golden parachute" agreement, and all employees of the Company are employees at
will. The Company has provided PA&E with copies of all relevant information
regarding (i) vacation, holiday or sick leave policies or arrangements with
employees, and (ii) compensation arrangements with employees and consultants,
including compensation in the form of benefits, allowances, perquisites or
otherwise.
2.1.17 Property.
a. Title to Real Property. Schedule 2.1.17(a) contains a list of
all real property owned or leased by the Company (the "Real Property"),
including the dates of and parties to all leases and any amendments thereof.
Except as described on Schedule 2.1.17(a), the Company has good and marketable
fee simple title to any Real Property listed as owned by it on Schedule
2.1.17(a), free and clear of all liens, mortgages, pledges, covenants,
easements, restrictions, leases, charges, and other claims and encumbrances of
any nature, except covenants, easements and restrictions of record.
b. Condition of Real Property. All Real Property (including
improvements thereon) is in satisfactory condition and repair consistent with
its present use, and is available for immediate use in the conduct of the
business of the Company. To the knowledge of the Company, neither the operations
of the Company on any Real Property nor any improvements on the Real Property
violate any applicable building or zoning code or regulation of any governmental
authority having jurisdiction.
c. Title to Tangible Personal Property. Schedule 2.1.17(c)
contains a complete and accurate list of all tangible personal property with a
value in excess of $5,000 owned or leased by the Company (the "Tangible Personal
Property"), including the dates of and parties to all leases and any amendments
thereof and the address at which such Tangible Personal Property is currently
located. The Company has good and marketable title to all of the Tangible
Personal Property listed as owned by it on Schedule 2.1.17(c), free and clear of
all liens, mortgages, pledges, leases, restrictions and other claims and
encumbrances of any nature, except as set forth on Schedule 2.1.17(c).
d. Condition of Tangible Personal Property. Except as set forth
on Schedule 2.1.17(c), the Tangible Personal Property is in good operating
condition and repair (ordinary wear and tear excepted), is performing
satisfactorily, and is adequate for the conduct of the business of the Company.
To the knowledge of the Individual Shareholders, all Tangible Personal Property
and the state of maintenance thereof are in compliance with all applicable laws
and regulations.
15
<PAGE>
2.1.18 Permits and Licenses. Schedule 2.1.18 contains a complete and
accurate list of all governmental licenses, permits and authorizations
(collectively, "Permits") held by the Company. Except as set forth on Schedule
2.1.18, to the knowledge of the Individual Shareholders, the Company (i) holds
all Permits necessary for the lawful conduct of its business pursuant to all
applicable statutes, laws, ordinances, rules and regulations of all governmental
bodies, agencies and other authorities having jurisdiction over it or any part
of its operations; and (ii) is in compliance with each of the terms of each of
the Permits, and there are no claims of violation by the Company of any Permit.
Complete and accurate copies of all Permits held by the Company have been
delivered to PA&E.
2.1.19 Certain Interests. Except as set forth on Schedule 2.1.19, no
current or former shareholder of the Company and no entity owned or controlled
by any of them (a) has any interest in any property, real or personal, tangible
or intangible, used in or pertaining to the business of the Company, (b) is
indebted to the Company, or (c) has any financial interest, direct or indirect,
in any supplier or customer of, or other outside business which has any
transactions with, the Company. Except as set forth on Schedule 2.1.19, the
Company is not indebted to any shareholder, director or officer of the Company
(or any entity owned or controlled by one or more of such parties), except for
amounts due under normal salary arrangements and for reimbursement of ordinary
business expenses. The consummation of the transactions contemplated by this
Agreement will not (either alone or upon the occurrence of any act or event, or
with the lapse of time, or both) result in any payment (severance or other)
becoming due from the Company to any shareholder, officer, director or employee
of the Company (or any entity owned or controlled by one or more of such
parties).
2.1.20 Certain Payments. Neither the Company nor any shareholder,
officer or director of the Company, nor any other person or entity has, directly
or indirectly, on behalf of or with respect to the Company or the business or
operations of the Company (a) made any payment outside the ordinary course of
business to any purchasing or selling agent or person charged with similar
duties of any entity to which the Company sells or from which the Company buys
products or services for the purpose of influencing such agent or person to buy
products or services from or sell products or services to the Company; (b)
otherwise made or received any payment that was not legal to make or receive
under any applicable law or regulation of the United States or any other country
or territory; or (c) engaged in any transaction, maintained any bank account, or
used any corporate funds or assets except for transactions, bank accounts,
funds, and assets which have been and are reflected in the normally maintained
books and records of the Company.
2.1.21 Consents and Approvals. Except as set forth on Schedule 2.1.21
(which includes a list of all consents, approvals, authorizations or filings to
be obtained or made), no consent, approval, or authorization of any entity or
person not a party to this Agreement is required for the consummation of the
transactions described in this Agreement by the Company or the Shareholders
except (i) filings by PA&E pursuant to the applicable requirements of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated under such Act (the "1934 Act"), and (ii) the filing of the Articles
Amendments with the Secretary of State.
16
<PAGE>
2.1.22 Records. The books of account of the Company are complete and
accurate in all material respects. Complete and accurate copies of the books and
records of the Company have been made available for PA&E's review.
2.1.23 Warranties. Schedule 2.1.23 contains any standard forms of
warranties provided by the Company. The Company has not made any warranties or
guarantees with respect to its services other than those disclosed on Schedule
2.1.23.
2.1.24 Brokers and Finders. Neither the Company nor any Shareholder,
officer, director or employee of the Company has employed any broker, finder or
investment banker, or incurred any liability for any brokerage or investment
banking fees, commissions or finder's fees, in connection with the transactions
contemplated in this Agreement.
2.1.25 Restrictive Covenants. The Company is not a party to any
agreement, contract or covenant limiting the freedom of the Company to compete
in any line of business or with any person or other entity in any geographic
area.
2.1.26 Reliance. The Company and the Individual Shareholders recognize
and agree that, notwithstanding any investigation by PA&E, PA&E is relying upon
the representations and warranties made by the Individual Shareholders in this
Agreement.
2.2 Representations and Warranties of PA&E. PA&E represents and warrants to
the Individual Shareholders that:
2.2.1 Incorporation; Articles and Bylaws. PA&E is a corporation duly
organized and validly existing under the laws of the State of Washington. PA&E
has all necessary corporate power and authority to own, operate, and lease its
assets and properties and to carry on its business, including its business as
proposed to be conducted. True and correct copies of the Articles of
Incorporation and Bylaws of PA&E have been or prior to the Closing will be
delivered to the Company.
2.2.2 Authority; Authorization. PA&E has full corporate power and
corporate authority to execute and deliver this Agreement, to consummate the
transactions contemplated in this Agreement, and to carry out its obligations
under this Agreement. After approval by the Board of Directors of PA&E, this
Agreement will have been duly and validly authorized, executed and delivered by
PA&E, and will constitute the valid and binding obligation of PA&E, enforceable
in accordance with its terms, except as enforcement may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, or other laws of general
application affecting the enforcement of creditors' rights, and except that the
availability of the equitable remedies of specific performance and injunctive
relief may be subject to the discretion of the court before which any proceeding
may be brought. To the knowledge of PA&E, assuming the accuracy of the
representations made by the Shareholders, other than reporting obligations of
PA&E under the 1934 Act, no declaration, filing, or registration with, or notice
to, or authorization, consent, or approval of, any governmental or regulatory
body or authority is necessary for the execution and delivery of this Agreement
by PA&E or the consummation by PA&E of the transactions contemplated in this
Agreement.
17
<PAGE>
2.2.3 Noncontravention. The execution and delivery of this Agreement
by PA&E and the consummation of the transactions contemplated by this Agreement
(i) will not conflict with the Articles of Incorporation or the Bylaws of PA&E
and (ii) except for consents required to be obtained as set forth in Section
2.2.6, will not result in any violation of or a default or loss of a material
benefit under, or permit the acceleration of any obligation under any mortgage,
indenture, lease, agreement or other instrument, permit, concession, grant,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to PA&E or its properties that would have a material
adverse effect on the business or financial condition of PA&E.
2.2.4 Financial Statements. PA&E's annual report on Form 10-K (the
"Form 10-K") for the fiscal year ended May 31, 1999, contains true and correct
copies of PA&E's audited balance sheets, statements of income and statements of
cash flow for the fiscal years ended May 31, 1998 and 1999, including the
related notes, each consolidated with respect to PA&E's subsidiaries
(collectively, the "PA&E Financial Statements"). The PA&E Financial Statements
are complete and accurate and, as of their respective dates, present fairly the
consolidated financial position, results of operations, and changes in financial
position of PA&E and its subsidiaries as of the dates and for the periods
indicated therein in accordance with GAAP applied on a consistent basis
throughout the periods indicated, except as otherwise indicated therein or in
the notes thereto.
2.2.5 Litigation. There is no claim, litigation, proceeding or
investigation pending by PA&E or against PA&E or the officers or directors of
PA&E in their capacities as such, or against the properties or business of PA&E
that should have been reported on the Form 10-K, and, to the best knowledge of
PA&E, no such claim, litigation, proceeding or investigation has been threatened
and there is no basis for any such claim, litigation, proceeding or
investigation. There are no actions, proceedings, suits, investigations, or
inquiries pending, or to the best knowledge of PA&E, threatened, that question
the validity of this Agreement or any actions taken or to be taken pursuant to
this Agreement.
2.2.6 Consents and Approvals. Except as set forth on Schedule 2.2.6
(which includes a list of all consents, approvals, authorizations or filings to
be obtained or made), no consent, approval, or authorization of any entity or
person not a party to this Agreement is required for the consummation of the
transactions described in this Agreement by PA&E.
2.2.7 Brokers and Finders. Neither PA&E, nor any shareholder, officer,
director or employee of PA&E, has employed any broker, finder or investment
banker, or incurred any liability for any brokerage or investment banking fees,
commissions or finder's fees, in connection with the transactions contemplated
by this Agreement.
2.3 Representations and Warranties of the ESOP Trustee. The person or
entity executing this Agreement on behalf of the ESOP represents and warrants to
PA&E that:
2.3.1 Authority. The ESOP Trustee has full power and authority to
execute and deliver this Agreement, to consummate the transactions contemplated
in this Agreement, and to carry out its obligations and the obligations of the
ESOP under this Agreement. This Agreement
18
<PAGE>
constitutes the valid and binding obligation of the ESOP, enforceable in
accordance with its terms, except as enforcement may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, or other laws of general
application affecting the enforcement of creditors' rights, and except that the
availability of the equitable remedies of specific performance and injunctive
relief may be subject to the discretion of the court before which any proceeding
may be brought. To the best knowledge of the ESOP Trustee, other than the filing
of the Articles Amendments with the Secretary of State, no declaration, filing,
or registration with, or notice to, or authorization, consent, or approval of,
any governmental or regulatory body or authority is necessary for the execution
and delivery of this Agreement by the ESOP Trustee or the consummation by the
ESOP of the transactions contemplated by this Agreement.
2.3.2 Noncontravention. The execution and delivery of this Agreement
by the ESOP Trustee, and the consummation of the transactions contemplated by
this Agreement (i) will not conflict with the documents governing the ESOP, and
(ii) except for consents required to be obtained as set forth in Section 2.1.21,
and after effectiveness of the Agreement Amendments, will not result in any
violation of or a default or loss of a material benefit under, or permit the
acceleration of any obligation under any indenture, agreements, or other
instrument, permit, concession, grant, franchise, license, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to the ESOP or
the ESOP Trustee that would have a Material Adverse Effect.
ARTICLE 3.
PRE-CLOSING CONDUCT AND AGREEMENTS
From the date of this Agreement until the Closing, except to the extent
expressly permitted by this Agreement or otherwise consented to by an instrument
in writing signed by PA&E, the parties agree that:
3.1 Conduct of the Parties. Before Closing, each of the parties will fully
cooperate with the other party and its counsel and accountants in connection
with any steps required to be taken as part of the obligations of the parties
under this Agreement. PA&E and the Shareholders each agree not to take any
action, and the Shareholders agree not to cause the Company to take any action,
which would, as of the Closing Date, cause any warranties or representations
contained in this Agreement and applicable to them to be false or misleading.
PA&E and the Shareholders agree to use their best efforts, and the Shareholders
agree to cause the Company to use its best efforts, to (a) take all actions
necessary to render accurate as of the Closing Date their respective
representations and warranties contained in this Agreement, and (b) perform or
cause to be satisfied each covenant, obligation or condition to be performed or
satisfied by them prior to the Closing Date.
3.2 Access to Properties, Books and Records.
3.2.1 PA&E. To permit PA&E to conduct its due diligence investigation,
the Shareholders will permit PA&E and its agents to have reasonable access to
the premises in which the Company conducts its business and to all of its books,
records, and personnel files and will
19
<PAGE>
furnish to PA&E such financial data, operating data, and other information as
they shall reasonably request, and the Shareholders will permit PA&E and its
agents to contact employees and customers of the Company.
3.2.2 The Shareholders. To permit the Shareholders to conduct their
due diligence investigation, PA&E will provide the Shareholders and their agents
with access to any of its public filings with the Securities and Exchange
Commission and will furnish to the Shareholders such financial data, operating
data, and other information as the Shareholders shall reasonably request.
3.3 Confidentiality. The parties each agree to comply with and be bound by
the terms of the confidentiality agreement between PA&E and the Company which
had been fully executed on August 10, 1998 (the "Confidentiality Agreement").
3.4 Conduct of the Company's Business. In addition to the provisions of
this Agreement, the Shareholders will cause the Company to conduct its business
in accordance with all of the provisions of the Operating Agreement. The
Shareholders will cause the Company to: (i) conduct the Company's business in a
reasonable and prudent manner in accordance with past practices and keep the
Company's business intact, (ii) not take or permit to be taken or do or suffer
to be done anything other than in the ordinary course of its business, and (iii)
use commercially reasonable efforts to preserve the Company's existing business
and relationships with its employees, customers, suppliers, directors, officers,
agents and others, to preserve and protect its properties, to conduct its
business in compliance with all applicable laws and regulations, and to maintain
the goodwill and reputation associated with its business. The parties understand
and agree that (a) PA&E must be consulted on every material issue and matter
which may affect the business or operations of the Company after the date of
this Agreement, and (b) no such issue or matter shall be acted on without the
prior written consent of PA&E. Subject to the foregoing, the Shareholders agree
to cause the Company to comply with the following covenants (except to the
extent that PA&E gives its prior written consent otherwise):
3.4.1 Properties and Assets.
a. Maintenance. The Company shall exercise commercially
reasonable efforts to maintain all of its properties and assets, tangible or
intangible, in good operating condition and repair, and take all steps necessary
to keep its operations functioning properly.
b. Liens and Encumbrances. The Company shall not further encumber
or permit to be further encumbered any of its properties or assets.
c. Disposition. The Company shall not purchase, sell, lease or
dispose of or make any contract for the purchase, sale, lease or disposition of
or subject to lien or security interest any properties or assets other than in
the ordinary and usual course of its business consistent with the
representations and warranties contained in this Agreement and not in breach of
any of the provisions of this Agreement.
20
<PAGE>
3.4.2 Compensation. The Company shall not grant any salary increase
to, or increase the draw of, any of its officers, directors, or employees, or
enter into any new, or amend or alter any existing, bonus, incentive
compensation, deferred compensation, profit sharing, retirement, pension, stock
option, group insurance, death benefit or other fringe benefit plan, trust
agreement or other similar or dissimilar arrangement, or any agreements or
documents relating to the ESOP, or any employment or consulting agreement.
3.4.3 Indebtedness. The Company shall not create, agree to or incur:
(a) any liabilities or obligations, contingent or otherwise, (i) in respect of
borrowed money (other than borrowings pursuant to the Company's existing line of
credit) or pursuant to the Operating Agreement, (ii) evidenced by bonds, notes,
debentures or similar instruments, (iii) representing the balance deferred and
unpaid of the purchase price of any property or services, except those incurred
in the ordinary course of its business that would constitute ordinarily a trade
payable to trade creditors, which are paid not later than 60 days after their
original due date, (iv) evidenced by bankers' acceptances or similar instruments
issued or accepted by banks, (v) relating to any capitalized lease obligation,
or (vi) evidenced by a letter of credit or a reimbursement obligation of the
Company with respect to any letter of credit; (b) any interest swap or hedging
obligations; (c) any guarantee by the Company of, or any pledge by the Company
of any of its assets to secure, any liabilities or obligations of any other
person or entity; (d) any obligation of the Company to purchase, redeem or
acquire any of its stock or other equity interests; or (e) any deferrals,
renewals, extensions, refinancing or refundings (whether direct or indirect) of,
or amendments, modifications or supplements to, any liability of the kind
described in any of the preceding clauses (a), (b), (c), (d) or this clause (e)
(all of the foregoing collectively referred to as the "Designated
Indebtedness"). At all times after the date of this Agreement and on the Closing
Date, the outstanding balance on the Company's existing line of credit shall not
exceed $500,000 without the prior written consent of PA&E, and on the Closing
Date the Company shall not have any Designated Indebtedness, other than that
line of credit and borrowings pursuant to the Operating Agreement.
3.4.4 Leases. The Company shall not enter into any leases.
3.4.5 Payments. Except as otherwise specified in this Agreement, the
Company shall not pay any obligation or liability (fixed or contingent) or
discharge or satisfy any lien or encumbrance, or settle any claim, liability or
suit pending or threatened against it or any of its properties, except for
liabilities on the Current Balance Sheet or current liabilities incurred between
the date of the Current Balance Sheet and the Closing Date in the ordinary and
usual course of business consistent with the Company's representations and
warranties contained in this Agreement and not in breach of any of the
provisions of this Agreement.
3.4.6 Contracts and Agreements. The Company shall not enter into any
contract, agreement or commitment not in the ordinary course of business,
including without limiting the generality of the foregoing, any contract,
agreement or commitment for the purchase of any materials or supplies. The
Company shall not modify, amend, cancel or terminate any of the Contracts or
waive any rights under any of the Contracts or any other material contracts or
agreements. Except for the Agreement Amendments, the Company and the ESOP shall
not amend any agreement or documents relating to the ESOP or the ESOP Debt.
21
<PAGE>
3.4.7 Shipments. The Company shall not, other than in the ordinary
course of business, curtail purchases or accelerate shipments beyond customer
requirements.
3.4.8 Insurance. The Company shall maintain in full force and effect
its policies of insurance.
3.4.9 Governing Documents. The Company will not make any change in its
Articles of Incorporation or Bylaws, other than the Articles Amendment.
3.4.10 Capital Stock. The Company will not (a) issue or cause to be
issued any additional shares of its capital stock, (b) effect any subdivision of
its outstanding capital stock, or purchase or redeem any capital stock, (c)
declare, make or pay any dividend, distribution or payment in respect of its
capital stock, other than dividends that are required to be paid by the terms of
the Class B Common as set forth on Schedule 2.1.2, or (d) grant or issue any
options, warrants or other rights to acquire any capital stock or other equity
securities, whether by conversion or otherwise, or make any commitment to do any
of the above.
3.5 Public Announcements. Promptly after the execution of this Agreement,
PA&E shall issue a press release in a form reasonably satisfactory to the
Shareholders. Thereafter, PA&E and the Shareholders will consult with each other
with respect to any news release or other announcement to the public concerning
the Stock Purchase, including without limitation announcements to mutual
customers or suppliers or potential customers or suppliers or any statement to
their employees generally concerning or relating to the Stock Purchase. Neither
the Shareholders, nor the Company nor PA&E, nor any person affiliated with any
of them, will issue or approve a news release or other announcement concerning
this transaction without the prior written consent of the other party, except
for announcements, reports or any other information which PA&E believes on the
advice of counsel to be required to be disclosed by applicable securities laws.
Except as otherwise required by applicable securities laws or other applicable
law or as agreed by the parties, the terms of this Agreement will be
confidential.
3.6 Notice of Breach.
3.6.1 By the Shareholders. The Shareholders will immediately give
written notice to PA&E of the occurrence of any event or the failure of any
event to occur that results in a breach of any representation or warranty by the
Shareholders, or a failure by the Shareholders to comply with any covenant,
condition or agreement contained in this Agreement.
3.6.2 By PA&E. PA&E will immediately give written notice to the
Shareholders of the occurrence of any event or the failure of any event to occur
that results in a breach of any representation or warranty by PA&E or a failure
by PA&E or to comply with any covenant, condition or agreement contained in this
Agreement.
3.7 Company Shareholder Approval. The Shareholders covenant and agree that
a meeting of the shareholders of the Company shall be held within 21 days after
receipt of the IRS Ruling, after proper notice to shareholders pursuant to the
Company's Articles of Incorporation, Bylaws and applicable law, or if practical,
a unanimous consent of the Shareholders shall be
22
<PAGE>
signed promptly after receipt of the IRS Ruling, to consider and approve the
Articles Amendments and any other action necessary to authorize the transactions
contemplated by this Agreement.
3.8 Consents. The Shareholders and PA&E will cooperate and use their
respective best efforts, between the date of this Agreement and the Closing
Date, to obtain all consents, approvals, licenses or permits that may be
required in connection with this Agreement and the transactions contemplated
hereby.
3.9 Further Assurances. Subject to the terms and conditions of this
Agreement, each of the parties agrees to use their respective best efforts to
take, or cause to be taken all actions and to do, or cause to be done, all
things necessary, proper or advisable to consummate the Stock Purchase.
3.10 No Solicitation. The Shareholders shall not, directly or indirectly,
take any of the following actions, and the Shareholders shall not permit the
Company or its officers, directors or employees, or their respective investment
bankers, attorneys, accountants, or other agents or persons retained by any of
them, directly or indirectly, to take any of the following actions: encourage,
initiate, or solicit any inquiries or the making of any proposal with respect
to, or engage in negotiations concerning, or provide any confidential
information or data to, or respond to any inquiries or proposals by, or have any
discussions with, any person or entity other than PA&E relating to any
financing, merger, acquisition, business combination, or purchase of all or
substantially all or a substantial part of the business or assets of the Company
or the acquisition of any outstanding equity securities or the issuance of any
equity securities of the Company, and they will immediately cease any existing
activities, discussions or negotiations with any parties with respect to any of
the foregoing. The Shareholders will notify PA&E immediately if any such
inquiries or proposals are received by, any such information is required or
requested from or any negotiations or discussions are sought to be initiated or
continued with the Company or with any person on behalf of the Company, and the
Shareholders will inform PA&E of the identity of the offeror or party making any
proposal and provide PA&E with a copy of all written material relating to any
such offer or proposal.
3.11 Updated ESOP Participant Information. Prior to the Closing, the ESOP
Trustee shall deliver to PA&E a complete and accurate list of all participants
in the ESOP and a complete and accurate summary of the account balance of each
participant in the ESOP, including the number of shares of Class B Common
allocable to each such account, as of the last allocation date prior to the
Closing.
ARTICLE 4.
CONDITIONS TO CLOSING
4.1 Conditions to the Obligations of PA&E. All obligations of PA&E under
this Agreement are subject to the fulfillment and satisfaction, prior to or at
Closing, of each of the following conditions, any one or more of which may be
waived by PA&E in writing:
23
<PAGE>
4.1.1 Corporate Actions. All actions required to be taken by, or on
the part of, the Company or the Shareholders to authorize the execution,
delivery and performance of this Agreement by the Shareholders, and the
consummation of the transactions contemplated by this Agreement (including
without limitation approval by the Shareholders as required by the Washington
Act of the Articles Amendments), shall have been duly and validly taken by the
Company and the Shareholders.
4.1.2 Representations and Warranties. The representations and
warranties of the Shareholders contained in this Agreement shall be true and
correct at and as of the Closing Date, with the same effect as though such
representations and warranties had been made at and as of the Closing Date.
4.1.3 Performance of Obligations. Each of the obligations of the
Shareholders required to be performed by them on or before the Closing Date
pursuant to the terms of this Agreement shall have been performed as required.
4.1.4 No Material Adverse Change. There shall have been, between the
date of this Agreement and the Closing, no Material Adverse Change.
4.1.5 Approvals; Consents. All required approvals, consents,
authorizations and waivers with regard to the transactions contemplated by this
Agreement, including those required by state and federal regulatory authorities,
approval of the Boards of Directors of PA&E and the Company, approval by the
shareholders of the Company, and, if PA&E shareholder approval is required by
law or PA&E elects to require such approval, by shareholders of PA&E, shall have
been obtained or waived, and all third-party consents and waivers required by,
or required to prevent a breach or default by the Company under, any contract,
lease, note or other document to which the Company is a party or any permit,
license or other governmental authorization held by the Company shall have been
obtained, and PA&E shall have received copies of such consents and waivers in a
form acceptable to PA&E.
4.1.6 Certificate. The Shareholders shall have delivered to PA&E a
certificate to the effect of Sections 4.1.1 through 4.1.5, signed by the
Shareholders.
4.1.7 Articles Amendments. The Articles Amendments shall have been
filed with the Secretary of State and shall have become effective.
4.1.8 Audit. If PA&E determines that it is necessary or appropriate,
the Company shall have permitted the audit of its financial statements for the
most recent three fiscal years, or for such shorter period as PA&E may
determine, by an independent accounting firm selected by PA&E.
4.1.9 Environmental Assessment. If PA&E elects to do so, PA&E shall
have obtained an environmental assessment of any real property leased by the
Company, and the results of the assessment shall be acceptable to PA&E in its
sole discretion.
24
<PAGE>
4.1.10 Capital Stock. All of the outstanding capital stock of the
Company shall be owned beneficially and of record by the Individual Shareholders
and the ESOP, and there shall be no agreements or other rights, other than this
Agreement, pursuant to which any person or entity would have any right to
acquire any securities of the Company either from the Company or from the
Shareholders.
4.1.11 IRS Letter Ruling. A private letter ruling shall be requested
and obtained from the IRS that (i) the sale by the ESOP to PA&E for cash and the
immediate repayment of the ESOP Debt will not cause the ESOP Debt to fail to be
exempt from the prohibited transition rules of ERISA and the Code; and (ii) the
allocation of the net proceeds of the sale of unallocated shares to participant
accounts will not be treated as annual additions under Code section 415, or
alternatively, will not cause annual additions under the ESOP to exceed the
limits in Code section 415 (the "IRS Ruling").
4.1.12 Employment Agreements. PA&E shall have received fully executed
employment agreements substantially as attached hereto as Exhibit B between the
Company and each of Hans Herrmann and Karl Herrmann, which shall be for a period
of 3 years after the Closing (the "Employment Agreements"), and PA&E shall have
received fully executed employment contracts between the Company and such other
employees of the Company as PA&E shall designate.
4.1.13 Lease Amendments. The Company and HHD Associates shall have
executed and delivered mutually agreeable lease amendments (the "Lease
Amendments").
4.1.14 Shareholders' Accounts. Any amounts owed by Shareholders to the
Company, as set forth on Schedule 2.1.19, shall have been paid to the Company,
and any amounts owed by the Company to its shareholders, as set forth in
Schedule 2.1.19, shall have been canceled, and there shall be no other amounts
receivable from or payable to the Shareholders by the Company, other than for
compensation for the current pay period coming due in the ordinary course of
business.
4.1.15 Agreement Amendments. The Agreement Amendments shall have been
duly executed and delivered by the parties thereto and shall have become
effective.
4.1.16 ESOP Valuation. The ESOP shall engage a valuation expert who
shall provide a valuation of the respective interests of the ESOP and the
Individual Shareholders in Nova-Tech, such valuation to be as of a date
immediately prior to the Closing, and who shall render an opinion that the ESOP
is receiving adequate consideration within the meaning of section 3(18) of ERISA
for its ESOP Shares and that the transaction is fair to the ESOP from a
financial point of view (the foregoing valuation and opinion referred to herein
as the "ESOP Valuation").
4.1.17 Further Documents. The Company and the Shareholders shall have
executed and delivered any other documents and rendered any other performance
necessary to consummate the transactions contemplated by this Agreement.
25
<PAGE>
4.2 Conditions to the Obligations of the Shareholders. All obligations of
the Shareholders under this Agreement are subject to the fulfillment and
satisfaction, prior to or at Closing, of each of the following conditions, any
one or more of which may be waived by the Shareholders in writing:
4.2.1 Corporate Actions. All actions required to be taken by, or on
the part of, PA&E to authorize the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated by this
Agreement shall have been duly and validly taken by PA&E.
4.2.2 Representations and Warranties. The representations and
warranties of PA&E contained in this Agreement shall be true and correct at and
as of the Closing Date, with the same effect as though such representations and
warranties had been made at and as of the Closing Date.
4.2.3 Performance of Obligations. Each of the obligations of PA&E
required to be performed by PA&E on or before the Closing Date pursuant to the
terms of this Agreement shall have been performed as required.
4.2.4 Certificate. PA&E shall have delivered to the Shareholders a
certificate to the effect of Sections 4.2.1 through 4.2.3, signed by the
President of PA&E.
4.2.5 IRS Letter Ruling. The IRS Ruling shall have been requested and
obtained.
4.2.6 Employment Agreements. The Company shall have executed and
delivered the Employment Agreements with each of Hans Herrmann and Karl
Herrmann.
4.2.7 Lease Amendments. The Company and HHD Associates shall have
executed and delivered the Lease Amendments.
4.2.8 Further Documents. PA&E shall have executed and delivered any
other documents and rendered any other performance necessary to consummate the
transactions contemplated by this Agreement.
4.3 Additional Condition to the Obligations of the ESOP. In addition to the
conditions of the Shareholders set forth in Section 4.2, all obligations of the
ESOP under this Agreement are subject to the fulfillment and satisfaction, prior
to or at Closing, of the following condition, which may be waived by the ESOP in
writing.
4.3.1 ESOP Valuation. The ESOP shall have received the ESOP Valuation,
and the ESOP Valuation shall be in form and substance reasonably acceptable to
the ESOP Trustee.
26
<PAGE>
ARTICLE 5.
INDEMNIFICATION
5.1 Indemnification by the Individual Shareholders. Notwithstanding any
investigation by PA&E and subject to Section 5.3.1, from and after the Closing,
the Individual Shareholders, jointly and severally, shall indemnify, hold
harmless and defend PA&E and its subsidiaries, shareholders, affiliates,
officers, directors, employees, agents, successors and assigns (the "PA&E
Indemnified Persons") from and against, and reimburse each of them with respect
to, any and all losses, damages, liabilities, costs, and expenses, including
without limitation interest, penalties and reasonable attorneys' fees
(collectively, "Damages") incurred by any of them based on or arising out of:
(a) any breach or inaccuracy of any representation or warranty of the Individual
Shareholders made in this Agreement or any exhibit, schedule, certificate or
agreement delivered in accordance with this Agreement (collectively the "Related
Documents"), or (b) any failure by the Shareholders to perform any covenant
required to be performed by them pursuant to this Agreement or any of the
Related Documents.
5.2 Indemnification by PA&E. Notwithstanding any investigation by the
Individual Shareholders, and subject to Section 5.3.2, from and after the
Closing, PA&E shall indemnify, hold harmless and defend the Individual
Shareholders and their agents, successors, heirs and assigns from and against,
and reimburse each of them with respect to, any and all Damages incurred by any
of them based on or arising out of: (a) any breach or inaccuracy of any
representation or warranty of PA&E made in this Agreement or any Related
Document, or (b) any failure by PA&E to perform any covenant required to be
performed by it pursuant to this Agreement or any Related Document.
5.3 Limits on Indemnification.
5.3.1 Limits on Liability of the Individual Shareholders.
Notwithstanding the foregoing, the liability of the Individual Shareholders
under Section 5.1 shall be subject to the following limitations:
a. Indemnification Period. No claim for indemnity will be
effective unless written notice of such claim is given pursuant to this
Agreement to the Individual Shareholders within two years after the Closing Date
(the "Indemnification Period"), except that claims based upon Sections 2.1.8,
2.1.13, 2.1.15, 2.1.17(a) or 2.1.17(c) or upon the assertion that any of the
Individual Shareholders had actual knowledge that a representation or warranty
made by the Individual Shareholders was false when made or was made with the
intent to deceive may be made at any time until expiration of the applicable
statute of limitations.
b. Amount of Indemnification. The Individual Shareholders shall
not have any obligation to make any indemnification payments until the PA&E
Indemnified Persons have suffered Damages exceeding $25,000 in the aggregate
from all matters as to which they are entitled to indemnification pursuant to
this Article 5 (at which point the indemnification obligation of the Individual
Shareholders shall cover all Damages in excess of $25,000). The maximum
27
<PAGE>
aggregate amount of liability of the Individual Shareholders for claims made on
or before the first anniversary of the Closing Date shall be limited to
$570,000. After the first anniversary of the Closing Date, the maximum aggregate
amount of liability of the Individual Shareholders will be automatically reduced
to $400,000. Notwithstanding the other provisions of this Section 5.3.1(b),
there shall be no limit on each Individual Shareholders' liability for claims
based upon the assertion that any of the Individual Shareholders had actual
knowledge that a representation or warranty made by the Individual Shareholders
was false when made or was made with the intent to deceive.
5.3.2 Limits on Liability of PA&E. The liability of PA&E pursuant to
Section 5.2 is limited as follows:
a. Indemnification Period. No claim for indemnity will be
effective unless written notice of such claim is given pursuant to this
Agreement to PA&E within two years after the Closing Date (the "Indemnification
Period"), except that claims based upon the assertion that PA&E had actual
knowledge that a representation or warranty made by PA&E was false when made or
was made with the intent to deceive, may be made at any time until expiration of
the applicable statute of limitations.
b. Amount of Indemnification. PA&E shall not have any obligation
to make any indemnification payments until the Individual Shareholders have
suffered Damages exceeding $25,000 in the aggregate from all matters as to which
they are entitled to indemnification pursuant to this Article 5 (at which point
the indemnification obligation of PA&E shall cover all Damages in excess of
$25,000). The maximum aggregate amount of PA&E's liability for claims made on or
before the first anniversary of the Closing Date shall be limited to $570,000.
After the first anniversary of the Closing Date, the maximum aggregate amount of
liability of PA&E will be automatically reduced to $400,000. Notwithstanding the
other provisions of this Section 5.3.2(b), there shall be no limit on PA&E's
liability for claims based upon the assertion that PA&E had actual knowledge
that a representation or warranty made by PA&E was false when made or was made
with the intent to deceive.
5.4 Indemnification Procedure.
5.4.1 Third Party Claims.
a. Each indemnified party will, promptly after obtaining
knowledge of a claim, provide the indemnifying party with written notice of all
third party actions, suits, proceedings, claims, demands or assessments that may
be subject to the indemnification provisions of this Article 5 (collectively,
"Third Party Claims"), including, in reasonable detail, the basis for the claim,
the nature of Damages and a good faith estimate of the amount of Damages.
b. The indemnifying party shall have 15 days after its receipt of
the claim notice to notify the indemnified party in writing whether the
indemnifying party agrees that the claim is subject to this indemnification
under this Article 5 and, if so, whether the indemnifying party elects to
undertake, conduct and control, through counsel of its choosing
28
<PAGE>
(subject to the consent of the indemnified party, such consent not to be
withheld unreasonably), and at its sole risk and expense, the good faith
settlement or defense of the Third Party Claim.
c. If, within 15 days after its receipt of the claim notice, the
indemnifying party notifies the indemnified party that it elects to undertake
the good faith settlement or defense of a Third Party Claim, the indemnified
party shall reasonably cooperate with the indemnifying party, including, without
limitation, by making available to the indemnifying party all relevant
information material to the defense of the Third Party Claim. The indemnified
party shall be entitled to participate in the settlement or defense of the Third
Party Claim through counsel chosen by the indemnified party, at its expense, and
to approve any proposed settlement that would impose any obligation or duty on
the indemnified party, which approval may, in the sole discretion of the
indemnified party, be withheld. So long as the indemnifying party is contesting
the Third Party Claim in good faith and with reasonable diligence, the
indemnified party shall not pay or settle the Third Party Claim. Notwithstanding
the foregoing, the indemnified party shall have the right to pay or settle any
Third Party Claim at any time, if it waives any right to indemnification
therefor by the indemnifying party.
d. If the indemnifying party does not provide notice that it
elects to undertake the good faith settlement or defense of a Third Party Claim,
or if the indemnifying party fails to contest the Third Party Claim or undertake
or approve settlement, in good faith and with reasonable diligence, the
indemnified party shall thereafter have the right to contest, settle or
compromise the Third Party Claim at its exclusive discretion, at the risk and
expense of the indemnifying party.
5.4.2 Non-Third Party Claims.
a. Each indemnified party will, with reasonable promptness,
deliver to the indemnifying party written notice of all claims for
indemnification under this Article 5, other than Third Party Claims, including,
in reasonable detail, the basis for the claim, the nature of Damages and a good
faith estimate of the amount of Damages.
b. The indemnifying party shall have 30 days after its receipt of
the claim notice to notify the indemnified party in writing whether the
indemnifying party accepts liability for all or any part of the Damages
described in the claim notice. If the indemnifying party does not so notify the
indemnified party, the indemnifying party shall be deemed to accept liability
for all the Damages described in the claim notice.
5.5 Exclusivity. The exclusive remedy of either party for damages or other
monetary relief based on claims arising under this Agreement shall be the
indemnification provisions set forth herein; provided that, notwithstanding the
foregoing, (i) each party shall retain the right to pursue any claims in equity
that may be available (whether for specific performance, injunction or other
equitable remedy) with respect to the nonperformance or breach of any obligation
required to be performed hereunder, and (ii) each party shall further retain the
right to obtain damages or other monetary relief against the other party or
parties based upon an assertion that any of the other parties had actual
knowledge that a representation or warranty made by the other parties was false
when made or was made with the intent to deceive. A party's failure to give
29
<PAGE>
timely notice of a claim relating to the indemnity will not constitute a defense
(in part or in whole) to any claim for indemnification by such party, unless,
and only to the extent that, such failure results in any material prejudice to
the indemnifying party.
5.6 Waiver of Certain Indemnity Rights. Effective upon the Closing, Hans
Herrmann in his capacity as a current or former trustee of the ESOP, and Karl
Herrmann in his capacity as a current or former trustee of the ESOP (each a
"Trustee"), each hereby irrevocably waives any right either Trustee or both
Trustees may now or hereafter have to indemnity from the Company for any acts or
omissions of such Trustees or either of them that (i) relate to the Stock
Purchase or any of the actions contemplated by this Agreement, or (ii) occurred
prior to the Closing Date.
5.7 Actual Knowledge. To the extent that any party has actual knowledge
prior to the Closing, without having any obligation to undertake any factual
inquiry or investigation, that any representation or warranty made by another
party in this Agreement is untrue, the representing or warranting party shall
have no liability with respect to specific facts that were known to be untrue.
5.8 Insurance Recoveries. In the event that any party actually receives
insurance proceeds with respect to an event or condition that would be subject
to a claim for indemnification under this Article 5, the amount of such recovery
will be deducted from the Damages claimed hereunder.
ARTICLE 6.
TERMINATION
6.1 Right to Terminate. Notwithstanding anything to the contrary in this
Agreement, this Agreement may be terminated and the transactions contemplated in
this Agreement abandoned at any time prior to the Closing:
6.1.1 Mutual Consent. By mutual consent of PA&E and the Shareholders.
6.1.2 Delay. By either PA&E or the Shareholders, if the Closing shall
not have occurred by May 31, 2000. However, the right to terminate this
Agreement under this Section 6.1.2 shall not be available to any party whose
failure to fulfill any obligation under this Agreement has been the cause of, or
resulted in, the failure of the Closing to occur on or before such date.
6.1.3 Breach by PA&E. By the Shareholders (if they are not in breach
of this Agreement), if PA&E breaches any of its representations and warranties
in any material respect or fails to comply in any material respect with any of
its obligations or agreements contained in this Agreement.
6.1.4 Breach by the Individual Shareholders. By PA&E (if it is not in
breach of this Agreement), if any of the Individual Shareholders breach any of
their representations and
30
<PAGE>
warranties in any material respect or fail to comply in any material respect
with any of their obligations or agreements contained in this Agreement.
6.1.5 Failure of the Company Shareholders to Approve. By PA&E, if a
unanimous consent or a meeting of shareholders of the Company has not occurred
as required by Section 3.7, or a meeting having been duly held, if the
shareholders of the Company fail to approve the Articles Amendment and any other
action necessary to authorize the transactions contemplated by this Agreement,
within 21 days after the receipt of the IRS Ruling.
6.2 Certain Obligations to Cease. If this Agreement is terminated pursuant
to Section 6.1, all obligations of the parties to this Agreement shall terminate
and there shall be no liability of any party to this Agreement to any other
party, except: (a) for breaches of Section 3.3 or 3.10, and (b) that nothing in
this Agreement will relieve any party from liability for any willful breach of
this Agreement.
ARTICLE 7.
MISCELLANEOUS PROVISIONS
7.1 Survival. Except as stated below, the representations and warranties
contained in this Agreement shall survive for a period of two years after the
Closing Date. The representations and warranties in Sections 2.1.8, 2.1.13,
2.1.15, 2.1.17(a) or 2.1.17(c) shall survive for the applicable statute of
limitations.
7.2 Exhibits; Schedules. Each Exhibit to this Agreement and each Schedule
delivered pursuant to the terms of this Agreement is incorporated into this
Agreement by reference.
7.3 Notices. Any notice or other communications required or permitted under
this Agreement shall be sufficiently given if in writing and shall be deemed
given or made when delivered personally, by facsimile, or by courier (with
signed receipt), or three days after sent by certified or registered mail,
return receipt requested, to the following addresses or to such other address as
a party may designate in writing to the others:
To PA&E: With a copy to:
Pacific Aerospace & Electronics, Inc. Stoel Rives LLP
110 Main Street, Suite 100 600 University St., Suite 3600
Edmonds, WA 98020 Seattle, WA 98101-3197
Facsimile: (425) 774-0103 Facsimile: (206) 386-7500
Attention: Sheryl A. Symonds, Attention: L. John Stevenson, Jr.
General Counsel
To the Individual Shareholders: With a copy to:
31
<PAGE>
Mr. Hans Herrmann Karr Tuttle Campbell
512 N.W. 195th 1201 Third Avenue, Suite 2900
Shoreline, WA 98177 Seattle, WA 98101-3028
Facsimile: (206) 682-7100
Mr. Karl Herrmann Attention: Walter M. Maas III
7200 - 34th N.W.
Seattle, WA 98117
To the ESOP: With a copy to:
NOVA-TECH Engineering, Inc. Lukins & Annis, P.S.
Employee Stock Ownership Trust 1600 Washington Trust
Alaska Trust Company, Trustee Financial Center
1029 - 3rd Ave., Suite 601 West 717 Sprague Avenue
Anchorage, Alaska 99501-1649 Spokane, WA 99201-0466
Facsimile: (907) 258-1649 Facsimile: (509) 747-2323
Attention: Douglas J. Blattmachr Attention: Philip J. Carstens, Jr.
7.4 No Assignment. Neither this Agreement nor any rights or obligations
hereunder may be assigned by operation of law or otherwise.
7.5 Titles and Captions. The section titles, captions and headings in this
Agreement are for convenience only and shall not be deemed part of this
Agreement or in any way intended to define, limit, extend or define the scope or
intent of any provisions of this Agreement.
7.6 Waiver. No failure by any party to this Agreement to insist upon the
strict performance of any covenant, duty, agreement, or condition of this
Agreement or to exercise any right or remedy consequent upon a breach thereof
shall constitute a waiver of any such breach or of such or any other covenant,
agreement, term or condition. Any party by notice pursuant to this Agreement
may, but shall be under no obligation to, waive any of its rights or any
conditions to its obligations under this Agreement, or any duty, obligation or
covenant of any other party. No waiver shall affect or alter the remainder of
this Agreement but each and every other covenant, agreement, term and condition
of this Agreement shall continue in full force and effect with respect to any
other then existing or subsequently occurring breach.
7.7 Amendment. This Agreement may be amended with respect to any provision
contained in this Agreement by a written instrument duly executed on behalf of
each party to this Agreement.
7.8 Severability. If any condition, covenant or other provision in this
Agreement is held to be invalid, void or unenforceable by a court of competent
jurisdiction, the same shall be deemed severable from the remainder of this
Agreement and shall in no way affect any other covenant, condition or provision
of this Agreement. If such condition, covenant or other provision shall be
deemed invalid due to its scope or breadth, such provision shall be deemed
reformed and valid to the extent of the scope or breadth permitted by law.
32
<PAGE>
7.9 Rights and Remedies. The rights and remedies of the parties under this
Agreement shall not be mutually exclusive and the exercise of one or more of the
provisions of this Agreement shall not preclude the exercise of any other
provision.
7.10 Attorney Fees. In the event of any legal action arising from or
relating to this Agreement, the non-prevailing party shall reimburse the
prevailing party for all of the prevailing party's costs and expenses, including
reasonable attorney fees, incurred in legal action.
7.11 Expenses. PA&E shall pay all fees and expenses (including attorney
fees) incurred by PA&E, and the Shareholders shall pay all fees and expenses
(including attorney fees) incurred by the Shareholders and the Company, with
respect to the negotiation and execution of this Agreement and the closing of
the transactions contemplated by this Agreement, except that: (i) the costs of
requesting and obtaining the IRS Ruling shall be borne 50% by PA&E and 50% by
the Shareholders; (ii) the Excise Tax shall be borne 50% by PA&E and 50% by the
Shareholders; and (iii) the costs of any audit required by PA&E pursuant to
Section 4.1.8 shall be paid by PA&E.
7.12 Governing Law. This Agreement and the Stock Purchase shall be governed
by and construed in accordance with the laws of the State of Washington, without
giving effect to conflicts of laws principles.
7.13 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement.
7.14 Entire Agreement. This Agreement, including the attached Schedules and
Exhibits, and the Confidentiality Agreement, constitute the entire agreement
between the parties and supersede all prior agreements or understandings between
parties, written or oral, as to the subject matter of this Agreement.
33
<PAGE>
Executed as of the date first written above.
SHAREHOLDERS:
/s/ HANS HERRMANN
-----------------------------------------
Hans Herrmann
/s/ KARL HERRMANN
-----------------------------------------
Karl Herrmann
NOVA-TECH Engineering, Inc. Employee
Stock Ownership Trust
By Alaska Trust Company
Its Trustee
By /s/ DOUGLAS J. BLATTMACHR
--------------------------------------
Its President and CEO
----------------------------------
PA&E:
PACIFIC AEROSPACE & ELECTRONICS, INC.
By /s/ DONALD A. WRIGHT
--------------------------------------
Donald A. Wright
Its President
34
<PAGE>
Consent of Spouse
The undersigned spouse of Hans Herrmann hereby joins in, consents to and
agrees to be bound by the foregoing Stock Purchase Agreement, to the extent
necessary to bind the marital community.
Dated as of October 7, 1999.
/s/ HEIDI U. HERRMANN
-----------------------------------------
Please Print Name: Heidi U. Herrmann
----------------------
Confirmation
The undersigned Karl Herrmann hereby confirms, represents and warrants to
PA&E that he is not married.
Dated as of October 6, 1999.
/s/ KARL HERRMANN
-----------------------------------------
Karl Herrmann
35
<PAGE>
List of Exhibits and Schedules to the Stock Purchase Agreement
The following list briefly identifies the contents of all exhibits and schedules
to the Stock Purchase Agreement, dated October 11, 1999, between Pacific
Aerospace & Electronics, Inc. and the shareholders of Nova-Tech Engineering,
Inc. (the "Agreement"). All of the exhibits and schedules listed below are
omitted from the Agreement filed as Exhibit 2.1 to the foregoing quarterly
report on Form 10-Q, pursuant to Regulation S-K, item 601(b)(2). The registrant
agrees to furnish supplementally a copy of any of the omitted exhibits and
schedules to the Securities and Exchange Commission upon request.
Exhibits:
Exhibit A - Agreement Amendments
Exhibit B - Employment Agreements
Schedules:
Schedule 2.1.2 Capitalization
Schedule 2.1.3 Interests in Other Entities
Schedule 2.1.5(b) Absence of Undisclosed Liabilities
Schedule 2.1.5(c) Accounts Receivable
Schedule 2.1.6 Litigation
Schedule 2.1.7 Absence of Changes
Schedule 2.1.8 Taxes
Schedule 2.1.9 Compliance With Laws
Schedule 2.1.10 Contracts
Schedule 2.1.11 Intellectual Property
Schedule 2.1.12 Insurance Policies
Schedule 2.1.13 Environmental Matters
Schedule 2.1.14 Labor Matters
Schedule 2.1.15 Employee Benefit Matters
Schedule 2.1.16 Employee Matters
Schedule 2.1.17(a) Real Property
Schedule 2.1.17(c) Tangible Personal Property
Schedule 2.1.18 Permits and Licenses
Schedule 2.1.19 Certain Interests
Schedule 2.1.21 Consents and Approvals (Company)
Schedule 2.1.23 Warranties
Schedule 2.2.6 Consents and Approvals (PA&E)
DEMAND PROMISSORY NOTE
Principal: $300,000.00 Bothell, WA
June 29, 1999
1. Promise to Pay. FOR VALUE RECEIVED, ORCA TECHNOLOGIES, INC., a Utah
corporation ("Borrower"), unconditionally promises to pay to the order of
PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington corporation ("Lender")
at 430 Olds Station Road, Wenatchee, Washington 98801, or at such other
place as the holder hereof from time to time may designate in writing, the
principal sum of THREE HUNDRED THOUSAND DOLLARS ($300,000.00), plus
interest and such other sums as are payable under the terms of this Note.
Lender agrees that demand for payment shall not occur prior to August 5,
1999.
2. Payments. All unpaid principal, interest and other sums owing under this
Note shall be due and payable on demand. Borrower may completely or
partially prepay this Note at any time or from time to time without
penalty. Payments shall be applied first to accrued interest, costs and
expenses payable under this Note and then to principal.
3. Interest. Interest shall accrue on the unpaid principal balance of this
Note from the date hereof at the rate of twelve percent (12%) per annum
until the date on which Lender demands payment ("Demand Date"). If Borrower
fails to pay all amounts due under this Note on the Demand Date, then
interest shall accrue thereafter on the unpaid principal balance at the
rate of eighteen percent (18%) per annum until this Note is paid in full.
4. Security. This Note is secured by a security interest in all Borrower's
tangible and intangible assets, according to a security agreement (the
"Security Agreement") of even date herewith, executed by Borrower in favor
of Lender and a UCC-1 Financing Statement filed with the Secretary of State
of the State of Washington in connection therewith. Additional rights and
obligations of Lender and Borrower are set forth in the Security Agreement.
5. Default; Acceleration. Borrower shall be in default under this Note if (i)
Borrower fails to pay all amounts due hereunder on the Demand Date or (ii)
if an event of default occurs under the terms of the Security Agreement.
Upon an event of default under the Security Agreement, unless and until
cure has been accomplished within time allowed for cure (if any), at the
option of the holder of this Note and without notice to the Borrowers of
the default, the entire indebtedness represented by this Note shall become
immediately due and payable and interest shall thereafter accrue on the
unpaid balance of principal due under this Note at the rate of eighteen
percent (18%) per annum. Upon default under this Note, Lender may exercise
any rights available to it under the Security Agreement or by applicable
law.
-1-
<PAGE>
6. Attorneys' Fees. If any action, judicial or nonjudicial, is brought on this
Note, or if it is placed in the hands of an attorney for collection or
advice following the expiration of the cure period (if any) for any
default, then Borrower promises to pay all of Lender's costs and expenses
in connection therewith, including without limitation reasonable attorneys'
fees incurred and paid by holder in connection herewith through any appeal
or in bankruptcy. All such costs and attorneys' fees shall bear interest
from the date incurred until paid at the default interest rate.
7. Waivers. Borrower, all endorsers, and all persons liable or to become
liable on this Note hereby waive presentment, demand, protest and notice of
demand, protest and nonpayment, and any defense or claim that resort must
first be had to any security or to any other person, and authorize the
holder of this Note, without affecting its liability hereunder, from time
to time, to renew, extend, or change the time for payment or the other
terms of this Note, to take and hold security for the payment of this Note,
to release or exchange the security therefor, to apply any such security to
such obligations as the holder may determine in its sole discretion, and to
release, substitute, or add to those liable or to become liable on this
Note.
8. Authorization. Borrower and the officer signing below on its behalf
represent and warrant to Lender that: (a) Borrower is a corporation duly
organized and validly existing under the laws of Utah; (b) Borrower has
taken all corporate action necessary to authorize execution and delivery of
this Note and performance of its obligations under this Note and the
Security Agreement; (c) Borrower has duly executed and delivered this Note
to Lender; and (d) this Note is the valid and binding obligation of
Borrower in accordance with its terms.
9. Governing Law. This Note shall be governed by and construed in accordance
with the laws of the State of Washington, United States of America, without
regard to conflict of laws rules.
10. Successors and Assigns. The provisions of this Note shall inure to the
benefit of and be binding on any successor to Borrower and shall extend to
any holder hereof.
BORROWER:
ORCA TECHNOLOGIES, INC.
By /s/ ROGER P. VALLO
-------------------------------------
Its Chairman & CEO
-------------------------------
SECURITY AGREEMENT
------------------
DATED: June 29, 1999
FROM: ORCA TECHNOLOGIES, INC.
DEBTOR
TO: PACIFIC AEROSPACE & ELECTRONICS, INC.
430 Olds Station Road
Wenatchee, WA 98801 SECURED PARTY
FOR VALUE RECEIVED, and to secure both the payment of the Indebtedness and
the performance of the obligations owed to Secured Party under this Security
Agreement and the Related Agreements, Debtor grants Secured Party a security
interest in the Collateral, in accordance with the definitions and terms set
forth below:
1. Definitions.
1.1 Indebtedness. "Indebtedness" shall mean all amounts now or
hereafter owed by Debtor to Secured Party, whether or not evidenced by a
promissory note or notes and whether direct, indirect, or contingent.
1.2 Related Agreements. The "Related Agreements" shall mean the
promissory note of even date herewith, in the principal amount of $300,000.00,
made by Debtor in favor of Secured Party, and any other present or future
agreement between Debtor and Secured Party evidencing any part of the
Indebtedness.
1.3 Collateral. The "Collateral" shall be all tangible and intangible
property of Debtor, whether now owned or hereafter acquired, whether now
existing or hereafter arising, or in which Debtor now has or hereafter acquires
any rights, including without limitation:
(1) All furniture, leasehold improvements, motor vehicles,
appliances, fixtures, furnishings, tools, machinery and equipment and other
goods of Debtor, now owned or hereafter acquired, and all additions and
accessions thereto and replacements therefor;
(2) All inventory, supplies and materials of Debtor now owned or
hereafter acquired, together with all additions and accessions thereto and
replacements therefor;
(3) All accounts, accounts receivable, negotiable documents,
notes, drafts, acceptances, claims, lease rights (to the extent they are
assignable without consent of the lessor), securities, instruments, choses in
action, whether in contract or in tort, proceeds of
<PAGE>
lawsuits, and general intangibles of Debtor (including, but not limited to
goodwill, permits, licenses, trademarks, trade names and trade secrets), and all
other rights of Debtor to the payment of money, now existing or hereafter
arising;
(4) All deposit accounts of Debtor maintained with any bank or
other financial institution;
(5) All records, papers and books of account or other documents
or papers relating to, affecting or describing any of the foregoing Collateral,
in whatever form, including without limitation all computerized records,
diskettes, programs, etc. relating thereto;
(6) All of Debtor's contract rights and proceeds of insurance
policies;
(7) All of Debtor's patents and patents pending;
(8) All of Debtor's stock in and to subsidiaries wholly owned by
Debtor; and
(9) All proceeds of the foregoing Collateral. For purposes of
this Security Agreement, the term "proceeds" includes whatever is receivable or
received when Collateral or proceeds is sold, collected, exchanged or otherwise
disposed of, whether such disposition is voluntary or involuntary, and includes,
without limitation, all rights to payment, including return premiums, with
respect to any insurance relating thereto.
2. Obligations of Debtor. Debtor warrants and covenants:
2.1 Payment and Performance. Debtor shall pay to Secured Party
promptly when due all amounts payment of which is secured by this Security
Agreement and shall strictly perform all obligations imposed upon Debtor by this
Security Agreement and the Related Agreements.
2.2 Perfection of Security Interest. Debtor agrees to execute
financing statements and to take whatever other action is requested by Secured
Party to perfect and continue Secured Party's security interest in the
Collateral. Any certificate of title existing on any of the Collateral will be
endorsed and delivered to Secured Party reciting Secured Party's security
interest. Debtor hereby appoints Secured Party Debtor's attorney in fact for the
purpose of executing any documents necessary to perfect or continue the security
interest. Secured Party may file copies or reproductions of this Security
Agreement as a financing statement at any time and without further authorization
from Debtor. Debtor will reimburse Secured Party for all expenses incurred in
perfecting or continuing this security interest.
2.3 Removal of Collateral. Debtor warrants that the Collateral is
located at Debtor's address set forth above. Except in the ordinary course of
Debtor's business, Debtor shall not remove the Collateral from its location
without the prior written consent of Secured Party, which shall not be
unreasonably withheld. To the extent the Collateral constitutes
2
<PAGE>
vehicles, Debtor shall not take or permit any action which would require
registration of the vehicles outside of the State of Washington without the
prior written consent of Secured Party.
2.4 Transactions Involving Collateral. Except for inventory sold in
the ordinary course of Debtor's business, Debtor shall not sell, offer to sell,
or otherwise transfer the Collateral. Debtor shall not pledge, mortgage,
encumber, or otherwise permit the Collateral to be subject to any lien, security
interest, or charge, other than the security interest in favor of Secured Party
and those created prior to the date hereof, without the prior written consent of
Secured Party.
2.5 Title. Debtor warrants that it holds good and marketable title to
the Collateral subject only to the lien of this Security Agreement and security
interests created prior to the date hereof and that Debtor has full power and
authority to execute this Security Agreement, to perform Debtor's obligations
hereunder, and to subject the Collateral to the security interest created
hereby. Debtor shall defend Secured Party's rights against the claims and
demands of all persons.
2.6 Compliance with Laws. Debtor warrants that its use of the
Collateral complies with, and that Debtor will in the future promptly comply
with, all applicable laws, ordinances, and regulations of governmental
authorities.
2.7 Use. Debtor shall maintain the Collateral in good condition and
repair and not use the Collateral for any unlawful purpose or in any way that
would void an effective insurance policy. Debtor will not commit or permit
damage to or destruction of the Collateral or any part of the Collateral.
2.8 Taxes, Assessments, and Liens. Debtor will pay when due all taxes,
assessments, and liens upon the Collateral, its use or operation, upon this
Security Agreement, or upon any promissory notes evidencing the Indebtedness.
Debtor may withhold any such payment or may elect to contest any lien if Debtor
is in good faith conducting appropriate proceedings to contest the obligation to
pay, so long as Secured Party's interest in the Collateral is not jeopardized.
If the Collateral is subjected to a lien which is not discharged within 15 days,
Debtor shall deposit with Secured Party cash, a sufficient corporate surety
bond, or other security satisfactory to Secured Party in an amount adequate to
provide for the discharge of the lien plus any interest, costs, attorneys' fees,
or other charges that could accrue as a result of foreclosure or sale. In any
contest proceedings, Debtor shall defend itself and Secured Party and will name
Secured Party as an additional obligee under any surety bond, and Debtor shall
satisfy any final adverse judgment before enforcement against the Collateral.
2.9 Maintenance of Property Damage Insurance. Debtor shall procure and
maintain policies of fire insurance with standard extended coverage endorsements
on a replacement cost basis covering the Collateral, in an amount sufficient to
avoid application of any coinsurance clause and with loss payable to Secured
Party. Policies shall be written in amounts, in form, on terms, and with
companies reasonably acceptable to Secured Party. Upon request, Debtor shall
deliver to Secured Party certificates of coverage from each insurer containing a
stipulation that coverage will not be canceled or diminished without a minimum
of 10 days' written notice to Secured Party.
3
<PAGE>
2.10 Application of Insurance Proceeds. Debtor shall promptly notify
Secured Party of any loss or damage to the Collateral or any portion thereof
having a fair market value in excess of $1,000. Secured Party may make proof of
loss if Debtor fails to do so within 15 days of the casualty. Secured Party may,
at its election, apply the proceeds to the reduction of the Indebtedness or the
restoration and repair of the Collateral. If Secured Party elects to apply the
proceeds to restoration and repair, Debtor shall repair or replace the damaged
or destroyed Collateral in a manner satisfactory to Secured Party. Upon
satisfactory proof of such expenditure, Secured Party shall pay or reimburse
Debtor from the proceeds for the reasonable cost of repair or restoration. Any
proceeds which have not been paid out within 180 days after their receipt and
which Secured Party has not committed to the repair or restoration of the
Collateral shall be used to prepay first accrued interest and then principal of
Debtor's Indebtedness. If Secured Party holds any proceeds after payment in full
of the Indebtedness, such proceeds shall be paid to Debtor.
3. Debtor's Right to Possession. Until in default, Debtor may have
possession of the tangible personal property and beneficial use of all of the
Collateral and may use it in any lawful manner not inconsistent with this
Security Agreement or the Related Agreements.
4. Release on Full Performance. If Debtor pays all of the Indebtedness when
due and otherwise performs all the obligations imposed upon Debtor under this
Security Agreement, Secured Party shall execute and deliver to Debtor suitable
statements of termination of any financing statement on file. The filing fees
shall be paid by Debtor.
5. Default.
5.1 Events of Default. The following shall constitute events of
default:
(1) Failure to pay any portion of the Indebtedness when it is
due.
(2) Any warranty, representation, or statement made or furnished
to Secured Party by or on behalf of Debtor proves to have been false in any
material respect when made or furnished.
(3) Transfer or agreement to transfer any part or interest in the
Collateral without the prior written consent of Secured Party, to the extent
required by this Security Agreement.
(4) Dissolution, termination of existence as a going business,
insolvency on a balance sheet basis or business failure of Debtor; the
commencement by Debtor of a voluntary case under the federal bankruptcy laws or
under any other federal or state law relating to insolvency or debtor's relief;
the entry of a decree or order for relief against Debtor in an involuntary case
under the federal bankruptcy laws or under any other applicable federal or state
law relating to insolvency or debtor's relief; the appointment or the consent by
Debtor to the appointment of a receiver, trustee, or custodian of Debtor or of
any of Debtor's property; an assignment for the benefit of creditors by Debtor;
the making or suffering by Debtor of a fraudulent transfer under applicable
federal or state law; concealment
4
<PAGE>
by Debtor of any of its property in fraud of creditors; the making or suffering
by Debtor of a preference within the meaning of the federal bankruptcy law; the
imposition of a lien through legal proceedings or distraint upon any of the
property of Debtor which is not discharged or bonded in the manner permitted by
Section 2.8; or Debtor's failure generally to pay its debts as such debts become
due. The events of default in this paragraph shall apply and refer to Debtor and
to each of the individuals or entities which are collectively referred to as
"Debtor."
(5) Failure of Debtor to perform any other obligation under this
Security Agreement, the Related Agreements or any other present or future
agreement between Debtor and Secured Party evidencing the Indebtedness or
securing the Indebtedness within 10 days after receipt of written notice from
Secured Party specifying the nature of the default. No notice of default and no
opportunity to cure shall be required if during the prior 12 months Secured
Party has already sent a notice to Debtor concerning default in performance of
the same obligation.
6. Rights of Secured Party.
6.1 Rights Prior to Default or Thereafter. Secured Party and its
designated representatives or agents may examine and inspect the Collateral,
wherever located, at all reasonable times.
6.2 Rights Upon Default or Thereafter. Upon the occurrence of any
event of default and at any time thereafter, Secured Party may exercise any one
or more of the following rights and remedies:
(1) Secured Party may, but shall have no obligation to, pay and
discharge any taxes, liens and encumbrances against the Collateral or any part
thereof which Debtor has failed to discharge in a timely fashion, and pay for
any necessary maintenance and preservation of the Collateral.
(2) Secured Party may declare the entire Indebtedness immediately
due and payable, including any prepayment penalty which Debtor would be required
to pay.
(3) Secured Party may require Debtor to deliver to Secured Party
all or any portion of the Collateral and any and all certificates of title and
other documents relating to the Collateral. Secured Party may require Debtor to
assemble the Collateral and make it available to Secured Party at a place to be
designated by Secured Party which is reasonably convenient to both parties.
Secured Party also shall have full power to enter upon the property of Debtor to
take possession of and remove the Collateral.
(4) Secured Party shall have full power to sell, lease, transfer,
or otherwise deal with the Collateral or proceeds thereof in its own name or
that of Debtor. Secured Party may sell the Collateral at public auction or
private sale. Unless the Collateral threatens to decline speedily in value or is
of the type customarily sold on a recognized market, Secured Party will give
Debtor reasonable notice of the time after which any private sale or any other
intended disposition of the Collateral is to be made. The requirements of
reasonable notice shall be met if such notice is mailed by registered or
certified mail, postage prepaid, to
5
<PAGE>
the address of Debtor stated in this Security Agreement at least 10 days before
the time of the sale or disposition. Debtor shall be liable for expenses of
retaking, holding, preparing for sale, selling, or the like.
(5) Secured Party may have a receiver appointed as a matter of
right. The receiver may be an employee of Secured Party and may serve without
bond. All fees of the receiver and its attorney shall be secured hereby.
(6) Secured Party may revoke Debtor's right to collect Debtor's
accounts receivable and revenues from the Collateral and may collect the same,
either itself or through a receiver. To facilitate collection, Secured Party
may: (i) notify any account debtors of Debtor to make payments directly to
Secured Party, (ii) demand, collect, settle, and prosecute and discontinue any
suits or proceedings in respect of any or all of the Collateral, in the name of
Debtor or otherwise, (iii) and otherwise take any action which Secured Party may
deem desirable in order to realize on the Collateral.
(7) Secured Party may obtain a judgment for any deficiency
remaining in the Indebtedness due to Secured Party after application of all
amounts received from the exercise of the rights provided in this section.
Debtor shall be liable for a deficiency even if the underlying transaction is a
sale of accounts or chattel paper.
(8) Secured Party shall have and may exercise any or all of the
rights and remedies of a secured creditor under the provisions of the Uniform
Commercial Code, in addition to any other rights or remedies that may be
available at law, in equity, or otherwise.
6.3 Waiver; Election of Remedies. A waiver by either party of a breach
of a provision of this Security Agreement shall not constitute a waiver of or
prejudice the party's right otherwise to demand strict compliance with that
provision or any other provision. Election by Secured Party to pursue any remedy
shall not exclude pursuit of any other remedy, and all remedies of Secured Party
under this Security Agreement are cumulative and not exclusive. An election to
make expenditures or take action to perform an obligation of Debtor shall not
affect Secured Party's right to declare a default and exercise its remedies
under this Security Agreement.
6.4 Attorneys' Fees; Expenses. In the event suit or action is
instituted to enforce any of the terms of this Security Agreement, the
prevailing party shall be entitled to recover its reasonable attorneys' fees at
trial and on any appeal, in addition to all other sums provided by law. Whether
or not any court action is involved, all reasonable expenses incurred by Secured
Party that are necessary at any time in Secured Party's opinion for the
protection of its interest or the enforcement of its rights shall become a part
of the Indebtedness payable on demand and shall bear interest from the date of
expenditure until repaid at the same interest rate as provided in Section 7.3.
7. Indemnity. Debtor agrees to defend, indemnify and hold harmless Secured
Party and its officers, employees, and agents against (a) all obligations,
demands, claims and liabilities claimed or asserted by any other party in
connection with the transactions contemplated by this Security Agreement and (b)
all losses or expenses in any way suffered,
6
<PAGE>
incurred or paid by Secured Party as a result of or in any way arising out of,
following or consequential to transactions between Secured Party and Debtor,
whether under this Security Agreement or otherwise (including without
limitation, reasonable attorneys' fees and expenses), except for losses arising
from or out of Secured Party's gross negligence or willful misconduct.
8. Miscellaneous.
8.1 Time of Essence. Time is of the essence of this Security
Agreement.
8.2 Successor Interests. Subject to the limitations on transfer of
Debtor's interest, this Security Agreement shall be binding upon and inure to
the benefit of the parties, their successors and assigns.
8.3 Expenditure by Beneficiary. If Debtor fails to comply with any
provision of this Security Agreement, Secured Party may elect to take the
required action on Debtor's behalf, and any amount that Secured Party expends in
so doing shall be added to the Indebtedness. Amounts so added shall be payable
on demand with interest from the date of expenditure at the rate of 18 percent
(18%) per annum or at the rate the Indebtedness bears, whichever is higher, but
not in any event at a rate higher than the maximum rate permitted by law. Such
action by Secured Party shall not constitute a cure or waiver of the default or
any other right or remedy which Secured Party may have on account of Debtor's
default.
8.4 Notices. Any notice under this Security Agreement shall be in
writing and shall be effective when either delivered in person or, if mailed,
shall be deemed effective when deposited as registered or certified mail,
postage prepaid, addressed to the party at the address stated in this Security
Agreement. Any party may change its address for notices by written notice to the
other.
8.5 Invalid Provisions to Affect No Others. If any of the provisions
contained in this Security Agreement shall be invalid, illegal, or unenforceable
in any respect, the validity of the remaining provisions shall not be affected.
8.6 Changes in Writing; No Waiver. This Security Agreement and any of
its terms may only be changed, waived, discharged, or terminated by an
instrument in writing signed by the party against which enforcement of the
change, waiver, discharge, or termination is sought. Any agreement subsequently
made by Debtor or Secured Party relating to this Security Agreement shall be
superior to the rights of the holder of any intervening security interest, lien,
or encumbrance. Secured Party shall not by any act, delay, omission or otherwise
be deemed to have waived any of its respective rights or remedies hereunder, nor
shall any single or partial exercise of any right or remedy hereunder on any one
occasion preclude the further exercise thereof or the exercise of any other
right or remedy.
8.7 Applicable Law. This Security Agreement has been executed and
delivered to Secured Party in the State of Washington, and all payments are to
be made to Secured Party in the State of Washington. The law of the State of
Washington shall be applicable for the purpose of construing and determining the
validity of this Security
7
<PAGE>
Agreement and, to the fullest extent permitted by the law of any state in which
any of the Collateral is located, determining the rights and remedies of Secured
Party on default.
8.8 Joint and Several Liability. If Debtor consists of more than one
person or entity, the obligations imposed upon Debtor under this Security
Agreement shall be joint and several.
IN WITNESS WHEREOF, Debtor has caused this Security Agreement to be
duly executed as of the day and year first written above.
DEBTOR: ORCA TECHNOLOGIES, INC.
By /s/ ROGER P. VALLO
----------------------------------
Its President & CEO
-----------------------------
SECURED PARTY: PACIFIC AEROSPACE & ELECTRONICS, INC.
By /s/ DONALD A. WRIGHT
----------------------------------
Its President & CEO
-----------------------------
DEMAND PROMISSORY NOTE
Principal: $1,200,000.00 Bothell, WA
October 5, 1999
1. Promise to Pay. FOR VALUE RECEIVED, ORCA TECHNOLOGIES, INC., a Utah
corporation ("Borrower"), unconditionally promises to pay to the order of
PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington corporation ("Lender")
at 430 Olds Station Road, Wenatchee, Washington 98801, or at such other
place as the holder hereof from time to time may designate in writing, the
principal sum of ONE MILLION TWO HUNDRED THOUSAND AND NO/100 DOLLARS
($1,200,000.00), or so much thereof as may be advanced by Lender to
Borrower and outstanding from time to time, plus interest on the unpaid
outstanding principal balance of each advance and such other sums as are
payable under the terms of this Note.
2. Payments. All unpaid principal, interest and other sums owing under this
Note shall be due and payable on demand. Borrower may completely or
partially prepay this Note at any time or from time to time without
penalty. Payments shall be applied first to accrued interest, costs and
expenses payable under this Note and then to principal.
3. Interest. Interest shall accrue on the unpaid principal balance of this
Note from the date hereof at the rate of twelve percent (12%) per annum
until the date on which Lender demands payment ("Demand Date"). If Borrower
fails to pay all amounts due under this Note on the Demand Date, then
interest shall accrue thereafter on the unpaid principal balance at the
rate of eighteen percent (18%) per annum until this Note is paid in full.
4. Security. This Note is secured by a security interest in all Borrower's
tangible and intangible assets, according to a security agreement (the
"Security Agreement") dated June 29, 1999, executed by Borrower in favor of
Lender and a UCC-1 Financing Statement filed with the Secretary of State of
the State of Washington in connection therewith. Additional rights and
obligations of Lender and Borrower are set forth in the Security Agreement.
5. Default; Acceleration. Borrower shall be in default under this Note if (i)
Borrower fails to pay all amounts due hereunder on the Demand Date or (ii)
if an event of default occurs under the terms of the Security Agreement.
Upon an event of default under the Security Agreement, unless and until
cure has been accomplished within time allowed for cure (if any), at the
option of the holder of this Note and without notice to the Borrowers of
the default, the entire indebtedness represented by this Note shall become
immediately due and payable and interest shall thereafter accrue on the
unpaid balance of principal due under this Note at the rate of eighteen
percent (18%) per annum. Upon default under this Note, Lender may exercise
any rights available to it under the Security Agreement or by applicable
law.
-1-
<PAGE>
6. Attorneys' Fees. If any action, judicial or nonjudicial, is brought on this
Note, or if it is placed in the hands of an attorney for collection or
advice following the expiration of the cure period (if any) for any
default, then Borrower promises to pay all of Lender's costs and expenses
in connection therewith, including without limitation reasonable attorneys'
fees incurred and paid by holder in connection herewith through any appeal
or in bankruptcy. All such costs and attorneys' fees shall bear interest
from the date incurred until paid at the default interest rate.
7. Waivers. Borrower, all endorsers, and all persons liable or to become
liable on this Note hereby waive presentment, demand, protest and notice of
demand, protest and nonpayment, and any defense or claim that resort must
first be had to any security or to any other person, and authorize the
holder of this Note, without affecting its liability hereunder, from time
to time, to renew, extend, or change the time for payment or the other
terms of this Note, to take and hold security for the payment of this Note,
to release or exchange the security therefor, to apply any such security to
such obligations as the holder may determine in its sole discretion, and to
release, substitute, or add to those liable or to become liable on this
Note.
8. Authorization. Borrower and the officer signing below on its behalf
represent and warrant to Lender that: (a) Borrower is a corporation duly
organized and validly existing under the laws of Utah; (b) Borrower has
taken all corporate action necessary to authorize execution and delivery of
this Note and performance of its obligations under this Note and the
Security Agreement; (c) Borrower has duly executed and delivered this Note
to Lender; and (d) this Note is the valid and binding obligation of
Borrower in accordance with its terms.
9. Governing Law. This Note shall be governed by and construed in accordance
with the laws of the State of Washington, United States of America, without
regard to conflict of laws rules.
10. Successors and Assigns. The provisions of this Note shall inure to the
benefit of and be binding on any successor to Borrower and shall extend to
any holder hereof.
BORROWER:
ORCA TECHNOLOGIES, INC.
By /s/ ROGER P. VALLO
----------------------------------
Its Chairman & CEO
----------------------------
AGREEMENT REGARDING
REPAYMENT UNDER GUARANTEE
This Agreement is made as of October 5, 1999, between Pacific Aerospace &
Electronics, Inc. ("PA&E") and Orca Technologies, Inc. ("Orca").
RECITALS
--------
A. PA&E has guaranteed certain indebtedness of Orca to KeyBank National
Association (the "Bank"), in the original principal amount of $1.3 million, plus
accrued interest (the "Bank Debt").
B. PA&E has previously loaned $300,000 to Orca pursuant to a Demand
Promissory Note dated June 29, 1999, for partial payment of the Bank Debt.
C. Orca and the Bank have entered into a Modification and/or Extension
Agreement dated September 27, 1999 (the "Modification Agreement"), which
provides for a repayment program, with three payments of principal and interest
scheduled on or before October 1, 1999, November 1, 1999, and December 5, 1999.
D. Orca cannot meet the payment schedule, and PA&E, as guarantor of the
Bank Debt, has agreed to advance funds to Orca for the sole purpose of repaying
the Bank Debt.
AGREEMENT
---------
1. Loan. PA&E will loan up to $1.2 million to Orca (the "Loan") for the
sole purpose of paying the three scheduled payments of the Bank Debt (together
with the $300,000 already loaned, the "Repayment Loan"). The Loan will be made
in three separate payments, and is evidenced by a Demand Promissory Note of even
date with this Agreement. The three payments will be made directly by PA&E to
the Bank on Orca's behalf in accordance with the Modification Agreement.
2. Covenants. For so long as any amounts remain outstanding under the
Repayment Loan, Orca will not, without the prior written consent of PA&E: (i)
borrow any money; (ii) sell any capital stock or other securities; (iii) sell
any assets of Orca not in the ordinary course of business; (iv) make any
payments or investments not in the ordinary course of business; (v) pay
dividends or make other distributions to shareholders; or (vi) enter into any
transaction with respect to the merger or sale of Orca or its business. In
addition, for so long as any of the Repayment Loan is outstanding, Orca will
promptly provide PA&E with monthly, quarterly and annual financial statements
and will immediately apprise PA&E of any circumstances that might have a
material adverse effect on Orca's business.
3. Security. The Repayment Loan is secured pursuant to a Security Agreement
dated June 29, 1999.
-1-
<PAGE>
4. Indemnification. In addition to repaying the Repayment Loan, Orca agrees
to indemnify PA&E and hold it harmless against any payments PA&E makes as a
result of its guarantee of the Bank Loan, including without limitation any costs
and expenses (including reasonable attorneys' fees and expenses) related to any
such payments.
5. Governing Law. This Agreement will be governed by the laws of
Washington.
6. Attorneys' Fees. The prevailing party in arbitration or litigation
related to this Agreement is entitled to reimbursement of its reasonable
attorneys' fees and expenses, including those incurred on appeal or in a
bankruptcy proceeding.
7. Entire Agreement; Waiver; Severability. This Agreement, the Demand
Promissory Notes dated June 29, 1999 and October 5, 1999, the Security Agreement
dated June 29, 1999, and the related UCC-1 financing statement, constitute the
entire agreement of the parties with respect to the subject matter hereof. Any
agreement to waive or modify any term of this Agreement must be in writing and
signed by the parties. If any provision of this Agreement is determined to be
invalid, the remaining provisions shall remain enforceable.
PACIFIC AEROSPACE & ELECTRONICS, INC.
By /s/ DONALD A. WRIGHT
----------------------------------
Its President
----------------------------
ORCA TECHNOLOGIES, INC.
By /s/ ROGER P. VALLO
----------------------------------
Its Chairman & CEO
----------------------------
-2-
LOAN AGREEMENT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$6,300,000.00 09-07-1999 09-05-2000 3000009903 403 302 E 357577 JCT02
- -------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this
document to any particular loan or item.
- -------------------------------------------------------------------------------------------------------
</TABLE>
Borrower: PACIFIC AEROSPACE & Lender: KEYBANK NATIONAL ASSOCIATION
ELECTRONICS, INC. WEN/ML COMMERCIAL BANKING CENTER
430 OLDS STATION ROAD 102 SOUTH WENATCHEE AVENUE
WENATCHEE, WA 98801 P. O. BOX 1301 WA-31-35-0163
WENATCHEE, WA 98807
================================================================================
THIS LOAN AGREEMENT between PACIFIC AEROSPACE & ELECTRONICS, INC. ("Borrower")
and KEYBANK NATIONAL ASSOCIATION ("Lender") is made and executed on the
following terms and conditions. Borrower has received prior commercial loans
from Lender or has applied to Lender for a commercial loan or loans and other
financial accommodations, including those which may be described on any exhibit
or schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations from
Lender to Borrower, are referred to in this Agreement individually as the "Loan"
and collectively as the "Loans." Borrower understands and agrees that: (a) in
granting, renewing, or extending any Loan, Lender is relying upon Borrower's
representations, warranties, and agreements, as set forth in this Agreement; (b)
the granting, renewing, or extending of any Loan by Lender at all times shall be
subject to Lender's sole judgment and discretion; and (c) all such Loans shall
be and shall remain subject to the following terms and conditions of this
Agreement.
TERM. This Agreement shall be effective as of September 7, 1999, and shall
continue thereafter until all indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
Agreement. The word "Agreement" means this Loan Agreement, as this Loan
Agreement may be amended or modified from time to time, together with all
<PAGE>
09-07-1999 LOAN AGREEMENT Page 2
Loan No 3000009903 (Continued)
================================================================================
exhibits and schedules attached to this Loan Agreement from time to time.
Account. The word "Account" means a trade account, account receivable, or
other right to payment for goods sold or services rendered owing to
Borrower (or to a third party grantor acceptable to Lender).
Account Debtor. The words "Account Debtor" mean the person or entity
obligated upon an Account.
Advance. The word "Advance" means a disbursement of Loan funds under this
Agreement.
Borrower. The word "Borrower" means PACIFIC AEROSPACE & ELECTRONICS, INC.
The word "Borrower" also includes, as applicable, all subsidiaries and
affiliates of Borrower as provided below in the paragraph titled
"Subsidiaries and Affiliates."
Borrowing Base. The words "Borrowing Base" mean, as determined by Lender
from time to time, the lesser of (a) $6,300,000.00; or (b) 80.000% of the
aggregate amount of Eligible Accounts.
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
Collateral. The word "Collateral" means and includes without limitation all
property and assets granted as collateral security for the Loan, whether
real or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a security
interest, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien, charge, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise. The
word "Collateral" includes without limitation all collateral described
below in the section titled "COLLATERAL."
<PAGE>
09-07-1999 LOAN AGREEMENT Page 3
Loan No 3000009903 (Continued)
================================================================================
Eligible Accounts.The words "Eligible Accounts" mean, at any time, all of
Borrower's Accounts which contain selling terms and conditions acceptable
to Lender. The net amount of any Eligible Account against which Borrower
may borrow shall exclude all returns, discounts, credits, and offsets of
any nature. Unless otherwise agreed to by Lender in writing, Eligible
Accounts do not include:
(a) Accounts with respect to which the Account Debtor is an officer, an employee
or agent of Borrower.
(b) Accounts with respect to which the Account Debtor is a subsidiary of, or
affiliated with or related to Borrower or its shareholders, officers, or
directors.
(c) Accounts with respect to which goods are placed on consignment, guaranteed
sale, or other terms by reason of which the payment by the Account Debtor may be
conditional.
(d) Accounts with respect to which the Account Debtor is not a resident of the
United States, except to the extent such Accounts are supported by insurance,
bonds or other assurances satisfactory to Lender.
(e) Accounts with respect to which Borrower is or may become liable to the
Account Debtor for goods sold or services rendered by the Account Debtor to
Borrower.
(f) Accounts which are subject to dispute, counterclaim, or setoff.
(g) Accounts with respect to which the goods have not been shipped or delivered,
or the services have not been rendered, to the Account Debtor.
(h) Accounts with respect to which Lender, in its sole discretion, deems the
creditworthiness or financial condition of the Account Debtor to be
unsatisfactory.
(i) Accounts of any Account Debtor who has filed or has had filed against it a
petition in bankruptcy or an application for relief under any provision of any
state or federal bankruptcy, insolvency, or debtor-in-relief acts; or who has
had appointed a trustee, custodian, or receiver for the assets of such Account
Debtor; or who has made
<PAGE>
09-07-1999 LOAN AGREEMENT Page 4
Loan No 3000009903 (Continued)
================================================================================
an assignment for the benefit of creditors or has become
insolvent or fails generally to pay its debts (including its payrolls) as such
debts become due.
(j) Accounts with respect to which the Account Debtor is in the United States
government or any department or agency of the United States.
(k) Accounts which have not been paid in full within 90 days from the invoice
date. The entire balance of any Account of any single Account debtor will be
ineligible whenever the portion of the Account which has not been paid within 90
days from the invoice date is in excess of 50.000% of the total amount
outstanding on the Account.
(l) The entire balance of any Account of any single Account Debtor whenever any
portion of the Account has not been paid within the grace period specified
above; Accounts which are subject to retainage.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
Expiration Date. The words "Expiration Date" mean the date of termination
of Lender's commitment to lend under this Agreement.
Grantor. The word "Grantor" means and includes without limitation each and
all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all Borrowers
granting such a Security Interest.
Guarantor. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with the Indebtedness.
Indebtedness. The word "Indebtedness" means and includes without limitation
all Loans, together with all other obligations, debts and liabilities of
Borrower to
<PAGE>
09-07-1999 LOAN AGREEMENT Page 5
Loan No 3000009903 (Continued)
================================================================================
Lender, or any one or more of them, as well as all claims by Lender against
Borrower, or any one or more of them, whether now or hereafter existing,
voluntary or involuntary, due or not due, absolute or contingent,
liquidated or unliquidated; whether Borrower may be liable individually or
jointly with others; whether Borrower may be obligated as a guarantor,
surety, or otherwise; whether recovery upon such indebtedness may be or
hereafter may become barred by any statute of limitations; and whether such
indebtedness may be or hereafter may become otherwise unenforceable.
Lender. The word "Lender" means KEYBANK NATIONAL ASSOCIATION, its
successors and assigns.
Line of Credit. The words "Line of Credit" mean the credit facility
described in the Section titled "LINE OF CREDIT" below.
Loan. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this
Agreement from time to time.
Note. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note
or notes therefor.
Permitted Liens. The words "Permitted Liens" mean: (a) liens and security
interests securing indebtedness owed by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either not yet due or being
contested in good faith; (c) liens of materialmen, mechanics, warehousemen,
or carriers, or other like liens arising in the ordinary course of business
and securing obligations which are not yet delinquent; (d) purchase money
liens or purchase money security interests upon or in any property acquired
or held by Borrower in the ordinary course of business to secure
indebtedness outstanding on the date of this Agreement or permitted to be
incurred under the paragraph of this
<PAGE>
09-07-1999 LOAN AGREEMENT Page 6
Loan No 3000009903 (Continued)
================================================================================
Agreement titled "Indebtedness and Liens"; (e) liens and security interests
which, as of the date of this Agreement, have been disclosed to and
approved by the Lender in writing; and (f) those liens and security
interests which in the aggregate constitute an immaterial and insignificant
monetary amount with respect to the net value of Borrower's assets.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
Security Agreement. The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
Security Interest. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended as
a security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time
from the date of this Agreement to the Expiration Date, provided the aggregate
amount of such Advances outstanding at any time does not exceed the Borrowing
Base. Within the foregoing limits, Borrower may borrow, partially or wholly
prepay, and reborrow under this Agreement as follows:
Conditions Precedent to Each Advance. Lender's obligation to make any
<PAGE>
09-07-1999 LOAN AGREEMENT Page 7
Loan No 3000009903 (Continued)
================================================================================
Advance to or for the account of Borrower under this Agreement is subject
to the following conditions precedent, with all documents, instruments,
opinions, reports, and other items required under this Agreement to be in
form and substance satisfactory to Lender:
(a) Lender shall have received evidence that this Agreement and all Related
Documents have been duly authorized, executed, and delivered by Borrower to
Lender.
(b) Lender shall have received such opinions of counsel, supplemental opinions,
and documents as Lender may request.
(c) The security interests in the Collateral shall have been duly authorized,
created, and perfected with first lien priority and shall be in full force and
effect.
(d) All guaranties required by Lender for the Line of Credit shall have been
executed by each Guarantor, delivered to Lender, and be in full force and
effect.
(e) Lender, at its option and for its sole benefit, shall have conducted an
audit of Borrower's Accounts, books, records, and operations, and Lender shall
be satisfied as to their condition.
(f) Borrower shall have paid to Lender all fees, costs, and expenses specified
in this Agreement and the Related Documents as are then due and payable.
(g) There shall not exist at the time of any Advance a condition which would
constitute an Event of Default under this Agreement, and Borrower shall have
delivered to Lender the compliance certificate called for in the paragraph below
titled "Compliance Certificate."
Making Loan Advances. Advances under the Line of Credit may be requested
either orally or in writing by authorized persons. Lender may, but need
not, require that all oral requests be confirmed in writing. Each Advance
shall be conclusively deemed to have been made at the request of and for
the benefit of Borrower (a) when credited to any deposit account of
Borrower maintained with Lender or (b) when advanced in accordance with the
instructions of an
<PAGE>
09-07-1999 LOAN AGREEMENT Page 8
Loan No 3000009903 (Continued)
================================================================================
authorized person. Lender, at its option, may set a cutoff time, after
which all requests for Advances will be treated as having been requested on
the next succeeding Business Day.
Mandatory Loan Repayments. If at any time the aggregate principal amount of
the outstanding Advances shall exceed the applicable Borrowing Base,
Borrower, immediately upon written or oral notice from Lender, shall pay to
Lender an amount equal to the difference between the outstanding principal
balance of the Advances and the Borrowing Base. On the Expiration Date,
Borrower shall pay to Lender in full the aggregate unpaid principal amount
of all Advances then outstanding and all accrued unpaid interest, together
with all other applicable fees, costs and charges, if any, not yet paid.
Loan Account. Lender shall maintain on its books a record of account in
which Lender shall make entries for each Advance and such other debits and
credits as shall be appropriate in connection with the credit facility.
Lender shall provide Borrower with periodic statements of Borrower's
account, which statements shall be considered to be correct and
conclusively binding on Borrower unless Borrower notifies Lender to the
contrary within thirty (30) days after Borrower's receipt of any such
statement which Borrower deems to be incorrect.
COLLATERAL. To secure payment of the Line of Credit and performance of all other
Loans, obligations and duties owed by Borrower to Lender, Borrower (and others,
if required) shall grant to Lender Security Interests in such property and
assets as Lender may require (the "Collateral"), including without limitation
Borrower's present and future Accounts and general intangibles. Lender's
Security Interests in the Collateral shall be continuing liens and shall include
the proceeds and products of the Collateral, including without limitation the
proceeds of any insurance. With respect to the Collateral, Borrower agrees and
represents and warrants to Lender:
Perfection of Security Interests. Borrower agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's Security Interests in the Collateral. Upon
request of Lender, Borrower will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Borrower will note
Lender's
<PAGE>
09-07-1999 LOAN AGREEMENT Page 9
Loan No 3000009903 (Continued)
================================================================================
interest upon any and all chattel paper if not delivered to Lender for
possession by Lender. Contemporaneous with the execution of this Agreement,
Borrower will execute one or more UCC financing statements and any similar
statements as may be required by applicable law, and will file such
financing statements and all such similar statements in the appropriate
location or locations. Borrower hereby appoints Lender as its irrevocable
attorney-in-fact for the purpose of executing any documents necessary to
perfect or to continue any Security Interest. Lender may at any time, and
without further authorization from Borrower, file a carbon, photograph,
facsimile, or other reproduction of any financing statement for use as a
financing statement. Borrower will reimburse Lender for all expenses for
the perfection, termination, and the continuation of the perfection of
Lender's security interest in the Collateral. Borrower promptly will notify
Lender of any change in Borrower's name including any change to the assumed
business names of Borrower. Borrower also promptly will notify Lender of
any change in Borrower's Social Security Number or Employer Identification
Number. Borrower further agrees to notify Lender in writing prior to any
change in address or location of Borrower's principal governance office or
should Borrower merge or consolidate with any other entity.
Collateral Records. Borrower does now, and at all times hereafter shall,
keep correct and accurate records of the Collateral, all of which records
shall be available to Lender or Lender's representative upon demand for
inspection and copying at any reasonable time. With respect to the
Accounts, Borrower agrees to keep and maintain such records as Lender may
require, including without limitation information concerning Eligible
Accounts and Account balances and agings.
Collateral Schedules. Concurrently with the execution and delivery of this
Agreement, Borrower shall execute and deliver to Lender a schedule of
Accounts and Eligible Accounts, in form and substance satisfactory to the
Lender. Thereafter and at such frequency as Lender shall require, Borrower
shall execute and deliver to Lender such supplemental schedules of Eligible
Accounts and such other matters and information relating to Borrower's
Accounts as Lender may request.
<PAGE>
09-07-1999 LOAN AGREEMENT Page 10
Loan No 3000009903 (Continued)
================================================================================
Representations and Warranties Concerning Accounts. With respect to the
Accounts, Borrower represents and warrants to Lender: (a) Each Account
represented by Borrower to be an Eligible Account for purposes of this
Agreement conforms to the requirements of the definition of an Eligible
Account; (b) All Account information listed on schedules delivered to
Lender will be true and correct, subject to immaterial variance; and (c)
Lender, its assigns, or agents shall have the right at any time and at
Borrower's expense to inspect, examine, and audit Borrower's records and to
confirm with Account Debtors the accuracy of such Accounts.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
Organization. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the state of Borrower's
incorporation and is validly existing and in good standing in all states in
which Borrower is doing business. Borrower has the full power and authority
to own its properties and to transact the businesses in which it is
presently engaged or presently proposes to engage. Borrower also is duly
qualified as a foreign corporation and is in good standing in all states in
which the failure to so qualify would have a material adverse effect on its
business or financial condition.
Authorization. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not
conflict with, result in a violation of, or constitute a default under (a)
any provision of its articles of incorporation or organization, or bylaws,
or any agreement or other instrument binding upon Borrower or (b) any law,
governmental regulation, court decree, or order applicable to Borrower.
Financial Information. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the
<PAGE>
09-07-1999 LOAN AGREEMENT Page 11
Loan No 3000009903 (Continued)
================================================================================
date of the statement and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material contingent
obligations except as disclosed in such financial statements.
Legal Effect. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
Properties. Except for Permitted Liens, Borrower owns and has good title to
all of Borrower's properties free and clear of all Security Interests, and
has not executed any security documents or financing statements relating to
such properties. All of Borrower's properties are titled in Borrower's
legal name, and Borrower has not used, or filed a financing statement under
any other name for at least the last five years. Borrower discloses and
Lender acknowledges that PCT Holdings, Inc., has filed financing statements
within the last five years.
Hazardous Substances. The terms "hazardous waste", "hazardous substance,"
"disposal," "release," and "threatened releases," as used in this
Agreement, shall have the same meanings as set forth in the "CERCLA,
"SARA," the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801,
et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section
6901, et seq., or other applicable state or Federal laws, rules, or
regulations adopted pursuant to any of the foregoing. Except as disclosed
to and acknowledged by Lender in writing (note: any such disclosure appears
on the Environmental Addendum attached hereto and incorporated herein by
this reference and if there is no such addendum or the addendum is marked
"not applicable", then there has been no such disclosure), Borrower
represents and warrants that: (a) During the period of Borrower's ownership
of the properties, there has been no use, generation, manufacture, storage,
treatment, disposal, release or threatened release of any hazardous waste
or substance by any person on, under, about or from any of the properties.
(b) Borrower has no knowledge of, or reason to believe that there has been
(i) any use, generation, manufacture, storage, treatment, disposal,
release, or threatened release of any hazardous waste or substance on,
under, about or from the properties by any prior owners or
<PAGE>
09-07-1999 LOAN AGREEMENT Page 12
Loan No 3000009903 (Continued)
================================================================================
occupants of any of the properties, or (ii) any actual or threatened
litigation or claims of any kind by any person relating to such matters.
(c) Neither Borrower nor any tenant, contractor, agent or other authorized
user of any of the properties shall use, generate, manufacture, store,
treat, dispose of, or release any hazardous waste or substance on, under,
about or from any of the properties; and any such activity shall be
conducted in compliance with all applicable federal, state, and local laws,
regulations, and ordinances, including without limitation those laws,
regulations and ordinances described above. Borrower authorizes Lender and
its agents to enter upon the properties to make such inspections and tests
as Lender may deem appropriate to determine compliance of the properties
with this section of the Agreement. Any inspections or tests made by Lender
shall be at Borrower's expense and for Lender's purposes only and shall not
be construed to create any responsibility or liability on the part of
Lender to Borrower or to any other person. The representations and
warranties contained herein are based on Borrower's due diligence in
investigating the properties for hazardous waste and hazardous substances.
Borrower hereby (a) releases and waives any future claims against Lender
for indemnity or contribution in the event Borrower becomes liable for
cleanup or other costs under any such laws, and (b) agrees to indemnify and
hold harmless Lender against any and all claims, losses, liabilities,
damages, penalties, and expenses which Lender may directly or indirectly
sustain or suffer resulting from a breach of this section of the Agreement
or as a consequence of any use, generation, manufacture, storage, disposal,
release or threatened release of a hazardous waste or substance on the
properties. The provisions of this section of the Agreement, including the
obligation to indemnify, shall survive the payment of the Indebtedness and
the termination or expiration of this Agreement and shall not be affected
by Lender's acquisition of any interest in any of the properties, whether
by foreclosure or otherwise.
Litigation and Claims. No material litigation, claim, investigation,
administrative proceeding or similar action (including those for unpaid
taxes) against Borrower is pending or threatened, and no other event has
occurred which may materially adversely affect Borrower's financial
condition or properties, other than litigation, claims, or other events, if
any, that have been disclosed to and acknowledged by Lender in writing.
<PAGE>
09-07-1999 LOAN AGREEMENT Page 13
Loan No 3000009903 (Continued)
================================================================================
Taxes. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith
in the ordinary course of business and for which adequate reserves have
been provided.
Lien Priority. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or
affecting any of the Collateral directly or indirectly securing repayment
of Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lender's Security Interests and rights in and to such
Collateral.
Binding Effect. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.
Commercial Purposes. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
Employee Benefit Plans. Each employee benefit plan as to which Borrower may
have any liability complies in all material respects with all applicable
requirements of law and regulations, and (i) no Reportable Event nor
Prohibited Transaction (as defined in ERISA) has occurred with respect to
any such plan, (ii) Borrower has not withdrawn from any such plan or
initiated steps to do so, (iii) no steps have been taken to terminate any
such plan, and (iv) there are no unfunded liabilities other than those
previously disclosed to Lender in writing.
Location of Borrower's Offices and Records. Borrower's place of business,
or Borrower's chief executive office, if Borrower has more than one place
of business, is located at 430 OLDS STATION RD, WENATCHEE, WA 98801. Unless
Borrower has designated otherwise in writing this location is
<PAGE>
09-07-1999 LOAN AGREEMENT Page 14
Loan No 3000009903 (Continued)
================================================================================
also the office or offices where Borrower keeps its records concerning the
Collateral.
Year 2000. Borrower warrants and represents that all software utilized in
the conduct of Borrower's business will have appropriate capabilities and
compatibility for operation to handle calendar dates falling on or after
January 1, 2000, and all information pertaining to such calendar dates, in
the same manner and with the same functionality as the software does
respecting calendar dates falling on or before December 31, 1999. Further,
Borrower warrants and represents that the data-related user interface
functions, data-fields, and data-related program instructions and functions
of the software include the indication of the century.
Information. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be true and accurate in every material respect on the date as of which such
information is dated or certified; and none of such information is or will
be incomplete by omitting to state any material fact necessary to make such
information not misleading.
Survival of Representations and Warranties. Borrower understands and agrees
that Lender, without independent investigation, is relying upon the above
representations and warranties in extending Loan Advances to Borrower.
Borrower further agrees that the foregoing representations and warranties
shall be continuing in nature and shall remain in full force and effect
until such time as Borrower's indebtedness shall be paid in full, or until
this Agreement shall be terminated in the manner provided above, whichever
is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
Litigation. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings
or similar actions
<PAGE>
09-07-1999 LOAN AGREEMENT Page 15
Loan No 3000009903 (Continued)
================================================================================
affecting Borrower or any Guarantor which could materially affect the
financial condition of Borrower or the financial condition of any
Guarantor.
Financial Records. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and audit Borrower's books and records at all
reasonable times.
Financial Statements. Furnish Lender with, as soon as available, but in no
event later than ninety (90) days after the end of each fiscal year,
Borrower's balance sheet and income statement for the year ended, audited
by a certified public accountant satisfactory to Lender, and as soon as
available, but in no event later than sixty (60) days after the end of each
fiscal quarter, Borrower's balance sheet and profit and loss statement for
the period ended, prepared and certified as correct to the best knowledge
and belief by Borrower's chief financial officer or other officer or person
acceptable to Lender. All financial reports required to be provided under
this Agreement shall be prepared in accordance with generally accepted
accounting principles, applied on a consistent basis, and certified by
Borrower as being true and correct.
Additional Information. furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables,
inventory schedules, budgets, forecasts, tax returns, and other reports
with respect to Borrower's financial condition and business operations as
Lender may request from time to time.
Insurance. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon request
of Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be canceled or diminished without at
least ten (10) days' prior written notice to Lender. Each insurance policy
also shall include an endorsement providing that coverage in favor of
Lender will not be impaired in any way by any act, omission or default of
Borrower or any other person. In connection with all
<PAGE>
09-07-1999 LOAN AGREEMENT Page 16
Loan No 3000009903 (Continued)
================================================================================
policies covering assets in which Lender holds or is offered a security
interest for the Loans, Borrower will provide Lender with such loss payable
or other endorsements as Lender may require.
Insurance Reports. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the
name of the insurer; (b) the risks insured; (c) the amount of the policy;
(d) the properties insured; (e) the then current property values on the
basis of which insurance has been obtained, and the manner of determining
those values; and (f) the expiration date of the policy. In addition, upon
request of Lender (however not more often than annually) Borrower will have
an independent appraiser satisfactory to Lender determine, as applicable,
the actual cash value or replacement cost of any Collateral. The cost of
such appraisal shall be paid by Borrower.
Guaranties. Prior to disbursement of any Loan proceeds, furnish executed
guaranties of the Loans in favor of Lender, executed by the guarantors
named below, on Lender's forms, and in the amounts and under the conditions
spelled out in those guaranties.
Guarantors Amounts
---------- -------
AEROMET AMERICA, INC. Unlimited
PACIFIC COAST TECHNOLOGIES, INC. Unlimited
SEISMIC SAFETY PRODUCTS, INC. Unlimited
CASHMERE MANUFACTURING CO., INC. Unlimited
CERAMIC DEVICES, INC. Unlimited
ELECTRONIC SPECIALITY CORPORATION Unlimited
NORTHWEST TECHNICAL INDUSTRIES, INC. Unlimited
SKAGIT ENGINEERING & MANUFACTURING, INC. Unlimited
Other Agreements. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
<PAGE>
09-07-1999 LOAN AGREEMENT Page 17
Loan No 3000009903 (Continued)
================================================================================
Loan Proceeds. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
Taxes, Charges and Liens. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all assessments,
taxes, governmental charges, levies and liens, of every kind and nature,
imposed upon Borrower or its properties, income, or profits, prior to the
date on which penalties would attach, and all lawful claims that, if
unpaid, might become a lien or charge upon any of Borrower's properties,
income, or profits. Provided however, Borrower will not be required to pay
and discharge any such assessment, tax, charge, levy, lien or claim so long
as (a) the legality of the same shall be contested in good faith by
appropriate proceedings, and (b) Borrower shall have established on its
books adequate reserves with respect to such contested assessment, tax,
charge, levy, lien, or claim in accordance with generally accepted
accounting practices. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies,
liens and claims and will authorize the appropriate governmental official
to deliver to Lender at any time a written statement of any assessments,
taxes, charges, levies, liens and claims against Borrower's properties,
income, or profits.
Performance. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely
manner, and promptly notify Lender if Borrower learns of the occurrence of
any event which constitutes an Event of Default under this Agreement or
under any of the Related Documents.
Operations. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and
management personnel; provide written notice to Lender of any change in
executive and management personnel; conduct its business affairs in a
reasonable and prudent manner and in compliance with all applicable
federal, state and municipal laws, ordinances, rules and regulations
respecting its properties, charters, businesses and operations, including
without limitation, compliance with the Americans With Disabilities Act and
with all minimum
<PAGE>
09-07-1999 LOAN AGREEMENT Page 18
Loan No 3000009903 (Continued)
================================================================================
funding standards and other requirements of ERISA and other laws applicable
to Borrower's employee benefit plans.
Inspection. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and
records. If Borrower now or at any time hereafter maintains any records
(including without limitation computer generated records and computer
software programs for the generation of such records) in the possession of
a third party, Borrower, upon request of Lender, shall notify such party to
permit Lender free access to such records at all reasonable times and to
provide Lender with copies of any records it may request, all at Borrower's
expense.
Compliance Certificate. Unless waived in writing by Lender, provide Lender
at least annually and at the time of each disbursement of Loan proceeds
with a certificate executed by Borrower's chief financial officer, or other
officer or person acceptable to Lender, certifying that the representations
and warranties set forth in this Agreement are true and correct as of the
date of the certificate and further certifying that, as of the date of the
certificate, no Event of Default exists under this Agreement.
Environmental Compliance and Reports. Borrower shall comply in all respects
with all environmental protection federal, state and local laws, statutes,
regulations and ordinances; not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part or on the part
of any third party, on property owned and/or occupied by Borrower, any
environmental activity where damage may result to the environment, unless
such environmental activity is pursuant to and in compliance with the
conditions of a permit issued by the appropriate federal, state or local
governmental authorities; shall furnish to Lender promptly and in any event
within thirty (30) days after receipt thereof a copy of any notice,
summons, lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or
unintentional action or omission on Borrower's part in connection with any
environmental activity whether or not there is damage to the environment
and/or other natural resources.
<PAGE>
09-07-1999 LOAN AGREEMENT Page 19
Loan No 3000009903 (Continued)
================================================================================
Additional Assurances. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing
statements, instruments, documents and other agreements as Lender or its
attorneys may reasonably request to evidence and secure the Loans and to
perfect all Security Interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
Continuity of Operations. Make any acquisition which individually would
dilute the Borrower's net worth by more than twenty-five percent (25%) in
any one year or jeopardize Borrower's ability to comply with any other
covenant or commitment under this Agreement, the Loan or Related Documents.
Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money or
assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) incur any obligation as surety or guarantor
other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; or (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loan with Lender.
ADDITIONAL DEFINITIONS.
<PAGE>
09-07-1999 LOAN AGREEMENT Page 20
Loan No 3000009903 (Continued)
================================================================================
Adjusted Tangible Capital means Tangible Capital less investments in, advances
to, promissory notes and any receivables from, any affiliate or other related
entity of Borrower.
Capital Expenditures means current period net fixed assets less prior period net
fixed assets, plus current period depreciation.
Cash Flow means net income after taxes, and exclusive of extraordinary gains and
income, plus depreciation and amortization.
Current Assets shall be as defined by GAAP, minus prepaid expenses.
Current Liabilities shall be as defined by GAAP.
Debt means all of Borrower's liabilities excluding Subordinated Debt.
EBITDA means, calculated for the period of the previous four fiscal quarters,
the net earnings of Borrower plus the aggregate amounts deducted in determining
such net income in respect of interest expenses, taxes, depreciation and
amortization; but not, however, giving effect to extraordinary losses or gains
in calculating net income.
Fixed Charges means interest expense plus lease expense, current maturities of
long-term debt and current maturities of capital leases.
Funded Debt means all interest bearing term loan Debt or capital lease payments
of Borrower having a maturity of greater than one year.
Liquid Assets means Borrower's cash on hand plus Borrower's readily marketable
securities.
Operating Cash Flow means net income after taxes, and exclusive of extraordinary
gains, gains on asset sales, and other income, plus depreciation, and
amortization, plus interest expense, plus lease expense, less dividends, and
distributions.
Subordinated Debt means indebtedness and liabilities of Borrower which have been
subordinated by written agreement to indebtedness owed by Borrower to Lender in
form and substance acceptable to Lender.
<PAGE>
09-07-1999 LOAN AGREEMENT Page 21
Loan No 3000009903 (Continued)
================================================================================
Tangible Capital means Tangible Net Worth plus Subordinated Debt.
Tangible Net Worth means Borrower's total assets excluding all intangible assets
(i.e., goodwill, trademarks, patents, copyrights, organizational expenses, and
similar intangible items, but including leaseholds and leasehold improvements)
less total Debt.
Total Fixed Charges means interest expense, plus current maturities of long-term
debt and current maturities of capital leases, plus lease expenses, plus
preferred stock dividends, plus Capital Expenditures.
Total Liquid Assets means Borrower's cash on hand plus Borrower's readily
marketable securities, plus Borrower's net trade accounts receivable.
Total Senior Liabilities means total liabilities less Subordinated Debt.
Unencumbered Liquidity means the sum of unpledged cash, stocks, bonds, and other
near cash investments held in a person's name and immediately available with
unimpaired value; but not including pledged assets, IRA, 401(k), annuity or
trust accounts.
Working Capital means Borrower's current assets, excluding prepaid expenses,
less Borrower's current liabilities.
ADDITIONAL COVENANTS. Borrower covenants and agrees with Lender that, while this
Agreement is in effect, Borrower will:
Tangible Net Worth. Borrower shall maintain a Tangible Net Worth of not less
than $35,000,000.00; calculated at the end of each QUARTER.
Debt/Tangible Capital Radio. Borrower shall maintain a ratio of Debt to Tangible
Capital of less than .75 to 1.0; calculated at the end of each QUARTER.
Working Capital. Borrower shall maintain Working Capital in excess of
$10,000,000.00; calculated at the end of each QUARTER.
<PAGE>
09-07-1999 LOAN AGREEMENT Page 22
Loan No 3000009903 (Continued)
================================================================================
Current Ratio. Borrower shall maintain a ratio of current assets to current
liabilities in excess of 2.0 to 1.0; calculated at the end of each QUARTER.
Minimum Debt Service Coverage. Borrower shall maintain a ratio of Minimum Debt
Service Coverage in excess of 1.50 to 1.00; measured annually (Debt Service
Coverage Ratio is defined as: net income plus depreciation minus cash dividends
minus unfinanced capital expenditures divided by prior year's current portion of
long term debt).
BORROWING PLAN. An exhibit, titled "BORROWING PLAN," is attached to this
Agreement and by this reference is made a part of this Agreement just as if all
the provisions, terms and conditions of the Exhibit had been fully set forth in
this Agreement.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness. Failure of Borrower to make any payment when due
on the Loans.
Other Defaults. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at
any time thereafter.
Defective Collateralization. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time
and for any reason.
Insolvency. The dissolution or termination of Borrower's existence as a
going
<PAGE>
09-07-1999 LOAN AGREEMENT Page 23
Loan No 3000009903 (Continued)
================================================================================
business, the insolvency of Borrower, the appointment of a receiver for any
part of Borrower's property, any assignment for the benefit of creditors,
any type of creditor workout, or the commencement of any proceeding under
any bankruptcy or insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any creditor
of any Grantor against any collateral securing the Indebtedness, or by any
governmental agency. This includes a garnishment, attachment, or levy on or
of any of Borrower's deposit accounts with Lender. However, this Event of
Default shall not apply if there is a good faith dispute by Borrower or
Grantor, as the case may be, as to the validity or reasonableness of the
claim which is the basis of the creditor or forfeiture proceeding, and if
Borrower or Grantor gives Lender written notice of the creditor or
forfeiture proceeding and furnishes reserves or a surety bond for the
creditor or forfeiture proceeding satisfactory to Lender.
Events Affecting Guarantor. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness, or any Guarantor dies or
becomes incompetent, or revokes or disputes the validity of, or liability
under, any Guaranty of the Indebtedness. Lender, at its option, may but
shall not be required to, permit the Guarantor's estate to assume
unconditionally the obligations arising under the guaranty in a manner
satisfactory to Lender, and, in doing so, cure the Event of Default.
Adverse Change. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
Right to Cure. If any default, other than a Default on Indebtedness, is
curable and if Borrower or Grantor, as the case may be, has not been given
a notice of a similar default within the preceding twelve (12) months, it
may be cured (and no Event of Default will have occurred) if Borrower or
Grantor, as the case may be, after receiving written notice from Lender
demanding cure of such default: (a) cures the default within fifteen (15)
days; or (b) if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender
<PAGE>
09-07-1999 LOAN AGREEMENT Page 24
Loan No 3000009903 (Continued)
================================================================================
deems in Lender's sole discretion to be sufficient to cure the default and
thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will terminate (including any obligation to make
Loan Advances or disbursements), and at Lender's option, all Indebtedness
immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
in the "Insolvency" subsection above, such acceleration shall be automatic and
not optional. In addition, Lender shall have all the rights and remedies
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire and final understanding and agreement of the parties
as to the matters set forth in this Agreement. No alteration of or
amendment to this agreement shall be effective unless given in writing and
signed by the party or parties sought to be charged or bound by the
alteration or amendment.
Applicable Law. This Agreement has been delivered to Lender and accepted by
Lender in the State of Washington. If there is a lawsuit, Borrower agrees
upon Lender's request to submit to the jurisdiction of the courts of King
or Pierce County, the State of Washington. Lender and Borrower hereby waive
the right to any jury trial in any action, proceeding, or counterclaim
brought by either Lender or Borrower against the other. This Agreement
shall be governed by and construed in
<PAGE>
09-07-1999 LOAN AGREEMENT Page 25
Loan No 3000009903 (Continued)
================================================================================
accordance with the laws of the State of Washington.
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
Multiple Parties; Corporate Authority. All obligations of Borrower under
this Agreement shall be joint and several, and all references to Borrower
shall mean each and every Borrower. This means that each of the persons
signing below is responsible for all obligations in this Agreement.
Consent to Loan Participation. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation whatsoever,
to any one or more purchasers, or potential purchasers, any information or
knowledge Lender may have about Borrower or about any other matter relating
to the Loan, and Borrower hereby waives any rights of privacy it may have
with respect to such matters. Borrower additionally waives any and all
notices of sale of participation interests, as well as all notices of any
repurchase of such participation interests. Borrower also agrees that the
purchasers of any such participation interests will be considered as the
absolute owners of such interests in the Loans and will have all the rights
granted under the participation agreement or agreements governing the sale
of such participation interests. Borrower further waives all rights of
offset or counterclaim that it may have now or later against Lender or
against any purchaser of such a participation interest and unconditionally
agrees that either Lender or such purchaser may enforce Borrower's
obligation under the Loans irrespective of the failure or insolvency of any
holder of any interest in the Loans. Borrower further agrees that the
purchaser of any such participation interests may enforce its interests
irrespective of any personal claims or defenses that Borrower may have
against Lender.
Costs and Expenses. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification and
collection of
<PAGE>
09-07-1999 LOAN AGREEMENT Page 26
Loan No 3000009903 (Continued)
================================================================================
this Agreement or in connection with the Loans made pursuant to this
Agreement. Lender may pay someone else to help collect the Loans and to
enforce this Agreement, and Borrower will pay that amount. This includes,
subject to any limits under applicable law, Lender's attorneys' fees and
Lenders' legal expenses, whether or not there is a lawsuit, including
attorneys' fees for bankruptcy proceedings (including efforts to modify or
vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. Borrower also will pay any court costs,
in addition to all other sums provided by law.
Notices. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile unless otherwise required by
law), and shall be effective when actually delivered or when deposited with
a nationally recognized overnight courier or deposited in the United States
mail, first class, postage prepaid, addressed to the party to whom the
notice is to be given at the address shown above. Any party may change its
address for notices under this Agreement by giving formal written notice to
the other parties, specifying that the purpose of the notice is to change
the party's address. To the extent permitted by applicable law, if there is
more than one Borrower, notice to any Borrower will constitute notice to
all Borrowers. For notice purposes, Borrower will keep Lender informed at
all times of Borrower's current address(es).
Severability. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
Subsidiaries and Affiliates of Borrower. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation, any representation, warranty or covenant, the word "Borrower"
as used herein
<PAGE>
09-07-1999 LOAN AGREEMENT Page 27
Loan No 3000009903 (Continued)
================================================================================
shall include all subsidiaries and affiliates of Borrower. Notwithstanding
the foregoing however, under no circumstances shall this Agreement be
construed to require Lender to make any Loan or other financial
accommodation to any subsidiary or affiliate of Borrower.
Successors and Assigns. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to
the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
Survival. All warranties, representations, and covenants made by Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery
to Lender of the Related Documents, regardless of any investigation made by
Lender or on Lender's behalf.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Borrower, or between Lender and any
Grantor, shall constitute a waiver of any of Lender's rights or of any
obligations of Borrower or of any Grantor as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the
granting of such consent by Lender in any instance shall not constitute
continuing consent to subsequent instances where such consent is required
and in all cases such consent may be granted or withheld in the sole
discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND
BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED SEPTEMBER 7, 1999.
<PAGE>
09-07-1999 LOAN AGREEMENT Page 28
Loan No 3000009903 (Continued)
================================================================================
- --------------------------------------------------------------------------------
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR
FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
- --------------------------------------------------------------------------------
BORROWER:
PACIFIC AEROSPACE & ELECTRONICS, INC.
By: /s/ DONALD A. WRIGHT
---------------------------------
DONALD A. WRIGHT, CEO & PRESIDENT
LENDER:
KEYBANK NATIONAL ASSOCIATION
By: /s/
---------------------------------
Authorized Officer
<PAGE>
ENVIRONMENTAL ADDENDUM
----------------------
Borrower is a manufacturer of a wide range of hermetically sealed electrical
connectors and assemblies, specialized filtering devices, explosively bonded
dissimilar metals, precision machined components, and cast aluminum components
for the aerospace, defense, electronics and transportation industries. In the
ordinary course of business, Borrower purchases, uses, and stores, and will
continue to purchase, use, and store hazardous substances as raw materials in
its operations, in material compliance with applicable laws. During routine
operations, Borrower has generated and stored, and will continue to generate and
store, on-site hazardous wastes in material compliance with applicable
environmental laws. Hazardous wastes generated by Borrower have been and will
continue to be transported off site by licensed transporters to facilities
licensed for the treatment, storage and disposal of hazardous wastes. To the
best of Borrower's knowledge, there have been no material disposals, releases or
threatened releases of hazardous substances or hazardous wastes on Borrower's
premises. Borrower has an ongoing program of monitoring and addressing
environmental matters and from time to time in the ordinary course of business
is required to, and promptly and reasonably does address minor issues of
noncompliance at its operating sites.
Date: October 6, 1999
Initials: Pacific Aerospace Aerospace & Electronics, Inc. /S/
----------
Bank /S/
----------
[Logo]
MODIFICATION AND/OR EXTENSION AGREEMENT
Date: October 6, 1999 AG-VAJ
Borrower(s): PACIFIC AEROSPACE & ELECTRONICS, INC.
Lender: KEYBANK NATIONAL ASSOCIATION
Note: Dated September 22, 1998, in the principal amount of
$6,300,000.00, including any and all amendments thereto.
Loan #: 31-357577-3000009903
FOR VALUE RECEIVED, Borrower and Lender hereby agree to modify the
above-referenced Loan and Promissory Note and/or Loan Agreement as follows:
1. MODIFICATION AND/OR EXTENSION PROVISIONS.
o The maturity date of the Loan is hereby extended to September 5,
2000.
o Effective October 6, 1999, the interest rate on this Note shall
change to a variable rate equal to the Prime rate announced by
the Lender (the "Index"), plus zero percent (0.00%) per annum.
The interest rate will change automatically and correspondingly
on the date of each announced change of the Index by the Lender.
The Index is not necessarily the lowest rate charged by the
Lender on its loans and is set by Lender in its sole discretion.
2. CONDITIONS. The modifications and/or extension described above are subject
to and conditioned upon Borrower's full satisfaction of all of the following
conditions on or before the date first stated above, time being of the essence.
A. There shall be no uncured event of default under the Loan, nor
any event or condition which with notice or the passage of time
would be an event of default thereunder.
B. Borrower shall deliver to Lender a fully executed original of
this Modification and/or Extension Agreement.
C. All expenses incurred by Lender in connection with this Agreement
(including without limitation, attorney fees, recording charges,
charges for title policy update(s), escrow charges, costs of
obtaining updated or additional appraisal(s) or collateral
valuations, if required by Lender) shall be paid by Borrower.
D. Borrower shall comply with the following additional conditions:
o No additional conditions apply.
3. GENERAL PROVISIONS. Except as modified above, all other provisions of the
Promissory Note and any other documents securing or relating to the Loan (the
"Loan Documents") remain in full force and effect. All security given for the
Loan and all guarantees of the Loan (as applicable) shall continue in full
force. Borrower warrants and represents to Lender that it has full right, power
and authority to enter into this agreement and to
-1-
<PAGE>
perform all its obligations hereunder, and that all information and materials
submitted to Lender in connection with this modification are accurate and
complete. Borrower warrants that no default exists under the Loan Documents.
Borrower reaffirms its obligation to pay the Loan in full and reaffirms the
validity and enforceability of the Loan Documents, without set-off, counterclaim
or defense.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR
FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
LENDER: BORROWER:
KEYBANK NATIONAL ASSOCIATION PACIFIC AEROSPACE & ELECTRONICS, INC.
By: /s/ JOHN C. THOREN By: /s/ DONALD A. WRIGHT
-------------------------------- -----------------------------------
John C. Thoren Vice President DONALD A. WRIGHT CEO & PRESIDENT
-2-
COMMERCIAL SECURITY AGREEMENT
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$6,300,000.00 09-07-1999 09-05-2000 3000009903 403 302 E 357577 JCT02
- --------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this
document to any particular loan or item.
- --------------------------------------------------------------------------------------------------------
</TABLE>
Borrower: PACIFIC AEROSPACE & LENDER: KEYBANK NATIONAL ASSOCIATION
ELECTRONICS, INC. WEN/ML COMMERCIAL BANKING CENTER
430 OLDS STATION ROAD 102 SOUTH WENATCHEE AVENUE
WENATCHEE, WA 98801 P. O. BOX 1301 WA-31-35-0163
WENATCHEE, WA 98807
Grantor: AEROMET AMERICA, INC., SEISMIC SAFETY PRODUCTS, INC., CASHMERE
MANUFACTURING CO., INC., CERAMIC DEVICES, INC., ELECTRONIC SPECIALTY
CORPORATION, NORTHWEST TECHNICAL INDUSTRIES, INC., PACIFIC COAST
TECHNOLOGIES, INC., and SKAGIT ENGINEERING & MANUFACTURING, INC.
================================================================================
THIS COMMERCIAL SECURITY AGREEMENT is entered into among PACIFIC AEROSPACE &
ELECTRONICS, INC., (referred to below as "Borrower"); AEROMET AMERICA, INC.,
SEISMIC SAFETY PRODUCTS, INC., BALO PRECISION PARTS, INC., CASHMERE
MANUFACTURING CO., INC., CERAMIC DEVICES, INC., ELECTRONIC SPECIALTY
CORPORATION, NORTHWEST TECHNICAL INDUSTRIES, INC., and PACIFIC COAST
TECHNOLOGIES, INC. (REFERRED TO BELOW INDIVIDUALLY AND COLLECTIVELY AS "Grantor"
or "Guarantor") and KEYBANK NATIONAL ASSOCIATION (referred to below as
"Lender"). For valuable consideration, Grantor grants to Lender a security
interest in the Collateral to secure the Indebtedness and agrees that Lender
shall have the rights stated in this Agreement with respect to the Collateral,
in additional to all other rights which Lender may have by law. This Commercial
Security Agreement is given in furtherance of the Grantor's contemporaneous
guarantee of the Indebtedness, as defined below.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
Agreement. The word "Agreement" means this Commercial Security Agreement,
as this Commercial Security Agreement may be amended or modified from time
to time, together with all exhibits and schedules attached to this
Commercial Security Agreement from time to time.
Borrower. The word "Borrower" means each and every person or entity signing
the Note, including without limitation PACIFIC AEROSPACE & ELECTRONICS,
INC., and its successors and assigns.
Collateral. The word "Collateral" means the following described property of
Grantor, whether now owned or hereafter acquired, whether now existing or
hereafter arising, and wherever located:
All inventory, chattel paper, accounts, and general intangibles.
In addition, the word "Collateral" includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:
(a) All attachments, accessions, accessories, tools, parts, supplies,
increases, and additions to and all replacements of and substitutions
for any property described above.
(b) All products and produce of any of the property described in this
Collateral section.
(c) All accounts, general intangibles, instruments, rents, monies,
payments, and all other rights, arising out of a sale, lease, or other
disposition of any of the property described in this Collateral
section.
(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property
described in this Collateral section.
(e) All records and data relating to any of the property described in
this Collateral section, whether in the form of a writing, photograph,
microfilm, microfiche, or electronic media, together with all of
Grantor's right, title, and interest in and to all computer software
required to utilize, create, maintain, and process any such records or
data on electronic media.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "Events of Default."
Grantor. The word "Grantor" means AEROMET AMERICA, INC., SEISMIC SAFETY
PRODUCTS, INC., CASHMERE MANUFACTURING CO., INC., CERAMIC DEVICES, INC.,
ELECTRONIC SPECIALTY CORPORATION, NORTHWEST TECHNICAL INDUSTRIES, INC.,
PACIFIC COAST TECHNOLOGIES, INC., and SKAGIT ENGINEERING & MANUFACTURING,
INC., and their successors or assigns. Any Grantor who signs this
Agreement, but does not sign the Note, is signing this Agreement only to
grant a security interest in Grantor's interest in the Collateral to Lender
and is not personally liable under the Note except as otherwise provided by
contract or law (e.g., personal liability under a guaranty or as a surety.)
Guarantor. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with the Indebtedness.
Indebtedness. The word "Indebtedness" means the indebtedness evidenced by
the Note, including all principal and interest, together with all other
indebtedness and costs and expenses for which Grantor is responsible under
this Agreement or under any of the Related Documents.
Lender. The word "Lender" means KEYBANK NATIONAL ASSOCIATION, its
successors and assigns.
<PAGE>
09-07-1999 COMMERCIAL SECURITY AGREEMENT Page 2
Loan No 3000009903 (Continued)
================================================================================
Note. The word "Note" means the note or credit agreement dated September
22, 1998, in the principal, amount of $6,300,000.00 from Grantor to Lender,
together with all renewals of, extensions of, modifications of,
refinancings of, consolidations of and substitutions for the note or credit
agreement.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
BORROWER'S WAIVERS AND RESPONSIBILITIES. Except as otherwise required under this
Agreement or by applicable law, (a) Borrower agrees that Lender need not tell
Borrower about any action or inaction Lender takes in connection with this
Agreement; (b) Borrower assumes the responsibility for being and keeping
informed about the Collateral; and (c) Borrower waives any defenses that may
arise because of any action or inaction of Lender, including without limitation
any failure of Lender to realize upon the Collateral or any delay by Lender in
realizing upon the Collateral; and Borrower agrees to remain liable under the
Note no matter what action Lender takes or fails to take under this Agreement.
GRANTOR'S REPRESENTATIONS AND WARRANTIES. Grantor warrants that: (a) this
Agreement is executed at Borrower's request and not at the request of Lender;
(b) Grantor has the full right, power and authority to enter into this Agreement
and to pledge the Collateral to Lender; (c) Grantor has established adequate
means of obtaining from Borrower on a continuing basis information about
Borrower's financial condition; and (d) Lender has made no representation to
Grantor about Borrower or Borrower's creditworthiness.
GRANTOR'S WAIVERS. Grantor waives all requirements of presentment, protest,
demand, and notice of dishonor or non-payment to Grantor, Borrower, or any other
party to the Indebtedness or the Collateral. Lender may do any of the following
with respect to any obligation of any Borrower, without first obtaining the
consent of Grantor: (a) grant any extension of time for any payment, (b) grant
any renewal, (c) permit any modification of payment terms or other terms, or (d)
exchange or release any Collateral or other security. No such act or failure to
act shall affect Lender's rights against Grantor or the Collateral.
If now or hereafter (a) Borrower shall be or become insolvent, and (b) the
Indebtedness shall not at all times until paid be fully secured by collateral
pledged by Borrower, Grantor hereby forever waives and relinquishes in favor of
Lender and Borrower, and their respective successors, any claim or right to
payment Grantor may now have or hereafter have or acquire against Borrower, by
subrogation or otherwise, so that at no time shall Grantor be or become a
'creditor" of Borrower within the meaning of 11 U.S.C. section 547(b), or any
successor provision of the Federal bankruptcy laws.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
Perfection of Security Interest. Grantor agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's security interest in the Collateral. Upon
request of Lender, Grantor will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Grantor will note
Lender's interest upon any and all chattel paper if not delivered to Lender
for possession by Lender. Grantor hereby appoints Lender as its irrevocable
attorney-win-fact for the purpose of executing any documents necessary to
perfect or to continue the security interest granted in this Agreement.
Lender may at any time, and without further authorization from Grantor,
file a carbon, photographic or other reproduction of any financing
statement or of this Agreement for use as a financing statement. Grantor
will reimburse Lender for all expenses for the perfection and the
continuation of the perfection of Lender's security Interest in the
Collateral. Grantor promptly will notify Lender before any change in
Grantor's name including any change to the assumed business names of
Grantor.
No Violation. The execution and delivery of this Agreement will not violate
any law or agreement governing Grantor or to which Grantor is a party, and
its articles or agreements relating to entity incorporation, organization
or existence do not prohibit any term or condition of this Agreement.
Enforceability of Collateral. To the extent the Collateral consists of
accounts, chattel paper, or general intangibles, the Collateral is
enforceable in accordance with its terms, is genuine, and complies with
applicable laws concerning form, content and manner of preparation and
execution, and all persons appearing to be obligated on the Collateral have
authority and capacity to contract and are in fact obligated as they appear
to be on the Collateral. At the time any account becomes subject to a
security interest in favor of Lender, the account shall be a good and valid
account representing an undisputed, bona fide indebtedness incurred by the
account debtor, for merchandise held subject to delivery instructions
theretofore shipped or delivered pursuant to a contract of sale, or for
services theretofore performed by Grantor with or for the account debtor;
there shall be no setoffs or counterclaims against any such account; and no
agreement under which any deductions or discounts may be claimed shall have
been made with the account debtor except those disclosed to Lender in
writing.
Location of the Collateral. Grantor, upon request of Lender, will deliver
to Lender in form satisfactory to Lender a schedule of real property and
Collateral locations relating to Grantor's operations, including without
limitation the following: (a) all real property owned or being purchased by
Grantor; (b) all real property being rented or leased by Grantor; (c) all
storage facilities owned, rented, leased, or being used by Grantor; and (d)
all other properties where Collateral is or may be located. Except in the
ordinary course of its business, Grantor shall not remove the Collateral
from its existing location without the prior written agreement of Lender.
Removal of Collateral. Grantor shall keep the Collateral (or to the extent
the Collateral consists of intangible property such as accounts, the
records concerning the Collateral) at Grantor's address shown above, or at
such other locations as are acceptable to Lender. Some or all of the
Collateral may be located at the real property described above. Except in
the ordinary course of its business, including the sales of inventory,
Grantor shall not remove the Collateral from its existing locations without
the prior written consent of Lender. To the extent that the Collateral
consists of vehicles, or other titled property, Grantor shall not take or
permit any action which would require application for certificates of title
for the vehicles outside the State of Washington, without the prior written
consent of Lender.
Transactions Involving Collateral. Except for inventory sold or accounts
collected or other actions taken in the ordinary course of Grantor's
business, Grantor shall not sell, offer to sell, or otherwise transfer or
dispose of the Collateral. Grantor shall not pledge, mortgage, encumber or
otherwise permit the Collateral to be subject to any lien, security
interest, encumbrance, or charge, other than the security interest provided
for in this Agreement, without the prior written consent of Lender. This
includes security interests even if junior in right to the security
interests granted under this Agreement. Unless waived by Lender, all
proceeds from any disposition of the Collateral (for whatever reason) shall
be held in trust for Lender and shall not be commingled with any other
funds; provided however, this requirement shall not constitute consent by
Lender to any sale or other disposition. Upon receipt, Grantor shall
immediately deliver any such proceeds to Lender.
Title. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement. No financing statement
covering any of the Collateral is on file in any public office other than
those which reflect the security interest
<PAGE>
09-07-1999 COMMERCIAL SECURITY AGREEMENT Page 3
Loan No 3000009903 (Continued)
================================================================================
created by this Agreement or to which Lender has specifically consented.
Grantor shall defend Lender's rights in the Collateral against the claims
and demands of all other persons.
Collateral Schedules and Locations. As often as Lender shall require, and
insofar as the Collateral consists of accounts and general intangibles,
Grantor shall deliver to Lender schedules of such Collateral, including
such information as Lender may require, including without limitation names
and addresses of account debtors and aging of accounts and general
intangibles. Insofar as the Collateral consists of inventory, Grantor shall
deliver to Lender, as often as Lender shall require, such lists,
descriptions, and designations of such Collateral as Lender may require to
identify the nature, extent and location of such Collateral. Such
information shall be submitted for Grantor and each of its subsidiaries or
related companies.
Maintenance and Inspection of Collateral. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not commit
or permit damage to or destruction of the Collateral or any part of the
Collateral. Lender and its designated representatives and agents shall have
the right at all reasonable times to examine, inspect, and audit the
Collateral wherever located. Grantor shall immediately notify Lender of all
cases involving the return, rejection, repossession, loss or damage of or
to any Collateral; of any request for credit or adjustment or of any other
dispute arising with respect to the Collateral; and generally of all
happenings and events affecting the Collateral or the value or the amount
of the Collateral.
Taxes, Assessments and Liens. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon this
Agreement, upon any promissory note or notes evidencing the Indebtedness,
or upon any of the other Related Documents. Grantor may withhold any such
payment or may elect to contest any lien if Grantor is in good faith
conducting an appropriate proceeding to contest the obligation to pay and
so long as Lender's interest in the Collateral is not jeopardized in
Lender's sole opinion. If the Collateral is subjected to a lien which is
not discharged within fifteen (15) days, Grantor shall deposit with Lender
cash, a sufficient corporate surety bond or other security satisfactory to
Lender in an amount adequate to provide for the discharge of the lien plus
any interest, costs, attorneys' fees or other charges that could accrue as
a result of foreclosure or sale of the Collateral. In any contest Grantor
shall defend itself and Lender and shall satisfy any final adverse judgment
before enforcement against the Collateral. Grantor shall name Lender as an
additional obligee under any surety bond furnished in the contest
proceedings.
Compliance With Governmental Requirements. Grantor shall comply promptly in
all material respects with all laws, ordinances, rules and regulations of
all governmental authorities, now or hereafter in effect, applicable to the
ownership, production, disposition, or use of the Collateral. Grantor may
contest in good faith any such law, ordinance or regulation and withhold
compliance during any proceeding, including appropriate appeals, so long as
Lender's interest in the Collateral, in Lender's opinion, is not
jeopardized.
Hazardous Substances. Grantor represents and warrants that, except as
disclosed to Lender (Note: Any such disclosure appears on the Environmental
Addendum attached hereto and incorporated herein by this reference and if
there is no such addendum or the addendum is marked "not applicable", then
there has been no such disclosure), the Collateral never has been, and
never will be so long as this Agreement remains a lien on the Collateral,
used for the generation, manufacture, storage, transportation, treatment,
disposal, release or threatened release of any hazardous waste or
substance, as those terms are defined in the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C.
Section 9601, et seq. ("CERCLA"), the Superfund Amendments and
Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous
Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other
applicable state or Federal laws, rules, or regulations adopted pursuant to
any of the foregoing. The terms "hazardous waste" and "hazardous substance"
shall also include, without limitation, petroleum and petroleum by-products
or any fraction thereof and asbestos. The representations and warranties
contained herein are based on Grantor's due diligence in investigating the
Collateral for hazardous wastes and substances. Grantor hereby (a) releases
and waives any future claims against Lender for indemnity or contribution
in the event Grantor becomes liable for cleanup or other costs under any
such laws, and (b) agrees to indemnify and hold harmless Lender against,
any and all claims and losses resulting from a breach of this provision of
this Agreement. This obligation to indemnify shall survive the payment of
the Indebtedness and the satisfaction of this Agreement.
Maintenance of Casualty Insurance. Grantor shall procure and maintain all
risks insurance, including without limitation fire, theft and liability
coverage together with such other insurance as Lender may require with
respect to the Collateral, in form, amounts, coverages and basis reasonably
acceptable to Lender and issued by a company or companies reasonably
acceptable to Lender. Grantor, upon request of Lender, will deliver to
Lender from time to time the policies or certificates of insurance in form
satisfactory to Lender, including stipulations that coverages will not be
canceled or diminished without at least ten (10) days' prior written notice
to Lender and not including any disclaimer of the insurer's liability for
failure to give such a notice. Each insurance policy also shall include an
endorsement providing that coverage in favor of Lender will not be impaired
in any way by any act, omission or default of Grantor or any other person.
In connection with all policies covering assets in which Lender holds or is
offered a security interest, Grantor will provide Lender with such loss
payable or other endorsements as Lender may require. If Grantor at any time
fails to obtain or maintain any insurance as required under this Agreement,
Lender may (but shall not be obligated to) obtain such insurance as Lender
deems appropriate, including if it so chooses "single interest insurance,"
which will cover only Lender's interest in the Collateral.
Application of Insurance Proceeds. Grantor shall promptly notify Lender of
any material loss or damage to the Collateral. Lender may make proof of
loss if Grantor fails to do so within fifteen (15) days of the casualty.
All proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral.. If Lender
consents to repair or replacement of the damaged or destroyed Collateral,
Lender shall, upon satisfactory proof of expenditure, pay or reimburse
Grantor from the proceeds for the reasonable cost of repair or restoration.
If Lender does not consent to repair or replacement of the Collateral,
Lender shall retain a sufficient amount of the proceeds to pay all of the
Indebtedness, and shall pay the balance to Grantor. Any proceeds which have
not been disbursed within six (6) months after their receipt and which
Grantor has not committed to the repair or restoration of the Collateral
shall be used to prepay the Indebtedness.
Insurance Reserves. Lender may require Grantor to maintain with Lender
reserves for payment of insurance premiums, which reserves shall be created
by monthly payments from Grantor of a sum estimated by Lender to be
sufficient to produce, at least fifteen (15) days before the premium due
date, amounts at least equal to the insurance premiums to be paid. If
fifteen (15) days before payment is due, the reserve funds are
insufficient, Grantor shall upon demand pay any deficiency to Lender. The
reserve funds shall be held by Lender as a general deposit and shall
constitute a non-interest-bearing account which Lender may satisfy by
payment of the insurance premiums required to be paid by Grantor as they
become due. Lender does not hold the reserve funds in trust for Grantor,
and Lender is not the agent of Grantor for payment of the insurance
premiums required to be paid by Grantor. The responsibility for the payment
of premiums shall remain Grantor's sole responsibility.
Insurance Reports. Grantor, upon request of Lender, shall furnish to Lender
reports on each existing policy of insurance showing such information as
Lender may reasonably request including the following: (a) the name of the
insurer; (b) the risks insured; (c) the amount of the policy; (d) the
property insured; (e) the then current value on the basis of which
insurance has been obtained and the manner of determining that value; and
(f) the expiration date of the policy. In addition, Grantor shall
<PAGE>
09-07-1999 COMMERCIAL SECURITY AGREEMENT Page 3
Loan No 3000009903 (Continued)
================================================================================
upon request by Lender (however not more often than annually) have an
independent appraiser satisfactory to Lender determine, as applicable, the
cash value or replacement cost of the Collateral.
GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except
as otherwise provided below with respect to accounts, Grantor may have
possession of the tangible personal property and beneficial use of all the
Collateral and may use it in any lawful manner not inconsistent with this
Agreement or the Related Documents, provided that Grantor's right to possession
and beneficial use shall not apply to any Collateral where possession of the
Collateral by Lender is required by law to perfect Lender's security interest in
such Collateral. Until otherwise notified by Lender, Grantor may collect any of
the Collateral consisting of accounts. At any time and even though no Event of
Default exists, Lender may exercise its rights to collect the accounts and to
notify account debtors to make payments directly to Lender for application to
the Indebtedness. If Lender at any time has possession of any Collateral,
whether before or after an Event of Default, Lender shall be deemed to have
exercised reasonable care in the custody and preservation of the Collateral if
Lender takes such action for that purpose as Grantor shall request or as Lender,
in Lender's sole discretion, shall deem appropriate under the circumstances, but
failure to honor any request by Grantor shall not of itself be deemed to be a
failure to exercise reasonable care. Lender shall not be required to take any
steps necessary to preserve any rights in the Collateral against prior parties,
nor to protect, preserve or maintain any security interest given to secure the
Indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required, to be
discharged or paid by Grantor under this Agreement, including without limitation
all taxes, liens, security interests, encumbrances, and other claims, at any
time levied or placed on the Collateral. Lender also may (but shall not be
obligated to) pay all costs for insuring, maintaining and preserving the
Collateral. All such expenditures incurred or paid by Lender for such purposes
will then bear interest at the rate charged under the Note from the date
incurred or paid by Lender to the date of repayment by Grantor. All such
expenses shall become a part of the Indebtedness and, at Lender's option, will,
(a) be payable on demand, (b) be added to the balance of the Note and be
apportioned among and be payable with any installment payments to become due
during either (i) the term of any applicable insurance policy or (ii) the
remaining term of the Note, or (c) be treated as a balloon payment which will be
due and payable at the Note's maturity. This Agreement also will secure payment
of these amounts. Such right shall be in addition to all other rights and
remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness. Failure of Borrower to make any payment when due
on the Indebtedness.
Other Defaults. Failure of Grantor or Borrower to comply with or to perform
any other term, obligation, covenant or condition contained in this
Agreement or in any of the Related Documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor or Borrower under this
Agreement, the Note or the Related Documents is false or misleading in any
material respect, either now or at the time made or furnished.
Defective Collateralization. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any collateral
documents to create a valid and perfected security interest or lien) at any
time and for any reason.
Insolvency. The dissolution or termination of Grantor or Borrower's
existence as a going business, the insolvency of Grantor or Borrower, the
appointment of a receiver for any part of Grantor or Borrower's property,
any assignment for the benefit of creditors, any type of creditor workout,
or the commencement of any proceeding under any bankruptcy or insolvency
laws by or against Grantor or Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or Borrower or
by any governmental agency against the Collateral or any other collateral
securing the Indebtedness. This includes a garnishment of any of Grantor or
Borrower's deposit accounts with Lender. However, this Event of Default
shall not apply if there is a good faith dispute by Grantor or Borrower as
to the validity or reasonableness of the claim which is the basis of the
creditor or forfeiture proceeding and if Grantor or Borrower gives Lender
written notice of the creditor or forfeiture proceeding and deposits with
Lender monies or a surety bond for the creditor or forfeiture proceeding,
in an amount determined by Lender, in its sole discretion, as being an
adequate reserve or bond for the dispute.
Events Affecting Guarantor. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or such Guarantor dies or
becomes incompetent. Lender, at its option, may, but shall not be required
to, permit the Guarantor's estate to assume unconditionally the obligations
arising under the guaranty in a manner satisfactory to Lender, and, in
doing so, cure the Event of Default.
Adverse Change. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
Right to Cure. If any default, other than a Default on Indebtedness, is
curable and if Grantor or Borrower has not been given a prior notice of a
breach of the same provision of this Agreement, it may be cured (and no
Event of Default will have occurred) if Grantor or Borrower, after Lender
sends written notice demanding cure of such default, (a) cures the default
within fifteen (15) days; or (b), if the cure requires more than fifteen
(15) days immediately initiates steps which Lender deems in Lender's sole
discretion to be sufficient to cure the default and thereafter continues
and completes all reasonable and necessary steps sufficient to produce
compliance as soon as reasonably practical.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the Washington Uniform Commercial Code. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:
Accelerate Indebtedness. Lender may declare the entire Indebtedness,
including any prepayment penalty which Borrower would be required to pay,
immediately due and payable, without notice.
Assemble Collateral. Lender may require Grantor to deliver to Lender all or
any portion of the Collateral and any and all certificates of title and
other documents relating to the Collateral. Lender may require Grantor to
assemble the Collateral and make it available to Lender at a place to be
designated by Lender. Lender also shall have full power to enter upon the
property of Grantor to take possession of and remove the Collateral. If the
Collateral contains other goods not covered by this Agreement at the time
of repossession, Grantor agrees Lender may take such other goods, provided
that Lender makes reasonable efforts to return them to Grantor after
repossession.
<PAGE>
09-07-1999 COMMERCIAL SECURITY AGREEMENT Page 4
Loan No 3000009903 (Continued)
================================================================================
Sell the Collateral. Lender shall have full power to sell, lease, transfer,
or otherwise deal with the Collateral or proceeds thereof in its own name
or that of Grantor. Lender may sell the Collateral at public auction or
private sale. Unless the Collateral threatens to decline speedily in value
or is of a type customarily sold on a recognized market, Lender will give
Grantor reasonable notice of the time after which any private sale or any
other intended disposition of the Collateral is to be made. The
requirements of reasonable notice shall be met if such notice is given at
least ten (10) days before the time of the sale or disposition. All
expenses relating to the disposition of the Collateral, including without
limitation the expenses of retaking, holding, insuring, preparing for sale
and selling the Collateral, shall become a part of the Indebtedness secured
by this Agreement and shall be payable on demand, with interest at the Note
rate from date of expenditure until repaid.
Appoint Receiver. To the extent permitted by applicable law, Lender shall
have the following rights and remedies regarding the appointment of a
receiver: (a) Lender may have a receiver appointed as a matter of right,
(b) the receiver may be an employee of Lender and may serve without bond,
and (c) all fees of the receiver and his or her attorney shall become part
of the Indebtedness secured by this Agreement and shall be payable on
demand, with interest at the Note rate from date of expenditure until
repaid.
Collect Revenues, Apply Accounts. Lender, either itself or through a
receiver, may collect the payments, rents, income, and revenues from the
Collateral. Lender may at any time in its discretion transfer any
Collateral into its own name or that of its nominee and receive the
payments, rents, income, and revenues therefrom and hold the same as
security for the Indebtedness or apply it to payment of the Indebtedness in
such order of preference as Lender may determine. Insofar as the Collateral
consists of accounts, general intangibles, insurance policies, instruments,
chattel paper, choses in action, or similar property, Lender may demand,
collect, receipt for, settle, compromise, adjust, sue for, foreclose, or
realize on the Collateral as Lender may determine, whether or not
Indebtedness or Collateral is then due. For these purposes, Lender may, on
behalf of and in the name of Grantor, receive, open and dispose of mail
addressed to Grantor; change any address to which mail and payments are to
be sent; and endorse notes, checks, draft, money orders, documents of
title, instruments and items pertaining to payment, shipment, or storage of
any Collateral. To facilitate collection, Lender may notify account debtors
and obligors on any Collateral to make payments directly to Lender.
Obtain Deficiency. If Lender chooses to sell any or all of the Collateral,
Lender may obtain a judgment against Borrower for any deficiency remaining
on the Indebtedness due to Lender after application of all amounts received
from the exercise of the rights provided in this Agreement. Borrower shall
be liable for a deficiency even if the transaction described in this
subsection is a sale of accounts or chattel paper.
Other Rights and Remedies. Lender shall have all the rights and remedies of
a secured creditor under the provisions of the Uniform Commercial Code, as
may be amended from time to time. In addition, Lender shall have and may
exercise any or all other rights and remedies it may have available at law,
in equity, or otherwise.
Cumulative Remedies. All of Lender's rights and remedies, whether evidenced
by this Agreement or the Related Documents or by any other writing, shall
be cumulative and may be exercised singularly or concurrently. Election by
Lender to pursue any remedy shall not exclude pursuit of any other remedy,
and an election to make expenditures or to take action to perform an
obligation of Grantor or Borrower under this Agreement, after Grantor or
Borrower's failure to perform, shall not affect Lender's right to declare a
default and to exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire and final understanding and agreement of the parties
as to the matters set forth in this Agreement. No alteration of or
amendment to this Agreement shall be effective unless given in writing and
signed by the party or parties sought to be charged or bound by the
alteration or amendment.
Applicable Law. This Agreement has been delivered to Lender and accepted by
Lender in the State of Washington. If there is a lawsuit, Grantor and
Borrower agree upon Lender's request to submit to the jurisdiction of the
courts of King or Pierce County, the State of Washington. Lender, Grantor
and Borrower hereby waive the right to any jury trial in any action,
proceeding, or counterclaim brought by either Lender, Grantor or Borrower
against the other. This Agreement shall be governed by and construed in
accordance, with the laws of the State of Washington.
Attorneys' Fees; Expenses. Grantor and Borrower agree to pay upon demand
all of Lender's costs and expenses, including attorneys' fees and Lender's
legal expenses, incurred in connection with the enforcement of this
Agreement. Lender may pay someone else to help enforce this Agreement, and
Grantor and Borrower shall pay the costs and expenses of such enforcement.
Costs and expenses include Lender's attorneys' fees and legal expenses
whether or not there is a lawsuit, including attorneys' fees and legal
expenses for bankruptcy proceedings (and including efforts to modify or
vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. Grantor and Borrower also shall pay all
court costs and such additional fees as may be directed by the court.
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
Multiple Parties; Corporate Authority. All obligations of Grantor and
Borrower under this Agreement shall be joint and several, and all
references to Borrower shall mean each and every Borrower, and all
references to Grantor shall mean each and every Grantor. This means that
each of the persons signing below is responsible for all obligations in
this Agreement.
Notices. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile (unless otherwise required
by law), and shall be effective when actually delivered or when deposited
with a nationally recognized overnight courier or deposited in the United
States mail, first class, postage prepaid, addressed to the party to whom
the notice is to be given at the address shown above. Any party may change
its address for notices under this Agreement by giving formal written
notice to the other parties, specifying that the purpose of the notice is
to change the party's address. To the extent permitted by applicable law,
if there is more than one Grantor or Borrower, notice to any Grantor or
Borrower will constitute notice to all Grantor and Borrowers. For notice
purposes, Grantor and Borrower will keep Lender informed at all times of
Grantor and Borrower's current address(es).
Power of Attorney. Grantor hereby appoints Lender as its true and lawful
attorney-in-fact, irrevocably, with full power of substitution to do the
following: (a) to demand, collect, receive, receipt for, sue and recover
all sums of money or other property which may now or hereafter become due,
owing or payable from the Collateral; (b) to execute, sign and endorse any
and all claims, instruments, receipts, checks, draft or warrants issued in
payment for the Collateral; (c) to settle or compromise any and all claims
arising under the Collateral, and, in the place and stead of Grantor, to
execute and deliver its release and settlement for the claim; and (d) to
file any claim or claims or to take any action or institute or take part in
any proceedings, either in its own name or in the name of Grantor, or
otherwise, which
<PAGE>
09-07-1999 COMMERCIAL SECURITY AGREEMENT Page 5
Loan No 3000009903 (Continued)
================================================================================
in the discretion of Lender may seem to be necessary or advisable. This
power is given as security for the Indebtedness, and the authority hereby
conferred is and shall be irrevocable and shall remain in full force and
effect until renounced by Lender.
Preference Payments. Any monies Lender pays because of an asserted
preference claim in Borrower's bankruptcy will become a part of the
Indebtedness and, at Lender's option, shall be payable by Borrower as
provided above in the "EXPENDITURES BY LENDER" paragraph.
Severability. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
Successor Interests. Subject to the limitations set forth above on transfer
of the Collateral, this Agreement shall be binding upon and inure to the
benefit of the parties, their successors and assigns.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Grantor, shall constitute a waiver of
any of Lender's rights or of any of Grantor's obligations as to any future
transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance shall not
constitute continuing consent to subsequent instances where such consent is
required and in all cases such consent may be granted or withheld in the
sole discretion of Lender.
BALANCE OF PAGE INTENTIONALLY LEFT BLANK.
<PAGE>
09-07-1999 COMMERCIAL SECURITY AGREEMENT Page 6
Loan No 3000009903 (Continued)
================================================================================
Waiver of Co-obligor's Rights. If more than one person is obligated for the
Indebtedness, Borrower irrevocably waives, disclaims and relinquishes all
claims against such other person which Borrower has or would otherwise have
by virtue of payment of the Indebtedness or any part thereof, specifically
including but not limited to all rights of indemnity, contribution or
exoneration.
BORROWER AND GRANTOR ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF THIS
COMMERCIAL SECURITY AGREEMENT, AND BORROWER AND GRANTOR AGREE TO ITS TERMS. THIS
AGREEMENT IS DATED SEPTEMBER 7, 1999.
BORROWER:
PACIFIC AEROSPACE & ELECTRONICS, INC.
By: /s/ DONALD A. WRIGHT
---------------------------------
DONALD A. WRIGHT, CEO & PRESIDENT
GRANTOR:
AEROMET AMERICA, INC.
By: /s/ DONALD A. WRIGHT
---------------------------------
DONALD A. WRIGHT, Executive Vice
President
SEISMIC SAFETY PRODUCTS, INC.
By: /s/ DONALD A. WRIGHT
---------------------------------
DONALD A. WRIGHT, Executive Vice
President
CASHMERE MANUFACTURING CO., INC.
By: /s/ DONALD A. WRIGHT
---------------------------------
DONALD A. WRIGHT, Executive Vice
President
CERAMIC DEVICES, INC.
By: /s/ DONALD A. WRIGHT
---------------------------------
DONALD A. WRIGHT, Executive Vice
President
ELECTRONIC SPECIALTY CORPORATION
By: /s/ DONALD A. WRIGHT
---------------------------------
DONALD A. WRIGHT, Executive Vice
President
NORTHWEST TECHNICAL INDUSTRIES, INC.
By: /s/ DONALD A. WRIGHT
---------------------------------
DONALD A. WRIGHT, Executive Vice
President
PACIFIC COAST TECHNOLOGIES, INC.
By: /s/ DONALD A. WRIGHT
---------------------------------
DONALD A. WRIGHT, Executive Vice
President
SKAGIT ENGINEERING & MANUFACTURING, INC.
By: /s/ DONALD A. WRIGHT
---------------------------------
DONALD A. WRIGHT, Executive Vice
President
<PAGE>
ENVIRONMENTAL ADDENDUM
TO
COMMERCIAL SECURITY AGREEMENT
Lender: KEYBANK NATIONAL ASSOCIATION
Borrower: PACIFIC AEROSPACE & ELECTRONICS, INC.
Grantor: AEROMET AMERICA, INC., SEISMIC SAFETY PRODUCTS, INC., CASHMERE
MANUFACTURING CO., INC., CERAMIC DEVICES, INC., ELECTRONIC
SPECIALTY CORPORATION, NORTHWEST TECHNICAL INDUSTRIES, INC.,
PACIFIC COAST TECHNOLOGIES, INC., and SKAGIT ENGINEERING &
MANUFACTURING, INC., collectively.
DESCRIPTION OF GRANTOR BUSINESSES:
- ----------------------------------
Cashmere Manufacturing, Co., Inc. :Produces precision machined components,
structural parts, and assemblies principally from aluminum and explosively
bonded metals for the commercial aerospace and defense industries.
Seismic Safety Products, Inc.: Produces and markets automatic gas shutoff
valves.
Aeromet America, Inc.: Produces precision cast aluminum parts using
permanent mold, sand, and lost foam casting technologies primarily for the
transportation and aerospace industries.
Pacific Coast Technologies, Inc.: Designs and manufactures two lines of
hermetically sealed electronic connectors, feed-throughs, assemblies, and
instrument packages used in harsh environments.
Ceramic Devices, Inc.: Designs and manufacturers very small, specialized,
multi-layer discoidal (round) ceramic capacitors and filters used to filter
out electromagnetic interference.
ENVIRONMENTAL ADDENDUM/Page 1
<PAGE>
Northwest Technical Industries, Inc.: Manufactures over 30 specialty metals
using explosive metallurgical technology to bond, at a molecular level,
metals that would not otherwise bond together using adhesives or welding.
Electronic Speciality Corporation: Designs and manufactures
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.
Skagit Engineering & Manufacturing, Inc.: A full-service fabricator of
high-performance components, assemblies, complete structures, and tooling.
In the ordinary course of their respective businesses, Grantor purchases, uses,
and stores, and will continue to purchase, use, and store hazardous substances
as raw materials in its operations, in material compliance with applicable laws.
During routine operations, Grantor has generated and stored, and will continue
to generate and store, on-site hazardous wastes in material compliance with
applicable environmental laws. Hazardous wastes generated by Grantor have been
and will continue to be transported off site by licensed transporters to
facilities licensed for the treatment, storage and disposal of hazardous wastes.
To the best of Grantor's knowledge, there have been no material disposals,
releases or threatened releases of hazardous substances or hazardous wastes on
Grantor's respective premises. Grantor has an ongoing program of monitoring and
addressing environmental matters and from time to time in the ordinary course of
business is required to, and promptly and reasonably does address minor issues
of noncompliance at its operating sites.
Dated this 6th day of October, 1999
Initials: Lender /S/
----------
Cashmere Manufacturing Co., Inc.: /S/
----------
Seismic Safety Products, Inc.: /S/
----------
Aeromet America, Inc.: /S/
----------
Ceramic Devices, Inc.: /S/
----------
Electronic Specialty Corporation /S/
----------
Northwest Technical Industries, Inc. /S/
----------
Skagit Engineering & Manufacturing, Inc. /S/
----------
ENVIRONMENTAL ADDENDUM/Page 2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited financial statements of Pacific Aerospace & Electronics, Inc., and its
subsidiaries for the three-month period ended August 31, 1999 and is qualified
it its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-END> AUG-31-1999
<CASH> 2,608,000
<SECURITIES> 0
<RECEIVABLES> 24,800,000
<ALLOWANCES> 484,000
<INVENTORY> 26,493,000
<CURRENT-ASSETS> 56,471,000
<PP&E> 57,830,000
<DEPRECIATION> 11,541,000
<TOTAL-ASSETS> 156,840,000
<CURRENT-LIABILITIES> 22,223,000
<BONDS> 81,108,000
0
0
<COMMON> 19,000
<OTHER-SE> 52,523,000
<TOTAL-LIABILITY-AND-EQUITY> 156,840,000
<SALES> 28,571,000
<TOTAL-REVENUES> 28,571,000
<CGS> 22,011,000
<TOTAL-COSTS> 22,011,000
<OTHER-EXPENSES> 5,104,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,548,000
<INCOME-PRETAX> (1,041,000)
<INCOME-TAX> 465,000
<INCOME-CONTINUING> (1,506,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,506,000)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
