8-K

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K

Current Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): March 19, 2002

PACIFIC AEROSPACE & ELECTRONICS, INC.

(Exact name of registrant as specified in its charter)

Washington	000-26088	91-1744587
(State or other	(Commission	(IRS Employer
jurisdiction of	File Number)	Identification No.)
incorporation)

430 Olds Station Road, Third Floor, Wenatchee, WA	98801
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number,
including area code:	(509) 667-9600

TABLE OF CONTENTS

	Item 1. Changes in Control of Registrant
	Item 5. Other Events
	Item 7. Financial Statements and Exhibits
SIGNATURES
EXHIBIT INDEX
Exhibit 3.1
Exhibit 3.2
Exhibit 4.1
Exhibit 10.1
Exhibit 10.2
Exhibit 10.3
Exhibit 10.4
Exhibit 10.5
Exhibit 10.6
Exhibit 10.7
Exhibit 10.8
Exhibit 10.9
Exhibit 10.10
Exhibit 10.11
Exhibit 10.12
Exhibit 10.13
Exhibit 10.14
Exhibit 10.15

Item 1. Changes in Control of Registrant

On March 19, 2002, the Company completed an exchange transaction (the “Exchange”) whereby the holders (the “Noteholders”) of all of the Company’s 11 1/4% senior subordinated notes due 2005 (“Old Notes”) exchanged $63.7 million aggregate principal amount of Old Notes, together with accrued interest thereon, for shares of the Company’s common stock, shares of the Company’s Series C Convertible Preferred Stock (the “New Preferred”) and $15 million in aggregate principal amount of 10% pay-in-kind senior subordinated notes due 2007 (“New Notes”). The Noteholders, by virtue of their ownership of the common stock and the New Preferred, in the aggregate, control 97.5% of the voting power of the Company.

The New Preferred will be automatically converted into common stock following shareholder approval of an increase in the number of authorized shares of common stock. Votes with respect to the increase in the number of authorized shares of common stock of the Company will be solicited only pursuant to a proxy statement filed with and cleared by the Securitites and Exchange Commission. Following the conversion of the New Preferred into common stock, the Noteholders will beneficially own 97.5% of the outstanding shares of common stock of the Company on a fully-diluted basis.

The following table sets forth information regarding the beneficial ownership of each entity that beneficially owns more than 1% of the outstanding shares of common stock on a fully-diluted, as converted basis.

Shareholders	Fully-diluted Number of		Fully-diluted Percentage
	Common Shares		Ownership
Greenwich Street Capital Partners        and its affiliates		2,644,656,383		52.44	%
M.W. Post Advisory Group L.L.C.,      on behalf of its investment      advisory clients		1,323,486,097		26.24	%
Alliance Capital Management,		656,146,505		13.01	%
L.P.,on behalf of its investment       advisory clients
William E. Simon & Sons Special		192,984,266		3.83	%
Situation Partners II, L.P. and       its affiliates
Other		77,193,706		1.53	%

Prior to the Exchange, the outstanding common stock of the Company was widely held. No shareholder or group of affiliated shareholders held a sufficient number of shares of common stock to exercise voting control over the Company.

In connection with the Exchange, Werner Hafelfinger, Dale L. Rasmussen, Gene C. Sharratt, Robert M. Stemmler and William A. Wheeler resigned as members of the Board of Directors. The Company’s Board of Directors was reconstituted to consist of five

2

directors, all of whom are designated by the Noteholders. Donald A. Wright, the Company’s President and Chief Executive Officer, will remain a member of the Company’s Board of Directors.

Item 5. Other Events

In addition to consummating the Exchange, the Company has entered into a new five-year senior secured loan (the “New Senior Loan”) in the principal amount of $36.0 million. The New Senior Loan was issued at a discount and will bear interest at a rate of 5% per annum. The net proceeds of the loan totaled approximately $22 million, which was used, in part, to pay off in full the Company’s 21% senior secured loan. The remainder of the proceeds of the New Senior Loan will be used for working capital, to pay the fees and costs of the restructuring and for other general corporate purposes.

Item 7. Financial Statements and Exhibits

(c) Exhibits

The following are filed as exhibits to this current report:

Exhibit Number	Description
Exhibit 3.1	Articles of Amendment of Pacific Aerospace & Electronics, Inc. filed March 19, 2002
Exhibit 3.2	Designation of Rights and Preferences for Series C Voting Convertible Preferred Stock of Pacific Aerospace and Electronics, Inc.
Exhibit 4.1	Indenture dated as of March 19, 2002, among Pacific Aerospace & Electronics, Inc., as issuer, Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., PA&E International, Inc., Seismic Safety Products, Inc. and Skagit Engineering and Manufacturing, Inc., each as guarantors, and U.S. Bank National Association, as trustee
Exhibit 10.1	Consent executed by KeyBank National

Exhibit Number	Description
	Association in favor of the Company and Pacific Coast Technologies, Inc. dated as of March 18, 2002
Exhibit 10.2	Forbearance Agreement executed by KeyBank National Association in favor of the Company dated as of March 15, 2002
Exhibit 10.3	Deed of Trust, Security Agreement And Fixture Filing With Assignment Of Leases And Rents by and among Pacific Aerospace & Electronics, Inc., Cashmere Manufacturing Co., Inc., Northwest Technical Industries, Inc., Land Title Company Of Chelan — Douglas County, Inc., and First Union National Bank (Headquarters building—430 Olds Station Road)
Exhibit 10.4	Deed of Trust, Security Agreement And Fixture Filing With Assignment Of Leases And Rents by and among Pacific Aerospace & Electronics, Inc., Cashmere Manufacturing Co., Inc., Northwest Technical Industries, Inc., Land Title Company Of Chelan — Douglas County, Inc., and First Union National Bank (Bonded Metals Division—2249 Diamond Point Road, Sequim WA)
Exhibit 10.5	Deed of Trust, Security Agreement And Fixture Filing With Assignment Of Leases And Rents by and among Pacific Aerospace & Electronics, Inc., Cashmere Manufacturing Co., Inc., Northwest Technical Industries, Inc., Land Title Company Of Chelan — Douglas County, Inc., and First Union National Bank (Cashmere Warehouse—209 Mission Street, Cashmere, WA)
Exhibit 10.6	Employment Agreement by and between Donald A. Wright and Pacific Aerospace & Electronics, Inc. dated March 19, 2002
Exhibit 10.7	Note Purchase Agreement by and among Pacific Aerospace and Electronics, Inc., the

Exhibit Number	Description
	Initial Purchaser and First Union National Bank dated as of March 19, 2002
Exhibit 10.8	5.0% Senior Secured Note due May 1, 2007
Exhibit 10.9	Subsidiary Guaranty Agreement dated March 25, 2002, executed by Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., PA&E International, Inc., Seismic Safety Products, Inc., and Skagit Engineering & Manufacturing, Inc., in favor of the holders of 5% senior secured notes due 2007 and First Union National Bank, as Collateral Agent
Exhibit 10.10	Security Agreement dated as of March 25, 2002, by and among Pacific Aerospace & Electronics, Inc., Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., PA&E International, Inc., Seismic Safety Products, Inc., Skagit Engineering & Manufacturing, Inc., and First Union National Bank, as Collateral Agent
Exhibit 10.11	Stock Pledge Agreement dated as of March 25, 2002, by and among Pacific Aerospace & Electronics, Inc., PA&E International, Inc. and First Union National Bank, as collateral agent
Exhibit 10.12	Exchange Agreement by and among Pacific Aerospace and Electronics, Inc., Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., PA&E International,

Exhibit Number	Description
	Inc., Seismic Safety Products, Inc. and Skagit Engineering & Manufacturing, Inc. and certain holders of the Company’s 11 1/4% Senior Subordinated Notes due 2005, dated as of March 19, 2002
Exhibit 10.13	Global 10% Senior Subordinated Pay-In-Kind Note due 2007
Exhibit 10.14	Subsidiary Guarantee dated March 19, 2002 executed by Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., PA&E International, Inc., Seismic Safety Products, Inc. and Skagit Engineering and Manufacturing, Inc. in favor of the holders of 10% Senior Subordinated Pay-In-Kind Notes due 2007
Exhibit 10.15	Conversion Adjustment Agreement dated as of March 19, 2002, by and among Pacific Aerospace & Electronics, Inc., GSCP Recovery, Inc., GSC Recovery II, L.P., Alliance Capital Management L.P., M.W. Post Advisory Group L.L.C., William E. Simon & Sons Special Situation Partners II, L.P. and HBK Master Fund L.P.

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 hereunto duly authorized.

PACIFIC AEROSPACE & ELECTRONICS, INC.

By:         /s/ Donald A. Wright             
      Donald A. Wright
      President & Chief Executive Officer

Dated: April 2, 2002

EXHIBIT INDEX

Exhibit Number	Description
Exhibit 3.1	Articles of Amendment of Pacific Aerospace & Electronics, Inc. filed March 19, 2002
Exhibit 3.2	Designation of Rights and Preferences for Series C Voting Convertible Preferred Stock of Pacific Aerospace and Electronics, Inc.
Exhibit 4.1	Indenture dated as of March 19, 2002, among Pacific Aerospace & Electronics, Inc., as issuer, Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., PA&E International, Inc., Seismic Safety Products, Inc. and Skagit Engineering and Manufacturing, Inc., each as guarantors, and U.S. Bank National Association, as trustee
Exhibit 10.1	Consent executed by KeyBank National Association in favor of the Company and Pacific Coast Technologies, Inc. dated as of March 18, 2002
Exhibit 10.2	Forbearance Agreement executed by KeyBank National Association in favor of the Company dated as of March 15, 2002
Exhibit 10.3	Deed of Trust, Security Agreement And Fixture Filing With Assignment Of Leases And Rents by and among Pacific Aerospace & Electronics, Inc., Cashmere Manufacturing Co., Inc., Northwest Technical Industries, Inc., Land Title Company Of Chelan — Douglas County, Inc., and First Union National Bank (Headquarters building—430 Olds Station Road)

Exhibit Number	Description
Exhibit 10.4	Deed of Trust, Security Agreement And Fixture Filing With Assignment Of Leases And Rents by and among Pacific Aerospace & Electronics, Inc., Cashmere Manufacturing Co., Inc., Northwest Technical Industries, Inc., Land Title Company Of Chelan — Douglas County, Inc., and First Union National Bank (Bonded Metals Division—2249 Diamond Point Road, Sequim WA)
Exhibit 10.5	Deed of Trust, Security Agreement And Fixture Filing With Assignment Of Leases And Rents by and among Pacific Aerospace & Electronics, Inc., Cashmere Manufacturing Co., Inc., Northwest Technical Industries, Inc., Land Title Company Of Chelan — Douglas County, Inc., and First Union National Bank (Cashmere Warehouse—209 Mission Street, Cashmere, WA)
Exhibit 10.6	Employment Agreement by and between Donald A. Wright and Pacific Aerospace & Electronics, Inc. dated March 19, 2002
Exhibit 10.7	Note Purchase Agreement by and among Pacific Aerospace and Electronics, Inc., the Initial Purchaser and First Union National Bank dated as of March 19, 2002
Exhibit 10.8	5.0% Senior Secured Note due May 1, 2007
Exhibit 10.9	Subsidiary Guaranty Agreement dated March 25, 2002, executed by Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., PA&E International, Inc., Seismic Safety Products, Inc., and Skagit Engineering & Manufacturing, Inc., in favor of the holders of 5% senior secured

Exhibit Number	Description
	notes due 2007 and First Union National Bank, as Collateral Agent
Exhibit 10.10	Security Agreement dated as of March 25, 2002, by and among Pacific Aerospace & Electronics, Inc., Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., PA&E International, Inc., Seismic Safety Products, Inc., Skagit Engineering & Manufacturing, Inc., and First Union National Bank, as Collateral Agent
Exhibit 10.11	Stock Pledge Agreement dated as of March 25, 2002, by and among Pacific Aerospace & Electronics, Inc., PA&E International, Inc. and First Union National Bank, as collateral agent
Exhibit 10.12	Exchange Agreement by and among Pacific Aerospace and Electronics, Inc., Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., PA&E International, Inc., Seismic Safety Products, Inc. and Skagit Engineering & Manufacturing, Inc. and certain holders of the Company’s 11 1/4% Senior Subordinated Notes due 2005, dated as of March 19, 2002
Exhibit 10.13	Global 10% Senior Subordinated Pay-In-Kind Note due 2007
Exhibit 10.14	Subsidiary Guarantee dated March 19, 2002 executed by Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., PA&E International, Inc., Seismic Safety Products, Inc. and

Exhibit Number	Description
	Skagit Engineering and Manufacturing, Inc. in favor of the holders of 10% Senior Subordinated Pay-In-Kind Notes due 2007
Exhibit 10.15	Conversion Adjustment Agreement dated as of March 19, 2002, by and among Pacific Aerospace & Electronics, Inc., GSCP Recovery, Inc., GSC Recovery II, L.P., Alliance Capital Management L.P., M.W. Post Advisory Group L.L.C., William E. Simon & Sons Special Situation Partners II, L.P. and HBK Master Fund L.P.

EX-3.1 3 f80483ex3-1.txt EXHIBIT 3.1 EXHIBIT 3.1 ARTICLES OF AMENDMENT OF PACIFIC AEROSPACE & ELECTRONICS, INC. Pursuant to the provisions of RCW 23B.06.020 of the Washington Business Corporation Act, the following Articles of Amendment are executed by the undersigned, a Washington corporation: 1. NAME. The name of the corporation is Pacific Aerospace & Electronics, Inc. 2. TEXT OF AMENDMENTS. The Articles of Incorporation of the corporation are amended to add a new Section C to Article II, which shall read as follows: The corporation's Certificate of Designation setting forth the rights and preferences of the corporation's Series C Voting Convertible Preferred Stock attached hereto and incorporated herein by this reference. 3. EXCHANGE, RECLASSIFICATION OR CANCELLATION OF ISSUED SHARES. The amendment does not provide for the exchange, reclassification or cancellation of issued shares. 4. DATE OF ADOPTION. The amendment was adopted on the 27th day of February, 2002 by the Board of Directors of the corporation, in accordance with the provisions of RCW 23B.10.020 and RCW 23B.06.020. Shareholder action was not required. 5. EFFECTIVE DATE. These Articles of Amendment will be effective upon filing. The undersigned hereby certifies that he is an officer of the corporation and is authorized to execute these Articles of Amendment on behalf of the corporation. DATED this 18th day of March, 2002. Pacific Aerospace & Electronics, Inc., a Washington corporation By /s/ Donald A. Wright ------------------------------------- Donald A. Wright, President EX-3.2 4 f80483ex3-2.txt EXHIBIT 3.2 Exhibit 3.2 DESIGNATION OF RIGHTS AND PREFERENCES OF SERIES C VOTING CONVERTIBLE PREFERRED STOCK OF PACIFIC AEROSPACE & ELECTRONICS, INC. 1. Designation. The Series C Convertible Preferred Stock of Pacific Aerospace & Electronics, Inc. (the "Corporation") shall consist of 3,000 shares, par value $0.001 per share, and shall be designated the "Series C Voting Convertible Preferred Stock" (the "Series C Stock"). The Series C Stock will rank senior in right of payment to all other classes or series of capital stock of the Corporation, including the common stock (the "Common Stock") and all other series of preferred stock of the Corporation as to dividends and upon liquidation, dissolution or winding up of the Corporation. 2. Dividends. (a) The holders of issued and outstanding Series C Stock shall be entitled to receive, out of any funds and assets of the Corporation legally available therefor, cumulative preferential dividends accruing at the rate of ten percent (10%) of the Liquidation Preference (as defined below) thereof per share per annum (the "Dividend Rate"), payable only in shares of Series C Stock (in lieu of cash) (valued for this purpose at the Liquidation Preference). Such cumulative preferential dividends shall be payable prior and in preference to the payment of any dividend or other distribution on all other classes or series of capital stock of the Corporation, including, without limitation, the Corporation's Common Stock. In the event that the Automatic Conversion Date (as defined below) is not on or prior to June 1, 2002, such Dividend Rate will increase, from and after June 1, 2002, to the rate of fourteen percent (14%) of the Liquidation Preference per share per annum. Such dividends shall accrue on each share of Series C Stock from the date of issuance and shall accrue from day-to-day until paid, whether earned or declared. (b) Notwithstanding the foregoing paragraph: (i) no dividend may be declared or paid on shares of Common Stock or any other shares of capital stock of the Corporation prior to the payment of any accrued dividends on the Series C Stock, except upon any capital stock which has been granted priority dividend rights pursuant to the affirmative written approval or consent of the holders of not less than two-thirds of the then issued and outstanding shares of Series C Stock; (ii) no dividend may be declared or paid on shares of capital stock of the Corporation (other than the Series C Stock) if the net assets of the Corporation thereafter would be insufficient to make the liquidation payment described in Section 3(a) on all outstanding shares of Series C Stock; and (iii) if the Board of Directors declares a dividend payable on the outstanding shares of Common Stock or any series of preferred stock (other than Series C Stock), other than a dividend payable in shares of Common Stock or shares of capital stock ranking, as to dividends, liquidations and otherwise, junior to the Series C Stock, the holders of Series C Stock shall be entitled to a dividend per share of Series C Stock that would be payable on that number of shares of Common Stock contemplated to be received by the holders upon the Automatic Conversion of Series C Stock as set forth in Section 5 (without requiring such conversion) (as of the record date for the determination of holders of Common Stock entitled to receive such dividend) in addition to any dividend which may be declared and payable on the Series C Stock. 3. Liquidation, Dissolution, or Winding Up. (a) Treatment at Liquidation, Dissolution, or Winding Up. (i) In the event of any liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, the holders of Series C Stock shall be entitled to be paid, before any sums are paid or any assets distributed among the holders of the shares of the Common Stock or any other junior series or class of preferred stock, out of the assets of the Corporation available for distribution to holders of the Corporation's capital stock, an amount (the "Liquidation Preference") equal to the greater of (i) forty five thousand dollars ($45,000) (plus any declared but unpaid dividends) per share of Series C Stock (which amount shall be subject to proportionate adjustment on any stock split, combination, reclassification, or other similar event involving the Series C Stock) or (ii) the amount the holders of the Series C Stock would be entitled to receive as if all of the Series C Stock were converted into that number of shares of Common Stock contemplated to be received by the holders upon the Automatic Conversion of Series C Stock as set forth in Section 5 hereof (without requiring such conversion) immediately before such liquidation, dissolution or winding up of the Corporation. (ii) If the assets of the Corporation are insufficient to permit payment in full to the holders of Series C Stock as provided in this subsection (a), then the entire assets of the Corporation available for such distribution shall be distributed ratably among the holders of Series C Stock. After payment is made in full to the holders of Series C Stock, or funds needed for such payments shall have been set aside by the Corporation in trust for the account of holders of Series C Stock so as to be available for such payments, all remaining assets available for distribution to shareholders shall be distributed ratably solely among holders of shares of other classes of capital stock. (b) Consolidations, Mergers, and Sales of Assets. 2 (i) At least 20 days before the consolidation or merger of the Corporation into or with another as a result of which the holders of more than 50% of the shares of Common Stock receive cash, securities of another entity, or other property in exchange for their shares, or a sale of all or substantially all of the assets of the Corporation, the Corporation shall notify the holders of Series C Stock thereof in writing, and the closing of such event shall be regarded as a liquidation, dissolution, or winding up of the affairs of the Corporation within the meaning of Section 3(a); provided, however, that for 20 days after the date of such notice, each holder of Series C Stock shall have the right, exercisable by written notice to the Corporation, to elect the benefits of Section 3(b)(ii) hereof in lieu of receiving payment in liquidation, dissolution, or winding up of the Corporation pursuant to this Section 3(b)(i). (ii) As part of any consolidation, merger, or sale of assets described in Section 3(b)(i), provision shall be made so that each holder of Series C Stock shall be entitled to elect to receive in such transaction for or in respect of the Series C Stock held by such holder, the number of shares of stock or other securities or property to which such holder would have been entitled if such holder had converted its shares of Series C Stock into the number of shares of the Corporation's Common Stock contemplated to be received by such holder upon the Automatic Conversion as set forth in Section 5 hereof (without requiring such conversion) immediately before the closing of such consolidation, merger, or sale of assets. (c) Distribution Other Than Cash. If the distribution provided for in this Section 3 is to be paid in property other than cash, the value of such distribution shall be the fair market value of such property as determined in good faith by the Board of Directors of the Corporation. 4. Voting Rights. The Series C Stock shall vote with the Corporation's Common Stock, together as a class, on all matters on which the Common Stock is entitled to vote and each share of Series C Stock shall have that number of votes equal to the number of shares of Common Stock into which such share of Series C Stock would be convertible upon the Automatic Conversion, as set forth in Section 5 hereof (without requiring such conversion). The holders of the Series C Stock then outstanding shall be entitled, voting together as a class, to elect all five (5) directors of the Corporation at each election of directors. The Series C Stock shall not be entitled to vote separately as a class except as otherwise provided herein or required by Washington law. In the event voting as a separate voting group by the holders of the Series C Stock is expressly required by Washington law, any vote by the holders of Series C Stock as a separate voting group shall be effective if approved by a majority of the outstanding shares of Series C Stock at a meeting or by written consent. 3 5. Automatic Conversion. (a) The holders of shares of Series C Stock shall have the following rights with respect to the conversion of shares of Series C Stock into shares of Common Stock ("Conversion Rights"): (i) On the date (the "Automatic Conversion Date") upon which an amendment to the Corporation's Articles of Incorporation increasing the number of authorized shares of Common Stock of the Corporation to at least 6,000,000,000 shares becomes effective, each share of then-unconverted Series C Stock (and all accrued dividends thereon) shall automatically convert (the "Automatic Conversion") into fully paid and nonassessable shares of Common Stock at a conversion price (the "Automatic Conversion Price") equal to $.008900664 without any action on the part of the holder by dividing the Liquidation Preference by the Automatic Conversion Price then in effect, and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent; provided, however, that in the event the Series C Stock converts into a number of shares of Common Stock which in the aggregate, when added to the number of shares of Common Stock issued pursuant to an exchange transaction of the Company consummated on March 19, 2002 (in an amount of approximately 51,419,101 shares) (the "Exchange Shares"), would exceed 97.5% of the shares of the Company's Common Stock on a fully-diluted, "as converted" basis, the Automatic Conversion Price shall be re-adjusted so that the aggregate number of shares of Common Stock issuable upon the Automatic Conversion shall equal in the aggregate, when added to the Exchange Shares, 97.5% of the Company's Common Stock on a fully-diluted, "as converted" basis. (ii) The Automatic Conversion Price shall be adjusted from time to time in accordance with and subject to the provisions set forth in Section 5(b) below. (b) Such Automatic Conversion Price shall be subject to adjustment from time to time as hereinafter provided in this Section 5(b). (i) Automatic Conversion Price Adjustment Formulas. If, at any time and from time to time after the date of original issuance of the Series C Stock, the Corporation shall issue or sell any share of Common Stock (excluding any grant, issuance or sale described in Section 5(b)(vii)) for a consideration per share which is less than the Automatic Conversion Price in effect at the time of such issue or sale, then in each such case (except when a different method of adjusting the Automatic Conversion Price is provided in Section 5(b)(ii), 5(b)(iii) or 5(b)(v)), the Automatic Conversion Price shall be forthwith changed (but only, except as otherwise provided in Section 5(b)(ii)(C), if a reduction to the Automatic Conversion Price would result) to the price (calculated to the nearest one/one-hundredth of a cent) determined by dividing (A) an amount equal to the sum of (x) the number of shares of Common Stock outstanding and deemed (in accordance with Section 5(b)(ii)) to be outstanding immediately prior to such issue or sale, multiplied by the then effective 4 Automatic Conversion Price, plus (y) the total consideration, if any, received and deemed (in accordance with Section 5(b)(ii)) received by the Corporation upon such issue or sale, by (B) the total number of shares of Common Stock outstanding and deemed (in accordance with Section 5(b)(ii)) outstanding immediately after such issue or sale. No adjustment of the Automatic Conversion Price, however, shall be made in an amount less than one/one-hundredth of a cent per share, but any such lesser adjustment shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which together with any subsequent adjustments so carried forward shall amount to one/one-hundredth of a cent per share or more. (ii) Constructive Issuances of Common Stock; Convertible Securities; Rights and Options. For purposes of Section 5(b)(i), the following provisions shall also be applicable: (A) If at any time the Corporation shall in any manner grant any rights or options (except for the grant of any rights or options referred to in Section 5(b)(vii)) to subscribe for or to purchase Common Stock or any stock or securities convertible into or exchangeable or exercisable for shares of Common Stock (such convertible, exchangeable or exercisable stock or securities being hereinafter called "Convertible Securities"), whether or not such rights or options or the right to convert, exchange or exercise any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such rights or options or upon conversion, exchange or exercise of such Convertible Securities (determined by dividing (x) the total amount, if any, received or receivable by the Corporation as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the exercise of such rights or options, plus, in the case of any such rights or options which relate to such Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion, exchange or exercise thereof, by (y) the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon the conversion, exchange or exercise of all such Convertible Securities issuable upon the exercise of such rights or options) shall be less than the Automatic Conversion Price in effect as of the time of granting such rights or options, then the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon conversion, exchange or exercise of the total maximum amount of such Convertible Securities issuable upon the exercise of such rights or options shall (on and after the date of the granting of such rights or options) be 5 deemed to be outstanding and to have been issued for such price per share. Except as provided in clause (C) below, no further adjustments of the Automatic Conversion Price shall be made upon the actual issue of shares of Common Stock or Convertible Securities upon exercise of such rights or options or upon the actual issue of shares of Common Stock upon conversion, exchange or exercise of such Convertible Securities. (B) If at any time the Corporation shall in any manner issue or sell any Convertible Securities (other than any Convertible Securities referred to in Section 5(b)(vii)), whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion, exchange or exercise (determined by dividing (x) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion, exchange or exercise thereof, by (y) the total maximum number of shares of Common Stock issuable upon the conversion, exchange or exercise of all such Convertible Securities) shall be less than the Automatic Conversion Price in effect as of the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion, exchange or exercise of all such Convertible Securities shall (on and after the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued for such price per share, provided, that, except as otherwise specified in clause (C) below, (x) no further adjustments of the Automatic Conversion Price shall be made upon the actual issue of Common Stock upon conversion, exchange or exercise of such Convertible Securities, and (y) if any such issue or sale of such Convertible Securities is made upon exercise of any rights to subscribe for or to purchase or any option to purchase any such Convertible Securities for which adjustments of the Automatic Conversion Price have been or are to be made pursuant to other provisions of this Section 5(b)(ii)), no further adjustment of the Automatic Conversion Price shall be made by reason of such issue or sale. (C) If the exercise price provided for in any right or option referred to in clause (A) of this Section 5(b)(ii), or the rate at which any Convertible Securities referred to in clauses (A) and (B) of this Section 5(b)(ii) are convertible into or exchangeable for Common Stock, shall change or a different exercise price or rate shall become effective at any time or from time to time (other than under or by reason of provisions designed to protect against dilution) then, upon such change becoming effective, the 6 Automatic Conversion Price then in effect hereunder shall forthwith be increased or decreased to such Automatic Conversion Price as would have been obtained had the adjustments made and required to be made under this Section 5(b)(ii) upon the issuance of such rights or options or Convertible Securities been made upon the basis of (and the total consideration received therefor) (x) the issuance of the number of shares of Common Stock theretofore actually delivered upon the exercise of such options or rights or upon the conversion, exchange or exercise of such Convertible Securities, (y) the issuance of all of Common Stock and all other rights, options and Convertible Securities issued after the issuance of such rights, options or Convertible Securities, and (z) the original issuance at the time of such change of any such options, rights and Convertible Securities then still outstanding. On the expiration of any such option or right or the termination of any such right to convert, exchange or exercise such Convertible Securities, the Automatic Conversion Price then in effect hereunder shall forthwith be increased or decreased to such Automatic Conversion Price as would have obtained (x) had the adjustments made upon the issuance of such rights or options or such Convertible Securities been made upon the basis of the issuance of only the number of shares of Common Stock theretofore actually delivered (and the total consideration received therefor) upon the exercise of such rights or options or upon the conversion, exchange or exercise of such Convertible Securities, and (y) had adjustments been made on the basis of the Automatic Conversion Price as adjusted under the immediately preceding clause (x) for all issues or sales of Common Stock or rights, options or Convertible Securities made after the issuance of such rights or options or such Convertible Securities. If the exercise price provided for in any right or option referred to in clause (A) of this Section 5(b)(ii), or the rate at which any Convertible Securities referred to in clauses (A) and (B) of this Section 5(b)(ii) are convertible into or exchangeable for shares of Common Stock, shall decrease at any time under or by reason of provisions with respect thereto designed to protect against dilution, then in the case of the delivery of shares of Common Stock upon the exercise of any such right or option or upon conversion, exchange or exercise of any such Convertible Securities, the Automatic Conversion Price then in effect hereunder shall forthwith be decreased to such Automatic Conversion Price as would have obtained had the adjustments made upon issuance of such right or option or such Convertible Securities been made upon the basis of the issuance of (and the total consideration received for) the shares of Common Stock delivered as aforesaid. 7 (D) If at any time any shares of Common Stock or Convertible Securities or any rights or options to purchase any shares of Common Stock or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount paid to the Corporation therefor without deduction therefrom of any expenses incurred or any underwriting commissions, concessions or discounts, or finders' fees or brokerage commissions, paid or allowed by the Corporation in connection therewith, except to the extent paid to any officer or director of the Corporation or any affiliate of any such officer or director. In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any shares of Common Stock or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash payable to the Corporation shall be deemed to be the fair value of such consideration as determined in good faith by the Board of Directors of the Corporation, without deduction therefrom of any expenses incurred or any underwriting commissions or concessions or discounts paid or allowed by the Corporation in connection therewith, except to the extent paid to any officer or director of the Corporation or any affiliate of any such officer or director. In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any share of Common Stock or Convertible Securities shall be issued in connection with any merger of another corporation into the Corporation, the amount of consideration therefor shall be deemed to be the fair value as determined in good faith by the Board of Directors of the Corporation of such portion of the assets of such merged corporation as such Board shall determine to be attributable to such shares of Common Stock, Convertible Securities, rights or options, as the case may be. (E) If at any time the Corporation shall take a record of the holders of Common Stock for the purpose of entitling them (x) to receive a dividend or other distribution payable in shares of Common Stock or in Convertible Securities, or (y) to subscribe for or purchase shares of Common Stock or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of the Common Stock deemed to have been issued or sold upon the declaration of such dividend or of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (iii) Stock Dividends. If at any time the Corporation shall declare a dividend or any other distribution upon any capital stock of the Corporation which is payable in shares of Common Stock, then the Automatic Conversion Price in effect immediately prior to the declaration of such dividend or 8 distribution shall be reduced to the quotient obtained by dividing (A) the product of (x) the number of shares of Common Stock outstanding and deemed (in accordance with Section 5(b)(ii)) to be outstanding immediately prior to such declaration, multiplied by (y) the then effective Automatic Conversion Price, by (B) the total number of shares of Common Stock outstanding and deemed (in accordance with Section 5(b)(ii)) to be outstanding immediately after such declaration. For purposes of clarification, all shares of Common Stock and all Convertible Securities issuable in payment of any dividend or other distribution upon the capital stock of the Corporation shall be deemed after such declaration to have been issued and sold without consideration. (iv) Extraordinary Dividends and Distributions. If at any time the Corporation shall declare a dividend or any other distribution upon the Common Stock payable otherwise than out of current earnings, retained earnings or earned surplus and otherwise than in shares of Common Stock or Convertible Securities, then, except to the extent that such dividend or distribution shall have been paid to the holders of Series C Stock pursuant to Section 2, the Corporation shall set aside an equal per share dividend (calculated, with respect to the Series C Stock, on an "as converted" basis in accordance with the conversion provisions set forth in this Section 5), which shall be payable to the holder of the subject Series C Stock upon conversion thereof into Common Stock. To the extent that any dividend or distribution required to be set aside under this Section 5(b)(iv) shall be in a form other than cash, then the Corporation shall have the right, in lieu of setting aside such non-cash property, to set aside a cash amount equal to the fair value of such non-cash property as determined by the Board of Directors of the Corporation in good faith. For the purposes of the foregoing, a dividend or distribution other than in cash shall be considered payable out of earnings, retained earnings or earned surplus only to the extent that such current earnings, retained earnings or earned surplus are charged an amount equal to the fair value of such dividend or distribution at the time of the declaration thereof, as determined by the Board of Directors of the Corporation in good faith. Such reductions shall take effect as of the date on which a record is taken for the purposes of such dividend or distribution, or, if a record is not taken, the date as of which the holders of record of Common Stock entitled to such dividend or distribution are to be determined. (v) Stock Splits and Reverse Splits. If at any time the Corporation shall subdivide its outstanding shares of Common Stock into a greater number of shares, the Automatic Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced and the number of Conversion Shares receivable upon conversion of outstanding Series C Stock immediately prior to such subdivision shall be proportionately increased, and conversely, in case at any time the Corporation shall combine the outstanding shares of Common Stock into a smaller number 9 of shares, the Automatic Conversion Price in effect immediately prior to such combination shall be proportionately increased and the number of Conversion Shares receivable upon conversion of outstanding Series C Stock immediately prior to such combination shall be proportionately reduced. (vi) Adjustments for Consolidation, Merger, Sale of Assets, Reorganization, etc. If at any time the Corporation shall be a party to any transaction (including without limitation a merger, consolidation, sale of all or substantially all of the Corporation's assets or a recapitalization of the Common Stock) in which the previously outstanding shares of Common Stock shall be changed into or exchanged for different securities of the Corporation or changed into or exchanged for common stock or other securities of another corporation or other property (including cash) or any combination of any of the foregoing (each such transaction being hereinafter referred to as the "Transaction"; the Corporation (in the case of a recapitalization of the Stock) or such other corporation being hereinafter referred to as the "Acquiring Corporation," and the common stock of the Acquiring Corporation being hereinafter referred to as the "Acquirer's Stock"), then, as a condition to the consummation of the Transaction, lawful and adequate provisions shall be made so that, upon the basis and the terms and in the manner provided in this Section 5(b)(vi), each holder of Series C Stock, upon conversion of such Series C Stock at any time after the consummation of the Transaction, shall be entitled to receive, in lieu of the shares of Common Stock issuable upon such exercise prior to such consummation, at the election of such holder given by notice to the Corporation on or before the later of the day on which the holders of Common Stock approve the Transaction, or the thirtieth day following the date of delivery or mailing to such holder of the last proxy statement relating to the vote on the Transaction by the holders of Common Stock: (A) the stock and other securities, cash and property to which such holder would have been entitled upon the consummation of the Transaction if such holder had converted such Series C Stock into that number of shares of Common Stock contemplated to be received by such holder upon the Automatic Conversion as set forth in this Section 5 (without requiring such conversion) immediately prior thereto (subject to adjustments from and after the date of the consummation of the Transaction (the "Consummation Date") as nearly equivalent as possible to the adjustments provided for in this Section 5(b)); or (B) only in the case of a Transaction other than a Transaction in which the previously outstanding shares of Common Stock shall be exchangeable for cash only, if the Acquiring Corporation meets the requirements set forth in this Section 5(b)(vi), the number of shares of the Acquirer's Stock or, if the Acquiring Corporation fails to 10 meet, but a Parent (as defined in this Section 5(b)(vi)) does meet, such requirements, of such Parent's common stock (subject to adjustments from and after the Consummation Date as nearly equivalent as possible to the adjustments provided for in this Section 5(b)), determined by dividing (x) the product obtained by multiplying (1) the number of shares of Common Stock to which the holder of such Series C Stock would have been entitled had such holder converted such Series C Stock into that number of shares of Common Stock contemplated to be received by such holder upon the Automatic Conversion as set forth in this Section 5 (without requiring such conversion) immediately prior to the consummation of the Transaction, times (2) the greater of the Automatic Conversion Price or the Acquisition Price (as defined in this Section 5(b)(vi)) in effect on the date immediately prior to the consummation of the Transaction, by (y) the Market Value of the Acquirer's Stock on the date immediately preceding the Consummation Date. For the purposes of this Section 5(b)(vi) only, the term "Market Value" shall mean, for any share of common stock on any date specified herein, the last sale price, regular way, on such date, or, if no sale takes place on such date, the average of the closing bid and asked prices on such date, in each case as officially reported on the New York Stock Exchange, or, if not so reported, on the principal national securities exchange on which such stock is listed or if not listed or admitted to trading, the average of the closing bid and asked prices of such stock in the over-the-counter market as reported by The Nasdaq Stock Market or a similar organization; and the term "Acquisition Price" shall mean the consideration per share to be paid for or received by the holders of the previously-outstanding shares of Common Stock in accordance with the terms of the Transaction, determined (x) in the case where the holders of the previously outstanding Common Stock received solely shares of the Acquirer's Stock in the Transaction, by multiplying the Market Value of the Acquirer's Stock as of the date immediately preceding the Consummation Date by a fraction the numerator of which shall be the aggregate number of shares of the Acquirer's Stock to be received in the Transaction in exchange for all of the previously outstanding shares of Common Stock and the denominator of which shall be the aggregate number of such previously outstanding shares of Common Stock, and (y) in any other case, by dividing the aggregate fair market value (using Market Value for any shares of the Acquirer's Stock), as of the date immediately preceding the Consummation Date, of the aggregate consideration to be received by the holders of such previously outstanding shares of Common Stock by the number of shares of such previously outstanding Common Stock. The requirements referred to in clause (B) of this Section 5(b)(vi) with reference to the Acquiring Corporation or to a corporation (herein referred to as a "Parent") which directly or indirectly 11 controls the Acquiring Corporation are as follows: (x) its common stock is listed on the New York Stock Exchange or a principal national securities exchange or bid and asked prices are reported with respect thereto by Nasdaq or a similar organization and such common stock continues to meet such requirements for listing thereon, (y) it is required to file, and in each of its three fiscal years immediately preceding the Consummation Date has filed, reports with the Securities and Exchange Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, and (z) in the case of a Parent, such Parent is required to include the Acquiring Corporation in the consolidated financial statements contained in the Parent's Annual Report on Form 10-K and is not itself included in the consolidated financial statements of any other person (other than its consolidated subsidiaries). Notwithstanding anything contained herein to the contrary, the Corporation shall not effect any Transaction unless prior to or simultaneously with the consummation of such Transaction the survivor or successor corporation (if other than the Corporation) resulting from such Transaction shall (AA) assume by written instrument executed and delivered to each holder of Series C Stock the obligation to deliver to such holder of Series C Stock such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to receive, and containing the express assumption of such successor corporation of the due and punctual performance and observance of every provision of the Series C Stock to be performed and observed by the Corporation and of all liabilities and obligations of the Corporation hereunder, and (BB) deliver to the holders of Series C Stock an opinion, in form, substance and from counsel reasonably satisfactory to the holders of Series C Stock, to the effect that such written instrument has been duly authorized, executed and delivered by such successor corporation and constitutes a legal, valid and binding instrument enforceable (subject to applicable bankruptcy and other similar laws affecting the enforcement of creditors' rights generally) against such successor corporation in accordance with its terms, and to such further effects as the holders of Series C Stock may reasonably request. (vii) Exceptions to Adjustment of Automatic Conversion Price. Anything herein to the contrary notwithstanding, the Corporation shall not be required to make any adjustment of the Automatic Conversion Price in the case of (A) the issuance of Series C Stock or the issuance of shares of Common Stock or other securities upon conversion of the Series C Stock or any adjustment of the conversion price with respect thereto, and (B) the issuance of shares of Common Stock pursuant to (x) any warrants or options outstanding on the date of first issuance of Series C Stock or (y) stock options granted under and in accordance with the Corporation's board-approved stock option plans. (viii) Treasury Shares. The number of shares of Common Stock outstanding at any time shall not include shares owned or held by or for the account of 12 the Corporation, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purposes of this Section 5(b). (ix) Certificate of Adjustment. Upon each adjustment of the Automatic Conversion Price and upon each change in the number of Conversion Shares issuable upon the conversion of the Series C Stock, and in the event of any change in the rights of the holders of the Series C Stock by reason of other events herein set forth, then and in each such case, the Corporation will promptly prepare a certificate of adjustment stating the adjusted Automatic Conversion Price and the new number of Conversion Shares so issuable, or specifying the other shares of stock, securities or assets and the amount thereof receivable as a result of such change in rights, and setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. The Corporation will promptly mail a copy of such certificate of adjustment to each registered holder of Series C Stock. (x) Other Notices. In case at any time (A) the Corporation shall declare any dividend upon its Common Stock payable in cash or stock or make any other distribution to the holders of its Common Stock, (B) the Corporation shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights, (C) there shall be any capital reorganization or reclassification of the capital stock of the Corporation, or a consolidation or merger of the Corporation with or into another entity or entities, or a sale, lease, abandonment, transfer or other disposition of all or substantially all of its assets, or there shall be a voluntary or involuntary dissolution, liquidation or winding up on the Corporation, then, in any one or more of said cases, the Corporation shall give, by delivery in person or by mail or telecopier, addressed to each holder of Series C Stock at the address of such holder as shown on the books of the Corporation, (x) at least twenty (20) days' prior written notice of the date on which the books of the Corporation shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, disposition, dissolution, liquidation or winding up, and (y) in the case of any such reorganization, reclassification, consolidation, merger, disposition, dissolution, liquidation or winding up, at least twenty (20) days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (x) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto, and such notice in accordance with the foregoing clause shall also specify the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, disposition, dissolution, liquidation or winding up, as the case may be. 13 (xi) Corporation to Prevent Dilution. If at any time or from time to time conditions arise by reason of action taken by the Corporation which, in the good faith opinion of its Board of Directors, are not adequately covered by the provisions of this Section 5(b), and which might materially and adversely affect the conversion rights of the registered holders of Series C Stock, the Board of Directors of the Corporation shall appoint a firm of independent certified public accountants of recognized national standing, which may be the firm regularly retained by the Corporation, which shall give its opinion upon the adjustment, if any, on a basis consistent with the standards established in the other provisions of this Section 5(b), necessary with respect to the Automatic Conversion Price, so as to preserve, without dilution, the conversion rights of the registered holders of the Series C Stock. Upon receipt of such opinion, the Board of Directors of the Corporation shall forthwith make the adjustments described therein. (xii) Closing of Books. The Corporation will at no time close its transfer books against the transfer of any Series C Stock or of any shares of Common Stock issued or issuable upon the conversion of any shares of Series C Stock in any manner which interferes with the timely conversion of such Series C Stock, except as may otherwise be required to comply with applicable securities laws. (xiii) Exercise Procedure. Any Automatic Conversion shall be deemed to have occurred without any requirement of notice from any holder or the surrender of any certificates for shares converted (which shares and certificates shall, upon such Automatic Conversion, be deemed to represent solely the right to receive the shares of Common Stock to which the holder is entitled by reason of the Automatic Conversion). Promptly after the occurrence of the event giving rise to Automatic Conversion and the surrender of the certificate or certificates for the share or shares of Series C Stock to be converted, the Corporation shall issue and deliver, or cause to be issued and delivered, to the holder, registered in such name or names as such holder may direct, a certificate or certificates for the number of whole shares of Common Stock issuable upon the conversion of such share or shares of Series C Stock. To the extent permitted by law, any Automatic Conversion shall be deemed to have been effected and the number of shares of Common Stock issuable upon such Automatic Conversion shall be determined as the close of business (Eastern time) on the Automatic Conversion Date (provided that the Corporation shall not be required to issue the certificate or certificates for the shares of the Common Stock issuable upon such Automatic Conversion unless and until the holder thereof shall have surrendered the certificate or certificates for the shares converted). (xiv) Fractional Shares; Dividends; Partial Conversion. No fractional shares shall be issued upon conversion of Series C Stock into Common Stock and 14 no payment or adjustment shall be made upon any conversion on account of any cash dividends on the Common Stock issued upon such conversion. At the time of each conversion, the Corporation shall pay in shares of Series C Stock (in lieu of cash) (valued for this purpose at the Liquidation Preference) an amount equal to all dividends declared and unpaid on the shares of Series C Stock surrendered for conversion to the date upon which such conversion is deemed to take place as provided in Section 5(b)(xiii); provided that no payment or adjustment shall be made on account of any accrued dividends that have not been declared. In case the number of shares represented by the certificate or certificates surrendered pursuant to this Section 5(b)(xiv) exceeds the number of shares converted, the Corporation shall, upon such conversion, execute and deliver to the holder, at the expense of the Corporation, a new certificate or certificates for the number of shares represented by the certificate or certificates surrendered which are not to be converted. If any fractional share of Common Stock would, except for the provisions of the first sentence of this Section 5(b)(xiv), be delivered upon such conversion, the Corporation, in lieu of delivering such fractional share, shall pay to the holder surrendering the Series C Stock for conversion an amount in cash equal to such fraction multiplied by the then applicable Automatic Conversion Price. (xv) Reservation of Shares. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of the Series C Stock, the Corporation will forthwith take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. The Corporation will obtain any authorization, consent, approval or other action by or make any filing with any court or governmental, quasi-governmental or administrative body that may be required under applicable law, including without limitation state securities laws, in connection with the issuance of the shares of Common Stock upon conversion of the Series C Stock. (xvi) Costs. The Corporation shall pay all documentary, stamp, transfer or other transactional taxes attributable to the issuance or delivery of Conversion Shares upon conversion of any shares of the Series C Stock; provided, however, that the Corporation shall not be required to pay any federal or state income taxes or other taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificate for such conversion shares received upon conversion in a name other than that of the holder of the shares of the Series C Stock in respect of which such shares are being issued. (c) No Impairment. The Corporation shall not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issuance or sale of securities, or any other voluntary action, 15 avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the performance of all the provisions of this Section 5 and in the taking of all such action needed to protect the Conversion Rights of the holders of the Series C Stock against impairment. 6. No Redemption. The Corporation shall not be entitled to redeem or retire all or any part of the Series C Stock without the consent or affirmative vote of the holder of record of each share to be redeemed or retired. 7. Required Approval by Holders of Series C Stock. At any time when there are outstanding any shares of Series C Stock, except where the vote or written consent of the holders of a greater number of shares is required by law or by the Articles of Incorporation, and in addition to any other vote required by law or the Articles of Incorporation, without the approval of the holders of two-thirds of the then outstanding shares of Series C Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a series, the Corporation will not: (a) amend or modify this Certificate of Rights and Preferences; (b) authorize or issue, or increase the authorized amount of, any class or series of capital stock of the Corporation ranking on a parity or superior to the Series C Stock as to dividends or upon liquidation, dissolution or winding up; (c) repeal, amend, restate or otherwise modify any provision of the Corporation's Articles of Incorporation, excluding, however, the creation, authorization, issuance and/or increase of any class or series of capital stock of the Corporation that ranks junior to the Series C Stock as to dividends and upon liquidation, dissolution or winding up; (d) consent to (i) the acquisition of the Corporation by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation) in which a majority of the outstanding capital stock of the Corporation or surviving entity is held by persons who were not stockholders of the Corporation prior to such transaction(s), or (ii) the sale of all or substantially all of the assets of the Corporation; (e) consent to the liquidation, dissolution or winding up of the Corporation; (f) purchase or set aside any sums for the purchase of any shares of stock; or (g) change the authorized number of directors of the Corporation from five (5); (h) agree to do any of the foregoing. 8. Transferability. Subject to applicable securities laws, any restrictive legends on certificates evidencing the shares of Series C Stock and any other agreements governing or restricting transfer of the Series C Stock, the holders of the Series C Stock shall have 16 the right to freely sell, assign, transfer, give away or dispose of their respective shares of the Series C Stock, whether in whole or in part, to any person without restriction. 9. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by verifiable facsimile, or three business days after being mailed by certified or registered mail, postage prepaid, return-receipt requested, addressed to the Corporation at its offices or to the holder of record at its address appearing on the books of the Corporation, as applicable. 10. No Preemptive Rights. No holder of Series C Stock shall be entitled as a matter of right to subscribe for, purchase, or receive any part of any new or additional shares of any class, whether now or hereinafter authorized, or of bonds or debentures, or other evidences of indebtedness convertible into or exchangeable for shares of any class, but all such new or additional shares of any class or bond or debentures, or other evidences of indebtedness convertible into or exchangeable for shares, may be issued and disposed of by the Board of Directors on such terms and for such consideration (to the extent permitted by law), and to such person or persons as the Board of Directors in their absolute discretion may deem advisable, subject to the terms hereof. 11. Amendment; Waivers. Any provision of this Designation of Rights and Preferences may be amended or waived (i) by the holders of two-thirds of the then-outstanding shares of Series C Stock at a meeting at which such amendment or waiver is presented and which is attended by a majority of the shares of the then-outstanding Series C Stock, in person or by proxy; or (ii) by the written consent of the holders of two-thirds of all then-outstanding shares of Series C Stock. /s/ Jonathan Michaels --------------------------------------- Jonathan Michaels Secretary Pacific Aerospace & Electronics, Inc. 17 EX-4.1 5 f80483ex4-1.txt EXHIBIT 4.1 EXHIBIT 4.1 Pacific Aerospace & Electronics, Inc. as Issuer Aeromet America, Inc. Balo Precision Parts, Inc. Cashmere Manufacturing Co., Inc. Ceramic Devices, Inc. Electronic Specialty Corporation Northwest Technical Industries, Inc. Pacific Coast Technologies, Inc. PA&E International, Inc. Seismic Safety Products, Inc. Skagit Engineering & Manufacturing, Inc as Guarantors $15,000,000 aggregate principal amount at Initial Issuance 10% Senior Subordinated Pay-In-Kind Notes due 2007 --------------------- INDENTURE Dated as of March 19, 2002 --------------------- U.S. Bank National Association Trustee TABLE OF CONTENTS ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE........................................1 SECTION 1.01 DEFINITIONS............................................................1 SECTION 1.02 OTHER DEFINITIONS.....................................................11 SECTION 1.03 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.....................12 SECTION 1.04 RULES OF CONSTRUCTION.................................................12 ARTICLE 2 THE NOTES........................................................................13 SECTION 2.01 FORM AND DATING.......................................................13 SECTION 2.02 EXECUTION AND AUTHENTICATION..........................................13 SECTION 2.03 REGISTRAR AND PAYING AGENT............................................14 SECTION 2.04 PAYING AGENT TO HOLD MONEY IN TRUST...................................14 SECTION 2.05 HOLDER LISTS..........................................................14 SECTION 2.06 TRANSFER AND EXCHANGE.................................................15 SECTION 2.07 REPLACEMENT NOTES.....................................................17 SECTION 2.08 OUTSTANDING NOTES.....................................................18 SECTION 2.09 TREASURY NOTES........................................................18 SECTION 2.10 TEMPORARY NOTES.......................................................18 SECTION 2.11 CANCELLATION..........................................................19 SECTION 2.12 DEFAULTED INTEREST....................................................19 ARTICLE 3 REDEMPTION AND PREPAYMENT........................................................19 SECTION 3.01 NOTICES TO TRUSTEE....................................................19 SECTION 3.02 SELECTION OF NOTES TO BE REDEEMED.....................................19 SECTION 3.03 NOTICE OF REDEMPTION..................................................20 SECTION 3.04 EFFECT OF NOTICE OF REDEMPTION........................................21 SECTION 3.05 DEPOSIT OF REDEMPTION PRICE...........................................21 SECTION 3.06 NOTES REDEEMED IN PART................................................21 SECTION 3.07 OPTIONAL REDEMPTION...................................................21 SECTION 3.08 NO MANDATORY REDEMPTION...............................................21 SECTION 3.09 NO SINKING FUND.......................................................22 ARTICLE 4 COVENANTS........................................................................22 SECTION 4.01 PAYMENT OF NOTES......................................................22 SECTION 4.02 MAINTENANCE OF OFFICE OR AGENCY.......................................22 SECTION 4.03 REPORTS...............................................................23 SECTION 4.04 COMPLIANCE CERTIFICATE................................................23 SECTION 4.05 TAXES.................................................................24 SECTION 4.06 STAY, EXTENSION AND USURY LAWS........................................24 SECTION 4.07 REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL...............................................................24 SECTION 4.08 LIMITATION ON RESTRICTED PAYMENTS.....................................25 SECTION 4.09 LIMITATION ON LIENS SECURING INDEBTEDNESS.............................26 SECTION 4.10 LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES..........................................................26 SECTION 4.11 LIMITATIONS ON TRANSACTIONS WITH AFFILIATES...........................27 SECTION 4.12 FUTURE SUBSIDIARY GUARANTORS..........................................28 i SECTION 4.13 RELEASE OF GUARANTORS.................................................28 SECTION 4.14 CORPORATE EXISTENCE...................................................28 SECTION 4.15 LIMITATION ON STATUS AS AN INVESTMENT COMPANY.........................28 ARTICLE 5 SUCCESSORS.......................................................................29 SECTION 5.01 MERGER, SALE OR CONSOLIDATION.........................................29 SECTION 5.02 SUCCESSOR CORPORATION SUBSTITUTED.....................................29 ARTICLE 6 DEFAULTS AND REMEDIES............................................................29 SECTION 6.01 EVENTS OF DEFAULT.....................................................29 SECTION 6.02 ACCELERATION..........................................................30 SECTION 6.03 OTHER REMEDIES........................................................31 SECTION 6.04 WAIVER OF PAST DEFAULTS...............................................31 SECTION 6.05 CONTROL BY MAJORITY...................................................31 SECTION 6.06 LIMITATION ON SUITS...................................................32 SECTION 6.07 RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT.........................32 SECTION 6.08 COLLECTION SUIT BY TRUSTEE............................................32 SECTION 6.09 TRUSTEE MAY FILE PROOF OF CLAIM.......................................33 SECTION 6.10 PRIORITIES............................................................33 SECTION 6.11 UNDERTAKING FOR COSTS.................................................34 SECTION 6.12 RESTORATION OF RIGHTS AND REMEDIES....................................34 ARTICLE 7 TRUSTEE..........................................................................34 SECTION 7.01 DUTIES OF TRUSTEE.....................................................34 SECTION 7.02 RIGHTS OF TRUSTEE.....................................................35 SECTION 7.03 INDIVIDUAL RIGHTS OF TRUSTEE..........................................36 SECTION 7.04 TRUSTEE'S DISCLAIMER..................................................36 SECTION 7.05 NOTICE OF DEFAULTS....................................................36 SECTION 7.06 REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES............................37 SECTION 7.07 COMPENSATION AND INDEMNITY............................................37 SECTION 7.08 REPLACEMENT OF TRUSTEE................................................38 SECTION 7.09 SUCCESSOR TRUSTEE BY MERGER, ETC......................................39 SECTION 7.10 ELIGIBILITY; DISQUALIFICATION.........................................39 SECTION 7.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.....................39 ARTICLE 8 LEGAL DEFEASANCE AND COVENANT DEFEASANCE.........................................40 SECTION 8.01 OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE..............40 SECTION 8.02 LEGAL DEFEASANCE AND DISCHARGE........................................40 SECTION 8.03 COVENANT DEFEASANCE...................................................40 SECTION 8.04 CONDITIONS TO LEGAL OR COVENANT DEFEASANCE............................41 SECTION 8.05 DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS........................................42 SECTION 8.06 REPAYMENT TO COMPANY..................................................43 SECTION 8.07 REINSTATEMENT.........................................................43 ARTICLE 9 AMENDMENT, SUPPLEMENT AND WAIVER.................................................44 SECTION 9.01 WITHOUT CONSENT OF HOLDERS OF NOTES...................................44 SECTION 9.02 WITH CONSENT OF HOLDERS OF NOTES......................................44 ii SECTION 9.03 COMPLIANCE WITH TRUST INDENTURE ACT...................................46 SECTION 9.04 REVOCATION AND EFFECT OF CONSENTS.....................................46 SECTION 9.05 NOTATION ON OR EXCHANGE OF NOTES......................................46 SECTION 9.06 TRUSTEE TO SIGN AMENDMENTS, ETC.......................................46 ARTICLE 10 SUBORDINATION...................................................................47 SECTION 10.01 AGREEMENT TO SUBORDINATE.............................................47 SECTION 10.02 LIQUIDATION; DISSOLUTION; BANKRUPTCY.................................47 SECTION 10.03 DEFAULT ON SENIOR INDEBTEDNESS.......................................48 SECTION 10.04 ACCELERATION OF NOTES................................................49 SECTION 10.05 WHEN DISTRIBUTION MUST BE PAID OVER..................................49 SECTION 10.06 NOTICE BY COMPANY....................................................49 SECTION 10.07 SUBROGATION..........................................................49 SECTION 10.08 RELATIVE RIGHTS......................................................50 SECTION 10.09 SUBORDINATION MAY NOT BE IMPAIRED BY COMPANY.........................50 SECTION 10.10 DISTRIBUTION OR NOTICE TO REPRESENTATIVE.............................50 SECTION 10.11 RIGHTS OF TRUSTEE AND PAYING AGENT...................................51 SECTION 10.12 AUTHORIZATION TO EFFECT SUBORDINATION................................51 SECTION 10.13 AMENDMENTS...........................................................51 ARTICLE 11 SUBSIDIARY GUARANTEES...........................................................51 SECTION 11.01 SUBSIDIARY GUARANTEES................................................51 SECTION 11.02 EXECUTION AND DELIVERY OF SUBSIDIARY GUARANTEES......................53 SECTION 11.03 GUARANTORS MAY CONSOLIDATE, ETC., ON CERTAIN TERMS...................53 SECTION 11.04 RELEASES FOLLOWING SALE OF ASSETS....................................54 SECTION 11.05 LIMITATION OF GUARANTOR'S LIABILITY..................................54 SECTION 11.06 APPLICATION OF CERTAIN TERMS AND PROVISIONS TO THE GUARANTOR.........55 SECTION 11.07 SUBORDINATION OF SUBSIDIARY GUARANTEES...............................55 ARTICLE 12 MISCELLANEOUS...................................................................55 SECTION 12.01 TRUST INDENTURE ACT CONTROLS.........................................55 SECTION 12.02 NOTICES..............................................................56 SECTION 12.03 COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS OF NOTES........57 SECTION 12.04 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT...................57 SECTION 12.05 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION........................57 SECTION 12.06 RULES BY TRUSTEE AND AGENTS..........................................57 SECTION 12.07 NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS.........................................................58 SECTION 12.08 GOVERNING LAW........................................................58 SECTION 12.09 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS........................58 SECTION 12.10 SUCCESSORS...........................................................58 SECTION 12.11 SEVERABILITY.........................................................58 iii SECTION 12.12 COUNTERPART ORIGINALS................................................58 SECTION 12.13 TABLE OF CONTENTS, HEADINGS, ETC.....................................59 iv INDENTURE dated as of March 19, 2002, among Pacific Aerospace & Electronics, Inc., a Washington corporation (the "Company"), and Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., PA&E International, Inc., Seismic Safety Products, Inc. and Skagit Engineering & Manufacturing, Inc., each as guarantors and any other Subsidiaries (as defined herein) of the Company that executes a Subsidiary Guarantee (as defined herein) guaranteeing the Notes in accordance with the provisions hereof (collectively, the "Guarantors"), and U.S. Bank National Association, a national banking association, as trustee (the "Trustee"). Each party agrees as follows for the benefit of each other and for the equal and ratable benefit of the Holders of the 10% Senior Subordinated Pay-in-Kind Notes due 2007 (the "Notes"). The term "Notes" as used herein shall also include each of the additional 10% Senior Subordinated Pay-In-Kind Notes issued in lieu of the cash payment of interest on the Notes. ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01 DEFINITIONS "Acquired Indebtedness" means Indebtedness or Disqualified Capital Stock of any Person existing at the time such person becomes a Subsidiary of the Company, including by designation, or is merged or consolidated into or with the Company or one of its Subsidiaries. "Affiliate" means any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company. For purposes of this definition, the term "control" means the power to direct the management and policies of a person, directly or through one or more intermediaries, whether through the ownership of voting securities, by contract, or otherwise, provided that, with respect to ownership interest in the Company and its Subsidiaries, a Beneficial Owner of 10% or more of the total voting power normally entitled to vote in the election of directors, managers or trustees, as applicable, shall for such purposes be deemed to constitute control. "Agent" means any Registrar, Paying Agent or co-registrar. "Average Life" means, as of the date of determination, with respect to any security or instrument, the quotient obtained by dividing (i) the sum of the products (a) of the number of years from the date of determination to the date or dates of each successive scheduled principal (or redemption) payment of such security or instrument and (b) the amount of each such respective principal (or redemption) payment by (ii) the sum of all such principal (or redemption) payments. "Bank Indebtedness" means Indebtedness of the Company or any of its Subsidiaries from financial institutions pursuant to a revolving credit or term loan facility (including, but not limited to, all Indebtedness arising under the Note Purchase Agreement, the New Senior Secured Notes and the other Senior Credit Documents), including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith. Without limiting the generality of the foregoing, the term "Bank Indebtedness" shall also include Indebtedness pursuant to any amendment, amendment and restatement, renewal, extension, restructuring, supplement or modification to any such facility and all refundings, refinancings and replacements of any such facility, including any agreement (i) extending the maturity of any Indebtedness incurred thereunder or contemplated thereby, (ii) adding or deleting borrowers or guarantors thereunder, so long as borrowers and issuers include one or more of the Company and its Subsidiaries and their respective successors and assigns, (iii) increasing the amount of Indebtedness incurred thereunder or available to be borrowed thereunder, or (iv) otherwise altering the terms and conditions thereof in a manner not prohibited by the terms of the Indenture. "Bankruptcy Law" means title 11, U.S. Code or any similar Federal or state law for the relief of debtors. "Beneficial Owner" or "beneficial owner" for purposes of the definitions of Change of Control and Affiliate has the meaning attributed to it in Rules 13d-3 and 13d-5 under the Exchange Act (as in effect on the Issue Date), whether or not applicable, except that a "person" shall be deemed to have "beneficial ownership" of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time. "Board of Directors" means, with respect to any Person, the board of directors of such person or any committee of the Board of Directors of such Person authorized, with respect to any particular matter, to exercise the power of the board of directors of such person. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York, New York are authorized or obligated by law or executive order to close. "Capitalized Lease Obligation" means, as to any Person, the obligations of such Person under a lease that are required to be classified and accounted for as capital lease obligations under GAAP and, for purposes of this definition, the amount of such obligations at any date shall be the capitalized amount of such obligations at such date, determined on a consolidated basis in accordance with GAAP. "Capital Stock" means, shares of capital stock, beneficial, partnership or limited liability company interests, participations or other equivalents (regardless of how designated) of or in a corporation, partnership, limited liability company or equivalent entity, whether voting or non-voting, and includes, without limitation, common stock and preferred stock. "Cash Equivalent" means (a) securities with maturities of one year or less from the date of acquisition issued or fully guaranteed or insured by the United States government or any agency thereof, (b) certificates of deposit, eurodollar time deposits, overnight bank deposits and bankers' acceptances of any financial institution having maturities of one year or less from the date of acquisition, (c) commercial paper of an issuer rated at least "A-1" by S&P or "P-1" by Moody's, or carrying an equivalent rating by a nationally recognized rating agency if both of 2 S&P and Moody's cease publishing ratings of investments, and (d) mutual funds investing solely in investments of the type described in the foregoing clauses (a) through (c). "Change of Control" means any transaction or series of transactions in which any of the following occurs: (a) any "person" or "group" (as such terms are used for purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable) (other than any of the Excluded Persons) becomes following the Issue Date the "beneficial owner," directly or indirectly, of more than 50% of the issued and outstanding Capital Stock entitled to vote in the election of directors, managers, or trustees, as applicable, of the Company or any Guarantor or the surviving entity or entities (if other than the Company or any Guarantor); or (b) individuals who immediately following the Issue Date after giving effect to the transactions contemplated by Section 6.6 of the Exchange Agreement constituted the Board of Directors of the Company or any Guarantor (together with any new directors whose election by such Board of Directors or whose nomination for election by the shareholders of the Company or any Guarantor, as applicable, was approved by a vote of at least a majority of the directors of the Company or any Guarantor then still in office who were either directors at the Issue Date or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company or any Guarantor then in office. Notwithstanding the foregoing to the contrary, a "Change of Control" shall expressly exclude the Exchange Transaction and subsequent conversion of the Company's Series C Preferred Stock into common stock. "Consolidated Net Income" means, with respect to any person for any period, the net income (or loss) of such person and its Consolidated Subsidiaries (determined in accordance with GAAP) for such period, adjusted to exclude (only to the extent included in computing such net income (or loss) and without duplication): (a) all gains (but not losses) which are either extraordinary (as determined in accordance with GAAP) or are either unusual or nonrecurring (including any gain from the sale or other disposition of assets outside the ordinary course of business or from the issuance or sale of any Capital Stock), (b) the net income, if positive, of any person, other than a Consolidated Subsidiary, in which such person or any of its Consolidated Subsidiaries has an interest, except to the extent of the amount of any dividends or distributions actually paid in cash to such person or a Consolidated Subsidiary of such person during such period, but in any case not in excess of such person's pro rata share of such person's net income for such period, (c) the net income or loss of any person acquired in a pooling of interests transaction for any period prior to the date of such acquisition, and (d) the net income, if positive, of any of such person's Consolidated Subsidiaries to the extent that the declaration or payment of dividends or similar distributions is not at the time permitted by operation of the terms of its charter or bylaws or any other agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such Consolidated Subsidiary. "Consolidated Subsidiary" means, for any person, each Subsidiary of such person (whether now existing or hereafter created or acquired) the financial statements of which are consolidated for financial statement reporting purposes with the financial statements of such person in accordance with GAAP. 3 "Corporate Trust Administration Office of the Trustee" shall be at the address of the Trustee specified in Section 12.02 hereof or such other address as to which the Trustee may give notice to the Company. "Credit Parties" means, collectively, the Company and the Guarantors, and "Credit Party" means any one of them, as the context may require. "Default" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. "Depositary" means, with respect to the Notes issuable or issued in whole or in part in global form, the Person specified in Section 2.03 hereof as the Depositary with respect to the Notes, until a successor shall have been appointed and become such Depositary pursuant to the applicable provision of this Indenture, and, thereafter, "Depositary" shall mean or include such successor. "Disqualified Capital Stock" means (a) except as set forth in (b), with respect to any Person, Capital Stock of such Person that, by its terms or by the terms of any security into which it is convertible, exercisable or exchangeable, is, or upon the happening of an event or the passage of time or both would be, required to be redeemed or repurchased (including at the option of the holder thereof) by such Person or any of its Subsidiaries, in whole or in part, on or prior to the Stated Maturity of the Notes and (b) with respect to any Subsidiary of such Person (including with respect to any Subsidiary of the Company), any Capital Stock other than any common equity with no preference, privileges, or redemption or repayment provisions. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Agreement" means the Exchange Agreement, dated as of March 19, 2002, among the Company, certain of its Subsidiaries and the holders of the Old Notes. "Exchange Transaction" means the transaction whereby the holders of the Company's Old Notes will exchange their Old Notes for shares of the Company's common stock, preferred stock and Notes pursuant to the Exchange Agreement. "Excluded Person" means any officer or director of the Company, the other Persons listed on Exhibit C hereto, any Persons related to such Persons by kinship or marriage, and any trust, corporation, partnership or other entity which is beneficially owned 80% or more by any such Persons. "Exempted Affiliate Transactions" means (a) customary employee compensation arrangements approved by a majority of independent (as to such transactions) members of the Board of Directors of the Company, (b) dividends permitted under the terms of the covenant discussed in Section 4.08, "Limitation on Restricted Payments," and payable, in form and amount, on a pro rata basis to all holders of common stock of the Company and (c) transactions solely between the Company and any of its wholly owned Consolidated Subsidiaries or solely among wholly owned Consolidated Subsidiaries of the Company. 4 "Foreign Subsidiary" means any Wholly-owned Subsidiary organized and incorporated in a jurisdiction outside of the United States and is not a Guarantor. "GAAP" means United States generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board. "Global Note" means a Note that contains the paragraph referred to in footnote 1 to the form of the Note attached hereto as Exhibit A. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Indebtedness or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation (whether arising by virtue of partnership agreements, agreements to keep well, to purchase assets, goods, securities or services, to take-or-pay or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided, however, that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has corresponding meaning. "Guarantor" means each Subsidiary of the Company that executes a Subsidiary Guarantee guaranteeing the Notes in accordance with the provisions of the Indenture. "Holder" means a Person in whose name a Note is registered on the Registrar's books or, at such time as the Notes are held in global form, the beneficial owner of the Note. "Indebtedness" of any Person at any date means, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations of such Person to pay the deferred purchase price of property or services, (d) all Capitalized Lease Obligations of such Person, (e) all contingent or non-contingent obligations of such Person to reimburse any Person in respect of amounts paid or payable (currently or in the future, on a contingent or non-contingent basis) under a letter of credit or similar instrument, (f) all Indebtedness of others secured by a Lien on any asset of such Person, and (g) all Indebtedness of others Guaranteed by such Person. "Indenture" means this Indenture, as amended or supplemented from time to time. "Investment" means any investment in any Person, whether by means of share purchase, capital contribution, loan, advance, time deposit or otherwise. "Issue Date" means the date of first issuance of the Notes under this Indenture. 5 "Junior Securities" of the Company or any Guarantor means securities of the Company or such Guarantor that are junior in right of payment to the Notes or the applicable Guarantee. "Lien" means any mortgage, charge, pledge, lien (statutory or otherwise), privilege, security interest, hypothecation or other encumbrance upon or with respect to any property of any kind, real or personal, movable or immovable, now owned or hereafter acquired. "Moody's" means Moody's Investors Service, Inc. "Net Cash Proceeds" means the aggregate amount of cash or Cash Equivalents received by the Company in the case of a sale of Qualified Capital Stock plus, upon any exercise, exchange or conversion of securities (including options, warrants, rights and convertible or exchangeable debt) of the Company that were issued for cash on or after the Issue Date, the amount of cash originally received by the Company upon the issuance of such securities (including options, warrants, rights and convertible or exchangeable debt) less, in each case, the sum of all payments, fees, commissions and expenses (including, without limitation, the fees and expenses of legal counsel and investment banking fees and expenses) incurred in connection with such sale of Qualified Capital Stock. "New Senior Secured Notes" means the Senior Secured Notes due 2007 issued pursuant to that certain Note Purchase Agreement. "Note Custodian" means the Trustee, as custodian with respect to the Global Notes, or any successor entity thereto. "Note Purchase Agreement" means that certain Note Purchase Agreement dated as of March 19, 2002 between the Company and Jefferies & Co., as Initial Purchaser of the New Senior Secured Notes. "Noteholder Affiliate" means any Person directly or indirectly controlling or controlled by or under direct or indirect common control with a Noteholder. For purposes of this definition, the term "control" means the power to direct the management and policies of a person, directly or through one or more intermediaries, whether through the ownership of voting securities, by contract or otherwise. "Noteholders" means, collectively, GSCP Recovery, Inc., William E. Simon & Sons Special Situation Partners II, L.P., M.W. Post Advisory Group L.L.C., Alliance Capital Management L.P. and any of their respective Noteholder Affiliates. "Notes" has the meaning ascribed to such term in the preamble hereto. The term Notes shall also include each of the additional 10% Senior Subordinated Pay-In-Kind Notes issued in lieu of cash payment of interest on the Notes. "Obligations" mean all Indebtedness, Guarantees (including the guarantees made by the Guarantors pursuant to Article 11 hereof) and obligations owed by the Company and each of the other Credit Parties pursuant to or in connection with this Agreement and the other Subordinated Debt Documents, including without limitation, all principal, interest, 6 reimbursement obligations and fees and expenses payable to any Holder in connection with the Subordinated Debt Documents and indemnification payments, whether direct or indirect, absolute or contingent, liquidated or unliquidated, now existing or hereafter arising hereunder or thereunder, and all obligations and liabilities incurred in connection with collecting and enforcing the foregoing, together with all renewals, extensions, modifications or refinancings thereof. "Officer" means, with respect to any Person, the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the General Counsel, the Controller, the Secretary or any Vice-President of such Person. "Officers' Certificate" means a certificate signed on behalf of the Company by two Officers of the Company, one of whom must be the principal executive officer, the principal financial officer, the treasurer or the principal accounting officer of the Company, that meets the requirements of Section 12.05 hereof. "Old Notes" shall mean the Company's 11 1/4% senior subordinated notes due 2005. "Opinion of Counsel" means a written opinion from legal counsel that meets the requirements of Section 12.05 hereof. The counsel may counsel to the Company, any Subsidiary of the Company or the Trustee. "Permitted Investment" means (a) Investments in any of the Notes; (b) Investments in Cash Equivalents; (c) Indebtedness incurred by the Company to any Guarantor and Indebtedness incurred by any Guarantor to the Company; provided, that, in the case of Indebtedness of the Company, such obligations shall be unsecured and subordinated in all respects to the Company's obligations pursuant to the Notes; and (d) any Investment by the Company or any Subsidiary in a Person if as a result of such Investment such Person immediately becomes a Wholly-owned Subsidiary which is a Guarantor or such Person is immediately merged with or into the Company or a Wholly-owned Guarantor. "Permitted Lien" means (a) Liens existing on the Issue Date; (b) Liens imposed by governmental authorities for taxes, assessments or other charges not yet subject to penalty or which are being contested in good faith and by appropriate proceedings, if adequate reserves with respect thereto are maintained on the books of the Company in accordance with GAAP; (c) statutory liens of carriers, warehousemen, mechanics, material men, landlords, repairmen or other like Liens arising by operation of law in the ordinary course of business, provided that (i) the underlying obligations are not overdue for a period of more than 60 days, or (ii) such Liens are being contested in good faith and by appropriate proceedings and adequate reserves with respect thereto are maintained on the books of the Company in accordance with GAAP; (d) Liens securing the performance of bids, trade contracts (other than borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business and consistent with the Company's past practice; (e) easements, rights-of-way, zoning, similar restrictions and other similar encumbrances or title defects which, singly or in the aggregate, do not in any case materially 7 detract from the value of the property, subject thereto (as such property is used by the Company or any of its Subsidiaries) or interfere with the ordinary conduct of the business of the Company or any of its Subsidiaries; (f) Liens arising by operation of law in connection with judgments, only to the extent, for an amount and for a period not resulting in an Event of Default with respect thereto; (g) pledges or deposits made in the ordinary course of business and consistent with the Company's past practice in connection with workers' compensation, unemployment insurance and other types of social security legislation; (h) Liens securing the Notes; (i) Liens securing Indebtedness of a Person existing at the time such Person becomes a Subsidiary or is merged with or into the Company or a Subsidiary, provided that such Liens were in existence prior to the date of such acquisition, merger or consolidation, were not incurred in anticipation thereof, and do not extend to any other assets; (j) leases or subleases granted to other persons in the ordinary course of business not materially interfering with the conduct of the business of the Company or any of its Subsidiaries or materially detracting from the value of the relative assets of the Company or any Subsidiary; (k) Liens securing Indebtedness incurred to refinance any Indebtedness that was previously so secured in a manner no more adverse to the Holders of the Notes than the terms of the Liens securing such refinanced Indebtedness, and provided that the Indebtedness secured is not increased and the lien is not extended to any additional assets or property that would not have been security for the Indebtedness refinanced; (l) Liens securing Bank Indebtedness incurred in accordance with the terms hereof; (m) purchase money Liens or purchase money security interests upon or in any property acquired or held by the Company or any such Subsidiary of the Company in the ordinary course of business to secure the purchase price of such property or to secure Indebtedness incurred solely for the purpose of financing the acquisition of such property, and Liens existing on such property at the time of its acquisition (other than any such Lien created in contemplation of such acquisition); provided, however, that the aggregate principal amount of the Indebtedness secured by the Liens referred to in this clause (m) and in clause (n) below shall not exceed $5,000,000 in the aggregate at any time outstanding; (n) Liens to secure Capitalized Lease Obligations; provided, however, that: (i) any such Lien is created solely for the purpose of securing Indebtedness representing, or incurred to finance, refinance or refund, the cost (including, without limitation, the cost of construction) of the property subject thereto, (ii) the principal amount of the Indebtedness secured by such Lien does not exceed 100% of such cost, and (iii) such Lien does not extend to or cover any other property other than such item of property and any improvements on such item and (iv) the aggregate principal amount of Indebtedness secured by the Liens referred to in this clause (n) and in clause (m) above shall not exceed $5,000,000 in the aggregate at any time outstanding; and (o) Liens affecting assets existing at the time such assets are acquired provided that such Liens are not created in contemplation of such acquisition. "Person" means any individual, corporation, partnership, joint venture, trust, estate, limited liability company, unincorporated organization or government or any agency or political subdivision thereof. "Qualified Capital Stock" means any Capital Stock of the Company that is not Disqualified Capital Stock. "Qualified Exchange" means any legal defeasance, redemption, retirement, repurchase or other acquisition of Capital Stock or of Indebtedness of the Company issued on or after the Issue Date with the Net Cash Proceeds received by the Company from the substantially 8 concurrent sale of Qualified Capital Stock or any exchange of Qualified Capital Stock for any Capital Stock or for Indebtedness of the Company issued on or after the Issue Date. "Related Business" means the business conducted (or proposed to be conducted) by the Company and its Subsidiaries as of the Issue Date and any and all businesses that in the good faith judgment of the Board of Directors of the Company are materially related businesses. "Representative" means the indenture trustee or other trustee, agent or representative for any Senior Indebtedness. GSCP Recovery, Inc. (or its Noteholder Affiliate) shall be the Representative for the New Senior Secured Notes until a successor replaces it in accordance with the Note Purchase Agreement and thereafter means the successor serving in such capacity thereunder. "Responsible Officer," when used with respect to the Trustee, means any officer within the Corporate Trust Department of the Trustee (or any successor group of the Trustee) or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Restricted Investments" means, in one or a series of related transactions, any Investment, other than: (a) Investments by the Company or any Guarantor in any Guarantor, (b) Permitted Investments, (c) Investments consisting of purchase money notes received in connection with the sale or disposition of any asset, provided that such sale or disposition was made in accordance with the terms of this Agreement and (d) Investments in Foreign Subsidiaries which Investments are existing on the date of the Closing and disclosed on Schedule 1. "Restricted Payment" means, with respect to the Company or any Subsidiary, (a) the declaration or payment of any dividend or other distribution in respect of Capital Stock or Stock Equivalents or to the holders of their Capital Stock or Stock Equivalents other than (A) dividends or distributions payable in their Capital Stock or dividends or distributions (or series of dividends of distributions) made by the Company or any Guarantor to the Company or any Guarantor or (B) dividends or distributions payable on the Series C Preferred Stock issued by the Company in connection with the Exchange, (b) the redemption, repurchase or other acquisition or retirement for value by the Company or any Subsidiary, of any such Capital Stock or Stock Equivalents (except shares acquired upon the conversion thereof into other shares of Capital Stock or rights to acquire such Capital Stock, odd lot shares, and except for the repurchase or acquisition of such Capital Stock held by directors, officers or employees of the Company or any Guarantor upon death, disability, retirement or termination of employment not to exceed $100,000 in the aggregate in any fiscal year) or rights to acquire such Capital Stock or Stock Equivalents, or (c) the direct or indirect redemption, repurchase, defeasance or other acquisition or retirement for value, prior to any scheduled or mandatory maturity, scheduled or mandatory repayment or scheduled sinking fund payment (after giving effect to the exercise of any and all unconditional (other than as to the giving of notice) options to extend the maturity), of the Indebtedness of the Company or any Guarantor (other than each of the (i) Notes issued pursuant to this Agreement, (ii) Senior Indebtedness and (iii) New Senior Secured Notes). 9 "S&P" means Standard and Poor's Rating Services, a division of McGraw-Hill, Inc. "SEC" means the United States Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Senior Credit Documents" shall mean, collectively, (i) the Note Purchase Agreement, (ii) any other credit agreement, loan agreement or other debt instrument that governs any indebtedness that extends, refinances, renews, replaces or refunds, in whole or in part, any indebtedness outstanding under the Note Purchase Agreement, or that is incurred pursuant to a credit commitment under a credit facility that extends, increases, refinances, renews, replaces or refunds, in whole or in part, any indebtedness outstanding under the Note Purchase Agreement, and (iii) all notes (including the New Senior Secured Notes), guarantees (including the Subsidiary Guarantees (as defined in the Note Purchase Agreement)), security agreements, mortgages, pledge agreements, hedging agreements and other documents and instruments related to or delivered pursuant to the foregoing agreements referred to in clauses (i) and (ii), as any of the foregoing documents may be amended, restated, extended, renewed, supplemented or otherwise modified from time to time. "Senior Indebtedness" of the Company or any Guarantor means Indebtedness of the Company or such Guarantor arising under Bank Indebtedness (including any monetary obligation in respect of Bank Indebtedness, and interest, whether or not allowable, accruing on Indebtedness after the filing of a petition initiating any proceeding under any bankruptcy, insolvency or similar law) or that, by the terms of the instrument creating or evidencing such Indebtedness, is expressly designated Senior Indebtedness and made senior in right of payment to the Notes or the applicable Guarantee, provided, that in no event shall Senior Indebtedness include (a) Indebtedness to any Subsidiary of the Company or any officer, director or employee of the Company or any Subsidiary of the Company, (b) Indebtedness incurred in violation of the terms of the Indenture, (c) Indebtedness to trade creditors, (d) Disqualified Capital Stock, (e) Capitalized Lease Obligations, and (f) any liability for taxes owed or owing by the Company or such Guarantor. "Series C Preferred Stock" shall mean the Company's Series C Convertible Preferred Stock, par value $0.001 per share. "Significant Subsidiary" shall have the meaning provided under Regulation S-X of the Securities Act, as in effect on the Issue Date. "Stated Maturity," when used with respect to any Note, means November 1, 2007. "Stock Equivalent" means all securities convertible into or exchangeable for Capital Stock and all warrants, options or other rights to purchase or subscribe for any Capital Stock, whether or not presently convertible, exchangeable or exercisable. "Subordinated Debt Documents" means this Agreement, the Notes and all other related agreements and documents issued or delivered by any Credit Party hereunder or thereunder or pursuant hereto or thereto. 10 "Subordinated Indebtedness" means Indebtedness of the Company or a Guarantor that is subordinated in right of payment by its terms or the terms of any document or instrument relating thereto to the Notes or such Guarantee, as applicable, in any respect or has a stated maturity after the Stated Maturity. "Subsidiary," with respect to any person, means (i) a corporation a majority of whose Capital Stock with voting power, under ordinary circumstances, to elect directors is at the time, directly or indirectly, owned by such person, by such person and one or more Subsidiaries of such person or by one or more Subsidiaries of such person, (ii) any other person (other than a corporation) in which such person, one or more Subsidiaries of such person, or such person and one or more Subsidiaries of such person, directly, or indirectly, at the date of determination thereof has at least majority ownership interest, or (iii) a partnership in which such person or a Subsidiary of such person is, at the time, a general partner. Unless the context requires otherwise, Subsidiary means each direct and indirect Subsidiary of the Company. "Subsidiary Guarantees" means the Subsidiary Guarantees of the Guarantors in the form set forth as Exhibit B hereto. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the date on which this Indenture is qualified under the TIA. "Trustee" means the party named as such above until a successor replaces it in accordance with the applicable provisions of this Indenture and thereafter means the successor serving hereunder. "U.S. Government Obligations" means securities issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof). "Wholly-owned Subsidiary" of any Person means a Subsidiary of such Person all of the outstanding Capital Stock of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly-owned Subsidiaries of such Person. SECTION 1.02 OTHER DEFINITIONS

Term Defined in Section ---- ------------------ "Acceleration Notice" 6.02 "Affiliate Transaction" 4.11 "Benefitted Party" 11.01 "Certificated Note" 2.06 "Change of Control Offer" 4.07 "Change of Control Purchase Price" 4.07 "Change of Control Purchase Date" 4.07 "Covenant Defeasance" 8.03 "Event of Default" 6.01 "Legal Defeasance" 8.02 "Paying Agent" 2.03

11 "Payment Blockage Period" 10.03 "Payment Default" 10.03 "Payment Notice" 10.03 "Registrar" 2.03 SECTION 1.03 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Notes; "indenture security holder" means a Holder of a Note; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; "obligor" on the Notes means the Company, the Guarantors and any successor obligor upon the Notes. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings so assigned to them. SECTION 1.04 RULES OF CONSTRUCTION Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; (5) provisions apply to successive events and transactions; and (6) references to sections of or rules under the Securities Act shall be deemed to include substitute, replacement of successor sections or rules adopted by the SEC from time to time. 12 ARTICLE 2 THE NOTES SECTION 2.01 FORM AND DATING The Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A hereto. The Notes may have notations, legends or endorsements required by law, stock exchange rule or usage. The Company shall furnish any such legend not contained in Exhibit A to the Trustee in writing. Each Note shall be dated the date of its authentication. The Notes and any additional Notes issued in lieu of the cash payment of interest on the Notes, in an aggregate principal amount equal to the amount of interest that would be payable with respect to such Notes if such interest were paid in cash, shall be issued in denominations (rounded, if necessary to the nearest dollar) of $1 and integral multiples thereof. The terms and provisions contained in the Notes shall constitute, and are hereby expressly made, a part of this Indenture and the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. In the event of a conflict, the terms of the Indenture shall control. Global Notes shall be substantially in the form of Exhibit A attached hereto (including the text referred to in footnote 1 thereto). Notes issued in certificated form shall be substantially in the form of Exhibit A attached hereto (but without including the text referred to in footnote 1 thereto). Each Global Note shall represent such of the outstanding Notes as shall be specified therein and each shall provide that it shall represent the aggregate amount of outstanding Notes from time to time endorsed thereon and that the aggregate amount of outstanding Notes represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges and redemptions. Any endorsement of a Global Note to reflect the amount of any increase or decrease in the amount of outstanding Notes represented thereby shall be made by the Trustee or the Note Custodian, at the direction of the Trustee, in accordance with instructions given by the Holder thereof as required by Section 2.06 hereof. SECTION 2.02 EXECUTION AND AUTHENTICATION Two Officers shall sign the Notes for the Company by manual or facsimile signature. If an Officer whose signature is on a Note no longer holds that office at the time a Note is authenticated, the Note shall nevertheless be valid. A Note shall not be valid until authenticated by the manual signature of the Trustee. The signature shall be conclusive evidence that the Note has been authenticated under this Indenture. The Trustee shall, upon receipt of a written order of the Company signed by two Officers, authenticate Notes for original issue up to the aggregate principal amount stated in paragraph 4 of the Notes. The aggregate principal amount of Notes outstanding at any time may not exceed $15,000,000, except as provided in Section 2.07 hereof. Notwithstanding the foregoing, the aggregate principal amount of Notes permitted to be outstanding at any time may exceed $15,000,000 by an amount sufficient to permit payments of interest in kind as provided for in the Notes. 13 The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Notes. An authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate of the Company. SECTION 2.03 REGISTRAR AND PAYING AGENT The Company shall maintain an office or agency where Notes may be presented for registration of transfer or for exchange ("Registrar") and an office or agency where Notes may be presented for payment ("Paying Agent"). The Registrar shall keep a register of the Notes and of their transfer and exchange. The Company may appoint one or more co-registrars and one or more additional paying agents. The term "Registrar" includes any co-registrar and the term "Paying Agent" includes any additional paying agent. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company shall notify the Trustee in writing of the name and address of any Agent not a party to this Indenture. If the Company fails to appoint or maintain another entity as Registrar or Paying Agent, the Trustee shall act as such. The Company or any of its Subsidiaries may act as Paying Agent or Registrar. The Company initially appoints The Depositary Trust Company ("DTC") to act as depositary with respect to the Global Notes (the "Depositary"). The Company initially appoints the Trustee to act as the Registrar and Paying Agent and to act as Note Custodian with respect to the Global Notes. SECTION 2.04 PAYING AGENT TO HOLD MONEY IN TRUST The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent solely for the payment of principal, premium, if any, or interest on the Notes, and will notify the Trustee in writing of any default by the Company in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee and account for any funds disbursed, and the Trustee may at any time during the continuance of any default in the payment of principal of, premium, if any, or accrued interest on the Notes pursuant to Sections 6.01(i) and 6.01(ii) hereof, upon written request to a Paying Agent, require such Paying Agent to pay all money held by it to the Trustee and to account for all funds disbursed. Upon payment over to the Trustee, the Paying Agent (if other than the Company or a Subsidiary) shall have no further liability for the money. If the Company or any Affiliate or any Subsidiary acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent. Upon any bankruptcy or reorganization proceedings relating to the Company, the Company shall so notify the Trustee in writing, and thereafter the Trustee shall serve as Paying Agent for the Notes. SECTION 2.05 HOLDER LISTS The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of all Holders and shall otherwise comply with TIA ss. 312(a). If the Trustee is not the Registrar, the Company shall furnish to the Trustee at least seven Business Days before each interest payment date and at such other times as 14 the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of the Holders of Notes and the Company shall otherwise comply with TIA ss. 312(a). SECTION 2.06 TRANSFER AND EXCHANGE (a)Transfer and Exchange of Certificated Notes. When certificated notes ("Certificated Notes") are presented by a Holder to the Registrar with a request: (x) to register the transfer of the Certificated Notes; or (y) to exchange such Certificated Notes for an equal principal amount of Certificated Notes of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested if its reasonable requirements for such transactions are met; provided, however, that the Certificated Notes presented or surrendered for register of transfer or exchange shall be duly endorsed or accompanied by a written instruction of transfer in form reasonably satisfactory to the Registrar duly executed by such Holder or by his attorney, duly authorized in writing. (b)Transfer of a Certificated Note for a Beneficial Interest in a Global Note. A Certificated Note may not be exchanged for a beneficial interest in a Global Note except upon satisfaction of the requirements set forth below and only if the Company, at the time of such transfer, has appointed a Depositary that is registered as a clearing agency under the Exchange Act. Upon receipt by the Trustee of a Certificated Note, duly endorsed or accompanied by appropriate instruments of transfer, in form reasonably satisfactory to the Trustee, together with written instructions from the Holder thereof directing the Trustee to make, or to direct the Note Custodian to make, an endorsement on the Global Note to reflect an increase in the aggregate principal amount of the Notes represented by the Global Note, in which case the Trustee shall cancel such Certificated Note in accordance with Section 2.11 hereof and cause, or direct the Note Custodian to cause, in accordance with the standing instructions and procedures existing between the Depositary and the Note Custodian, the aggregate principal amount of Notes represented by the Global Note to be increased accordingly. If no Global Notes are then outstanding, the Company shall issue and, upon receipt of an authentication order in accordance with Section 2.02 hereof, the Trustee shall authenticate a new Global Note in the appropriate principal amount. (c)Transfer and Exchange of Global Notes. The transfer and exchange of Global Notes or beneficial interests therein shall be effected through the Depositary, in accordance with this Indenture and the procedures of the Depositary therefor, which shall include restrictions on transfer comparable to those set forth herein to the extent required by the Securities Act. (d)Transfer of a Beneficial Interest in a Global Note for a Certificated Note. (i) Any Person having a beneficial interest in a Global Note may upon request exchange such beneficial interest for a Certificated Note. Upon receipt by the Trustee of written instructions or such other form of instructions as is customary for the Depositary, from the Depositary or its nominee on behalf of any Person having a beneficial interest in a Global Note, the Trustee or the Note Custodian, at the direction of the Trustee, shall, in accordance with the standing instructions and procedures existing between the Depositary and the Note Custodian, cause the aggregate principal amount of Global Notes to be 15 reduced accordingly and, following such reduction, the Company shall execute and, upon receipt of an authentication order in accordance with Section 2.02 hereof, the Trustee shall authenticate and deliver to the transferee a Certificated Note in the appropriate principal amount. (ii) Certificated Notes issued in exchange for a beneficial interest in a Global Note pursuant to this Section 2.06(d) shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. The Trustee shall deliver such Certificated Notes to the Persons in whose names such Notes are so registered. (e) Restrictions on Transfer and Exchange of Global Notes. Notwithstanding any other provision of this Indenture (other than the provisions set forth in subsection (f) of this Section 2.06), a Global Note may not be transferred as a whole except by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. (f) Authentication of Certificated Notes in Absence of Depositary. If at any time: (i) the Depositary for the Notes notifies the Company that the Depositary is unwilling or unable to continue as Depositary for the Global Notes and a successor Depositary for the Global Notes is not appointed by the Company within 90 days after delivery of such notice; or (ii) the Company, at its option, notifies the Trustee in writing that it elects to cause the issuance of Certificated Notes under this Indenture; or (iii) there shall have occurred and be continuing a Default or an Event of Default with respect to the Notes, then the Company shall execute, and the Trustee shall, upon receipt of an authentication order in accordance with Section 2.02 hereof, authenticate and deliver Certificated Notes in accordance with Section 2.06(d)(ii) above in an aggregate principal amount equal to the principal amount of the Global Notes in exchange for such Global Notes. (g) Cancellation and/or Adjustment of Global Notes. At such time as all beneficial interests in Global Notes have been exchanged for Certificated Notes, redeemed, repurchased or cancelled, all Global Notes shall be returned to or retained and cancelled by the Trustee in accordance with Section 2.11 hereof. At any time prior to such cancellation, if any beneficial interest in a Global Note is exchanged for Certificated Notes, redeemed, repurchased or cancelled, the principal amount of Notes represented by such Global Note shall be reduced accordingly and an endorsement shall be made on such Global Note, by the Trustee or the Notes Custodian, at the direction of the Trustee, to reflect such reduction. (h) General Provisions Relating to Transfers and Exchanges. (i) To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Certificated Notes and Global Notes at the Registrar's request. 16 (ii) No service charge shall be made to a Holder for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith. (iii) The Registrar shall not be required to register the transfer of or exchange any Note selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part. (iv) All Certificated Notes and Global Notes issued upon any registration of transfer or exchange of Certificated Notes or Global Notes shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Certificated Notes or Global Notes surrendered upon such registration of transfer or exchange. (v) The Company and the Registrar shall not be required: (A) to issue, to register the transfer of or to exchange Notes during a period beginning at the opening of business 15 days before the day of any selection of Notes for redemption under Section 3.02 hereof and ending at the close of business on the day of selection; or (B) to register the transfer of or to exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part; or (C) to register the transfer of or to exchange a Note between a record date and the next succeeding interest payment date. (vi) Prior to due presentment for the registration of a transfer of any Note, the Trustee, any Agent and the Company may deem and treat the Person in whose name any Note is registered as the absolute owner of such Note for the purpose of receiving payment of principal of and interest on such Notes, and neither the Trustee, any Agent nor the Company shall be affected by notice to the contrary. (vii) The Trustee shall authenticate Certificated Notes and Global Notes in accordance with the provisions of Section 2.02 hereof. SECTION 2.07 REPLACEMENT NOTES If any mutilated Note is surrendered to the Trustee, or the Company or the Trustee receives evidence to its reasonable satisfaction of the destruction, loss or theft of any Note, the Company shall issue and the Trustee, upon the written order of the Company signed by two Officers of the Company, shall authenticate a replacement Note if the Trustee's reasonable requirements are met. If required by the Trustee or the Company, an indemnity bond must be supplied by the Holder that is sufficient in the reasonable judgment of the Trustee and the Company to protect the Company, the Trustee, any Agent and any authenticating agent from any loss that any of them may suffer if a Note is replaced. Every replacement Note is an additional Obligation of the Company and shall be entitled to all of the benefits of this Indenture equally and proportionately with all other Notes duly issued hereunder. 17 SECTION 2.08 OUTSTANDING NOTES The Notes outstanding at any time are all the Notes authenticated by the Trustee except for those cancelled by it, those delivered to it for cancellation, those reductions in the interest in a Global Note effected by the Trustee in accordance with the provisions hereof, and those described in this Section as not outstanding. Except as set forth in Section 2.09 hereof, a Note does not cease to be outstanding because the Company or an Affiliate of the Company holds the Note. If a Note is replaced pursuant to Section 2.07 hereof, it ceases to be outstanding unless the Trustee receives proof reasonably satisfactory to it that the replaced Note is held by a bona fide purchaser. If the principal amount of any Note is considered paid under Section 4.01 hereof, it ceases to be outstanding and interest on it ceases to accrue. If the Paying Agent (other than the Company, a Subsidiary of the Company or an Affiliate) holds, on a redemption date or maturity date, money sufficient to pay Notes payable on that date, then on and after that date such Notes shall be deemed to be no longer outstanding and shall cease to accrue interest. SECTION 2.09 TREASURY NOTES In determining whether the Holders of the required principal amount of Notes have concurred in any direction, amendment, supplement, waiver or consent, or the taking of any other action, Notes owned by the Company, or by any Subsidiary or Affiliate (other than a Noteholder or a Noteholder Affiliate), shall be considered as though not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, amendment, supplement, waiver or consent, only Notes that a Responsible Officer of the Trustee actually knows are owned by the Company, any Subsidiary or an Affiliate (other than a Noteholder or a Noteholder Affiliate) shall be so disregarded. The Company shall notify the Trustee promptly in writing, when it, any Subsidiary or any Affiliate (other than a Noteholder or a Noteholder Affiliate) repurchases or otherwise acquires Notes of the aggregate principal amount of such Notes so repurchased or otherwise acquired. SECTION 2.10 TEMPORARY NOTES Until Certificated Notes are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Notes upon a written order of the Company signed by two Officers of the Company. Temporary Notes shall be substantially in the form of Certificated Notes but may have variations that the Company considers appropriate for temporary Notes and as shall be reasonably acceptable to the Trustee. Without unreasonable delay, the Company shall prepare and the Trustee shall, upon a written order of the Company signed by two Officers, authenticate Certificated Notes in exchange for temporary Notes. Holders of temporary Notes shall be entitled to all of the benefits of this Indenture. 18 SECTION 2.11 CANCELLATION The Company at any time may deliver Notes to the Trustee for cancellation. The Registrar and Paying Agent shall deliver to the Trustee any Notes surrendered to them for registration of transfer, exchange or payment. The Trustee and no one else shall cancel all Notes surrendered for registration of transfer, exchange, payment, replacement or cancellation in accordance with its customary procedures (subject to the record retention requirement of the Exchange Act). Certification of the cancellation of all cancelled Notes shall be delivered to the Company. The Company may not issue new Notes to replace Notes that it has paid or that have been delivered to the Trustee for cancellation. SECTION 2.12 DEFAULTED INTEREST If the Company defaults in a payment of interest on the Notes, it shall pay the defaulted interest in any lawful manner to the Persons who are Holders on a subsequent special record date, in each case at the rate provided in the Notes and in Section 4.01 hereof. The Company shall, in lieu of paying defaulted interest on the Notes in cash, execute and deliver to each Noteholder one or more promissory notes in the form of the promissory note attached hereto as Exhibit A in a principal amount equal to the sum of defaulted interest due to such Noteholder under this Section 2.12. The Company shall notify the Trustee in writing of the amount of defaulted interest proposed to be paid on each Note and the date of the proposed payment. The Company shall fix or cause to be fixed each such special record date and payment date, provided that no such special record date shall be less than 10 days prior to the related payment date for such defaulted interest. At least 15 days before the special record date, the Company (or, upon the written request of the Company, the Trustee in the name and at the expense of the Company) shall mail or cause to be mailed to Holders a notice that states the special record date, the related payment date and the amount of such interest to be paid. ARTICLE 3 REDEMPTION AND PREPAYMENT SECTION 3.01 NOTICES TO TRUSTEE If the Company elects to redeem Notes pursuant to the optional redemption provisions of Section 3.07 hereof, it shall furnish to the Trustee, at least 30 days (unless a shorter period is consented to in writing by the Trustee) but not more than 60 days before a redemption date, an Officers' Certificate setting forth (i) the redemption date, (ii) the principal amount of Notes to be redeemed and (iii) the redemption price. SECTION 3.02 SELECTION OF NOTES TO BE REDEEMED If less than all of the Notes are to be redeemed at any time, the Trustee shall select the Notes to be redeemed among the Holders of the Notes in compliance with the requirements of the principal national security exchange, if any, on which the Notes are listed or, if the Notes are not so listed, on a pro rata basis, by lot or in accordance with any other method the Trustee considers fair and appropriate. In the event of partial redemption by lot, the particular Notes to be redeemed shall be selected, unless otherwise provided herein, not less than 20 nor more than 60 19 days prior to the redemption date by the Trustee from the outstanding Notes not previously called for redemption. The Trustee shall promptly notify the Company in writing of the Notes selected for redemption and, in the case of any Note selected (other than Notes issued pursuant to Section 4.01 hereunder) for partial redemption, the principal amount thereof to be redeemed. Notes and portions of Notes selected shall be in amounts of $1,000 or integral multiples of $1,000; except that if all of the Notes of a Holder are to be redeemed, the entire outstanding amount of Notes held by such Holder, even if not an integral multiple of $1,000, shall be redeemed. Except as provided in the preceding sentence, provisions of this Indenture that apply to Notes called for redemption also apply to portions of Notes called for redemption. SECTION 3.03 NOTICE OF REDEMPTION Subject to the provisions of Section 3.07 hereof, at least 30 days but not more than 60 days before a redemption date, the Company shall mail or cause to be mailed, by first class mail, a notice of redemption to each Holder whose Notes are to be redeemed at its registered address as shown upon the registry books of the Registrar. The notice shall identify the Notes to be redeemed by CUSIP number or PPN number and shall state: (a) the redemption date; (b) the redemption price; (c) if any Note is being redeemed in part, the portion of the principal amount of such Note to be redeemed, the portion of the principal amount equal to the unredeemed portion thereof, and that, after the redemption date upon surrender of such Note, a new Note or Notes in principal amount equal to the unredeemed portion shall be issued upon cancellation of the original Note; (d) the name and address of the Paying Agent; (e) that Notes called for redemption must be surrendered to the Paying Agent to collect the redemption price; (f) that, unless the Company defaults in making such redemption payment, interest on Notes called for redemption ceases to accrue on and after the redemption date; (g) that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Notes. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at its expense; provided, however, that the Company shall have delivered to the Trustee, at least 45 days prior to the redemption date, an Officers' Certificate requesting that the Trustee give such notice and setting forth the information to be stated in such notice as provided in the preceding paragraph. 20 SECTION 3.04 EFFECT OF NOTICE OF REDEMPTION Once notice of redemption is mailed in accordance with Section 3.03 hereof, Notes called for redemption become irrevocably due and payable on the redemption date at the redemption price. A notice of redemption may not be conditional. SECTION 3.05 DEPOSIT OF REDEMPTION PRICE On or prior to the redemption date, the Company shall deposit with the Trustee or with the Paying Agent immediately available funds sufficient to pay the redemption price of and accrued interest on all Notes to be redeemed on that date. The Trustee or the Paying Agent shall promptly return to the Company any money deposited with the Trustee or the Paying Agent by the Company in excess of the amounts necessary to pay the redemption price of and accrued interest on all Notes to be redeemed. If the Company complies with the provisions of the preceding paragraph, on and after the redemption date, interest shall cease to accrue on the Notes or the portions of Notes called for redemption unless the Company defaults in such payments due on the redemption date. If a Note is redeemed on or after an interest record date but on or prior to the related interest payment date, then any accrued and unpaid interest shall be paid to the Person in whose name such Note was registered at the close of business on such record date. If any Note called for redemption shall not be so paid upon surrender for redemption due to the Company's failure to fund the Redemption Price, interest shall be paid on the unpaid principal from the redemption date until such principal is paid and, to the extent lawful, on any interest not paid on such unpaid principal, in each case at the rate provided in the Notes and in Section 4.01 hereof. SECTION 3.06 NOTES REDEEMED IN PART Upon surrender of a Note that is redeemed in part, the Company shall issue and the Trustee shall upon a written order of the Company signed by two Officers authenticate for the Holder at the expense of the Company a new Note equal in principal amount to the unredeemed portion of the Note surrendered. SECTION 3.07 OPTIONAL REDEMPTION (a)The Company shall have the right to redeem the Notes, in whole or in part, at any time after the date of this Indenture upon not less than 15 days nor more than 60 days notice to each holder of Notes at a redemption price equal to 100% of the principal amount of such notes being redeemed, together with accrued and unpaid interest thereon, to the date of redemption. (b)Any redemption pursuant to this Section 3.07 shall be made pursuant to the provisions of Section 3.01 through 3.06 hereof. SECTION 3.08 NO MANDATORY REDEMPTION The Company shall not be required to make mandatory redemption payments with respect to the Notes. 21 SECTION 3.09 NO SINKING FUND The Notes shall not have the benefit of a sinking fund. ARTICLE 4 COVENANTS SECTION 4.01 PAYMENT OF NOTES The Company shall pay or cause to be paid the principal of, premium, if any, and interest on the Notes on the dates and in the manner provided in this Indenture and the Notes. Principal, premium, if any, and interest shall be considered paid on the date due if the Trustee or Paying Agent, if other than the Company or any Affiliate or Subsidiary thereof, holds as of 12:00 p.m. (noon) New York time on the due date money deposited by the Company in immediately available funds and designated for and sufficient to pay all principal, premium, if any, and interest then due. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal and premium, if any, at the rate equal to 1% per annum in excess of the then applicable interest rate on the Notes to the extent lawful. The Company shall, in lieu of paying such interest on the Notes in cash, execute and deliver to each Noteholder one or more promissory notes in the form of the promissory note attached hereto as Exhibit A in a principal amount equal to the sum of interest due to such Noteholder under this Section 4.01. SECTION 4.02 MAINTENANCE OF OFFICE OR AGENCY The Company shall maintain in the Borough of Manhattan, the City of New York, an office or agency (which may be an office of the Trustee or an affiliate of the Trustee, Registrar or co-registrar) where Notes may be surrendered for registration of transfer or for exchange and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Administration Office of the Trustee. The Company may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, the City of New York for such purposes. The Company shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby designates the Corporate Trust Administration Office of the Trustee as one such office or agency of the Company in accordance with Section 2.03 hereof. 22 SECTION 4.03 REPORTS (a) Whether or not the Company is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall deliver to the Trustee and to each Holder of the Notes within 15 days after it is or would have been (if it were subject to such reporting obligations) required to file such with the SEC, all annual and quarterly financial statements substantially equivalent to financial statements that would have been included in reports filed with the SEC on Forms 10-K and 10-Q, if the Company were subject to the requirements of Section 13 or 15(d) of the Exchange Act, including, with respect to annual information only, a report thereon by the Company's certified independent public accountants as such would be required in such reports to the SEC and (ii) all current reports that would be required to be filed with the SEC on Form 8-K if the Company were required to file such reports; and, in each case, together with a management's discussion and analysis of financial condition and results of operations which would be so required and, unless the SEC will not accept such reports, file with the SEC the annual, quarterly and other reports which it is or would have been required to file with the SEC. (b) Notwithstanding Section 4.03(a) hereof, if the Company timely files all required reports under Section 13 and 15(d) of the Exchange Act via EDGAR, the Company shall be deemed to have satisfied in full its obligations contained in Section 4.03(a) above; provided, however, that this Section 4.03(b) shall not apply to any current reports required to be filed with the SEC on Form 8-K, which reports shall remain subject to the delivery requirements of Section 4.03(a). SECTION 4.04 COMPLIANCE CERTIFICATE (a) The Company shall deliver to the Trustee, within 90 days after the end of each fiscal year, an Officers' Certificate stating that a review of the activities of the Company and its Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under this Indenture, and further stating, as to each such Officer signing such certificate, that to the best of his or her knowledge the Company has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions of this Indenture (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he or she may have knowledge and what action the Company is taking or proposes to take with respect thereto) and that to the best of his or her knowledge no event has occurred and remains in existence by reason of which payments on account of the principal of or premium, if any, or interest on the Notes is prohibited or if such event has occurred, a description of the event and what action the Company is taking or proposes to take with respect thereto. (b) So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants, the year-end financial statements delivered pursuant to Section 4.03(a) hereof shall be accompanied by a written statement of the Company's independent public accountants (who shall be a firm of established national reputation) that in making the examination necessary for certification of such financial statements, nothing has come to their attention that would lead them to believe that the Company has violated any 23 provisions of Article 4 or Article 5 hereof or, if any such violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation. (c) The Company shall, so long as any of the Notes are outstanding, deliver to the Trustee, forthwith upon any Officer becoming aware of any Default or Event of Default, an Officers' Certificate specifying such Default or Event of Default and what action the Company is taking or proposes to take with respect thereto. SECTION 4.05 TAXES The Company and Guarantors shall pay, and shall cause each of their Subsidiaries to pay, prior to delinquency, all material taxes, assessments, and governmental levies except such as are contested in good faith and by appropriate proceedings or where the failure to effect such payment is not adverse in any material respect to the Holders of the Notes. SECTION 4.06 STAY, EXTENSION AND USURY LAWS The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, that may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it shall not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee or to any Holder, but shall suffer and permit the execution of every such power as though no such law has been enacted. SECTION 4.07 REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL After the Company has indefeasibly repaid in full or otherwise fully discharged all of the Obligations in respect of Senior Indebtedness, then upon the occurrence of a Change of Control, each Holder of Notes shall have the right, at such Holder's option, pursuant to an offer (subject only to conditions required by applicable law, if any) by the Company (the "Change of Control Offer"), to require the Company to repurchase all or any part of such Holder's Notes (provided, that the principal amount of such Notes must be $1,000 or an integral multiple thereof) on a date (the "Change of Control Purchase Date") that is no later than 35 Business Days after the occurrence of such Change of Control at a cash price equal to 101% of the principal amount thereof (the "Change of Control Purchase Price"), together with accrued and unpaid interest to the Change of Control Purchase Date. The Change of Control Offer shall be made within 10 Business Days following a Change of Control and shall remain open for 20 Business Days following its commencement (the "Change of Control Offer Period"). Upon expiration of the Change of Control Offer Period, the Company promptly shall purchase all Notes properly tendered in response to the Change of Control Offer. The Company shall comply with the applicable requirements of Regulation 14E under the Exchange Act and the rules and regulations thereunder and all other federal and state securities laws. To the extent that the 24 provisions of any securities laws or regulations conflict with the provisions of this Section 4.07, compliance by the Company or any of the Guarantors with such laws and regulations shall not in and of itself cause a breach of its obligations under this Section 4.07. On or before the Change of Control Purchase Date, the Company shall (i) accept for payment Notes or portions thereof properly tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent cash sufficient to pay the Change of Control Purchase Price (together with accrued and unpaid interest) of all Notes so tendered and (iii) deliver to the Trustee Notes so accepted together with an Officers' Certificate listing the Notes or portions thereof being purchased by the Company. The Paying Agent promptly will pay the Holders of Notes so accepted an amount equal to the Change of Control Purchase Price (together with accrued and unpaid interest), and the Trustee promptly will authenticate and deliver to such Holders, a new Note equal in principal amount to any unpurchased portion of the Note surrendered. Any Notes not so accepted will be delivered promptly by the Company to the Holder thereof. The Company publicly will announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Purchase Date. If the Change of Control Purchase Date hereunder is on or after an interest payment record date and on or before the associated interest payment date, any accrued and unpaid interest due on such interest payment date will be paid to the person in whose name a Note is registered at the close of business on such Record Date, and such interest will not be payable to Holders who tender the Notes pursuant to the Change of Control Offer. SECTION 4.08 LIMITATION ON RESTRICTED PAYMENTS The Company and the Guarantors shall not, and shall not permit any of their Subsidiaries to, directly or indirectly make any Restricted Payment if, after giving effect to such Restricted Payment on a pro forma basis: (a) a Default or an Event of Default shall have occurred and be continuing; or (b) the aggregate amount of all Restricted Payments made by the Company and its Subsidiaries, including after giving effect to such proposed Restricted Payment, from and after the Issue Date, would exceed, without duplication, the sum of (a) 50% of the aggregate Consolidated Net Income of the Company for the period (taken as one accounting period), commencing on the first day of the first full fiscal quarter commencing after the Issue Date, to and including the last day of the fiscal quarter ended immediately prior to the date of each such calculation (or, in the event Consolidated Net Income for such period is a deficit, then minus 100% of such deficit), plus (b) the aggregate Net Cash Proceeds received by the Company from the sale of its Qualified Capital Stock (other than (i) to a Subsidiary of the Company, (ii) to the extent applied in connection with a Qualified Exchange and (iii) to the extent credited in (x) in the following paragraph), after the Issue Date, plus (c) other than amounts credited pursuant to clause (x) of the next following paragraph, the net amount of any Restricted Investments (not to exceed the original amount of such Investment) made after the Issue Date that is returned to the Company or the Subsidiary that made such prior Investment, without restriction in cash on or prior to the date of any such calculation. 25 The foregoing clauses (a) and (b) of the immediately preceding paragraphs, however, will not prohibit (x) Restricted Investments in a Related Business, (y) a Qualified Exchange or (z) the payment of any dividend on Qualified Capital Stock within 60 days after the date of its declaration if such dividend could have been made on the date of such declaration in compliance with the foregoing provisions. The full amount of any Restricted Payment made pursuant to the foregoing clauses (x) and (z) (but not pursuant to clause (y)) of the immediately preceding sentence, however, will be deducted in the calculation of the aggregate amount of Restricted Payments available to be made referred to in clause (c) of the immediately preceding paragraph. For purposes of this Section 4.08, the amount of any Restricted Payment, if other than in cash, shall be the fair market value thereof, as determined in the good faith reasonable judgment of the Board of Directors of the Company. Additionally, on the date of each Restricted Payment, the Company shall deliver an Officers' Certificate to the Trustee describing in reasonable detail the nature of such Restricted Payment, stating the amount of such Restricted Payment, stating in reasonable detail the provisions of this Indenture pursuant to which such Restricted Payment was made and certifying that such Restricted Payment was made in compliance with the terms of this Indenture. SECTION 4.09 LIMITATION ON LIENS SECURING INDEBTEDNESS The Company and the Subsidiaries shall not, and shall not permit any of their Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien of any kind, other than Permitted Liens, upon any of their respective assets now owned or acquired on or after the date of this Indenture or upon any income or profits therefrom securing any Indebtedness of the Company or any Subsidiary other than Senior Indebtedness, unless the Company and such Subsidiary provides, and causes its Subsidiaries to provide, concurrently therewith, that the Notes are equally and ratably so secured; provided that, if such Indebtedness is Subordinated Indebtedness, the Lien securing such Subordinated Indebtedness shall be subordinate and junior to the Lien securing the Notes with the same relative priority as such Subordinated Indebtedness shall have with respect to the Notes; and provided, further, that this Section 4.09 shall not be applicable to any Liens securing any such Indebtedness which became Indebtedness of the Company pursuant to a transaction subject to the provisions described in Section 5.01 hereof or which constitutes Acquired Indebtedness and which in either case were in existence at the time of such transaction (unless such Indebtedness was incurred or such Lien created in connection with or in contemplation of such transaction), so long as such Liens do not extend to or cover any property or assets of the Company or any Subsidiary of the Company other than property or assets acquired in such transaction. SECTION 4.10 LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES The Company and the Guarantors shall not, and shall not permit any of their Subsidiaries to, directly or indirectly, create, assume or suffer to exist any consensual restriction on the ability of any Subsidiary of the Company to pay dividends or make other distributions to or on behalf of, or to pay any obligation to or on behalf of, or otherwise to transfer assets or property to or on behalf of, or make or pay loans or advances to or on behalf of, the Company or 26 any Subsidiary of the Company, except (a) restrictions imposed by the Notes or this Indenture, (b) restrictions imposed by applicable law, (c) existing restrictions under Indebtedness outstanding on the Issue Date, (d) restrictions under any Acquired Indebtedness not incurred in violation of this Indenture or any agreement relating to any property, asset, or business acquired by the Company or any of its Subsidiaries, which restrictions in each case existed at the time of acquisition, were not put in place in connection with or in anticipation of such acquisition and are not applicable to any person, other than the person acquired, or to any property, asset or business, other than the property, assets and business so acquired, (e) any such restriction or requirement imposed by Bank Indebtedness, (f) restrictions with respect solely to a Subsidiary of the Company imposed pursuant to a binding agreement which has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Subsidiary, provided such restrictions apply solely to the Capital Stock or assets of such Subsidiary which are being sold, and (g) in connection with and pursuant to permitted refinancings, replacements of restrictions imposed pursuant to clauses (a), (c) or (d) of this Section 4.10 that are not more restrictive than those being replaced and do not apply to any other person or assets than those that would have been covered by the restrictions in the Indebtedness so refinanced. Notwithstanding the foregoing, neither (a) customary provisions restricting subletting or assignment of any lease entered into in the ordinary course of business, consistent with industry practice, nor (b) Liens permitted under the terms of this Indenture on assets securing Senior Indebtedness incurred in accordance with the terms of Section 4.09 hereof shall in and of themselves be considered a restriction on the ability of the applicable Subsidiary to transfer such agreement or assets, as the case may be. SECTION 4.11 LIMITATIONS ON TRANSACTIONS WITH AFFILIATES The Company shall not, and shall not permit any of its Subsidiaries on or after the Issue Date to enter into or suffer to exist any contract, agreement, arrangement or transaction with any Affiliate (an "Affiliate Transaction"), or any series of related Affiliate Transactions, (other than Exempted Affiliate Transactions), (i) unless the Company reasonably and in good faith determines that the terms of such Affiliate Transaction are fair and reasonable to the Company, and no less favorable to the Company than could have been obtained in an arm's length transaction with a non-Affiliate, and (ii) if involving consideration to either party in excess of $1.0 million, unless such Affiliate Transaction(s) is evidenced by an Officers' Certificate addressed and delivered to the Trustee certifying that such Affiliate Transaction (or Transactions) has been approved by a majority of the members of the Board of Directors that are disinterested in such transaction and (iii) if involving consideration to either party in excess of $5.0 million, unless in addition the Company, prior to the consummation thereof, obtains a written favorable opinion as to the fairness of such transaction to the Company from a financial point of view from an independent investment banking firm of national reputation or, if pertaining to a matter for which such investment banking firms do not customarily render such opinions, an appraisal or valuation firm of national reputation. Notwithstanding the foregoing, the Company and its Subsidiaries shall be permitted to enter into transactions with Affiliates pursuant to agreements or other documents entered into simultaneously herewith on the Issue Date, including without limitation, the agreements and other documents relating to the New Senior Secured Notes and the issuance of the Company's Series C Preferred Stock. 27 SECTION 4.12 FUTURE SUBSIDIARY GUARANTORS All present and future Subsidiaries (other than Foreign Subsidiaries) of the Company jointly and severally will guarantee irrevocably and unconditionally all principal, premium, if any, and interest on the Notes on a senior subordinated basis to the extent provided in Section 11 hereof; provided that any Foreign Subsidiary that guarantees any Indebtedness of the Company or any Subsidiary (other than a Foreign Subsidiary) and guarantees the Indebtedness outstanding under the Note Purchase Agreement and the New Senior Secured Notes, shall become a Guarantor, in each case by executing a counterpart signature page hereof. SECTION 4.13 RELEASE OF GUARANTORS No Guarantor shall consolidate or merge with or into (whether or not such Guarantor is the surviving Person), or shall sell all or substantially all of its assets to, another Person unless (i) subject to the provisions of this Section 4.13 and Section 5.01 of this Indenture (as if such Guarantor were the Company), the Person formed by or surviving any such consolidation or merger (if other than such Guarantor) assumes all the obligations of such Guarantor pursuant to a supplemental indenture in form reasonably satisfactory to the Trustee, pursuant to which such person shall unconditionally guarantee, on a senior subordinated basis, all of such Guarantor's obligations under such Guarantor's guarantee, on the terms set forth in this Indenture; and (ii) immediately before and immediately after giving effect to such transaction on a pro forma basis, no Default or Event of Default shall have occurred or be continuing. SECTION 4.14 CORPORATE EXISTENCE Subject to Article 5 hereof, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect (i) its corporate existence, and the corporate, partnership or other existence of each of its Subsidiaries, in accordance with the respective organizational documents (as the same may be amended from time to time) of the Company or any such Subsidiary and (ii) the rights (charter and statutory), licenses and franchises of the Company and its Subsidiaries; provided, however, that the Company shall not be required to preserve any such right, license or franchise, or the corporate, partnership or other existence of any of its Subsidiaries if the Board of Directors shall reasonably and in good faith determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries, taken as a whole, and that the loss thereof is not adverse in any material respect to the Holders of the Notes. SECTION 4.15 LIMITATION ON STATUS AS AN INVESTMENT COMPANY The Company and its Subsidiaries shall not register as an "investment company" (as that term is defined in the Investment Company Act of 1940, as amended), or otherwise become subject to regulation under the Investment Company Act. 28 ARTICLE 5 SUCCESSORS SECTION 5.01 MERGER, SALE OR CONSOLIDATION The Company will not consolidate with or merge with or into another person or, directly or indirectly, sell, lease, convey or transfer all or substantially all of its assets (computed on a consolidated basis), whether in a single transaction or a series of related transactions, to another Person or group of affiliated Persons unless (i) either (a) the Company is the continuing entity or (b) the resulting, surviving or transferee entity is a corporation organized under the laws of the United States, any state thereof or the District of Columbia and expressly assumes, by supplemental indenture in form reasonably satisfactory to the Trustee, all of the obligations of the Company in connection with the Notes and this Indenture; and (ii) no Default or Event of Default shall exist or shall occur immediately after giving effect on a pro forma basis to such transaction; and the Company or such entity shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, sale, lease, conveyance or transfer and, if a supplemental indenture is required in connection with such a transaction, such supplemental indenture comply with this provision of this Indenture and all conditions precedent in this Indenture relating to such a transaction have been satisfied. SECTION 5.02 SUCCESSOR CORPORATION SUBSTITUTED Upon any consolidation or merger, or any transfer of all or substantially all of the assets of the Company in accordance with Section 5.01 hereof, the successor corporation formed by such consolidation or into or with which the Company is merged or to which such transfer is made shall succeed to and (except in the case of a lease) be substituted for, and may exercise every right and power of the Company under this Indenture with the same effect as if such successor corporation had been named herein as the Company, and (except in the case of a lease) the Company shall be released from the obligations under the Notes and this Indenture except with respect to any obligations that arise from, or are related to, such transaction. For purposes of this Article 5, the transfer (by lease, assignment, sale or otherwise) of all or substantially all of the properties and assets of one or more Subsidiaries, the Company's interest in which constitutes all or substantially all of the properties and assets of the Company, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. ARTICLE 6 DEFAULTS AND REMEDIES SECTION 6.01 EVENTS OF DEFAULT An "Event of Default" is defined as: (i) the failure by the Company to pay any installment of interest on the Notes as and when the same becomes due and payable and the continuance of any such failure for 30 days, 29 (ii) the failure by the Company to pay all or any part of the principal, or premium, if any, on the Notes when and as the same becomes due and payable at maturity, redemption, by acceleration or otherwise, including, without limitation, payment of the Change of Control Purchase Price or otherwise, (iii) the failure by the Company or any Subsidiary of the Company to observe or perform any other covenant or agreement contained in the Notes or this Indenture and, the continuance of such failure for a period of 30 days after written notice is given to the Company by the Trustee or to the Company and the Trustee by the holders of at least 33.3% in aggregate principal amount of the Notes outstanding, stating that such notice is a "notice of default" under Section 6.01(iii) of this Indenture, (iv) the following events of bankruptcy, insolvency or reorganization under applicable Bankruptcy Laws in respect of the Company or any of its Significant Subsidiaries: (a) the Company or any of its Significant Subsidiaries pursuant to or within the meaning of any Bankruptcy Law (i) commences a voluntary case, (ii) consents to the entry of an order for relief against it in an involuntary case, (iii) consents to the appointment of a custodian of it or for all or substantially all of its property, (iv) makes a general assignment for the benefit of its creditors, or generally is not paying its debts as they become due; or (b) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (i) is for relief against the Company or any Significant Subsidiary in an involuntary case, (ii) appoints a custodian of the Company or any Significant Subsidiary or for all or substantially all of the property of the Company or a Significant Subsidiary, or (iii) orders the liquidation of the Company or any Significant Subsidiary, and, in each case of the preceding (i), (ii) or (iii), the order or decree remains unstayed and in effect for 60 consecutive days. (v) a default in any issue of Indebtedness of the Company or any of its Subsidiaries with an aggregate principal amount in excess of $5.0 million (a) resulting from any payment default or (b) as a result of which the maturity of such Indebtedness has been accelerated prior to its stated maturity, and (vi) final unsatisfied judgments not covered by insurance aggregating in excess of $5.0 million, at any one time rendered against the Company or any of its Subsidiaries and not stayed, bonded or discharged within 60 days. SECTION 6.02 ACCELERATION If an Event of Default occurs and is continuing (other than an Event of Default specified in Section 6.01(iv) relating to the Company or any of its Significant Subsidiaries), then in every such case, unless the principal of all of the Notes shall have already become due and payable, either the Trustee or the Holders of at least 33.3% in aggregate principal amount of the Notes then outstanding, by notice in writing to the Company (and to the Trustee if given by 30 Holders) (an "Acceleration Notice"), may declare all principal, determined as set forth below, and accrued interest thereon to be due and payable immediately; provided, however, that if any Bank Indebtedness is outstanding, upon a declaration of such acceleration, such principal and interest shall be due and payable upon the earlier of (x) the third Business Day after the sending to the Company and the holders of such Bank Indebtedness or their representative of such written notice, unless such Event of Default is cured or waived prior to such date and (y) the date of acceleration of any Bank Indebtedness. If an Event of Default specified in Section 6.01(iv) occurs, all principal and accrued interest thereon will be immediately due and payable on all outstanding Notes without any declaration or other act on the part of the Trustee or the Holders of the Notes. The Holders of a majority in aggregate principal amount of Notes are authorized to rescind such acceleration if all existing Events of Default, other than the non-payment of the principal of, premium, if any, and interest on the Notes which have become due solely by such acceleration and except on default with respect to any provision requiring a supermajority approval to amend, which default may only be waived by such a supermajority, have been cured or waived. SECTION 6.03 OTHER REMEDIES If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy by proceeding at law or in equity to collect the payment of principal, premium, if any, and interest on the Notes or to enforce the performance of any provision of the Notes or this Indenture. Except as provided in Section 6.06 below, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request, order or direction of any of the Holders of the Notes, unless such Holders have offered to the Trustee reasonable security or, at the option of the Trustee, in lieu of such security, reasonable indemnity. The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder of a Note in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. SECTION 6.04 WAIVER OF PAST DEFAULTS Prior to the declaration of acceleration of the maturity of the Notes, the Holders of a majority in aggregate principal amount of the Notes at the time outstanding may waive on behalf of all the Holders of the Notes any default, except a default with respect to any provision requiring a supermajority approval to amend, which default may only be waived by such a supermajority, and except a default in the payment of principal of or interest on any Note not yet cured or a default with respect to any covenant or provision which cannot be modified or amended without the consent of the Holder of each outstanding Note affected. SECTION 6.05 CONTROL BY MAJORITY Holders of a majority in principal amount of the then outstanding Notes may direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee or exercising any trust or power conferred on it. However, the Trustee 31 may refuse to follow any direction that conflicts with law or this Indenture that the Trustee, in its reasonable discretion, determines may be unduly prejudicial to the rights of other Holders of Notes, that may involve the Trustee in personal liability or if the Trustee determines that it does not have reasonable security or at the option of the Trustee, in lieu of such security, reasonable indemnification against any loss or expense; provided, that the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. This Section 6.05 shall be in lieu of TIA ss. 315(d)(3) and said TIA section is hereby expressly excluded from this Indenture, as permitted by the TIA. SECTION 6.06 LIMITATION ON SUITS A Holder of a Note may pursue a remedy with respect to this Indenture or the Notes only if: (a) the Holder gives to the Trustee written notice of a continuing Event of Default; (b) the Holders of at least 33.3% in principal amount of the then outstanding Notes make a written request to the Trustee to pursue the remedy; (c) such Holder or Holders offer and, if requested, provide to the Trustee reasonable security or at the option of the Trustee, in lieu of such security, reasonable indemnity against any loss, liability or expense; (d) the Trustee does not comply with the request within 30 days after receipt of the request and the offer and, if requested, the provision of the security or, at the option of the Trustee, in lieu of such security, the indemnity described in clause (c) above; and (e) during such 30-day period the Holders of a majority in aggregate principal amount of the then outstanding Notes do not give the Trustee a direction which, in the opinion of the Trustee, is inconsistent with the request. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over another Holder. SECTION 6.07 RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of principal, premium, if any, and interest on the Notes, on or after the respective due dates expressed in the Notes (including in connection with an offer to purchase), or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 6.08 COLLECTION SUIT BY TRUSTEE If an Event of Default occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of principal of, premium, if any, and interest remaining unpaid on the Notes and 32 interest on overdue principal and, to the extent lawful, interest and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel and any other amounts due to the Trustee pursuant to Section 7.07. SECTION 6.09 TRUSTEE MAY FILE PROOF OF CLAIM The Trustee is authorized to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders allowed in any judicial proceedings relative to the Company (or any other obligor upon the Notes), its creditors or its property and shall be entitled and empowered to collect, receive and distribute any money or other property payable or deliverable on any such claims and any custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof out of the estate in any such proceeding shall be denied for any reason, payment of the same shall be secured by a Lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties that the Holders may be entitled to receive in such proceeding, whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 6.10 PRIORITIES If the Trustee collects any money pursuant to this Article, it shall pay out the money in the following order: First: to the Trustee, its agents and attorneys for amounts due under Section 7.07 hereof, including payment of all reasonable compensation, expense and liabilities incurred, and all advances made, by the Trustee and the costs and expenses of collection; Second: to Holders for amounts due and unpaid on the Notes for principal, premium, if any, and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for principal, premium, if any, and interest, respectively; and Third: to the Company or to such party as a court of competent jurisdiction shall direct. The Trustee may fix a record date and payment date for any payment to Holders pursuant to this Section 6.10. 33 SECTION 6.11 UNDERTAKING FOR COSTS In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07 hereof, or a suit by Holders of more than 10% in principal amount of the then outstanding Notes. SECTION 6.12 RESTORATION OF RIGHTS AND REMEDIES If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. ARTICLE 7 TRUSTEE SECTION 7.01 DUTIES OF TRUSTEE (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in its exercise, as a prudent person would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default of which the Trustee is charged with knowledge pursuant to Section 7.02(g): (i) the duties of the Trustee shall be determined solely by the express provisions of this Indenture and the Trustee need perform only those duties that are specifically set forth in this Indenture and no others, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of negligence, bad faith or willful misconduct on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, in the case of an Officers' Certificate or Opinion of Counsel, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. This subparagraph (b)(ii) shall be in lieu of TIA ss. 315(d)(3) and said TIA section is hereby expressly excluded from this Indenture, as permitted by the TIA. 34 (c) The Trustee may not be relieved from liabilities for its own negligent action, its own negligent failure to act, or its own bad faith or willful misconduct, except that: (i) this paragraph does not limit the effect of paragraph (b) of this Section; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05 hereof. (d) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b), and (c) of this Section. (e) No provision of this Indenture shall require the Trustee to expend or risk its own funds or incur any liability. The Trustee shall be under no obligation to exercise any of its rights and powers under this Indenture at the request of the Company or any Holder, unless the Company or such Holder, as the case may be, shall have offered to the Trustee security and indemnity reasonably satisfactory to it against any loss, liability or expense. (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. SECTION 7.02 RIGHTS OF TRUSTEE (a) The Trustee may conclusively rely upon any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel or both, which shall conform to Section 10.05 hereof. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. The Trustee may consult with counsel of its selection as to legal matters and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection from liability in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon with respect to such legal matters. (c) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith that it believes to be authorized or within the rights or powers conferred upon it by this Indenture. 35 (e) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company shall be sufficient if signed by two Officers of the Company. (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders unless such Holders shall have offered to the Trustee reasonable security or reasonable indemnity against the costs, expenses and liabilities that might be incurred by it in compliance with such request or direction. (g) Except with respect to Section 4.01 herein, the Trustee shall have no duty to inquire as to the performance of the Company's covenants in Article 4 hereof. In addition, the Trustee shall not be deemed to have knowledge of any Default or Event of Default except (i) any Event of Default occurring pursuant to Sections 6.01(i) or 6.01(ii) and Section 4.01 or (ii) any Default or Event of Default of which a Responsible Officer of the Trustee shall have received written notification in accordance with Section 12.02 hereof from the Company or any Holder. SECTION 7.03 INDIVIDUAL RIGHTS OF TRUSTEE The Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with the Company or any Affiliate with the same rights it would have if it were not Trustee. However, in the event that the Trustee acquires any conflicting interest, it must eliminate such conflict within 90 days, apply to the SEC for permission to continue as Trustee or resign. Any Agent may do the same with like rights and duties. SECTION 7.04 TRUSTEE'S DISCLAIMER The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Notes, it shall not be accountable for the Company's use of the proceeds from the Notes or any money paid to the Company or upon the Company's direction under any provision of this Indenture, it shall not be responsible for the use or application of any money received by any Paying Agent other than the Trustee, and it shall not be responsible for any statement or recital herein or any statement in the Notes or any other document in connection with the sale of the Notes or pursuant to this Indenture other than its certificate of authentication. SECTION 7.05 NOTICE OF DEFAULTS If a Default or Event of Default occurs and is continuing and if the Trustee is charged with knowledge thereof pursuant to Section 7.02(g) hereof, the Trustee shall mail to Holders of Notes a notice of the Default or Event of Default within 90 days after it obtains actual knowledge of said Default. Except in the case of a Default or Event of Default in payment of principal of, premium, if any, or interest on any Note, the Trustee may withhold the notice if and so long as a committee of at least two of its Responsible Officers in good faith determines that withholding the notice is in the interests of the Holders of the Notes. The second sentence of this Section 7.05 shall be in lieu of the proviso to TIA ss. 315(b) and said TIA section is hereby expressly excluded from this Indenture, as permitted by the TIA. 36 SECTION 7.06 REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES Within 60 days after each May 15, beginning with the May 15 following the date of this Indenture, and for so long as Notes remain outstanding, the Trustee shall mail to the Holders of the Notes a brief report dated as of such reporting date that complies with TIA ss. 313(a) (but if no event described in TIA ss. 313(a) has occurred within the twelve months preceding the reporting date, no report need be transmitted). The Trustee also shall comply with TIA ss. 313(b)(2). The Trustee shall also transmit by mail all reports as required by TIA ss. 313(c). A copy of each report at the time of its mailing to the Holders of Notes shall be mailed to the Company and filed with the SEC and each stock exchange on which the Notes are listed in accordance with TIA ss. 313(d). The Company shall promptly notify the Trustee in writing when the Notes are listed on any stock exchange or national securities market. SECTION 7.07 COMPENSATION AND INDEMNITY The Company shall pay to the Trustee from time to time compensation for its acceptance of this Indenture and services hereunder in accordance with a written agreement between the Trustee and the Company. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee promptly upon request for all reasonable disbursements, advances and expenses incurred or made by it in addition to the compensation for its services. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents, accountants, experts and counsel. The Company shall indemnify the Trustee for, and hold the Trustee harmless against, any and all losses, liabilities, claims, damages or expenses (including, without limitation reasonable attorneys' fees and expenses) incurred by it arising out of or in connection with the acceptance or administration of its duties under this Indenture, including the costs and expenses of enforcing this Indenture against the Company (including this Section 7.07) and defending itself against any claim (whether asserted by the Company or any Holder or any other Person) or liability in connection with the exercise or performance of any of its powers or duties hereunder, except to the extent any such loss, liability or expense may be attributable to its negligence, bad faith or willful misconduct. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder unless the Company is materially prejudiced thereby. The Company shall defend the claim with counsel designated by the Company, who may be outside counsel to the Company but shall in all events be reasonably satisfactory to the Trustee, and the Trustee shall cooperate in the defense. In addition, the Trustee may retain separate counsel and, if the Trustee shall have been advised by such counsel that there may be one or more legal defenses available to the Trustee which are different from or in addition to those available to the Company and which the counsel designated by the Company would be precluded from asserting or that the Trustee has one or more interests that conflict with those of the Company, the Company shall pay the reasonable fees and expenses of such separate counsel. The indemnification herein extends to any settlement, provided that the Company will not be 37 liable for any settlement made without its written consent, provided, further, that such consent will not be unreasonably withheld. The obligations of the Company under this Section 7.07 shall survive the resignation or removal of the Trustee and/or the satisfaction and discharge of this Indenture. To secure the Company's payment obligations in this Section, the Trustee shall have a Lien prior to the Notes on all money or property held or collected by the Trustee, except that held in trust to pay principal, premium, if any, and interest on particular Notes. Such Lien shall survive the satisfaction and discharge of this Indenture. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(iv) hereof occurs, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are intended to constitute expenses of administration under any Bankruptcy Law. The Trustee shall comply with the provisions of TIA ss. 313(b)(2) to the extent applicable. SECTION 7.08 REPLACEMENT OF TRUSTEE A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section. The Trustee may resign in writing at any time and be discharged from the trust hereby created by so notifying the Company. The Holders of a majority in principal amount of the then outstanding Notes may remove the Trustee by so notifying the Trustee and the Company in writing, and may appoint a successor Trustee with the Company's consent (which shall not be unreasonably withheld, delayed or conditioned). The Company may remove the Trustee if: (a) the Trustee fails to comply with Section 7.10 hereof, unless the Trustee's duty to resign is stayed as provided in TIA ss. 310(b); (b) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (c) a custodian or public officer takes charge of the Trustee or its property; or (d) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in aggregate principal amount of the then outstanding Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Company. 38 If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee (at the expense of the Company), the Company, or the Holders of at least 10% in aggregate principal amount of the then outstanding Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 7.10, unless the Trustee's duty to resign is stayed as provided in TIA ss. 310(b), any Holder, who has been a bona fide Holder for at least six (6) months, may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Holders of the Notes. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, provided all sums owing to the Trustee hereunder have been paid and subject to the Lien provided for in Section 7.07 hereof. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the Company's obligations under Section 7.07 hereof shall continue for the benefit of the retiring Trustee. SECTION 7.09 SUCCESSOR TRUSTEE BY MERGER, ETC. Subject to Section 7.10, if the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further act shall be the successor Trustee. The provisions of TIA ss. 310 shall apply to the Company as obligor on the Notes. SECTION 7.10 ELIGIBILITY; DISQUALIFICATION There shall at all times be a Trustee hereunder that is a corporation organized and doing business under the laws of the United States of America or of any state thereof that is authorized under such laws to exercise corporate trustee power, that is subject to supervision or examination by federal or state authorities and that has a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition. This Indenture shall always have a Trustee who satisfies the requirements of TIA ss. 310(a)(1), (2) and (5). The Trustee is subject to TIA Section 310(b). SECTION 7.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY The Trustee is subject to TIA ss. 311(a), excluding any creditor relationship listed in TIA ss. 311(b). A Trustee who has resigned or been removed shall be subject to TIA ss. 311(a) to the extent indicated therein. The provisions of TIA ss. 311 shall apply to the Company as obligor on the Notes. 39 ARTICLE 8 LEGAL DEFEASANCE AND COVENANT DEFEASANCE SECTION 8.01 OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE The Company may, at the option of its Board of Directors evidenced by a resolution set forth in an Officers' Certificate, at any time, elect to have either Section 8.02 or 8.03 hereof be applied to all outstanding Notes upon compliance with the conditions set forth below in this Article 8. SECTION 8.02 LEGAL DEFEASANCE AND DISCHARGE Upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.02, the Company and each of the Guarantors, as applicable, shall, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, be deemed to have been discharged from its obligations with respect to all outstanding Notes and Guarantees, as applicable, on the date the conditions set forth below are satisfied (hereinafter, "Legal Defeasance"). Such Legal Defeasance means that the Company shall be deemed to have paid and discharged all amounts owed under the outstanding Notes and this Indenture shall cease to be of further effect as to all outstanding Notes and Guarantees, except as to (i) rights of Holders to receive payments in respect of the principal of, premium, if any, and interest on such Notes when such payments are due from the trust funds described in Section 8.04 below; (ii) the Company's obligations with respect to such Notes concerning issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes, and the maintenance of an office or agency for payment and money for security payments held in trust; (iii) the rights, powers, trust, duties, and immunities of the Trustee, and the Company's obligations in connection therewith; and (iv) this Article 8. The Company may exercise its option under this Section 8.02 notwithstanding the prior exercise of its option under Section 8.03 hereof. SECTION 8.03 COVENANT DEFEASANCE Upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.03, the Company and each of the Guarantors shall, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, be released from their respective obligations under the covenants contained in Sections 4.03, 4.04, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13 and 4.15 hereof with respect to the outstanding Notes and the Guarantors shall be released from their obligations under Section 11.03(b) hereof in each case, on and after the date the conditions set forth below are satisfied (hereinafter, "Covenant Defeasance"), and the Notes and the Guarantees shall thereafter be deemed not "outstanding" for the purposes of any direction, waiver, consent or declaration or act of Holders (and the consequences of any breach thereof) in connection with such covenants, but shall continue to be deemed "outstanding" for all other purposes hereunder (it being understood that such Notes and Guarantees shall not be deemed outstanding for accounting purposes). For this purpose, Covenant Defeasance means that, with respect to the outstanding Notes, the Company and the Guarantors may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by 40 reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 6.01 hereof, but, except as specified above, the remainder of this Indenture and such Notes and Guarantees shall be unaffected thereby. In addition, upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.03, subject to the satisfaction of the conditions set forth in Section 8.04, Section 6.01(iii) hereof shall not constitute an Event of Default for all purposes hereunder. SECTION 8.04 CONDITIONS TO LEGAL OR COVENANT DEFEASANCE The following shall be the conditions to the application of either Section 8.02 or 8.03 hereof to the outstanding Notes: In order to exercise either Legal Defeasance or Covenant Defeasance: (i) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders, U.S. legal tender, U.S. Government Obligations or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest on such Notes on the stated date for payment thereof or on the redemption date of such principal or installment of principal of, premium, if any, or interest on such Notes, and the Holders must have a valid, perfected, first priority exclusive security interest in such trust; (ii) in the case of Legal Defeasance only, the Company shall have delivered to the Trustee an opinion of counsel of national standing with respect to tax law in the United States reasonably acceptable to the Trustee confirming that (A) the Company has received from, or there has been published by the Internal Revenue Service, a ruling or (B) since the date of the Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance only, the Company shall have delivered to the Trustee an opinion of counsel of national standing with respect to tax law in the United States reasonably acceptable to such Trustee confirming that the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (iv) no Default or Event of Default shall have occurred and be continuing on the date of such deposit and the Company shall have delivered to the Trustee an Officer's Certificate, to the effect that, assuming no intervening bankruptcy of the Company between the date of deposit and a date that is one year plus one day following the deposit, 41 after the date that is one year plus one day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors rights generally (it being understood that this condition to Legal Defeasance may not be satisfied until such date that is one year plus one calendar day after the date of deposit); (v) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under this Indenture or any other material agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (vi) the Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the holders of such Notes over any other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding any other creditors of the Company or others; (vii) the monies held in trust by the Trustee on behalf of the Holders shall not be considered or required to register as an "investment company" (as that term is defined in the Investment Company Act of 1940, as amended), or otherwise become subject to regulation under the Investment Company Act.; and (viii) the Company shall have delivered to the Trustee an Officers' Certificate and an opinion of counsel, each stating that the conditions precedent provided for in, in the case of the Officers' Certificate, (i) through (vi) and, in the case of the opinion of counsel, clauses (i) (with respect to the validity and perfection of the security interest), and (ii), (iii), (iv), (v) and (vii) of this Section 8.04 have been complied with. If the funds deposited with the Trustee to effect Covenant Defeasance are insufficient to pay the principal of, premium, if any, and interest on the Notes when due, then the obligations of the Company and the Guarantors under this Indenture and the Collateral Agreement will be revived and no such defeasance will be deemed to have occurred. Legal Defeasance and Covenant Defeasance shall be deemed to occur on the date all of the applicable conditions set forth in this Section 8.04 are satisfied. SECTION 8.05 DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS Subject to Section 8.06 hereof, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee pursuant to Section 8.04 hereof in respect of the outstanding Notes shall be held in trust and applied by the Trustee, in accordance with the provisions of such Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as Paying Agent) as the Trustee may determine, to the Holders of such Notes of all sums due and to become due thereon in respect of principal, premium, if any, and interest, but such money need not be segregated from other funds except to the extent required by law. 42 The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the cash or U.S. Government Obligations deposited pursuant to Section 8.04 hereof or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders. Anything in this Article 8 to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon the written request of the Company any money or U.S. Government Obligations held by it as provided in Section 8.04 hereof which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee are in excess of the amount thereof that would then be required to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance. SECTION 8.06 REPAYMENT TO COMPANY Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium, if any, or interest on any Note and remaining unclaimed for two years after such principal, and premium, if any, or interest has become due and payable shall be paid to the Company on its written request or (if then held by the Company) shall be discharged from such trust; and the Holders of the Notes shall thereafter, as a secured creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease. SECTION 8.07 REINSTATEMENT If the Trustee or Paying Agent is unable to apply any United States dollars or U.S. Government Obligations in accordance with Section 8.02 or 8.03 hereof, as the case may be, by reason of any order requiring any Holder to return or refund any amount paid to it pursuant to this Article 8, or directing the repayment of the deposited money to the Company or otherwise making the deposit unavailable to make payments on the Notes when due, or if any court or other government authority enters an order or judgment enjoining, restraining or otherwise prohibiting such application, or requiring any Holder to return or refund any amount paid to it pursuant to this Article 8, then (for so long as the insufficiency exists or the order remains in effect) the Company's and the Guarantors' obligations under this Indenture, the Notes and the Guarantees shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.02 or 8.03 hereof until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 8.02 or 8.03 hereof, as the case may be; provided, however, that, if the Company makes any payment of principal of, premium, if any, or interest on any Note following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money held by the Trustee or Paying Agent. 43 ARTICLE 9 AMENDMENT, SUPPLEMENT AND WAIVER SECTION 9.01 WITHOUT CONSENT OF HOLDERS OF NOTES Notwithstanding Section 9.02 of this Indenture, the Company, the Guarantors and the Trustee may amend or supplement this Indenture or the Notes without the consent of any Holder of a Note: (a) to cure any ambiguity, defect or inconsistency in a manner not adverse to any Holder; (b) to provide for uncertificated Notes in addition to or in place of Certificated Notes; (c) to provide for the assumption of the Company's obligations to the Holders in the case of a merger, sale or consolidation pursuant to Article 5 hereof; (d) to provide for additional Guarantors as set forth in Section 4.11, successor Guarantors as set forth in Section 11.03 or for the release or assumption of a Guarantee in compliance with this Indenture; (e) to make any change that would provide any additional rights or benefits to the Holders (including the addition of any Guarantors) or that does not adversely affect the rights hereunder of any Holder; (f) to comply with requirements of the SEC in order to effect or maintain the qualification of this Indenture under the TIA; or (g) to evidence, and provide for acceptance of, the appointment of a successor Trustee hereunder. Upon the request of the Company accompanied by a resolution of its Board of Directors authorizing the execution of any such amended or supplemental indenture, and upon receipt by the Trustee of the documents described in Section 9.06 hereof, stating that the execution of such amended or supplemental indenture is authorized or permitted by this Indenture, the Trustee shall join with the Company in the execution of any amended or supplemental indenture authorized or permitted by the terms of this Indenture and to make any further appropriate agreements and stipulations that may be therein contained, but the Trustee shall not be obligated to enter into such amended or supplemental indenture that affects its own rights, duties or immunities under this Indenture or otherwise. SECTION 9.02 WITH CONSENT OF HOLDERS OF NOTES Except as provided below in this Section 9.02, the Company and the Trustee may amend or supplement this Indenture and the Notes may be amended or supplemented with the written consent of the Holders of at least a majority in aggregate principal amount of the Notes then outstanding (including consents obtained in connection with a tender offer or exchange 44 offer for the Notes), and, subject to Sections 6.04 and 6.07 hereof, any existing Default or Event of Default (other than a Default or Event of Default in the payment of the principal of, premium, if any, or interest on the Notes, except a payment default resulting from an acceleration that has been rescinded) or compliance with any provision of this Indenture, the Notes or the Guarantees may be waived with the written consent of the Holders of at least a majority in aggregate principal amount of the then outstanding Notes (including consents obtained in connection with a tender offer or exchange offer for the Notes); provided that no such amendment, supplement or waiver may, without the consent of Holders of at least 66 2/3% in aggregate principal amount of Notes at the time outstanding, modify the provisions (including the defined terms used therein) of Section 4.07 hereof in a manner adverse to the Holders. Upon the request of the Company accompanied by a resolution of its Board of Directors authorizing the execution of any such amended or supplemental indenture, and upon the filing with the Trustee of evidence reasonably satisfactory to the Trustee of the consent of the Holders of Notes as aforesaid, and upon receipt by the Trustee of the documents described in Section 9.06 hereof, the Trustee shall join with the Company in the execution of such amended or supplemental indenture unless such amended or supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its sole discretion, but shall not be obligated to, enter into such amended or supplemental indenture. It shall not be necessary for the consent of the Holders under this Section 9.02 to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. The calculation of Holders of Notes so consenting shall be made pursuant to Section 2.09 hereof. After an amendment, supplement or waiver under this Section 9.02 becomes effective, the Company shall mail to the Holders of Notes affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amended or supplemental indenture or waiver. Subject to Sections 6.04 and 6.07 hereof, the Holders of a majority in aggregate principal amount of the Notes then outstanding may waive compliance in a particular instance by the Company or a Guarantor with any provision of this Indenture or the Notes. However, without the written consent of each Holder affected, an amendment or waiver may not (with respect to any Notes held by a non-consenting Holder): (i) change the Stated Maturity on any Note, or reduce the principal amount thereof or the rate (or extend the time for payment) of interest thereon or any premium, if any, payable upon the redemption at the option of the Company thereof, or change the place of payment where, or the coin or currency in which, any Note or any premium or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption at the option of the Company, on or after the Redemption Date), or reduce the Change of Control Purchase Price or alter the provisions (including the defined terms used therein) requiring the Company to offer to repurchase the Notes upon a Change of Control or 45 regarding the right of the Company to redeem the Notes in a manner adverse to the holders of the Notes, or (ii) reduce the percentage in principal amount of the outstanding Notes, the consent of whose holders is required for any such amendment, supplemental indenture or waiver provided for in the Indenture, or (iii) change in any manner materially adverse to the Holders, the provisions of Article 10 hereof (and the definitions relating thereto), or (iv) modify any of the waiver provisions, except to increase any required percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each outstanding Note affected thereby. SECTION 9.03 COMPLIANCE WITH TRUST INDENTURE ACT Every amendment or supplement to this Indenture or the Notes shall be set forth in a amended or supplemental indenture that complies with the TIA as then in effect. SECTION 9.04 REVOCATION AND EFFECT OF CONSENTS Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder of a Note is a continuing consent by such Holder and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note, even if notation of the consent is not made on any Note. However, any such Holder of a Note or subsequent Holder of a Note may revoke the consent as to its Note if the Trustee receives written notice of revocation before the date the waiver, supplement or amendment becomes effective. An amendment, supplement or waiver becomes effective in accordance with its terms and thereafter binds every Holder. SECTION 9.05 NOTATION ON OR EXCHANGE OF NOTES The Trustee may place an appropriate notation about an amendment, supplement or waiver on any Note thereafter authenticated. The Company in exchange for all Notes may issue and the Trustee shall authenticate new Notes that reflect the amendment, supplement or waiver. Failure to make the appropriate notation or issue a new Note shall not affect the validity and effect of such amendment, supplement or waiver. SECTION 9.06 TRUSTEE TO SIGN AMENDMENTS, ETC. The Trustee shall sign any amended or supplemental indenture authorized pursuant to this Article 9 if the amendment or supplement does not adversely affect the rights, duties, liabilities or immunities of the Trustee. The Company may not sign an amendment or supplemental indenture until the Board of Directors approves it. In executing any amended or supplemental indenture, the Trustee shall be provided with and (subject to Section 7.01) shall be 46 fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel stating that the execution of such amended or supplemental indenture is authorized or permitted by this Indenture and that such supplemental indenture and this Indenture, as so amended or supplemented, constitute the valid and binding obligations of the Company and the Guarantors, enforceable against each of them in accordance with their respective terms (subject to customary and necessary exceptions) and all conditions precedent have been complied with. ARTICLE 10 SUBORDINATION SECTION 10.01 AGREEMENT TO SUBORDINATE The Company agrees, and each Holder by accepting a Note agrees, that the Indebtedness evidenced by the Note is subordinated in right of payment, to the extent and in the manner provided in this Article 10, to the prior payment in full in cash or Cash Equivalents of all Obligations in respect of Senior Indebtedness (whether outstanding on the date hereof or hereafter created, incurred, assumed or guaranteed), and that the subordination is for the benefit of the holders of Senior Indebtedness. This Article 10 shall constitute a continuing offer to all Persons who become holders of, or continue to hold, Senior Indebtedness, and such provisions are made for the benefit of the holders of Senior Indebtedness. SECTION 10.02 LIQUIDATION; DISSOLUTION; BANKRUPTCY Upon any distribution of assets of the Company or any Guarantor upon any dissolution, winding up, total or partial liquidation or reorganization of the Company or a Guarantor, whether voluntary or involuntary, in bankruptcy, insolvency, receivership or a similar proceeding or upon assignment for the benefit of creditors or any marshalling of assets or liabilities: (i) the holders of all Senior Indebtedness of the Company or such Guarantor, as applicable, will first be entitled to receive payment in full in cash or Cash Equivalents (or have such payment duly provided for) or otherwise to the extent such holders accept satisfaction of amounts due by settlement in other than cash or Cash Equivalents before the holders of the Notes are entitled to receive any payment on account of any Obligation in respect of the Notes, including the principal of, premium, if any, and interest on the Notes (other than Junior Securities) and (ii) any payment or distribution of assets of the Company or such Guarantor of any kind or character from any source, whether in cash, property or securities (other than Junior Securities) to which the holders of the Notes or the Trustee on behalf of such holders would be entitled (by set-off or otherwise), except for the subordination provisions contained in this Indenture, will be paid by the liquidating trustee or agent or other person making such a payment or distribution directly to the holders of such Senior Indebtedness or their representative to the extent necessary to make payment in full (or have such payment duly provided for) on all such Senior Indebtedness remaining unpaid, after giving effect to any concurrent payment or distribution to the holders of such Senior Indebtedness. 47 SECTION 10.03 DEFAULT ON SENIOR INDEBTEDNESS No payment (by set-off or otherwise) may be made by or on behalf of the Company or a Guarantor, as applicable, on account of any Obligation in respect of the Notes, including the principal of, premium, if any, or interest on the Notes (including any repurchases of Notes), or on account of the redemption provisions of the Notes for cash or property (other than Junior Securities), (i) upon the maturity of any Senior Indebtedness of the Company or such Guarantor by lapse of time, acceleration (unless waived) or otherwise, unless and until all principal of, premium, if any, and the interest on such Senior Indebtedness are first paid in full in cash or Cash Equivalents (or such payment is duly provided for) or otherwise to the extent holders accept satisfaction of amounts due by settlement in other than cash or Cash Equivalents, or (ii) in the event of default in the payment of any principal of, premium, if any, or interest on Senior Indebtedness of the Company or such Guarantor when it becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise (a "Payment Default"), unless and until such Payment Default has been cured or waived or otherwise has ceased to exist. Upon (i) the happening of an event of default other than a Payment Default that permits the holders of Senior Indebtedness to declare such Senior Indebtedness to be due and payable and (ii) written notice of such event of default given to the Company and the Trustee by the holders of an aggregate of at least $10.0 million principal amount outstanding of any Senior Indebtedness or their Representative (a "Payment Notice"), then, unless and until such event of default has been cured or waived or otherwise has ceased to exist, no payment (by set-off or otherwise) may be made by or on behalf of the Company or any Guarantor which is an obligor under such Senior Indebtedness on account of any Obligation in respect of the Notes, including the principal of, premium, if any, or interest on the Notes, (including any repurchases of any of the Notes), or on account of the redemption provisions of the Notes, in any such case, other than payments made with Junior Securities. Notwithstanding the foregoing, unless the Senior Indebtedness in respect of which such event of default exists has been declared due and payable in its entirety within 179 days after the Payment Notice is delivered as set forth above (the "Payment Blockage Period") (and such declaration has not been rescinded or waived), at the end of the Payment Blockage Period, the Company and the Guarantors shall be required to pay all sums not paid to the holders of the Notes during the Payment Blockage Period due to the foregoing prohibitions and to resume all other payments as and when due on the Notes. Any number of Payment Notices may be given; provided, however, that (i) not more than one Payment Notice shall be given within a period of any 360 consecutive days, and (ii) no default that existed upon the date of such Payment Notice or the commencement of such Payment Blockage Period (whether or not such event of default is on the same issue of Senior Indebtedness) shall be made the basis for the commencement of any other Payment Blockage Period (it being acknowledged that any subsequent action, or any subsequent breach of any financial covenant for a period commencing after the expiration of such Payment Blockage Period that, in either case, would give rise to a new event of default, even though it is an event that would also have been a separate breach pursuant to any provision under which a prior event of default previously existed, shall constitute a new event of default for this purpose). 48 SECTION 10.04 ACCELERATION OF NOTES If payment of the Notes is accelerated because of an Event of Default, the Company shall promptly notify holders of Senior Indebtedness of the acceleration. SECTION 10.05 WHEN DISTRIBUTION MUST BE PAID OVER In the event that the Trustee or any Holder receives any payment or distribution of assets of the Company or any Guarantor (other than Junior Securities) at a time when the Trustee or such Holder, as applicable, has actual knowledge that such payment is prohibited by Section 10.03 hereof, such payment or distribution shall be held in trust for the benefit of the holders of such Senior Indebtedness, and shall be paid or delivered by the Trustee or the Holders of the Notes, as the case may be, to the holders of such Senior Indebtedness remaining unpaid or unprovided for or to their Representative or Representatives ratably according to the aggregate principal amounts remaining unpaid on account of such Senior Indebtedness held or represented by each, for application to the payment of all such Senior Indebtedness remaining unpaid, to the extent necessary to pay or to provide for the payment of all such Senior Indebtedness in full in cash or Cash Equivalents or otherwise to the extent holders accept satisfaction of amounts due by settlement in other than cash or Cash Equivalents after giving effect to any concurrent payment or distribution to the holders of such Senior Indebtedness. With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform only such obligations on the part of the Trustee as are specifically set forth in this Article 10, and no implied covenants or obligations with respect to the holders of Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness and shall not be liable to any such holders if the Trustee shall pay over or distribute to or on behalf of Holders or the Company or any other Person money or assets to which any holders of Senior Indebtedness shall be entitled by virtue of this Article 10, except if such payment is made as a result of the willful misconduct or gross negligence of the Trustee. SECTION 10.06 NOTICE BY COMPANY The Company shall promptly notify in writing the Trustee and the Paying Agent of any facts known to the Company that would cause a payment of any Obligations with respect to the Notes to violate this Article 10, but failure to give such notice shall not affect the subordination of the Notes to the Senior Indebtedness as provided in this Article 10. SECTION 10.07 SUBROGATION After all Senior Indebtedness is paid in full and until the Notes are paid in full, Holders shall be subrogated (equally and ratably with all other Indebtedness pari passu with the Notes) to the rights of holders of Senior Indebtedness to receive distributions applicable to Senior Indebtedness to the extent that distributions otherwise payable to the Holders have been applied to the payment of Senior Indebtedness. A distribution made under this Article 10 to holders of Senior Indebtedness that otherwise would have been made to Holders is not, as between the Company and Holders, a payment by the Company on the Notes. 49 SECTION 10.08 RELATIVE RIGHTS This Article 10 defines the relative rights of Holders and holders of Senior Indebtedness. Nothing in this Indenture shall: (1) impair, as between the Company, the Guarantors and Holders, the obligation of the Company and the Guarantors, which is absolute and unconditional, to pay, when due, principal of, premium, if any, and interest on the Notes in accordance with their terms; (2) affect the relative rights of Holders and creditors of the Company other than their rights in relation to holders of Senior Indebtedness; or (3) prevent the occurrence of any Default or Event of Default under this Indenture or limit the Trustee or any Holder from exercising its available remedies upon a Default or Event of Default, subject to the rights of holders and owners of Senior Indebtedness to receive distributions and payments otherwise payable to Holders. If the Company fails because of this Article 10 to pay principal of or interest on a Note on the due date, the failure is still a Default or Event of Default. SECTION 10.09 SUBORDINATION MAY NOT BE IMPAIRED BY COMPANY No right of any holder of Senior Indebtedness to enforce the subordination of the Indebtedness evidenced by the Notes shall be impaired by any act or failure to act by the Company or any Holder or by the failure of the Company or a Guarantor, as applicable, or any Holder to comply with this Indenture. SECTION 10.10 DISTRIBUTION OR NOTICE TO REPRESENTATIVE Whenever a distribution is to be made or a notice given to holders of Senior Indebtedness, the distribution may be made and the notice given to their Representative. The Company shall provide to the Trustee, in writing, notice of the name and address of any Representative. In the absence of such a notice, the Trustee may conclusively assume that no Representative exists. Upon any payment or distribution of assets of the Company referred to in this Article 10, the Trustee and the Holders shall be entitled to rely upon any order or decree made by any court of competent jurisdiction or upon any certificate of such Representative or of the liquidating trustee or agent or other Person making any distribution to the Trustee or to the Holders for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Senior Indebtedness and other Indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 10. 50 SECTION 10.11 RIGHTS OF TRUSTEE AND PAYING AGENT Notwithstanding the provisions of this Article 10 or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment or distribution by the Trustee, and the Trustee and the Paying Agent may continue to make payments on the Notes, unless the Trustee shall have received at the Corporate Trust Administration Office of the Trustee at least five Business Days prior to the date of such payment written notice (which may be via facsimile) of facts that would cause the payment of any Obligations with respect to the Notes to violate this Article 10. Only the Company or a Representative of Senior Indebtedness previously identified by the Company to the Trustee pursuant to Section 10.10 may give the notice. Nothing in this Article 10 shall impair the claims of, or payments to, the Trustee under or pursuant to Section 7.07 hereof. The Trustee in its individual or any other capacity may hold Senior Indebtedness with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. Any Holder or any Affiliate of any Holder may hold Senior Indebtedness with the same rights it would have if it were not a Holder or an Affiliate of a Holder. SECTION 10.12 AUTHORIZATION TO EFFECT SUBORDINATION Each Holder of a Note by the Holder's acceptance thereof authorizes and directs the Trustee on the Holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Article 10, and appoints the Trustee to act as the Holder's attorney-in-fact for any and all such purposes. If the Trustee does not file a proper proof of claim or proof of debt in the form required in any proceeding referred to in Section 6.09 hereof at least 30 days before the expiration of the time to file such claim, the Representative is hereby authorized to file an appropriate claim for and on behalf of the Holders of the Notes. SECTION 10.13 AMENDMENTS The provisions of this Article 10 shall not be amended or modified in a manner materially adverse to the holders of Senior Indebtedness without the written consent of the Representative or Representatives of all holders of Senior Indebtedness. ARTICLE 11 SUBSIDIARY GUARANTEES SECTION 11.01 SUBSIDIARY GUARANTEES Subject to the provisions of this Article 11, by its execution hereof, each Guarantor, jointly and severally, hereby unconditionally guarantees to each Holder of a Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, that: (a) the principal of, and premium, if any, and interest on the Notes will be duly and punctually paid in full when due, whether at maturity, by acceleration, upon a Change in Control or otherwise, and interest on overdue principal of, and premium, if any, and (to the extent permitted by law) interest on any interest, if any, on the Notes and all other obligations of the Company to the Holders or the Trustee hereunder or under the Notes (including fees, expenses or other) will be promptly paid in full or performed, all in accordance with the terms hereof; and (b) in case of 51 any extension of time of payment or renewal of any Notes or any of such other obligations, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. Failing payment when due of any amount so guaranteed or failing performance of any other obligation of the Company to the Holders, for whatever reason, each Guarantor will be obligated to pay, or to perform or to cause the performance of, the same immediately. An Event of Default under this Indenture or the Notes shall constitute an event of default under this Subsidiary Guarantee, and shall entitle the Holders of Notes to accelerate the obligations of each Guarantor hereunder in the same manner and to the same extent as the obligations of the Company. Each Guarantor hereby agrees that its obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Notes or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Notes with respect to any thereof, the entry of any judgment against the Company, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a Guarantor. Each Guarantor hereby waives and relinquishes: (a) any right to require the Trustee, the Holders or the Company (each, a "Benefitted Party") to proceed against the Company, the Subsidiaries or any other Person or to proceed against or exhaust any security held by a Benefitted Party at any time or to pursue any other remedy in any secured party's power before proceeding against the Guarantors; (b) any defense that may arise by reason of the incapacity, lack of authority, death or disability of any other Person or Persons or the failure of a Benefitted Party to file or enforce a claim against the estate (in administration, bankruptcy or any other proceeding) of any other Person or Persons; (c) demand, protest and notice of any kind (except as expressly required by this Indenture), including but not limited to notice of the existence, creation or incurring of any new or additional Indebtedness or obligation or of any action or non-action on the part of the Guarantors, the Company, the Subsidiaries, any Benefitted Party, any creditor of the Guarantors, the Company or the Subsidiaries or on the part of any other Person whomsoever in connection with any obligations the performance of which are hereby guaranteed; (d) any defense based upon an election of remedies by a Benefitted Party, including but not limited to an election to proceed against the Guarantors for reimbursement; (e) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; (f) any defense arising because of a Benefitted Party's election, in any proceeding instituted under Bankruptcy Law, of the application of Section 1111(b)(2) of the United States Federal Bankruptcy Code; and (g) any defense based on any borrowing or grant of a security interest under Section 364 of the Bankruptcy Code. The Guarantors hereby covenant that the Subsidiary Guarantee will not be discharged except by payment in full of all principal, premium, if any, and interest on the Notes and all other costs provided for under this Indenture, or as provided in Section 8.01. If any Holder or the Trustee is required by any court or otherwise to return to either the Company or the Guarantors, or any trustee or similar official acting in relation to either the Company or the Guarantors, any amount paid by the Company or the Guarantors to the Trustee or such Holder, the Subsidiary Guarantees, to the extent theretofore discharged, shall be reinstated in full force and effect. Each of the Guarantors agrees that it will not be entitled to any right of subrogation in relation to the Holders in respect of any obligations guaranteed hereby until payment in full of all obligations guaranteed hereby. Each Guarantor agrees that, as between it, on the one hand, and the Holders of Notes and the Trustee, on the other hand, (x) the maturity of the obligations guaranteed hereby may be accelerated as provided in Article 6 hereof 52 for the purposes hereof, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby, and (y) in the event of any acceleration of such obligations as provided in Article 6 hereof, such obligations (whether or not due and payable) shall forthwith become due and payable by such Guarantor for the purpose of the Subsidiary Guarantee. SECTION 11.02 EXECUTION AND DELIVERY OF SUBSIDIARY GUARANTEES To evidence the Subsidiary Guarantees set forth in Section 11.01 hereof, each of the Guarantors agrees that a notation of the Subsidiary Guarantees substantially in the form included in Exhibit B shall be endorsed on each Note authenticated and delivered by the Trustee and that this Indenture shall be executed on behalf of each Guarantor by the Chairman of the Board, any Vice Chairman, the President or one of the Vice Presidents of such Guarantor and attested to by any other Officer thereof. Each of the Guarantors agree that the Subsidiary Guarantees set forth in this Article 11 will remain in full force and effect and apply to all the Notes notwithstanding any failure to endorse on each Note a notation of the Subsidiary Guarantees. If an Officer whose facsimile signature is on a Note no longer holds that office at the time the Trustee authenticates the Note on which the Subsidiary Guarantees are endorsed, the Subsidiary Guarantees shall be valid nevertheless. The delivery of any Note by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of the Subsidiary Guarantees set forth in this Indenture on behalf of the Guarantors. SECTION 11.03 GUARANTORS MAY CONSOLIDATE, ETC., ON CERTAIN TERMS (a) Nothing contained in this Indenture or in the Notes shall prevent any consolidation or merger of a Guarantor with or into the Company or another Guarantor, or shall prevent the transfer of all of the assets of a Guarantor to the Company or another Guarantor. Upon any such consolidation, merger, transfer or sale, the Subsidiary Guarantee of such Guarantor shall no longer have any force or effect. (b) Except as set forth in paragraph (a) of this Section 11.03, no Guarantor may consolidate or merge with or into (whether or not such Guarantor is the surviving Person) another Person or, directly or indirectly, sell, lease, convey or transfer all or substantially all of its assets (computed on a consolidated basis), whether in a single transaction or a series of transactions, to another Person or group of affiliated Persons unless (i) the Person formed by or surviving any such consolidation or merger (if other than such Guarantor) is a corporation organized under the laws of the United States, any state thereof or the District of Columbia and expressly assumes all the obligations of such Guarantor pursuant to a supplemental indenture in form reasonably satisfactory to the Trustee pursuant to which such person shall unconditionally assume all of such Guarantor's obligations under such Guarantor's Guarantee, on the terms set forth under this Indenture; and (ii) immediately before and immediately after giving effect to such transaction on a pro forma basis, no Default or Event of Default shall have occurred or be continuing. In case of any such consolidation, merger or transfer of assets and upon the 53 assumption by the successor corporation, by supplemental indenture, executed and delivered to the Trustee and reasonably satisfactory in form to the Trustee, of the Subsidiary Guarantee endorsed upon the Notes and the due and punctual performance of all of the covenants and conditions of this Indenture to be performed by such Guarantor, such successor corporation shall succeed to and be substituted for such Guarantor with the same effect as if it had been named herein as a Guarantor. Such successor corporation thereupon may cause to be signed any or all of the Subsidiary Guarantees to be endorsed upon all of the Notes issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee. All the Subsidiary Guarantees so issued shall in all respects have the same legal rank and benefit under this Indenture as the Subsidiary Guarantees theretofore and thereafter issued in accordance with the terms of this Indenture as though all of such Subsidiary Guarantees had been issued at the date of the execution hereof. (c) The Trustee, subject to the provisions of Section 12.04 hereof, shall be entitled to receive an Officers' Certificate as conclusive evidence that any such consolidation, merger, sale or conveyance, and any such assumption of Obligations, comply with the provisions of this Section 11.03. Such certificate shall comply with the provisions of Section 12.05. SECTION 11.04 RELEASES FOLLOWING SALE OF ASSETS Upon the sale or disposition (whether by merger, stock purchase, asset sale or otherwise) of a Guarantor of all of its assets to an entity which is not a Guarantor, which transaction is otherwise in compliance with this Indenture (including, without limitation, the provisions of Section 11.03), such Guarantor shall be deemed released from its obligations under its Guarantee of the Notes or Section 11.03 hereof, as the case may be; provided, however, that any such termination shall occur only in the event that all obligations of such Guarantor under all of its Guarantees of, and under all of its pledges of assets or other security interests which secure, any Indebtedness of the Company or any other Subsidiary of the Company shall also terminate upon such release, sale or transfer. Upon delivery by the Company to the Trustee of an Officers' Certificate and Opinion of Counsel, each to the effect that such sale or other disposition was made by the Company in accordance with the provisions of this Indenture, the Trustee shall execute any documents reasonably required in order to evidence the release of any such Guarantor from its obligations under its Subsidiary Guarantee. Any Guarantor not released from its obligations under its Subsidiary Guarantee shall remain liable for the full amount of principal of, premium, if any, and interest on the Notes and for the other obligations of any Guarantor under this Indenture as provided in this Article 11. SECTION 11.05 LIMITATION OF GUARANTOR'S LIABILITY Each Guarantor, and by its acceptance hereof each Holder, hereby confirms that it is the intention of all such parties that the guarantee by such Guarantor pursuant to its Subsidiary Guarantee not constitute a fraudulent transfer or conveyance for purposes of Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law. To effectuate the foregoing intention, the Holders and such Guarantor hereby irrevocably agree that the obligations of such Guarantor under this Article 11 shall be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Guarantor and after giving effect to any collections from or payments made by 54 or on behalf of any other Guarantor in respect of the Obligations of such other Guarantor under this Article 11, result in the Obligations of such Guarantor under the Subsidiary Guarantee of such Guarantor not constituting a fraudulent transfer or conveyance. SECTION 11.06 APPLICATION OF CERTAIN TERMS AND PROVISIONS TO THE GUARANTOR (a) For purposes of any provision of this Indenture which provides for the delivery by any Guarantor of an Officers' Certificate and/or an Opinion of Counsel, the definitions of such terms in Section 1.01 shall apply to such Guarantor as if references therein to the Company were references to such Guarantor. (b) Any request, direction, order or demand which by any provision of this Indenture is to be made by any Guarantor, shall be sufficient if evidenced as described in Section 12.02 as if references therein to the Company were references to such Guarantor. (c) Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the Holders to or on any Guarantor may be given or served as described in Section 12.02 as if references therein to the Company were references to such Guarantor. (d) Upon any demand, request or application by any Guarantor to the Trustee to take any action under this Indenture, such Guarantor shall furnish to the Trustee such certificates and opinions as are required in Section 12.04 hereof as if all references therein to the Company were references to such Guarantor. SECTION 11.07 SUBORDINATION OF SUBSIDIARY GUARANTEES The Obligations of each Guarantor under its Subsidiary Guarantee pursuant to this Article 11 shall be junior and subordinated to all obligations in respect of the Senior Indebtedness of such Guarantor on the same basis as the Notes are junior and subordinated to all obligations in respect of the Senior Indebtedness of the Company. For the purposes of the foregoing sentence, (a) each Guarantor may make, and the Trustee and the Holders of the Notes shall have the right to receive and/or retain, payments by any of the Guarantors only at such times as they may receive and/or retain payments in respect of the Notes pursuant to this Indenture, including Article 10 hereof, and (b) the rights and obligations of the relevant parties relative to the Subsidiary Guarantees shall be the same as their respective rights and obligations relative to the Notes and Senior Indebtedness of the Company pursuant to Article 10. ARTICLE 12 MISCELLANEOUS SECTION 12.01 TRUST INDENTURE ACT CONTROLS If any provision of this Indenture limits, qualifies or conflicts with the duties imposed by TIA ss. 318(c), the imposed duties shall control. 55 SECTION 12.02 NOTICES Any notice or communication by the Company or the Trustee to the other is duly given if in writing and delivered in person or mailed by first class mail (registered or certified, return receipt requested, postage prepaid), telecopier or overnight air courier guaranteeing next day delivery, to the other's address: If to the Company: Pacific Aerospace & Electronics, Inc. 430 Olds Station Road Wenatchee, Washington 98801 Telephone No.: (509) 667-9600 Telecopier No.: (509) 667-9696 Attention: President If to the Trustee: U.S. Bank National Association 180 East Fifth Street EP-MN-T2CT St. Paul, Minnesota 55101 Telephone No.: (651) 244-8677 Telecopier No.: (651) 244-0711 Attention: Frank P. Leslie III The Company or the Trustee, by notice to the other may designate additional or different addresses for subsequent notices or communications. All notices and communications (other than those sent to Holders) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. Any notice or communication to a Holder shall be mailed by first class mail, certified or registered, return receipt requested, or by overnight air courier guaranteeing next day delivery to its address shown on the register kept by the Registrar. Any notice or communication shall also be so mailed to any Person described in TIA ss. 313(c), to the extent required by the TIA. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Company mails a notice or communication to Holders, it shall mail a copy to the Trustee and each Agent at the same time. If the Trustee or an Agent mails a notice or communication to Holders, it shall mail a copy to the Company at the same time. 56 SECTION 12.03 COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS OF NOTES Holders may communicate pursuant to TIA ss. 312(b) with other Holders with respect to their rights under this Indenture or the Notes. The Company, the Trustee, the Registrar and any other relevant Person shall have the protection of TIA ss. 312(c). SECTION 12.04 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (a) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 12.05 hereof) stating that, in the opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been satisfied; and (b) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee stating that, in the opinion of such counsel, all such conditions precedent and covenants have been satisfied. SECTION 12.05 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to TIA ss. 314(a)(4)) shall comply with the provisions of TIA ss. 314(e) and shall include: (a) a statement that the Person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such Person, he or she has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been satisfied; and (d) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been satisfied. SECTION 12.06 RULES BY TRUSTEE AND AGENTS The Trustee may make reasonable rules for action by or at a meeting of Holders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. 57 SECTION 12.07 NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS No direct or indirect shareholder, employee, officer or director, as such, past, present or future of the Company, the Guarantors or any successor entity shall have any personal liability in respect of the Obligations of the Company or the Guarantors under this Indenture or the Notes solely by reason of his or its status as such shareholder, employee, officer or director, except that this provision shall in no way limit the Obligation of any Guarantor pursuant to any guarantee of the Notes. SECTION 12.08 GOVERNING LAW THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE THIS INDENTURE, THE NOTES AND THE SUBSIDIARY GUARANTEES, WITHOUT REGARD TO THE CONFLICTS OF LAWS PROVISIONS THEREOF TO THE EXTENT THAT THE APPLICATION OF THE LAW OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. IF ANY ACTION OR PROCEEDING SHALL BE BROUGHT BY A HOLDER OF ANY OF THE NOTES OR BY THE TRUSTEE IN ORDER TO ENFORCE ANY RIGHT OR REMEDY UNDER THIS INDENTURE OR UNDER THE NOTES, THE COMPANY AND THE GUARANTORS HEREBY CONSENT AND WILL SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK SITTING IN THE CITY OF NEW YORK OR ANY FEDERAL COURT SITTING IN THE CITY OF NEW YORK. THE COMPANY AND THE GUARANTORS HEREBY AGREE TO ACCEPT SERVICE OF PROCESS BY NOTICE GIVEN TO THE COMPANY PURSUANT TO THE PROVISIONS OF SECTION 12.02. SECTION 12.09 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS This Indenture may not be used to interpret any other indenture, loan or debt agreement of the Company or its Subsidiaries or of any other Person. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 12.10 SUCCESSORS All agreements of the Company in this Indenture and the Notes shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 12.11 SEVERABILITY In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 12.12 COUNTERPART ORIGINALS The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 58 SECTION 12.13 TABLE OF CONTENTS, HEADINGS, ETC. The Table of Contents, Cross-Reference Table and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part of this Indenture and shall in no way modify or restrict any of the terms or provisions hereof. [Signatures on following pages] 59 IN WITNESS WHEREOF, each of the parties have executed this Indenture as of the date first written above. THE COMPANY: PACIFIC AEROSPACE & ELECTRONICS, INC. By: /s/ Donald Wright -------------------------------- Donald Wright Chief Executive Officer and President THE GUARANTORS: AEROMET AMERICA, INC. By: /s/ Donald Wright -------------------------------- Donald A. Wright Executive Vice President BALO PRECISION PARTS, INC. By: /s/ Donald Wright -------------------------------- Donald Wright Executive Vice President CASHMERE MANUFACTURING CO., INC. By: /s/ Donald Wright -------------------------------- Donald Wright Executive Vice President CERAMIC DEVICES, INC. By: /s/ Donald Wright -------------------------------- Donald Wright Executive Vice President ELECTRONIC SPECIALTY CORPORATION By: /s/ Donald Wright -------------------------------- Donald Wright Executive Vice President NORTHWEST TECHNICAL INDUSTRIES, INC. By: /s/ Donald Wright -------------------------------- Donald Wright Executive Vice President PACIFIC COAST TECHNOLOGIES, INC. By: /s/ Donald Wright -------------------------------- Donald Wright Executive Vice President SEISMIC SAFETY PRODUCTS, INC. By: /s/ Donald Wright -------------------------------- Donald Wright Executive Vice President PA&E INTERNATIONAL, INC. By: /s/ Donald Wright _______________________________________ Donald Wright President THE TRUSTEE: U. S. BANK NATIONAL ASSOCIATION By: /s/ Frank P. Leslie, III _______________________________________ Name: Frank P. Leslie, III Title: Vice President CROSS-REFERENCE TABLE*

Trust Indenture Act Section Indenture Section --------------- ----------------- 310(a)(1) 7.10 (a)(2) 7.10 (a)(3) N.A. (a)(4) N.A. (b) 7.08; 7.10; 12.02 (c) N.A. 311(a) 7.11 (b) 7.11 (c) N.A. 312(a) 2.05 (b) 12.03 (c) 12.03 313(a) 7.06 (b)(1) N.A. (b)(2) 7.06 (c) 7.06; 12.02 (d) 7.06 314(a) 4.08; 12.02 (b) N.A. (c)(1) 12.04 (c)(2) 7.02; 12.04 (c)(3) N.A. (d) N.A. (e) 12.05 (f) N.A. 315(a) 7.01(b) (b) 7.05; 12.02 (c) 7.01(a) (d) 7.01(c) (e) 6.11 316(a)(last sentence) 2.09 (a)(1)(A) 6.05 (a)(1)(B) 6.04 (a)(2) N.A. (b) 6.07 317(a)(1) 6.08 (a)(2) 6.09 (b) 2.04 318(a) 12.01

- --------------------- N.A. means not applicable. *This Cross-Reference Table is not part of the Indenture. SCHEDULE I INVESTMENTS IN FOREIGN SUBSIDIARIES Pacific Aerospace & Electronics, Inc. Investments in Foreign Subsidiaries as of January 31, 2001

Common Intercompany Total Stock Investments Investment ---------- ------------ ---------- Subsidiary PA&E International, Inc. 33,709,232 33,709,232 ---------- ---------- Total investment in foreign subsidiaries 33,709,232 33,709,232

Intercompany investments change on a daily basis due to PA&E's cash management system which transfers funds to and from subsidiaries as needed. EXHIBIT A FORM OF NOTE [FILED SEPARATELY] EXHIBIT B FORM OF SUBSIDIARY GUARANTEE [FILED SEPARATELY] EXHIBIT C EXCLUDED PERSONS GSCP Recovery, Inc. GSC Recovery II, L.P. William E. Simon & Sons Special Situation Partners II, L.P. M.W. Post Advisory Group L.L.C. Alliance Capital Management L.P. HBK Master Fund L.P. EX-10.1 6 f80483ex10-1.txt EXHIBIT 10.1 EXHIBIT 10.1 CONSENT THIS CONSENT (the "Consent") is made and given as of March 18, 2002 by KeyBank National Association ("KeyBank") in favor of Pacific Aerospace & Electronics, Inc. (the "Company") and Pacific Coast Technologies, Inc. ("PCT"). Reference is made to that certain Deed of Trust dated as of September 30, 1998 in favor of KeyBank and recorded in the official records of Chelan County as Auditor's No. 2037983 (the "Deed of Trust"), pursuant to which the Company granted KeyBank a security interest in certain real property located in Wenatchee, Washington (the "Property"). RECITALS WHEREAS, the Company executed a Promissory Note (Loan No. 9002) dated as of September 30, 1998 in the amount of $1,200,000 in favor of KeyBank (the "Promissory Note") and in connection with the Promissory Note, the Company executed the Deed of Trust in favor of KeyBank; WHEREAS, the Company executed a Promissory Note (Loan No. 9001) dated as of March 18, 1998 in the amount of $712,086 in favor of KeyBank, and in connection with such promissory note, the Company, PCT and KeyBank entered into a Commercial Security Agreement dated as of March 18, 1998 (the "KeyBank Security Agreement"); WHEREAS, in connection with the Note Purchase Agreement (the "Note Purchase Agreement") to be entered into by and among the Company, Jefferies & Company, Inc. and First Union National Bank, as collateral agent (the "Collateral Agent"), the Company and certain of its subsidiaries intend to execute a Deed of Trust, Security Agreement and Fixture Filing with Assignment of Rents (the "Junior Deed of Trust") in favor of the Collateral Agent for the benefit of the Secured Parties (as defined in that certain Security Agreement to be entered into by and among the Company, certain of its subsidiaries and the Collateral Agent (the "Security Agreement")), pursuant to which the Company will grant a junior security interest in the Property to the Collateral Agent (for the benefit of the Secured Parties); WHEREAS, pursuant to the Deed of Trust, the Company must obtain KeyBank's consent prior to granting any security interest in the Property; and WHEREAS, pursuant to the KeyBank Security Agreement, PCT must obtain KeyBank's consent prior to entering into the Security Agreement and the Subsidiary Guaranty Agreement to be made in favor of the Holders (as defined therein) and the Collateral Agent (the "Subsidiary Guaranty"). NOW, THEREFORE, in consideration of the foregoing and subject to the terms and conditions set forth herein, KeyBank hereby agrees as follows: 1. KeyBank hereby consents to (i) the granting by the Company of a second priority, perfected security interest and mortgage in the Property in favor of the Collateral Agent (for the benefit of the Secured Parties) pursuant to the Junior Deed of Trust, which security interest shall be junior to KeyBank's existing security interest in the Property, (ii) the recording of the Junior Deed of Trust in the real property records of Chelan County and (iii) the entering into the Note Purchase Agreement, the Subsidiary Guaranty, and the Collateral Documents (as defined in the Note Purchase Agreement) by the Company and certain of its subsidiaries, as applicable, and the transactions contemplated therein. 2. Miscellaneous. a. This Consent shall be construed in accordance with the laws of the state of Washington, without regard to principles of conflicts of law thereof. b. This Consent shall bind the legal and equitable successors and assigns of KeyBank, including any that occur by operation of law. IN WITNESS WHEREOF, KeyBank has issued this Consent executed as of the date and year first written above. KEYBANK NATIONAL ASSOCIATION By: /s/ Monty D. Sampson ------------------------------ Name: Monty D. Sampson Title: Vice President EX-10.2 7 f80483ex10-2.txt EXHIBIT 10.2 EXHIBIT 10.2 [LETTERHEAD OF KEYBANK OF WASHINGTON] March 15, 2002 Pacific Aerospace and Electronics Inc. VIA MAIL AND FAX 434 Olds Station Road Wenatchee, WA 98801 Attn: Charlie Miracle; Donald Wright Re: Loans #357577-9001 & 357577-9002 and Lease #8800017858 Gentlemen: Pacific Aerospace and Electronics Inc. is currently out of compliance with all financial covenants related to the above referenced obligations. In addition, the loans and the lease are past due for several payments each. The Bank has elected, as you know, to forbear from enforcing its remedies regarding the financial covenant violations and payment defaults so long as Pacific Aerospace and Electronics Inc. maintained payments within 90 days of current status. Forbearance has been intended to provide additional time to the company to make necessary restructuring and refinancing arrangements that have been in process for the past several months. We understand these transactions are now scheduled to close in the next few days, or approximately by March 20, 2002. Mr. Miracle has advised us that although the company will be able to bring all loan and lease payment obligations with Key Bank current once the refinancing process is complete, compliance with all covenants will probably not be possible for some time. While the Bank is not willing to waive covenants established in connection with these loans, we will agree to continue to forbear from declaring covenant defaults until May 31, 2003. Such forbearance is conditioned upon there being no loan or lease payment delinquency or defaults after April 1, 2002. Should the company be unable to comply with all covenants by May 31, 2003, the Bank will be willing to revisit the matter in order to consider continued forbearance of those covenant violations not met at that time. Such consideration will be at the sole discretion of the Bank. Sincerely, /s/ Monty D. Sampson Monty D. Sampson Vice President EX-10.3 8 f80483ex10-3.txt EXHIBIT 10.3 EXHIBIT 10.3 After Recording Return To: Dewey Ballantine LLP 1301 Avenue of the Americas New York, New York 10019 Attention: Val A. Soupios, Esq. DEED OF TRUST, SECURITY AGREEMENT AND FIXTURE FILING WITH ASSIGNMENT OF LEASES AND RENTS GRANTOR: 1. PACIFIC AEROSPACE & ELECTRONICS, INC. 2. CASHMERE MANUFACTURING CO., INC. 3. NORTHWEST TECHNICAL INDUSTRIES, INC. GRANTEE: 1. FIRST UNION NATIONAL BANK, as collateral agent for Holders listed on Schedule A to Note Purchase Agreement (Beneficiary) 2. LAND TITLE COMPANY OF CHELAN -- DOUGLAS COUNTY, INC. (Trustee) Legal Description: Abbreviated form: Units 1-4 Confluence Pk Condo (Exhibit A) Portion of East half of West half of Section 20, Township 30 North, Range 2 West, Clallam County, Washington (Exhibit B) Lts 6-14, Block 1, Steward's Plat of Mission & ptn lot 16 & Lts 17-18 JF Woodring's Plat of Mission (Exhibit C) Additional legal on Exhibits A- C of document Assessor's Property Tax Parcel Account Number(s): 23-20-28-525-010 (Unit 1, Exhibit A) 23-20-28-525-020 (Unit 2, Exhibit A) 23-20-28-525-030 (Unit 3, Exhibit A) 23-20-28-525-040 (Unit 4, Exhibit A) 023020-31000 (Exhibit B) 23-19-04-850-065 (Portion of Exhibit C) 23-19-04-850-065 (Balance of Exhibit C) Reference number(s) of Related Document(s): 2 DEED OF TRUST, SECURITY AGREEMENT AND FIXTURE FILING WITH ASSIGNMENT OF LEASES AND RENTS THIS DEED OF TRUST is made this 25th day of March, 2002, between PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington corporation, CASHMERE MANUFACTURING CO., INC., a Washington corporation, and NORTHWEST TECHNICAL INDUSTRIES, INC., a Washington corporation (individually and collectively, as Grantor), whose address is 430 Olds Station Road, Wenatchee, Washington 98020 to LAND TITLE COMPANY OF CHELAN - DOUGLAS COUNTY, INC., as Trustee, whose address is 16 South Mission Street, P.O. Box 1726, Wenatchee, Washington 98807-1726 to FIRST UNION NATIONAL BANK, as collateral agent for the holders set forth on Schedule A (each a "Holder" and collectively the "Holders") to that certain Note Purchase Agreement dated as of March 19, 2002 (the "Note Purchase Agreement") by and among Pacific Aerospace & Electronics, Inc., a Washington corporation ("Grantor"), Jefferies & Company, Inc. ("Initial Purchaser") and First Union National Bank, as Collateral Agent ("Agent" or "Beneficiary") whose address is 401 South Tryon Street - Suite 1200, Mail Code NC-1179, Charlotte, North Carolina 28202. 1. Granting Clause. Grantor irrevocably grants, bargains, sells and conveys to Trustee and its successors and assigns in trust, with power of sale and with right of entry and possession as provided herein, all of Grantor's estate, right, title, interest, claim and demand, now owned or hereafter acquired, in and to the following: (a) The property in Chelan and Clallam Counties, Washington, described in Exhibits "A" -- "C" attached hereto and incorporated herein by this reference (individually and collectively, the "Property" which term shall include all or any part of the Property, any improvements thereon and all of the property described in this Section 1). (b) All land lying in streets and roads adjoining the Property, and all access rights and easements pertaining to the Property. (c) All the lands, tenements, privileges, reversions, remainders, irrigation and water rights and stock, oil and gas rights, royalties, minerals and mineral rights, all development rights and credits, air rights, hereditaments and appurtenances belonging or in any way pertaining to the Property. (d) All buildings, structures, improvements, fixtures, equipment and machinery and property now or hereafter attached to or used in connection with the use, occupancy or operation of the Property including, but not limited to, heating and incinerating apparatus and equipment, boilers, engines, motors, generating equipment, telephone and other communication systems, piping and plumbing fixtures, ranges, cooking apparatus and mechanical kitchen equipment, refrigerators, cooling, ventilating, sprinkling and vacuum cleaning systems, fire extinguishing apparatus, gas and electric fixtures, irrigation equipment, carpeting, underpadding, elevators, escalators, partitions, mantles, built-in mirrors, window shades, blinds, screens, storm sash, awnings, furnishings of public spaces, halls and lobbies, and shrubbery and plants. All property mentioned in this subsection 1(d) shall be deemed part of the realty and not severable wholly or in part without material injury to the Property. (e) All rents, royalties, issues, profits, revenue, income, recoveries, reimbursements and other benefits of the Property, all existing and future leases of the Property (including extensions, renewals and subleases), all agreements for use and occupancy of the Property (all such leases and agreements whether written or oral, are hereafter referred to as the "Leases"), and all right, title and interest of Grantor thereunder, including, without limitation, all guaranties of lessees' performance under the Leases, together with the immediate and continuing right to collect and receive all of the rents, income, receipts, revenues, issues, profits and other income of any nature now or hereafter due (including any income of any nature coming due during any redemption period) under the Leases or from or arising out of the Property including minimum rents, additional rents, percentage rents, parking or common area maintenance contributions, tax and insurance contributions, deficiency rents, liquidated damages following default in any Lease, all proceeds payable under any policy of insurance covering loss of rents resulting from untenantability caused by destruction or damage to the Property, all proceeds payable as a result of exercise of an option to purchase the Property, all proceeds derived from the termination or rejection of any Lease in a bankruptcy or other insolvency proceeding, all security deposits or other deposits for the performance of any lessee's obligations under the Leases, and all proceeds from any rights and claims of any kind which Grantor may have against any lessee under the Leases or any occupants of the Property (all of the above are hereafter collectively referred to as the "Rents"). This subsection 1(e) is in addition to other provisions of this Deed of Trust providing for the assignment of rents and leases to Beneficiary, and is subject to the right, power and authority given to the Beneficiary in Section 7 hereof to collect and apply the Rents. (f) All of Grantor's rights to further encumber said Property for debt and all Grantor's rights to enter into any lease agreement which would create a tenancy that is or may become subordinate in any respect to any mortgage or deed of trust other than this Deed of Trust. (g) All reciprocal easement agreements, declarations, development agreements, developer's or utility agreements, and any similar such agreements or declarations now or hereafter affecting the Collateral (as defined below) or any part thereof. (h) All (a) development work product prepared in connection with the Collateral, including, but not limited to, engineering, drainage, traffic, soil and other studies and tests; water, sewer, gas, electrical and telephone approvals, taps and connections; surveys, drawings, plans and specifications; and subdivision, zoning and platting materials; (b) building and other permits, rights, licenses and approvals relating to the Collateral; (c) contracts and agreements (including, without limitation, contracts with architects and engineers, construction contracts and contracts for the maintenance, management or leasing of the Collateral), contract rights, logos, trademarks, trade names, 2 copyrights and other general intangibles used or useful in connection with the ownership, operation or occupancy of the Collateral or any part thereof; (d) financing commitments (debt or equity) issued to Grantor in respect of the Collateral and all amounts payable to Grantor thereunder; (e) contracts for the sale of all or any portion of the Collateral, and all amounts payable by the purchasers thereunder; (f) operating and other bank accounts, and monies therein, of Grantor relating to the Collateral, including, without limitation, any accounts relating to real estate taxes or assessments; (g) interest rate protection agreements entered into by Grantor in respect of the loan, whether pursuant to the Note Purchase Agreement or otherwise; and (h) commercial tort claims related to the Collateral. (i) All rights of Grantor under promissory notes, letters of credit, electronic chattel paper, proceeds from accounts, payment intangibles, and general intangibles related to the Collateral, as the terms "accounts", "general intangibles", and "payment intangibles" are defined in the applicable Uniform Commercial Code Article 9, as the same may be modified or amended from time to time. (j) All other assets of Grantor related in any way to the Collateral, subject to certain limitations that may be set forth herein. (k) All proceeds of the conversion, voluntary or involuntary, of any of the foregoing into cash or liquidated claims, including, without limitation, proceeds of insurance and condemnation awards, and all rights of Grantor to refunds of real estate taxes and assessments. (l) All of Grantor's right, title and interest, as lessee, in, to and under the leases listed on Exhibit D hereto (the "Leased Property"), subject to Grantor's obtaining any required approvals by Landlord. The Property is not used principally or primarily for agricultural purposes. 2. Collateral. The following described estate, property and rights of Grantor are also included as security for the performance of each covenant and agreement of Grantor contained herein and the payment of all sums of money secured hereby: (a) All furniture, furnishings, appliances, machinery, vehicles, equipment and all other property of any kind now or hereafter located on the Property, used or intended to be used on the Property wherever actually located, or purchased with the proceeds of the Notes (as defined herein), and all rights of Grantor as lessee of any property described in this Section 2 and subsection 1(d) above. (b) All compensation, awards, damages, rights of action and proceeds (including insurance proceeds and any interest on any of the foregoing) arising out of or relating to a taking or damaging of the Property by reason of any public or private improvement, condemnation proceeding (including change of grade), fire, earthquake or other casualty, injury or decrease in the value of the Property. 3 (c) All returned premiums or other payments on any insurance policies pertaining to the Property and any refunds or rebates of taxes or assessments on the Property. (d) All rights to the payment of money, accounts receivable, deferred payments, refunds, cost savings, payments and deposits, whether now or later to be received from third parties (including all utility deposits), architectural and engineering plans, specifications and drawings, contract rights, governmental permits and licenses, and agreements and purchase orders which pertain to or are incidental to the design or construction of any improvements on the Property, Grantor's rights under any payment, performance, or other bond in connection with construction of improvements on the Property, and all construction materials, supplies, and equipment delivered to the Property or intended to be used in connection with the construction of improvements on the Property wherever actually located. (e) All contracts and agreements pertaining to or affecting the Property including, but not limited to, management, operating and franchise agreements, licenses, trade names and trademarks. (f) All of Grantor's interest in and to the loan account, the loan funds, whether disbursed or not, and Grantor's own funds now or later to be held on deposit as equity funds or for payment of bills relating to the Property. (g) All commitments or agreements, now or hereafter in existence, which will provide Grantor with proceeds to satisfy the Secured Obligations (defined below) and the right to receive the proceeds due under such commitments or agreements including refundable deposits and fees. (h) All books and records pertaining to any and all of the property described above, including computerreadable memory and any computer hardware or software necessary to access and process such memory. (i) All additions, accessions, replacements, substitutions, proceeds and products of the property described in this Section 2 and of any of the Property which is personal property. The Property and all of the property and rights described in Section 1 and 2 are referred to herein collectively as the "Collateral." 3. Security Agreement. To the extent that any of the Collateral may be determined to be personal property, Grantor as debtor hereby grants Holders and Beneficiary as agent for the Holders as secured party a security interest in all such personal property or fixtures to secure payment and performance of the Secured Obligations (defined below). This Deed of Trust constitutes a security agreement, a financing statement and fixture filing pursuant to the Uniform Commercial Code with respect to any and all property now or hereafter described in any Uniform Commercial Code Financing Statement naming Grantor as Debtor and Beneficiary as Secured Party affecting or related to the use and enjoyment of the Property. Grantor agrees that it will 4 not terminate or amend any financing statements filed in connection with the Secured Obligations (as hereinafter defined) without Beneficiary's prior consent. The remedies for any violation of the covenants, terms and conditions of the agreements herein contained shall be (a) as prescribed herein, or (b) by general law, or (c) as to such part of the security which is also reflected in any such Financing Statement by the specific statutory consequences now or hereafter enacted and specified in the Uniform Commercial Code, all at Beneficiary's sole election. Grantor and Beneficiary agree that the filing of such a Financing Statement in the records normally having to do with personal property shall never be construed as in anywise derogating from or impairing this declaration and hereby stated intention of the parties hereto, that everything used in connection with the production of income from the property that is the subject of this Deed of Trust and/or adapted for use therein and/or which is described or reflected in this Deed of Trust is, and at all times and for all purposes and in all proceedings both legal or equitable shall be, regarded as part of the real estate irrespective of whether (a) any such item is physically attached to the improvements, (b) serial numbers are used for the better identification of certain equipment items capable of being thus identified in any list filed with the Beneficiary, or (c) any such item is referred to or reflected in any such Financing Statement so filed at any time. 4. Financing Statement. This Deed of Trust shall also serve as a financing statement filed for record in the real estate records as a fixture filing pursuant to the Uniform Commercial Code. This Deed of Trust may be given to secure an obligation incurred to refinance an obligation incurred for the construction of an improvement on the Property, including the acquisition of the Property. 5. Obligations Secured. THIS DEED OF TRUST IS FOR THE PURPOSE OF SECURING the following ("Secured Obligations"): (a) Payment of the sum of up to THIRTY-SIX MILLION DOLLARS ($36,000,000) or so much thereof with interest thereon as shall be evidenced by all notes described in the Note Purchase Agreement or other instruments evidencing the indebtedness secured by this Deed of Trust including all renewals, amendments, modifications or extensions thereof and substitutions therefor. (b) Payment of any further sums now or hereafter advanced or loaned by Beneficiary or Holders (including any assignee of Beneficiary or Holders) to any Borrower under the Note Purchase Agreement or any of their successors or assigns, and payment of every other present and future obligation owing by any Borrower to Beneficiary or Holders (or any such assignee) of any kind, and all renewals, modifications, and extensions thereof, including any interest, fees, costs, service charges and expenses connected with such obligations (this Deed of Trust, the Note Purchase Agreement and all such other documents, evidencing or securing the loan are hereafter collectively referred to as the "Loan Documents") together with interest thereon at the rate set forth in the Note Purchase Agreement unless otherwise specified in the Loan Documents or agreed to in writing. 5 (c) Performance of each agreement, term and condition set forth or incorporated by reference in the Loan Documents, as such may be amended, including without limitation the Note Purchase Agreement, which are incorporated herein by reference, or contained herein. 6. Performance of Obligations. Grantor shall promptly and timely pay all sums due pursuant to the Loan Documents, strictly comply with all the terms and conditions of the Loan Documents, and perform each Secured Obligation in accordance with its terms. 7. Assignment of Rents and Leases. Grantor hereby absolutely and irrevocably assigns to Beneficiary all Grantor's interest in the Rents and Leases whether now due, past due or to become due, and hereby gives to and confers upon Beneficiary the right, power and authority to collect such Rents and proceeds, and Grantor, without limiting the generality of the Granting Clause hereof, specifically hereby presently, absolutely, unconditionally and irrevocably assigns, transfers and sets over all of the Rents now or hereafter accruing to Beneficiary. Grantor irrevocably appoints Beneficiary its true and lawful attorney at the option of Beneficiary at any time to demand, receive and enforce payment, to give receipts, releases and satisfactions, and to sue, either in the name of Grantor or in the name of Beneficiary, for all such Rents and proceeds. It is understood and agreed that neither the foregoing assignment of Rents and proceeds to Beneficiary nor the exercise by Beneficiary of any of its rights or remedies under this Deed of Trust shall be deemed to make Beneficiary a "mortgagee-in-possession" or otherwise responsible or liable in any manner with respect to the Property or the use, occupancy or enjoyment or operation of all or any portion thereof, unless and until Beneficiary, in person or by agent, assumes actual possession thereof; nor shall appointment of a receiver for the Property by any court at the request of Beneficiary or by agreement with Grantor or the entering into possession of the Property or any part thereof by such receiver be deemed to make Beneficiary a "mortgagee-in-possession" or otherwise responsible or liable in any manner with respect to the Property or the use, occupancy, enjoyment or operation of all or any portion thereof. This assignment is intended to be specific, perfected and choate upon the recording of this Deed of Trust as provided in RCW 7.28.230. This assignment shall be subject to the terms and conditions of any separate assignment of leases and/or rents, whenever executed, in favor of Beneficiary and covering the Property. Grantor warrants that it has made no prior assignment of the Rents or Leases and will make no subsequent assignment without the prior written consent of Beneficiary. (a) Unless otherwise provided in any separate assignment of leases and/or rents, and so long as Grantor is not in default under the Loan Documents, Grantor may collect the Rents as they become due and not more than one (1) month in advance. Grantor shall use the Rents to pay normal operating expenses for the Property and sums due and payments required under the Loan Documents. No Rents shall be collected for a period subsequent to the current one month rental period and first or last month's rent. Grantor's right to collect the Rents shall not constitute Beneficiary's consent to the use of cash collateral in any bankruptcy proceeding. 6 (b) If Grantor is in default under the Loan Documents, without notice to Grantor, Beneficiary or its agents, or a court appointed receiver, may collect the Rents. In doing so, Beneficiary may (i) evict lessees for nonpayment of rent, (ii) terminate in any lawful manner any tenancy or occupancy, (iii) lease the Property in the name of the then owner on such terms as it may deem best and (iv) institute proceedings against any lessee for past due Rents. The Rents received shall be applied to payment of the costs and expenses of collecting the Rents, including a reasonable fee to Beneficiary, a receiver or an agent, operating expenses for the Property and any sums due or payments required under the Loan Documents, in such order as Beneficiary may determine. Any excess shall be paid to Grantor, however, Beneficiary may withhold from any excess a reasonable amount to pay sums anticipated to become due which exceed the anticipated future Rents. Beneficiary's failure to collect or discontinuing collection at any time shall not in any manner affect the subsequent enforcement by Beneficiary of its rights to collect the Rents. Except in the case of a full reinstatement of the Secured Obligations, the collection of the Rents shall not cure or waive any default under the Loan Documents. Any Rents paid to Beneficiary or a receiver shall be credited against the amount due from the lessees under the Leases. In the event any lessee under the Leases becomes the subject of any proceeding under the Bankruptcy Code or any other federal, state or local statute which provides for the possible termination or rejection of the Leases assigned hereby, Grantor covenants and agrees that in the event any of the Leases are so rejected, no damages settlement shall be made without the prior written consent of Beneficiary; any check in payment of damages for rejection or termination of any such Lease will be made payable both to the Grantor and Beneficiary; and Grantor hereby assigns any such payment to Beneficiary and further covenants and agrees that upon request of Beneficiary, it will duly endorse to the order of Beneficiary any such check, the proceeds of which will be applied to any portion of the indebtedness secured hereunder in such manner as Beneficiary may elect. (c) Regardless of whether or not Beneficiary, in person or by agent, takes actual possession of the Property or any part thereof, Beneficiary is not and shall not be deemed to be: (i) "a mortgagee in possession" for any purpose; or (ii) responsible for performing any of the obligations of the lessor under any Lease; or (iii) responsible for any waste committed by lessees or any other parties, any dangerous or defective condition of the Property, or any negligence in the management, upkeep, repair or control of the Property; or (iv) liable in any manner for the Property or the use, occupancy, enjoyment or operation of all or any part of it. In exercising its rights under this Section Beneficiary shall be liable only for the proper application of and accounting for the Rents collected by Beneficiary or its agents. 7 8. Leases. (a) Grantor shall fully comply with all of the terms, conditions and provisions of the Leases so that the same shall not become in default and to do all that is needful to preserve all said Leases in force. With respect to any Lease of the whole or any part of the Property, Grantor shall not, without the prior written consent of Beneficiary, which consent shall not be unreasonably withheld, (i) permit assignment or subletting of all or part of the lessee's rights under the Lease unless the right to assign or sublet is expressly reserved by the lessee under the Lease, (ii) execute an assignment of the rents or any part thereof from the Collateral without Beneficiary's prior consent, (iii) modify or amend any lease so as to shorten the unexpired term thereof or so as to decrease, waive or compromise in any manner the amount of rents payable thereunder or materially expand the obligations of the lessor thereunder, (iv) accept surrender of the Lease or terminate the Lease except in accordance with the terms of the Lease providing for termination in the event of a default, (v) accept prepayments of any installments of rents to become due under such leases, except prepayments in the nature of security for the performance of the lessees thereunder, (vi) modify, release or terminate any guaranties of any such lease or (vii) in any other manner impair the value of the Property or the security hereof. Any proceeds or damages resulting from a lessee's default under any such Lease, at Beneficiary's option, shall be paid to Beneficiary and applied against sums owed under the Loan Documents even though such sums may not be due and payable. Except for non-delinquent real estate taxes and assessments, Grantor shall not permit any lien to be created against the Property which may be or may become prior to any Lease. If the Property is partially condemned or suffers a casualty, Grantor shall promptly repair and restore the Property in order to comply with the Leases. (b) Grantor will not execute any lease of all or a substantial portion of the Property except for actual occupancy by the lessee thereunder, and will at all times promptly and faithfully perform, or cause to be performed, all of the covenants, conditions and agreements contained in all leases of the Property or portions thereof now or hereafter existing, on the part of the lessor thereunder to be kept and performed and will at all times do all things necessary to compel performance by the lessee under each lease of all obligations, covenants and agreements by such lessee to be performed thereunder. If any of such leases provide for the giving by the lessee of certificates with respect to the status of such leases, Grantor shall exercise its right to request such certificates within five (5) days of any demand therefor by Beneficiary and shall deliver copies thereof to Beneficiary promptly upon receipt. (c) Each lease of the Property, or of any part thereof, executed after the date hereof, shall provide that, in the event of the enforcement by Trustee or Beneficiary of the remedies provided for hereby or by law, the lessee thereunder will, upon request of any person succeeding to the interest of Grantor as a result of such enforcement, automatically become the lessee of said successor in interest, without change in the terms or other provisions of such lease, provided, however, that said successor in interest shall not be bound by (i) any payment of rent or additional rent for more than one (1) month in advance, except prepayments in the nature of security for the performance by said lessee of its obligations under said lease or (ii) any amendment or 8 modification of the lease made without the consent of Beneficiary or such successor in interest. Each lease shall also provide that, (x) the lease is subordinate to this Deed (but shall also provide that Beneficiary, at its option, may subordinate this Deed to such lease) and (y) upon request by said successor in interest, such lessee shall execute and deliver an instrument or instruments confirming such attornment. (d) Grantor shall furnish to Beneficiary upon request, but not more than semi-annually, a certified leasing status report in respect of the Property and a certified rent roll containing the names of all lessees of the Property, the terms of their respective leases, the space occupied and the rentals payable thereunder, together with copies, certified to be true and complete, of such leases as may be requested by Beneficiary. (e) Grantor shall, promptly upon Beneficiary's request, deposit all tenant security deposits in respect of the Property into an account with Beneficiary or as designated by Beneficiary, which deposits shall be held and disbursed to tenants as required under the terms of their respective leases. 9. Warranty of Title. Grantor warrants that it (i) has good and marketable title to an indefeasible fee simple estate in the Property, unless Grantor's present interest in the Property is described in Exhibits A through C as a leasehold interest, in which case Grantor warrants that it lawfully possesses and holds a valid leasehold interest in the Property as stated in Exhibits A through C, (ii) has good and marketable title to the personal property Collateral, and (iii) holds a valid leasehold interest as tenant under the leases described in Exhibit D, and that said leases are prior to all liens, charges and encumbrances on the lessor's interest thereunder, subject, in each case, to no liens, encumbrances, easements, assessments, security interests, claims or defects of any kind prior or subordinate to the lien of this Deed of Trust, except those listed in Beneficiary's title insurance policy, listed on Exhibit E hereto, or approved by Beneficiary in writing (the "Permitted Exceptions") and real estate taxes for the current year. Grantor warrants that the Permitted Exceptions and the real estate taxes are not delinquent or in default, and that Grantor has the right to convey the Property to Trustee for the benefit of Beneficiary, and the right to grant a security interest in the personal property Collateral. Grantor has the full power and authority to subject the Property to the lien hereof in the manner and form herein done and intended hereafter to be done. Grantor will preserve such title, and Grantor will forever warrant and defend title to the Collateral and will defend the validity and priority of the lien of this Deed of Trust and the security interest granted herein against any claims or demands. 10. Prohibited Liens. (a) Grantor shall not permit any governmental or statutory liens (including tax, mechanic's or materialmen's liens) to be filed against the Property except for real estate taxes and assessments not yet delinquent by non-payment and liens permitted by the Loan Documents or approved by Beneficiary in writing. Grantor will pay, from time to time when the same shall become due, all lawful claims and demands of mechanics, materialmen, laborers, and others which, if unpaid, might result in, or 9 permit the creation of, a lien on the Property or any part thereof, and in general will do or cause to be done everything necessary so that the lien and effect hereof shall be fully preserved, at the cost of Grantor and without expense to Trustee or Beneficiary. (b) Grantor will have the right to contest in good faith by an appropriate legal or administrative proceeding the validity of any prohibited lien, encumbrance or charge so long as (i) no default exists under the Loan Documents, (ii) Grantor first deposits with Beneficiary a bond or other security satisfactory to Beneficiary in the amount reasonably required by Beneficiary, but not more than one and one--half (1 1/2) (i.e., 150%) of the amount of the claim; (iii) Grantor immediately commences its contest of such lien, provided, however, that within twenty (20) days after the filing of such lien Grantor discharges said lien of record or records a bond which complies with the requirements of RCW 60.04.161 eliminating such lien as an encumbrance on the Property, and continuously pursues the contest in good faith and with due diligence; (iv) foreclosure of the lien, encumbrance or charge is stayed; and (v) Grantor pays any judgment rendered for the lien claimant or other third party within ten (10) days after the entry of the judgment. If the contested item is a mechanic's or materialmen's lien, Grantor will furnish Beneficiary with an endorsement to its title insurance policy which insures the priority of this Deed of Trust over the lien being contested. Grantor will discharge or elect to contest and post an appropriate bond or other security within twenty (20) days of written demand by Beneficiary. 11. Payment of Taxes and Other Encumbrances. Grantor will pay when due: (a) All taxes, assessments and other governmental or public charges affecting the Property, including assessments on appurtenant water stock, and any accrued interest, cost and/or penalty thereon and upon request by Beneficiary will submit receipts therefor to Beneficiary promptly following payment; (b) All encumbrances (including any debt secured by deeds of trust), ground rents, liens and/or charges, with interest, on the Property or any part thereof which appear to be prior, superior or on a parity hereto, and all costs and fees related thereto; (c) All charges for utilities or services, including, but not limited to, electricity, gas, sewer and water; (d) All costs, fees and expenses of this Deed of Trust, including cost of evidence of title, Trustee's fees and attorneys' fees in connection with sale pursuant to this Deed of Trust (whether completed or not) together with interest from and after ten (10) days following demand for repayment at the default interest rate set forth in the Note Purchase Agreement until paid in full. 12. Maintenance -- No Waste. (a) Keep the Property in good condition and repair and not commit or permit any waste or deterioration of the Property; 10 (b) Not remove, demolish or substantially alter any portion of the Property, except as approved in writing by Beneficiary and except such alterations as may be required by laws, ordinances or regulations of governmental authorities; (c) Comply with all laws, ordinances, rules, regulations and orders of governmental authorities now or hereafter affecting the Property or requiring any alterations or improvements to be made thereon, and perform all of its obligations under any covenant, condition, restriction or agreement of record affecting the Property; (d) Complete promptly and in good and workmanlike manner any portion of the Property which may be constructed hereafter, and promptly restore in like manner as obligated in Section 14, any portion of the Property which may be damaged or destroyed, and pay, when due, all costs incurred and claims for labor performed and materials furnished therefor; (e) Not commit, suffer or permit any act to be done in, upon or to the Property in violation of any law or ordinance or any covenant, condition or restriction affecting the Property; (f) Do any and all acts which, from the character or use of the Property, may be reasonably necessary to protect and preserve the security of Beneficiary, the specific enumerations herein not excluding the general; (g) Not permit any construction liens against the Property; (h) Not take or permit to be taken any actions that might invalidate any insurance carried on the Property; (i) Maintain in full force and effect all licenses (including but not limited to any operating licenses or similar matters) required or permitted in the operation of the improvements on the Property. 13. Alterations Removal and Demolition. Grantor shall not structurally alter, remove or demolish any building or improvement on the Property without Beneficiary's prior written consent. Grantor shall not remove any fixture or other item of property which is part of the Collateral without Beneficiary's prior written consent unless the fixture or item of property is replaced by an article of equal suitability owned by Grantor free and clear of any lien or security interest. 14. Restoration. (a) After the happening of any casualty to the Property whether or not required to be insured against under the policies to be provided by Grantor hereunder, Grantor shall give prompt written notice thereof to Beneficiary generally describing the nature and cause of such casualty and the extent of the damage or destruction to the Property. 11 (b) Grantor hereby assigns to Beneficiary all proceeds of insurance ("Insurance Proceeds") which Grantor may be entitled to receive. In the event of any damage to or destruction of the Collateral, then, provided there is not an Event of Default under the Note Purchase Agreement, the Notes, the Deed of Trust or any of the Loan Documents (as defined in the Note Purchase Agreement) and Beneficiary has reasonably determined that its security has not been impaired, Grantor shall commence and diligently pursue to completion in accordance with this Section 14 the repair, restoration and rebuilding of any portion of the Collateral that has been partially damaged or destroyed in full compliance with all legal requirements and to the same condition, character and at least equal value and general utility as nearly as possible to that existing prior to such damage or destruction (the "Restoration"), and Beneficiary shall hold and disburse the Insurance Proceeds (less the cost, if any, to Beneficiary of recovering and paying out such proceeds (including, without limitation, attorneys' fees and expenses, adjuster's fees, and fees incurred in Beneficiary's performance of its obligations hereunder)) (the "Net Insurance Proceeds") in the manner hereinafter provided to the Restoration. In the event that the Collateral is substantially destroyed or Beneficiary has determined that its security has been impaired, the Beneficiary may, at its option, apply the Net Insurance Proceeds to the reduction of the Secured Obligations and secured by this Deed of Trust in such order as Beneficiary may determine and, at Beneficiary's option and in its sole discretion, Beneficiary, may declare the Secured Obligations immediately due and payable. (c) In the event the Net Insurance Proceeds are to be used for the Restoration, Grantor shall, prior to disbursement of any Net Insurance Proceeds for any work in connection with the Restoration (the "Work"), deliver or furnish to Beneficiary (i) complete plans and specifications for the Work which (A) have been approved by all governmental authorities whose approval is required, (B) bear the signed approval of an architect reasonably satisfactory to Beneficiary (the "Architect") and (C) are accompanied by Architect's signed estimate of the total estimated cost of the Restoration. Such plans and specifications shall be subject to Beneficiary's approval, which approval shall not be unreasonably withheld or delayed (the "Approved Plans and Specifications"); (ii) the amount of money which, as determined by Beneficiary, will be sufficient when added to the Net Insurance Proceeds, if any, to pay the entire cost of the Restoration (all money as held by Beneficiary is referred to herein as the "Restoration Funds"); (iii) copies of all permits and approvals required by law in connection with the commencement and conduct of the Restoration; and (iv) a contract for construction executed by Grantor and a contractor satisfactory to Beneficiary (the "Contractor") in form, scope and substance satisfactory to Beneficiary (including the customary retention) for performance of the Work. (d) After commencing the Work, Grantor shall perform or cause Contractor to perform the Work diligently and in good faith in accordance with the Approved Plans and Specifications approved by Beneficiary. So long as Grantor is not in default under any of the Loan Documents, Beneficiary shall disburse the Restoration Funds in increments to Grantor or as Grantor may direct, from time to time as the Work progresses, to pay (or reimburse Grantor for) the costs of the Restoration, but subject to the following conditions, any of which Beneficiary may waive in its sole discretion: 12 (i) Beneficiary shall make such payments only upon not less than ten (10) days' prior written notice from Grantor to Beneficiary and Grantor's delivery to Beneficiary of (A) Grantor's written request for payment (a "Request for Payment") accompanied by a certificate by Architect in form, scope and substance satisfactory to Beneficiary which states that all of the Work completed to that date has been done in compliance with the Approved Plans and Specifications and in accordance with all provisions of law, that the amount requested has been paid or is then due and payable and is properly a part of the cost of the Restoration and that when added to all sums, if any, previously paid out by Beneficiary, the requested amount does not exceed the value of the Work done to the date of such certificate; (B) evidence satisfactory to Beneficiary that there are no construction or similar liens for labor or material supplied in connection with the Work to date or that any such liens have been adequately provided for to Beneficiary's satisfaction; and (C) evidence satisfactory to Beneficiary that the balance of the Restoration Funds remaining after making the payments shall be sufficient to pay the balance of the cost of the Restoration not completed to date (giving in such reasonable detail as Beneficiary may require an estimate of the cost of such completion). Each Request for Payment shall be accompanied by waivers of liens satisfactory to Beneficiary covering that part of the Work previously paid for, if any, and by a search prepared by a title company or by other evidence satisfactory to Beneficiary that no construction liens or other liens or instruments for the retention of title in respect of any part of the Work have been filed against the Property and not discharged of record and that no encumbrance exists on or affecting the Property other than encumbrances, if any, which are set forth in the title policy issued to Beneficiary insuring the lien of this Deed of Trust; and (ii) Any Request for Payment after the Restoration has been completed shall be accompanied by a copy of any certificate or certificates required by law to render occupancy of the Property legal. (e) Upon Beneficiary's receipt of the certificate of occupancy for the Property and other customary evidence requested by Beneficiary that the Restoration has been completed and the costs thereof paid in full, and satisfactory evidence that no mechanic's or similar liens for labor or material supplied in connection with the Restoration are outstanding against the Property and Beneficiary's disbursement under the final Request for Payment, and provided that Grantor is not then in default under any of the Loan Documents (as defined in the Note Purchase Agreement), Beneficiary shall pay any remaining Restoration Funds then held by Beneficiary to Grantor; provided, however, nothing contained herein shall prevent Beneficiary from applying at any time the whole or any part of the Restoration Funds to the curing of any Event of Default under the Loan Documents. (f) If (i) within sixty (60) days after the occurrence of any damage or destruction to the Property requiring Restoration, Grantor fails to submit to Beneficiary and receive Beneficiary's approval of plans and specifications or fails to deposit with Beneficiary the additional amount necessary to accomplish the Restoration as provided in Section 14, or (ii) after such plans and specifications are approved by all such governmental authorities and Beneficiary, Grantor fails to commence promptly or 13 diligently continue to completion the Restoration, or (iii) Grantor becomes delinquent in payment to mechanics, materialmen or others for the costs incurred in connection with the Restoration, then, in addition to all of the rights herein set forth, Beneficiary may apply the Restoration Funds then or thereafter held by Beneficiary to reduce the unpaid indebtedness secured hereby in such order as Beneficiary may determine, and at Beneficiary's option and in its sole discretion, Beneficiary may declare the Secured Obligations immediately due and payable. (g) In the event that Beneficiary applies all or any portion of the Restoration Funds to reduce the unpaid indebtedness secured hereby as provided in this Section 14, after payment in full of all sums secured hereby, any remaining Restoration Funds shall be paid to Grantor. 15. Compliance with Laws. Grantor shall comply with all laws, ordinances, regulations, covenants, conditions, and restrictions affecting the Property, including, without limitation, all applicable requirements of the Fair Housing Act of 1968 (as amended) and the Americans With Disabilities Act of 1990 (as the same may be amended from time to time), and shall not commit or permit any act upon or concerning the Property in violation of any such laws, ordinances, regulations, covenants, conditions, and restrictions. Grantor agrees to protect, defend, indemnify and hold Beneficiary harmless from and against all liability threatened against or suffered by Beneficiary by reason of a breach by Grantor of the foregoing representations, warranties, covenants and agreements. The foregoing indemnity shall include the cost of all alterations to the Property (including architectural, engineering, legal and accounting costs), all fines, fees and penalties, and all legal and other expenses (including attorneys' fees) incurred in connection with the Property being in violation of any such laws, ordinances, regulations, covenants, conditions and restrictions, and for the cost of collection of the sums due under the indemnity. In the event that Beneficiary or its designee shall become the owner of or acquire an interest in or rights to the Property by foreclosure or deed in lieu of foreclosure of this Deed of Trust or by other means, the foregoing indemnification obligation shall survive such foreclosure or deed in lieu of foreclosure or other acquisition of the Property. 16. Leased Premises. Grantor shall undertake, and shall use its commercially reasonable efforts, to obtain, within sixty (60) days of the date hereof, (a) any and all required approvals by, and consents of, all landlords with respect to the assignment of leases to Beneficiary pursuant to Section 1(l) hereof, and (b) any and all subordination and non-disturbance agreements required by Beneficiary in connection with the Leased Premises, on terms and conditions reasonably satisfactory to Beneficiary. 17. Impairment of Collateral. Grantor will faithfully perform each and every covenant to be performed by Grantor under any lien or encumbrance, including, without limiting the generality hereof, mortgages, deeds of trust, leases, declarations or covenants, conditions and/or restrictions and other agreements which affect the Property, in law or in equity, which Beneficiary reasonably believes may be prior or superior to or on a parity with the lien or charge of this Deed of Trust. Grantor shall not, without Beneficiary's prior written consent, change the general nature of the occupancy of the 14 Property, initiate, acquire or permit any change in any public or private restrictions (including without limitation a zoning reclassification) limiting the uses which may be made of the Property, or take or permit any action which would impair the Collateral or Beneficiary's lien or security interest in the Collateral. A breach of or a default under any such lien or encumbrance, or a breach of any requirement of this Section 16 shall constitute an event of default under this Deed of Trust. 18. Inspection of Property. Beneficiary is authorized, by itself, its agents, employees or workmen, to enter at any reasonable time upon any part of the Property for the purpose of inspecting the same upon reasonable prior notice (except in the case of an emergency for which no prior notice need be given), and for the purpose of performing any of the acts it is authorized to perform under the terms of this Deed of Trust. Grantor agrees to cooperate with Beneficiary to facilitate such inspections. 19. Grantor's Defense of Collateral. Grantor shall appear in and defend any action or proceeding which may affect the Collateral or the rights or powers of Beneficiary or Trustee, and to pay all costs and expenses, including cost of evidence of title and attorneys' fees in a reasonable sum, in any action or proceeding in which Beneficiary and/or Trustee may appear or be made a party, including, but not limited to, foreclosure or other proceeding commenced by those claiming a right to any part of the Property under subordinate liens, in any action to partition or condemn all or part of the Property, whether or not pursued to final judgment, and in any exercise of the power of sale contained herein, whether or not the sale is actually consummated. 20. Beneficiary's Right to Protect Collateral. Beneficiary may commence, appear in, and defend any action or proceeding which may affect the Collateral or the rights or powers of Beneficiary or Trustee, and in such event, Beneficiary shall be allowed and paid all of Beneficiary's costs, charges and expenses, including cost of evidence of title and attorneys' fees incurred in such action or proceeding in which Beneficiary may appear. Beneficiary may pay, purchase, contest or compromise any encumbrance, charge or lien not listed as a Permitted Exception which in its judgment appears to be prior or superior to the lien of this Deed of Trust. If Grantor fails to make any payment or do any act required under the Loan Documents, Beneficiary, without any obligation to do so and without releasing Grantor from any obligations under the Loan Documents, may make the payment or cause the act to be performed in such manner and to such extent as Beneficiary may deem necessary to protect the Collateral. Beneficiary is authorized to enter upon the Property for such purposes. In exercising any of these powers Beneficiary may incur such expenses, in its absolute discretion, it deems necessary, including cost of evidence of title, employ an attorney, and pay said attorneys' reasonable fees. Grantor hereby agrees to pay immediately following demand, together with interest from and after ten (10) days following demand for payment at the default interest rate set forth in the Note Purchase Agreement until paid in full, all of Beneficiary's costs, charges, expenses and accounts referred to above in this Section 19, including cost of evidence of title and reasonable attorneys' fees incurred in such action or proceeding in which Beneficiary may appear. All costs, charges and expenses so incurred, together with interest thereon as aforesaid, shall be secured by the lien of this Deed of Trust. 15 21. Hazardous Substances. Grantor represents and warrants to Beneficiary that to the best of Grantor's knowledge after due and diligent inquiry, no hazardous or toxic waste or substances are being stored on the Property or any adjacent property except in strict compliance with all Environmental Laws nor have any such waste or substances been stored or used in, on, under, over or about the Property or any adjacent property prior to or during Grantor's ownership, possession or control of the Property. Grantor agrees to provide written notice to Beneficiary immediately upon Grantor becoming aware that the Property or any adjacent property is being or has been contaminated with hazardous or toxic waste or substances. Grantor will not cause nor permit any activities on the Property which directly or indirectly could result in the Property or any other property becoming contaminated with hazardous or toxic waste or substances. For purposes of this Deed of Trust, the term "hazardous or toxic waste or substances " means any substance or material defined or designated as hazardous or toxic wastes, hazardous or toxic material, hazardous, toxic or radioactive substance or other similar term by any applicable federal, state or local statute, regulation or ordinance now or hereafter in effect. 22. Insurance. (a) Grantor shall maintain insurance on the Property with premiums prepaid providing replacement cost coverage and insuring against loss by fire and such other risks covered by extended coverage insurance, flood (but only if the Property is in a federally-designated flood plain), and such other perils and risks, including loss of rents and business interruption as may be required by Beneficiary. Grantor shall also maintain commercial general liability insurance. All insurance shall be with companies satisfactory to Beneficiary and in such amounts as required by Beneficiary with lender's loss payable clauses in favor of and in form satisfactory to Beneficiary. At least thirty (30) days prior to the expiration of the term of any insurance policy, Grantor shall furnish Beneficiary with written evidence of renewal or issuance of a satisfactory replacement policy. If requested Grantor shall deliver copies of all policies to Beneficiary. If Grantor fails to maintain such insurance satisfactory to Beneficiary, Beneficiary may make the payment on behalf of Grantor and any sums expended shall be added to principal and bear interest at the default interest rate set forth in the Note Purchase Agreement. Each policy of insurance shall provide Beneficiary with no less than forty-five (45) days prior written notice of any cancellation, expiration, nonrenewal or modification. (b) In the event of any loss or damage to the Property, all Insurance Proceeds shall be payable to Beneficiary, and Grantor hereby authorizes and directs any affected insurance company to make payment of the Insurance Proceeds directly to Beneficiary. The application or release by Beneficiary of any Insurance Proceeds shall not cure or waive any default or notice of default hereunder or invalidate any act done pursuant to such notice. (c) In the event of the foreclosure of this Deed of Trust or other transfer of the title to the Property in extinguishment, in whole or in part, of the indebtedness secured hereby, all right, title and interest of Grantor in and to any insurance policy, or premiums or payments in satisfaction of claims or any other rights thereunder 16 then in force, shall pass to the purchaser or grantee notwithstanding the amount of any bid at such foreclosure sale. Nothing contained herein shall prevent accrual of interest as provided in the Note Purchase Agreement on any portion of the principal balance due under the Note Purchase Agreement until such time as the Insurance Proceeds are actually received and applied to reduce the principal balance outstanding. 23. Condemnation. Should the Property or any part thereof be taken or damaged by reason of any public improvement, condemnation proceeding, or conveyance in lieu thereof, or in any other manner, Beneficiary shall be entitled to all compensation, awards and other payments or relief therefor, and shall be entitled, at its option, to commence, appear in and prosecute in its own name any action or proceeding. Grantor shall have the right, with the prior written consent of the Beneficiary, to make a compromise or settlement in connection with such taking or damage. All such compensation, awards, damages, rights of action and proceeds (the "Condemnation Proceeds") are hereby assigned to Beneficiary, who shall, after deducting therefrom all its reasonable expenses, including attorneys' fees, apply or release the Condemnation Proceeds with the same effect as provided in Section 14 above with respect to disposition of insurance proceeds; provided, that if such Condemnation Proceeds are to be utilized for restoration of the Property and there are any excess Condemnation Proceeds after application thereof to the restoration of the Property, Beneficiary shall be entitled to apply such excess to the reduction of any indebtedness outstanding under the Note Purchase Agreement. Grantor agrees to execute such further assignments of the Condemnation Proceeds as Beneficiary may require. Nothing contained herein shall prevent the accrual of interest as provided in the Note Purchase Agreement on any portion of the Condemnation Proceeds to be applied to the principal balance due under the Note Purchase Agreement until such Condemnation Proceeds are actually received and applied. 24. Reserve Account. (a) If Beneficiary so requires, Grantor shall pay to Beneficiary monthly, together with and in addition to any payments of principal and/or interest due under the Note Purchase Agreement, a sum, as estimated by the Beneficiary, equal to the ground rents, if any, the real estate taxes and assessments next due on the Property and the premiums next due on insurance policies required under the Loan Documents, less all sums already paid therefor, divided by the number of months to elapse before two (2) months prior to the date when the ground rents, real estate taxes, assessments and insurance premiums will become delinquent. The monthly reserve account payments and any principal and/or interest payments due shall be paid in a single payment and applied by Beneficiary in the following order: (i) ground rents, real estate taxes, assessments and insurance premiums, (ii) expenditures made pursuant to the Loan Documents and interest thereon, (iii) interest on the obligations of Borrowers under Note Purchase Agreement, and (iv) principal due on the obligations of Borrowers under Note Purchase Agreement. Grantor shall promptly deliver to Beneficiary all bills and notices pertaining to the ground rents, taxes, assessments and insurance premiums. 17 (b) The reserve account is solely for the protection of Beneficiary. Beneficiary shall have no responsibility except to credit properly the sums actually received by it. No interest will be paid on the funds in the reserve account and Beneficiary shall have no obligation to deposit the funds in an interest-bearing account. Upon assignment of this Deed of Trust by Beneficiary, any funds in the reserve account shall be turned over to the assignee and any responsibility of Beneficiary with respect thereto shall terminate. Each transfer of the Property shall automatically transfer to the grantee all rights of Grantor to any funds in the reserve account. (c) If the total of the payments to the reserve exceeds the amount of payments actually made by Beneficiary, plus such amounts as have been reasonably accumulated in the reserve account toward payments to become due, such excess may, at Beneficiary's election, be (i) credited by Beneficiary against sums then due and payable under the Loan Documents or (ii) refunded to Grantor as its name appears on the records of Beneficiary. If, however, the reserve account does not have sufficient funds to make the payments when they become due, Grantor shall pay to Beneficiary the amount necessary to make up the deficiency within fifteen (15) days after written notice to Grantor. If this Deed of Trust is foreclosed or if Beneficiary otherwise acquires the Property, the Beneficiary shall, at the time of commencement of the proceedings or at the time the Property is otherwise acquired, apply the remaining funds in the reserve account, less such sums as will become due during the pendency of the proceedings, against the sums due under the Loan Documents and/or to make payments required under the Loan Documents. 25. Repayment of Beneficiary's Expenditures. Grantor shall pay within ten (10) days after written notice from Beneficiary all sums expended by Beneficiary and all costs and expenses incurred by Beneficiary in taking any actions pursuant to the Loan Documents, including attorneys' fees, accountants' fees, appraisal and inspection fees, and the costs for title reports. If any laws or regulations are passed subsequent to the date of this Deed of Trust which require Beneficiary to incur out-of-pocket expenses in order to maintain, modify, extend or foreclose this Deed of Trust, or revise the terms of the loan secured hereby, Grantor shall reimburse Beneficiary for such expenses within ten (10) days after written notice from Beneficiary. Expenditures by Beneficiary shall bear interest from the date of such advance or expenditure at the default interest rate set forth in the Note Purchase Agreement until paid, shall constitute advances made under this Deed of Trust and shall be secured by and have the same priority as the lien of this Deed of Trust. If Grantor fails to pay any such expenditures, costs and expenses and interest thereon, Beneficiary may, at its option, without foreclosing the lien of this Deed of Trust, commence an independent action against Grantor for the recovery of the expenditures and/or advance any undisbursed loan proceeds to pay the expenditures. 26. Additional Security Documents. Grantor shall within fifteen (15) days after request by Beneficiary execute and deliver any financing statement, renewal, affidavit, certificate, continuation statement, or other document as Beneficiary may request in order to perfect, preserve, continue, extend, or maintain security interests or liens previously granted and the priority of the security interests or liens. Grantor shall 18 pay all costs and expenses incurred by Beneficiary in connection with the preparation, execution, recording, filing, and refiling of any such document. 27. Conveyance of Property; Further Encumbrance. In the event that all or any part of or any interest in the Property shall be sold, transferred, leased (other than space leases without options to purchase), further encumbered, conveyed, or a contract of sale or other conveyance entered into with respect thereto, without the prior written consent of Beneficiary, then, upon the occurrence of any one or more of the foregoing events, and regardless of whether or not Grantor shall be in default under the Note Purchase Agreement or this Deed of Trust or any Loan Document, Beneficiary may, at its option, declare the then outstanding principal balance evidenced by the Note Purchase Agreement plus accrued interest thereon immediately due and payable or, at its sole option, it may consent to said conveyance or transfer in writing and may increase the rate of the loan to the interest rate which Beneficiary would then commit to make a mortgage loan to a borrower of comparable financial strength and managerial expertise, and secured by similar security of comparable value and character, and impose whatever other conditions it shall deem necessary to compensate it for such increased risk resulting from the breach of the foregoing covenants. Such increase in interest rate or imposition of additional terms shall entitle Beneficiary to increase monthly payments under the Notes so that the increased monthly installments will fully amortize the outstanding balance of the indebtedness evidenced thereby over the unexpired amortization term of the Notes. The execution and delivery by the Grantor of any joint venture agreement, partnership agreement, declaration of trust or option agreement whereunder any other person or corporation may become entitled, directly or indirectly, to the possession or enjoyment of the Property, or the income or other benefits derived or to be derived therefrom shall in each case be deemed to be a conveyance or assignment of the Grantor's interest in the Property for the purposes of this section, and shall require the prior written consent of the Beneficiary. 28. Release of Parties or Collateral. Without affecting the obligations of any party under the Loan Documents and without affecting the lien of this Deed of Trust and Beneficiary's security interest in the Collateral, Beneficiary and/or Trustee may, without notice (a) release all or any Grantor, any Borrower and/or any other party now or hereafter liable for any of the Secured Obligations (including guarantors), (b) release all or any part of the Collateral, (c) subordinate the lien of this Deed of Trust or Beneficiary's security interest in the Collateral, (d) take and/or release any other security for or guarantees of the Secured Obligations, (e) grant an extension of time for performance of the Secured Obligations, (f) modify, waive, forbear, delay or fail to enforce any of the Secured Obligations, (g) sell or otherwise realize on any other security or guaranty prior to, contemporaneously with or subsequent to a sale of all or any part of the Collateral, (h) make advances pursuant to the Loan Documents including advances in excess of the amount provided for under the Note Purchase Agreement, (i) consent to the making of any map or plat of the Property, and (j) join in the grant of any easement on the Property. Any subordinate lienholder shall be subject to all such releases, extensions or modifications without notice to or consent from the subordinate lienholder. Grantor shall pay any Trustee's, attorneys', title insurance, recording, inspection or other fees or 19 expenses incurred in connection with release of Collateral, the making of a map, plat or the grant of an easement. 29. Default--Remedies. The occurrence of any Event of Default (as defined in the Note Purchase Agreement) or Grantor's failure to comply with any term or condition of the Loan Documents, including without limitation, this Deed of Trust and payments due under the Note Purchase Agreement or other obligations secured by this Deed of Trust, shall constitute an Event of Default. Upon the occurrence of an Event of Default Beneficiary may declare all amounts owed under the Secured Obligations, and all accrued and unpaid interest and other sums in respect thereof, immediately due and payable after applicable notice as set forth herein and/or exercise its rights and remedies under the Loan Documents and applicable law including foreclosure of this Deed of Trust judicially or non judicially by the Trustee pursuant to the power of sale. In the event of any such Event of Default and upon written request of Beneficiary, Trustee shall sell the Property in accordance with the Deed of Trust Act of the state of Washington (RCW Chapter 61.24 as existing now or hereafter amended) and the Uniform Commercial Code of the state of Washington, where applicable, at public auction to the highest bidder. Any person except Trustee may bid at Trustee's sale. Trustee shall apply the proceeds of the sale as follows: (i) to the expenses of sale, including a reasonable Trustee's fee and attorneys' fee; (ii) to all the Secured Obligations (principal and interest) and all other indebtedness secured by this Deed of Trust or any other instrument, in such order and amounts as Beneficiary may elect; (iii) the surplus, if any, shall be distributed in accordance with said Deed of Trust Act. Trustee shall deliver to the purchaser at the sale its deed, without warranty, which shall convey to the purchaser the interest in the property which Grantor had or had the power to convey at the time of its execution of this Deed of Trust and such as it may have acquired thereafter. Trustee's deed shall recite the facts showing that the sale was conducted in compliance with all the requirements of the law and of this Deed of Trust, which recital shall be prima facie evidence of such compliance and conclusive evidence thereof in favor of bona fide purchasers and encumbrances for value. The power of sale conferred by this Deed of Trust and by the Deed of Trust Act of the state of Washington is not an exclusive remedy, and when not exercised Beneficiary may foreclose this Deed of Trust as a mortgage. Trustee is not obligated to notify any party hereto of pending sale under any other deed of trust or of any action or proceeding in which Grantor, Trustee or Beneficiary shall be a party, unless such action or proceeding is brought by Trustee. Beneficiary may proceed as to the Collateral which constitutes personal property in accordance with Beneficiary's rights and remedies in respect to the Property or sell the Personal Property Collateral separately and without regard to the remainder of the Property in accordance with Beneficiary's rights and remedies provided by the Washington Uniform Commercial Code as well as other rights and remedies available at law or in equity. Beneficiary's exercise of any of its rights and remedies shall not constitute a waiver or cure of a default. Beneficiary's failure to enforce any default shall not constitute a waiver of the default or any subsequent default. In the event of foreclosure, the cost of the title premium for the trustee sale guarantee (or equivalent policy) shall be paid for by Grantor. In the event the Loan Documents are referred to an 20 attorney for enforcement or preservation of Beneficiary's rights or remedies, whether or not suit is filed or any proceedings are commenced, Grantor shall pay all Beneficiary's costs and expenses including Trustee's and attorneys' fees (including attorneys' fees for any appeal, bankruptcy proceeding or any other proceeding), accountants' fees, appraisal and inspection fees and cost of a title report. 30. Cumulative Remedies. To the extent allowed by law, all Beneficiary's and Trustee's rights and remedies specified in the Loan Documents are cumulative, not mutually exclusive and not in substitution for any rights or remedies available in law or equity. In order to obtain performance of Grantor's obligations under the Loan Documents, without waiving its rights in the Collateral, Beneficiary may proceed against Grantor or any Borrower or may proceed against any other security or guaranty for the Secured Obligations, in such order and manner as Beneficiary may elect. The commencement of proceedings to enforce a particular remedy shall not preclude the discontinuance of the proceedings and the commencement of proceedings to enforce a different remedy. 31. Entry. Beneficiary, in person, by agent or by court appointed receiver, may enter, take possession of, manage and operate all or any part of the Property, and may also do any and all other things in connection with those actions that Beneficiary may in its sole discretion consider necessary and appropriate to protect the security of this Deed of Trust. Such other things may include: taking and possessing all of Grantor's or the then owner's books and records; entering into, enforcing, modifying, or canceling Leases on such terms and conditions as Beneficiary may consider proper; obtaining and evicting tenants; fixing or modifying Rents; collecting and receiving any payment of money owing to Grantor; completing any unfinished construction; and/or contracting for and making repairs and alterations. Grantor hereby irrevocably constitutes and appoints Beneficiary as its attorney-in-fact to perform such acts and execute such documents as Beneficiary in its sole discretion may consider to be appropriate in connection with taking these measures. 32. Appointment of Receiver. In the event of a default, Grantor consents to and Beneficiary shall be entitled, without notice, without bond, and without regard to the adequacy of the Collateral, to the appointment of a receiver for the Collateral. The receiver shall have, in addition to all the rights and powers customarily given to and exercised by a receiver, all the rights and powers granted to Beneficiary by the Loan Documents. The receiver shall be entitled to receive a reasonable fee for management of the Property. If Grantor is an occupant of the Property, Beneficiary has the right to require Grantor to pay rent at fair market rates and the right to remove Grantor from Property if Grantor fails to pay rent. 33. Sale of Property After Default. The Collateral may be sold separately or as a whole, at the option of Beneficiary following a default. In the event of a Trustee's sale of all the Collateral, Beneficiary hereby assigns its security interest in the personal property Collateral to the Trustee. Beneficiary may also realize on the personal property Collateral in accordance with the remedies available under the Uniform Commercial Code or at law. In the event of a Trustee's sale, Grantor, and the holder of any 21 subordinate liens or security interest with actual or constructive notice hereof, waive any equitable, statutory or other right they may have to require marshaling of assets in connection with the exercise of any of the remedies permitted by applicable law or provided herein, or to direct the order in which any of the Collateral will be sold in the event of any sale under this Deed of Trust or foreclosure in the inverse order of alienation. 34. Foreclosure of Lessee's Rights--Subordination. Beneficiary shall have the right, of its option, to foreclose this Deed of Trust subject to the rights of any lessees of the Property. Beneficiary's failure to foreclose against any lessee shall not be asserted as a claim against Beneficiary or as a defense against any claim by Beneficiary in any action or proceeding. Beneficiary at any time may subordinate this Deed of Trust to any or all of the Leases except that Beneficiary shall retain its priority claim to any condemnation or insurance proceeds. 35. Repairs During Redemption. In the event of a judicial foreclosure the purchaser during any redemption period may make such repairs and alterations to the Property as may be reasonably necessary for the proper operation, care, preservation, protection and insuring of the Property. Any sums so paid, together with interest from the date of the expenditure at the rate provided in the judgment, shall be added to the amount required to be paid for redemption of the Property. 36. Reconveyance After Payment. Upon written request of Beneficiary stating that all obligations secured by this Deed of Trust have been paid, Trustee shall reconvey, without warranty, the Property then subject to the lien of this Deed of Trust. The recitals in any reconveyance of any matters of fact shall be conclusive proof of the truthfulness thereof. The grantee in the reconveyance may be described as "the person or persons legally entitled thereto." Grantor shall pay any costs, Trustee's fees and recording fees incurred in so reconveying the Property. 37. Nonwaiver of Terms and Conditions. Time is of the essence with respect to performance of the obligations due under the Loan Documents. Beneficiary's failure to require prompt enforcement of any required obligation shall not constitute a waiver of the obligation due or any subsequent required performance of the obligation. No term or condition of the Loan Documents may be waived, modified or amended except by a written agreement signed by Grantor and Beneficiary. Any waiver of any term or condition of the Loan Documents shall apply only to the time and occasion specified in the waiver and shall not constitute a waiver of the term or condition at any subsequent time or occasion. 38. Waivers by Grantor. Without affecting any of Grantor's obligations under the Loan Documents, Grantor waives the following: (a) Any right to require Beneficiary to proceed against any specific party liable for sums due under the Loan Documents or to proceed against or exhaust any specific security for sums due under the Loan Documents. 22 (b) Diligence, demand for performance, notice of nonperformance, presentment, protest and notice of dishonor and notice of new or additional indebtedness of any Grantor, any Borrower or any other party liable for sums due under the Loan Documents to Beneficiary. (c) Any defense arising out of Beneficiary entering into additional financing or other arrangements with any Grantor, any Borrower or any party liable for sums due under the Loan Documents not relating to the Property and any action taken by Beneficiary in connection with any such financing or other arrangements or any pending financing or other arrangements not related to the Property. (d) Any defense arising out of the absence, impairment, or loss of any or all rights of recourse, reimbursement, contribution or subrogation or any other rights or remedies of Beneficiary against any Grantor, any Borrower or any other party liable for sums due under the Loan Documents or any Collateral. (e) Any obligation of Beneficiary to see to the proper use and application of any proceeds advanced pursuant to the Loan Documents. 39. Right of Subrogation. Beneficiary is subrogated to the rights, whether legal or equitable, of all beneficiaries, mortgagees, lienholders and owners directly or indirectly paid off or satisfied in whole or in part by any proceeds advanced by Beneficiary under the Loan Documents, regardless of whether these parties assigned or released of record their rights or liens upon payment. 40. Joint and Several Liability. If there is more than one Grantor of this Deed of Trust, their obligations shall be joint and several. 41. Statement of Amount Owing. Grantor upon request by Beneficiary will furnish a written statement duly acknowledged of the amount due under the Loan Documents and whether any offsets or defenses exist against the amount due. 42. Books and Records Financial Statements. Grantor will keep and maintain at Grantor's address stated above, or such other place as Beneficiary may approve in writing, books of accounts and records adequate to reflect correctly the results of the operation of the Property and copies of all written contracts, leases and other instruments which affect the Property. Such books, records, contracts, leases and other instruments shall be subject to examination, inspection and copying at any reasonable time by Beneficiary. Grantor shall provide to Beneficiary within ninety (90) days after the end of each of Grantor's fiscal years (or within twenty (20) days of Beneficiary's written request therefor if Grantor is in default), for each Grantor, each Borrower and for each guarantor of the Secured Obligations, a complete and current financial statement and copy of its most recent federal income tax return, together with a statement of income and expenses of the Property and a statement of changes in financial position with respect to the Property for the prior year, each in reasonable detail and certified by Grantor, each Borrower or guarantor, as the case may be, and if Beneficiary shall require, by an independent certified public accountant. At the same time, Grantor shall also furnish a 23 current rent roll for the Property, certified by Grantor, showing the name of each tenant, the space occupied, the lease expiration date, the monthly rent, a schedule of gross receipts for each tenant obligated to pay rent based on a percentage of receipts, the date to which rent has been paid and any deposit Grantor is holding. Grantor's compliance with these provisions shall not limit or affect Grantor's obligations to comply with financial, tax and operation covenants and reporting requirements under any other agreement between Grantor and Beneficiary whether or not such other agreement is related to the Secured Obligations. 43. Appraisals. In the event of a default Beneficiary may obtain a current appraisal of the Property which is to be paid for by Grantor. Appraisals may be commissioned by Beneficiary when required by laws and regulations which govern Beneficiary's lending practices. The cost of all such appraisals will be home by Grantor. 44. Maximum Interest Rate. If any payment of interest, fees and/or charges under the Loan Documents shall exceed the maximum amounts permitted by any applicable law of the State of Washington, then the payment made or to be made shall be reduced so that in no event shall any obligor pay or Beneficiary receive an amount in excess of the maximum amount permitted by any applicable law. If Beneficiary receives an excess amount, it shall be treated as a prepayment of principal or shall be returned to the payor, at Beneficiary's option. 45. Evasion of Prepayment Fee. If Grantor is in default, whether Beneficiary has accelerated the maturity of the indebtedness or not, any tender of payment sufficient to satisfy all sums due under the Loan Documents trade at any time prior to foreclosure sale shall constitute an evasion of the prepayment terms of the Note Purchase Agreement, if any, and shall be deemed a voluntary prepayment. Any such payment, to the extent permitted by law, shall include the additional payment required under the prepayment fee provision in the Note Purchase Agreement, if any. 46. Payment of New Taxes. If any federal, state or local law is passed subsequent to the date of this Deed of Trust which requires Beneficiary to pay any tax because of this Deed of Trust or the sums due under the Loan Documents (excluding income taxes), then Grantor shall pay to Beneficiary on demand any such taxes if it is lawful for Grantor to pay them, or, in the alternative Grantor may repay all sums due under the Loan Documents plus any prepayment fee within thirty (30) days of such demand. If it is not lawful for Grantor to pay such taxes, then at its option Beneficiary may declare a default under the Loan Documents. 47. Insolvency Proceedings. Grantor or any party liable on the Secured Obligations (including guarantors) shall not make any assignment for the benefit of creditors and shall not permit the institution of any proceedings under any federal or state statutes pertaining to bankruptcy, insolvency, arrangement, dissolution, liquidation or receivership whether or not an order for relief is entered. 24 48. Substitution of Trustee. Beneficiary may at any time discharge the Trustee and appoint a successor Trustee who shall have all of the powers of the original Trustee. 49. In-House Counsel Fees. Whenever Grantor is obligated to pay or reimburse Beneficiary or Trustee for any attorneys' fees, those fees shall include the allocated costs for services of in-house counsel. 50. Notices. Any notice given by Grantor, Trustee or Beneficiary shall be in writing and shall be effective (a) on personal delivery to the party receiving the notice, or (b) on the third day after deposit in the United States mail, postage prepaid with return receipt requested, addressed to the party at the address set forth above, or with respect to the Grantor, to the address at which Beneficiary customarily or last communicated with Grantor. 51. Time. Time is of the essence in connection with all obligations of Grantor herein. 52. Successors and Assigns. This Deed of Trust applies to, inures to the benefit of, and binds all parties hereto and their successors and assigns. The terms "Grantor," "Trustee" and "Beneficiary" include their successors and assigns. 53. Controlling Document; Definitions. In the event of a conflict or inconsistency between the terms and conditions of this Deed of Trust and the terms and conditions of any other of the Loan Documents (except for any separate assignment of rents and/or leases and any Note Purchase Agreement which shall prevail over this Deed of Trust), the terms and conditions of this Deed of Trust shall prevail. All capitalized terms not otherwise defined herein shall have the same meaning as in the Note Purchase Agreement. 54. Invalidity of Terms and Conditions. If any term or condition of this Deed of Trust is found to be invalid, the invalidity shall not affect any other term or condition of the Deed of Trust and the Deed of Trust shall be construed as if not containing the invalid term or condition. 55. Legislation Affecting Beneficiary's Rights. If enactment or expiration of applicable laws has the effect of rendering any provision of the Note Purchase Agreement or this Deed of Trust unenforceable according to its terms, Beneficiary, at its option, may require immediate payment in full of all sums secured by this Deed of Trust and may invoke any remedies permitted herein. 56. Rules of Construction. This Deed of Trust shall be construed so that, whenever applicable, the use of the singular shall include the plural, the use of the plural shall include the singular, and the use of any gender shall be applicable to all genders and shall include corporations, partnerships and limited partnerships. 25 57. Section Headlines. The headings to the various sections have been inserted for convenience of reference only and shall not be used to construe this Deed of Trust. 58. Applicable Law. This Deed of Trust shall be governed by and construed in accordance with the laws of the State of Washington. 59. Commercial Purposes. The Secured Obligations were incurred primarily for commercial, investment or business purposes and not for personal, family or household purposes. 60. Counterpart Notice. This Deed of Trust encumbers real property situated in Chelan County and Clallam County in the State of Washington. In order to facilitate recording in each of the two counties at the same time, this Deed of Trust has been prepared in counterparts, each of which is identical to this counterpart, except that Exhibits A and C of this counterpart describe only the portion of the Mortgaged Property situated in the county in which this counterpart is recorded. Grantor and Beneficiary intend and agree that the two counterparts constitute one and the same deed of trust, that the lien thereof shall attach to all property encumbered thereby on execution and delivery of any one of the counterparts, and that to the extent permitted by law, foreclosure thereof may be accomplished in a single judicial or nonjudicial proceeding in any county in which any of the Mortgaged Property is located. [TO BE INCLUDED ONLY IN THE DEED OF TRUST COUNTERPART RECORDED IN CHELAN COUNTY; INTENTIONALLY OMITTED FROM THE CLALLAM COUNTY DEED OF TRUST COUNTERPART] 61. Counterpart Notice. This Deed of Trust encumbers real property situated in Chelan County and Clallam County in the State of Washington. In order to facilitate recording in each of the two counties at the same time, this Deed of Trust has been prepared in counterparts, each of which is identical to this counterpart, except that Exhibits [A-C (TO CHANGE DEPENDING ON COUNTY IN WHICH THE DEED OF TRUST IS RECORDED] of this counterpart describe only the portion of the Mortgaged Property situated in the county in which this counterpart is recorded. Grantor and Beneficiary intend and agree that the two counterparts constitute one and the same deed of trust, that the lien thereof shall attach to all property encumbered thereby on execution and delivery of any one of the counterparts, and that to the extent permitted by law, foreclosure thereof may be accomplished in a single judicial or nonjudicial proceeding in any county in which any of the Mortgaged Property is located. 62. Washington State Notice. Beneficiary hereby notifies Grantor as follows: 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. 63. Prior Mortgages. If this Deed of Trust is subordinate to any other mortgage(s) or similar security document(s) on all or part of the Collateral, the following modifications shall apply hereto: 1. The following definition is added hereto: 26 "Prior Mortgage" means the mortgage(s) or similar security document(s) of all or part of the Collateral, to which this Deed of Trust is subordinate, set forth in the title policy insuring the lien hereof together with the note(s) secured thereby and all other documents securing said note(s). 2. The following is added at the end of the Granting Clause: (m) all sums held by or under the control of the holder of the Prior Mortgage which were deposited on account of real estate taxes, insurance premiums or otherwise. 3. The following is added to the end of Section 9: Grantor further represents that neither Grantor nor any of its affiliates (nor any person or entity acting on behalf of any of them) is the holder of the Prior Mortgage or any participation or other interest therein or is the owner of a legal or equitable interest in any such holder. 4. The following is added to the end of Section 14: (h) The foregoing provisions of this Section are subject to any provision of the Prior Mortgage requiring the application of insurance proceeds to restoration or requiring the payment of such proceeds to the holder of the Prior Mortgage. 5. The following is added to the end of Section 23: The foregoing provisions of this Section are subject to any provision of the Prior Mortgage requiring the application of condemnation proceeds to restoration or requiring the payment of such proceeds to the holder of the Prior Mortgage. 64. Additional Provisions Concerning Prior Mortgages. (a) Grantor shall perform or observe all covenants and conditions to be performed or observed by the Grantor or grantor under the Prior Mortgage. (b) Upon notice from Beneficiary, simultaneously with the making of each payment of principal and interest on the Prior Mortgage, Grantor shall deliver to Beneficiary a copy of the check in the amount of such payment delivered to the holder of the Prior Mortgage. Beneficiary shall have the right, exercisable by notice to Grantor, to require Grantor to make payment of principal and interest on the Prior Mortgage through Beneficiary and, if Beneficiary exercises such right, Grantor shall deliver to Beneficiary a check in the amount of each installment of such principal and interest, payable to the order of the holder of the Prior Mortgage, not later than three (3) days prior to the due date thereof and Beneficiary shall promptly forward such check to said holder. 27 (c) Grantor hereby irrevocably designates Beneficiary its agent and attorney-in-fact to perform or observe on behalf of Grantor any covenant or condition which Grantor fails to perform or observe under the Prior Mortgage within any applicable grace period specified in the Prior Mortgage, and any advances made by Beneficiary in connection with such performance or observance shall be repaid by Grantor on demand with interest at the default interest rate set forth in the Note Purchase Agreement and the amount so advanced, with interest, shall be secured hereby. Beneficiary shall have the right, but not the obligation, to so perform or so observe. The performance or observance of such covenant or condition by Beneficiary shall not prevent Grantor's failure to so perform or observe from constituting an Event of Default. In performing or observing any such covenant or condition, Beneficiary shall have the right to enter upon the Collateral. Upon receipt by Beneficiary from the holder of the Prior Mortgage of any notice of default under the Prior Mortgage, Beneficiary may rely thereon and take any action permitted by this Section to remedy such default notwithstanding that the existence of such default or the nature thereof may be questioned or denied by Grantor. (d) Grantor shall not enter into any modification, amendment or supplement to the Prior Mortgage nor acquire, whether directly or indirectly, any interest whatsoever in the Prior Mortgage. 28 The undersigned Grantor requests that a copy of any notices, including but not limited to any Notice of Sale, be mailed to it at the address herein before set forth. PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington corporation By: /s/ Donald A. Wright ------------------------------------- Name: Donald A. Wright Title: President and Chief Executive Officer CASHMERE MANUFACTURING CO., INC., a Washington corporation By: /s/ Donald A. Wright ------------------------------------- Name: Donald A. Wright Title: Executive Vice President NORTHWEST TECHNICAL INDUSTRIES, INC., a Washington corporation By: /s/ Donald A. Wright ------------------------------------- Name: Donald A. Wright Title: Executive Vice President STATE OF WASHINGTON ) )ss. COUNTY OF KING ) I certify that I know or have satisfactory evidence that Donald A. Wright is the person who appeared before me, and said person acknowledged that he/she signed this instrument, on oath stated that he/she was authorized to execute the instrument and acknowledged it as the President and Chief Executive Officer of PACIFIC AEROSPACE & ELECTRONICS, INC. to be the free and voluntary act of such party for the uses and purposes mentioned in the instrument. Dated: March 15, 2002 Notary Public: /s/ Susan R. Benson Print Name: Susan R. Benson My commission expires: October 11, 2002 (Use this space for notarial stamp/seal) STATE OF WASHINGTON ) )ss. COUNTY OF KING ) I certify that I know or have satisfactory evidence that Donald A. Wright is the person who appeared before me, and said person acknowledged that he/she signed this instrument, on oath stated that he/she was authorized to execute the instrument and acknowledged it as the Executive Vice President of CASHMERE MANUFACTURING CO., INC. to be the free and voluntary act of such party for the uses and purposes mentioned in the instrument. Dated: March 15, 2002 Notary Public: /s/ Susan R. Benson Print Name: Susan R. Benson My commission expires: October 11, 2002 (Use this space for notarial stamp/seal) STATE OF WASHINGTON ) )ss. COUNTY OF KING ) I certify that I know or have satisfactory evidence that Donald A. Wright is the person who appeared before me, and said person acknowledged that he/she signed this instrument, on oath stated that he/she was authorized to execute the instrument and acknowledged it as the Executive Vice President of NORTHWEST TECHNICAL INDUSTRIES, INC. to be the free and voluntary act of such party for the uses and purposes mentioned in the instrument. Dated: March 15, 2002 Notary Public: /s/ Susan R. Benson Print Name: Susan R. Benson My commission expires: October 11, 2002 (Use this space for notarial stamp/seal) EXHIBIT A Legal Description of Project PARCEL "A" Units 1, 2, 3 and 4, Confluence Park Condominium, Chelan County, Washington, according to the plat thereof recorded November 6, 1998 under Auditor's No. 2040202, TOGETHER WITH limited common elements and garage spaces. EXHIBIT B Legal Description of Property That portion of the East half of the West half of Section 20, Township 30 North, Range 2 West, W.M., Clallam County, Washington, described as follows: Beginning at a portion which is the Northeast corner of the Northwest quarter of said Section 20; Thence South along the North-South center line of said Section 20 of a distance of 1,403 feet to the TRUE POINT OF BEGINNING of this description; Thence continuing South along said center line 2,755 feet to the intersection of the Northerly right of way boundary of the existing road designated as the DNR P-1200 Road; Thence North 68 degrees 00 minutes West along said boundary 615 feet; Thence North, parallel to said North-South center line, 2,525 feet; Thence East, parallel to the North East-West center line of said Section 20, a distance of 577.5 feet, more or less, to the TRUE POINT OF BEGINNING. EXHIBIT C Legal Description of Property Lots 6, 7, 8, 9, 10, 11, 12, 13 and 14, Block 1, Steward's Plat of Mission (now Cashmere), according to the plat thereof recorded in Book 1 of Plats, Page 19, records of Chelan County, and Lots 17 and 18 and that portion of Lot 16, hereinafter described, Block 1, J.F. Woodring's Plat of Mission (now Cashmere) according to the plat thereof recorded in Book 1 of Plats, Page 18, records of said county, said portion of Lot 16, described as follows: Beginning at the Northeast corner of said Lot 16; thence Westerly along the Northerly line thereof 29.25 feet to the Northwest corner of a building lying Easterly and the Northeast corner of a building lying Westerly and from said building corner the Northwest corner of said Lot 16 bears Westerly 0.75 feet; thence Southerly along the coincident line between said buildings, the Easterly and Westerly faces of which are the same or coincident line between said buildings, 104.67 feet to the Southwest corner and the Southeast corner of said buildings; thence continue along the extension of said coincident line Southerly 15.39 feet to a point of intersection with the Southerly line of said Lot 16 from which the Southwest corner of said Lot 16 bears Westerly 0.56 feet; thence from said point of intersection Easterly along the Southerly line of said Lot 16, 29.44 feet to the Southeast corner thereof; thence Northerly 120.05 feet to the Northeast corner thereof and the True Point of Beginning. EXHIBIT D Leases (1) Lease Agreement, Cashmere Manufacturing, Inc. 1994, dated November 4, 1994, between Port of Chelan County and Cashmere Manufacturing Co., Inc. (2) Lease Agreement, Pacific Coast Technologies, Inc. 1993, dated February 1, 1993, between Port of Chelan County and Pacific Coast Technologies, Inc. (3) Lease Agreement 1999, dated December 30, 1998, between Port of Chelan County and Pacific Aerospace & Electronics, Inc., as amended by that certain First Addendum to 1999 Lease, dated November 21, 2001, between Port of Chelan County and Pacific Aerospace & Electronics, Inc. (4) Lease Agreement - PA&E IB#9 2000, dated July 13, 2000, between Port of Chelan County and Pacific Aerospace & Electronics, Inc. (5) Lease Agreement, dated March 31, 1994, between Erickson Realty, Ltd. and Electronic Specialty Corporation. (6) Lease, dated April 3, 1998, between Sea-Land Development Corporation and Skagit Engineering & Manufacturing, Inc., as amended by that certain Amendment to Lease, dated June 19, 2000, between Sea-Land Development Corporation and Skagit Engineering & Manufacturing, Inc., as amended by that certain Amendment to Lease, dated January 25, 2002, between Sea-Land Development Corporation and Skagit Engineering & Manufacturing, Inc., as amended by that certain Amendment to Lease, dated January 31, 2002, Sea-Land Development Corporation and Skagit Engineering & Manufacturing, Inc. (7) Lease Agreement, dated June 2, 2000, between 220TH Street, LLC and Skagit Engineering Manufacturing, Inc. (d/b/a Pacific Aerospace Electronics, Inc. - Engineering & Fabrication Division). (8) Lease Agreement, dated August 6, 2001, between Pacific Aerospace & Electronics, Inc. and North Central Educational Service District, as amended by that certain Amendment No. 1 to Lease Agreement, dated December 17, 2001, between Pacific Aerospace & Electronics, Inc. and North Central Educational Service District. EXHIBIT E Encumbrances 1. Property described in Exhibit A, as to Certain Equipment: (a) Master Equipment Lease Agreement, dated as of May 27, 1999, between KeyCorp Leasing, A Division of Key Corporate Capital Inc., as Lessor, and Pacific Aerospace & Electronics, Inc., as Lessee, as amended by Equipment Schedule No. 02, dated as of June 14, 1999, between KeyCorp Leasing, A Division of Key Corporate Capital Inc. and Pacific Aerospace & Electronics, Inc., with a total cost of $233,443.08. 2. Lease Agreement, Pacific Coast Technologies, Inc. 1993, dated February 1, 1993, between Port of Chelan County and Pacific Coast Technologies, Inc.: (a) Commercial Security Agreement between Pacific Aerospace & Electronics, Inc., as Borrower, Pacific Coast Technologies, Inc., as Grantor, and KeyBank National Association, as Lender, securing the Promissory Note between Pacific Aerospace & Electronics, Inc. and KeyBank National Association in principal amount of $712,085.00, and (b) UCC-2 fixture filing between Pacific Coast Technologies, Inc., as Debtor, and KeyBank National Association, as Secured Party, dated March 18, 1998. EX-10.4 9 f80483ex10-4.txt EXHIBIT 10.4 EXHIBIT 10.4 After Recording Return To: Dewey Ballantine LLP 1301 Avenue of the Americas New York, New York 10019 Attention: Val A. Soupios, Esq. DEED OF TRUST, SECURITY AGREEMENT AND FIXTURE FILING WITH ASSIGNMENT OF LEASES AND RENTS GRANTOR: 1. PACIFIC AEROSPACE & ELECTRONICS, INC. 2. CASHMERE MANUFACTURING CO., INC. 3. NORTHWEST TECHNICAL INDUSTRIES, INC. GRANTEE: 1. FIRST UNION NATIONAL BANK, as collateral agent for Holders listed on Schedule A to Note Purchase Agreement (Beneficiary) 2. LAND TITLE COMPANY OF CHELAN -- DOUGLAS COUNTY, INC. (Trustee) Legal Description: Abbreviated form: Units 1-4 Confluence Pk Condo (Exhibit A) Portion of East half of West half of Section 20, Township 30 North, Range 2 West, Clallam County, Washington (Exhibit B) Lts 6-14, Block 1, Steward's Plat of Mission & ptn lot 16 & Lts 17-18 JF Woodring's Plat of Mission (Exhibit C) Additional legal on Exhibits A- C of document Assessor's Property Tax Parcel Account Number(s): 23-20-28-525-010 (Unit 1, Exhibit A) 23-20-28-525-020 (Unit 2, Exhibit A) 23-20-28-525-030 (Unit 3, Exhibit A) 23-20-28-525-040 (Unit 4, Exhibit A) 023020-31000 (Exhibit B) 23-19-04-850-065 (Portion of Exhibit C) 23-19-04-850-065 (Balance of Exhibit C) Reference number(s) of Related Document(s): 2 DEED OF TRUST, SECURITY AGREEMENT AND FIXTURE FILING WITH ASSIGNMENT OF LEASES AND RENTS THIS DEED OF TRUST is made this 25th day of March, 2002, between PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington corporation, CASHMERE MANUFACTURING CO., INC., a Washington corporation, and NORTHWEST TECHNICAL INDUSTRIES, INC., a Washington corporation (individually and collectively, as Grantor), whose address is 430 Olds Station Road, Wenatchee, Washington 98020 to LAND TITLE COMPANY OF CHELAN - DOUGLAS COUNTY, INC., as Trustee, whose address is 16 South Mission Street, P.O. Box 1726, Wenatchee, Washington 98807-1726 to FIRST UNION NATIONAL BANK, as collateral agent for the holders set forth on Schedule A (each a "Holder" and collectively the "Holders") to that certain Note Purchase Agreement dated as of March 19, 2002 (the "Note Purchase Agreement") by and among Pacific Aerospace & Electronics, Inc., a Washington corporation ("Grantor"), Jefferies & Company, Inc. ("Initial Purchaser") and First Union National Bank, as Collateral Agent ("Agent" or "Beneficiary") whose address is 401 South Tryon Street - Suite 1200, Mail Code NC-1179, Charlotte, North Carolina 28202. 1. Granting Clause. Grantor irrevocably grants, bargains, sells and conveys to Trustee and its successors and assigns in trust, with power of sale and with right of entry and possession as provided herein, all of Grantor's estate, right, title, interest, claim and demand, now owned or hereafter acquired, in and to the following: (a) The property in Chelan and Clallam Counties, Washington, described in Exhibits "A" -- "C" attached hereto and incorporated herein by this reference (individually and collectively, the "Property" which term shall include all or any part of the Property, any improvements thereon and all of the property described in this Section 1). (b) All land lying in streets and roads adjoining the Property, and all access rights and easements pertaining to the Property. (c) All the lands, tenements, privileges, reversions, remainders, irrigation and water rights and stock, oil and gas rights, royalties, minerals and mineral rights, all development rights and credits, air rights, hereditaments and appurtenances belonging or in any way pertaining to the Property. (d) All buildings, structures, improvements, fixtures, equipment and machinery and property now or hereafter attached to or used in connection with the use, occupancy or operation of the Property including, but not limited to, heating and incinerating apparatus and equipment, boilers, engines, motors, generating equipment, telephone and other communication systems, piping and plumbing fixtures, ranges, cooking apparatus and mechanical kitchen equipment, refrigerators, cooling, ventilating, sprinkling and vacuum cleaning systems, fire extinguishing apparatus, gas and electric fixtures, irrigation equipment, carpeting, underpadding, elevators, escalators, partitions, mantles, built-in mirrors, window shades, blinds, screens, storm sash, awnings, furnishings of public spaces, halls and lobbies, and shrubbery and plants. All property mentioned in this subsection 1(d) shall be deemed part of the realty and not severable wholly or in part without material injury to the Property. (e) All rents, royalties, issues, profits, revenue, income, recoveries, reimbursements and other benefits of the Property, all existing and future leases of the Property (including extensions, renewals and subleases), all agreements for use and occupancy of the Property (all such leases and agreements whether written or oral, are hereafter referred to as the "Leases"), and all right, title and interest of Grantor thereunder, including, without limitation, all guaranties of lessees' performance under the Leases, together with the immediate and continuing right to collect and receive all of the rents, income, receipts, revenues, issues, profits and other income of any nature now or hereafter due (including any income of any nature coming due during any redemption period) under the Leases or from or arising out of the Property including minimum rents, additional rents, percentage rents, parking or common area maintenance contributions, tax and insurance contributions, deficiency rents, liquidated damages following default in any Lease, all proceeds payable under any policy of insurance covering loss of rents resulting from untenantability caused by destruction or damage to the Property, all proceeds payable as a result of exercise of an option to purchase the Property, all proceeds derived from the termination or rejection of any Lease in a bankruptcy or other insolvency proceeding, all security deposits or other deposits for the performance of any lessee's obligations under the Leases, and all proceeds from any rights and claims of any kind which Grantor may have against any lessee under the Leases or any occupants of the Property (all of the above are hereafter collectively referred to as the "Rents"). This subsection 1(e) is in addition to other provisions of this Deed of Trust providing for the assignment of rents and leases to Beneficiary, and is subject to the right, power and authority given to the Beneficiary in Section 7 hereof to collect and apply the Rents. (f) All of Grantor's rights to further encumber said Property for debt and all Grantor's rights to enter into any lease agreement which would create a tenancy that is or may become subordinate in any respect to any mortgage or deed of trust other than this Deed of Trust. (g) All reciprocal easement agreements, declarations, development agreements, developer's or utility agreements, and any similar such agreements or declarations now or hereafter affecting the Collateral (as defined below) or any part thereof. (h) All (a) development work product prepared in connection with the Collateral, including, but not limited to, engineering, drainage, traffic, soil and other studies and tests; water, sewer, gas, electrical and telephone approvals, taps and connections; surveys, drawings, plans and specifications; and subdivision, zoning and platting materials; (b) building and other permits, rights, licenses and approvals relating to the Collateral; (c) contracts and agreements (including, without limitation, contracts with architects and engineers, construction contracts and contracts for the maintenance, management or leasing of the Collateral), contract rights, logos, trademarks, trade names, 2 copyrights and other general intangibles used or useful in connection with the ownership, operation or occupancy of the Collateral or any part thereof; (d) financing commitments (debt or equity) issued to Grantor in respect of the Collateral and all amounts payable to Grantor thereunder; (e) contracts for the sale of all or any portion of the Collateral, and all amounts payable by the purchasers thereunder; (f) operating and other bank accounts, and monies therein, of Grantor relating to the Collateral, including, without limitation, any accounts relating to real estate taxes or assessments; (g) interest rate protection agreements entered into by Grantor in respect of the loan, whether pursuant to the Note Purchase Agreement or otherwise; and (h) commercial tort claims related to the Collateral. (i) All rights of Grantor under promissory notes, letters of credit, electronic chattel paper, proceeds from accounts, payment intangibles, and general intangibles related to the Collateral, as the terms "accounts", "general intangibles", and "payment intangibles" are defined in the applicable Uniform Commercial Code Article 9, as the same may be modified or amended from time to time. (j) All other assets of Grantor related in any way to the Collateral, subject to certain limitations that may be set forth herein. (k) All proceeds of the conversion, voluntary or involuntary, of any of the foregoing into cash or liquidated claims, including, without limitation, proceeds of insurance and condemnation awards, and all rights of Grantor to refunds of real estate taxes and assessments. (l) All of Grantor's right, title and interest, as lessee, in, to and under the leases listed on Exhibit D hereto (the "Leased Property"), subject to Grantor's obtaining any required approvals by Landlord. The Property is not used principally or primarily for agricultural purposes. 2. Collateral. The following described estate, property and rights of Grantor are also included as security for the performance of each covenant and agreement of Grantor contained herein and the payment of all sums of money secured hereby: (a) All furniture, furnishings, appliances, machinery, vehicles, equipment and all other property of any kind now or hereafter located on the Property, used or intended to be used on the Property wherever actually located, or purchased with the proceeds of the Notes (as defined herein), and all rights of Grantor as lessee of any property described in this Section 2 and subsection 1(d) above. (b) All compensation, awards, damages, rights of action and proceeds (including insurance proceeds and any interest on any of the foregoing) arising out of or relating to a taking or damaging of the Property by reason of any public or private improvement, condemnation proceeding (including change of grade), fire, earthquake or other casualty, injury or decrease in the value of the Property. 3 (c) All returned premiums or other payments on any insurance policies pertaining to the Property and any refunds or rebates of taxes or assessments on the Property. (d) All rights to the payment of money, accounts receivable, deferred payments, refunds, cost savings, payments and deposits, whether now or later to be received from third parties (including all utility deposits), architectural and engineering plans, specifications and drawings, contract rights, governmental permits and licenses, and agreements and purchase orders which pertain to or are incidental to the design or construction of any improvements on the Property, Grantor's rights under any payment, performance, or other bond in connection with construction of improvements on the Property, and all construction materials, supplies, and equipment delivered to the Property or intended to be used in connection with the construction of improvements on the Property wherever actually located. (e) All contracts and agreements pertaining to or affecting the Property including, but not limited to, management, operating and franchise agreements, licenses, trade names and trademarks. (f) All of Grantor's interest in and to the loan account, the loan funds, whether disbursed or not, and Grantor's own funds now or later to be held on deposit as equity funds or for payment of bills relating to the Property. (g) All commitments or agreements, now or hereafter in existence, which will provide Grantor with proceeds to satisfy the Secured Obligations (defined below) and the right to receive the proceeds due under such commitments or agreements including refundable deposits and fees. (h) All books and records pertaining to any and all of the property described above, including computerreadable memory and any computer hardware or software necessary to access and process such memory. (i) All additions, accessions, replacements, substitutions, proceeds and products of the property described in this Section 2 and of any of the Property which is personal property. The Property and all of the property and rights described in Section 1 and 2 are referred to herein collectively as the "Collateral." 3. Security Agreement. To the extent that any of the Collateral may be determined to be personal property, Grantor as debtor hereby grants Holders and Beneficiary as agent for the Holders as secured party a security interest in all such personal property or fixtures to secure payment and performance of the Secured Obligations (defined below). This Deed of Trust constitutes a security agreement, a financing statement and fixture filing pursuant to the Uniform Commercial Code with respect to any and all property now or hereafter described in any Uniform Commercial Code Financing Statement naming Grantor as Debtor and Beneficiary as Secured Party affecting or related to the use and enjoyment of the Property. Grantor agrees that it will 4 not terminate or amend any financing statements filed in connection with the Secured Obligations (as hereinafter defined) without Beneficiary's prior consent. The remedies for any violation of the covenants, terms and conditions of the agreements herein contained shall be (a) as prescribed herein, or (b) by general law, or (c) as to such part of the security which is also reflected in any such Financing Statement by the specific statutory consequences now or hereafter enacted and specified in the Uniform Commercial Code, all at Beneficiary's sole election. Grantor and Beneficiary agree that the filing of such a Financing Statement in the records normally having to do with personal property shall never be construed as in anywise derogating from or impairing this declaration and hereby stated intention of the parties hereto, that everything used in connection with the production of income from the property that is the subject of this Deed of Trust and/or adapted for use therein and/or which is described or reflected in this Deed of Trust is, and at all times and for all purposes and in all proceedings both legal or equitable shall be, regarded as part of the real estate irrespective of whether (a) any such item is physically attached to the improvements, (b) serial numbers are used for the better identification of certain equipment items capable of being thus identified in any list filed with the Beneficiary, or (c) any such item is referred to or reflected in any such Financing Statement so filed at any time. 4. Financing Statement. This Deed of Trust shall also serve as a financing statement filed for record in the real estate records as a fixture filing pursuant to the Uniform Commercial Code. This Deed of Trust may be given to secure an obligation incurred to refinance an obligation incurred for the construction of an improvement on the Property, including the acquisition of the Property. 5. Obligations Secured. THIS DEED OF TRUST IS FOR THE PURPOSE OF SECURING the following ("Secured Obligations"): (a) Payment of the sum of up to THIRTY-SIX MILLION DOLLARS ($36,000,000) or so much thereof with interest thereon as shall be evidenced by all notes described in the Note Purchase Agreement or other instruments evidencing the indebtedness secured by this Deed of Trust including all renewals, amendments, modifications or extensions thereof and substitutions therefor. (b) Payment of any further sums now or hereafter advanced or loaned by Beneficiary or Holders (including any assignee of Beneficiary or Holders) to any Borrower under the Note Purchase Agreement or any of their successors or assigns, and payment of every other present and future obligation owing by any Borrower to Beneficiary or Holders (or any such assignee) of any kind, and all renewals, modifications, and extensions thereof, including any interest, fees, costs, service charges and expenses connected with such obligations (this Deed of Trust, the Note Purchase Agreement and all such other documents, evidencing or securing the loan are hereafter collectively referred to as the "Loan Documents") together with interest thereon at the rate set forth in the Note Purchase Agreement unless otherwise specified in the Loan Documents or agreed to in writing. 5 (c) Performance of each agreement, term and condition set forth or incorporated by reference in the Loan Documents, as such may be amended, including without limitation the Note Purchase Agreement, which are incorporated herein by reference, or contained herein. 6. Performance of Obligations. Grantor shall promptly and timely pay all sums due pursuant to the Loan Documents, strictly comply with all the terms and conditions of the Loan Documents, and perform each Secured Obligation in accordance with its terms. 7. Assignment of Rents and Leases. Grantor hereby absolutely and irrevocably assigns to Beneficiary all Grantor's interest in the Rents and Leases whether now due, past due or to become due, and hereby gives to and confers upon Beneficiary the right, power and authority to collect such Rents and proceeds, and Grantor, without limiting the generality of the Granting Clause hereof, specifically hereby presently, absolutely, unconditionally and irrevocably assigns, transfers and sets over all of the Rents now or hereafter accruing to Beneficiary. Grantor irrevocably appoints Beneficiary its true and lawful attorney at the option of Beneficiary at any time to demand, receive and enforce payment, to give receipts, releases and satisfactions, and to sue, either in the name of Grantor or in the name of Beneficiary, for all such Rents and proceeds. It is understood and agreed that neither the foregoing assignment of Rents and proceeds to Beneficiary nor the exercise by Beneficiary of any of its rights or remedies under this Deed of Trust shall be deemed to make Beneficiary a "mortgagee-in-possession" or otherwise responsible or liable in any manner with respect to the Property or the use, occupancy or enjoyment or operation of all or any portion thereof, unless and until Beneficiary, in person or by agent, assumes actual possession thereof; nor shall appointment of a receiver for the Property by any court at the request of Beneficiary or by agreement with Grantor or the entering into possession of the Property or any part thereof by such receiver be deemed to make Beneficiary a "mortgagee-in-possession" or otherwise responsible or liable in any manner with respect to the Property or the use, occupancy, enjoyment or operation of all or any portion thereof. This assignment is intended to be specific, perfected and choate upon the recording of this Deed of Trust as provided in RCW 7.28.230. This assignment shall be subject to the terms and conditions of any separate assignment of leases and/or rents, whenever executed, in favor of Beneficiary and covering the Property. Grantor warrants that it has made no prior assignment of the Rents or Leases and will make no subsequent assignment without the prior written consent of Beneficiary. (a) Unless otherwise provided in any separate assignment of leases and/or rents, and so long as Grantor is not in default under the Loan Documents, Grantor may collect the Rents as they become due and not more than one (1) month in advance. Grantor shall use the Rents to pay normal operating expenses for the Property and sums due and payments required under the Loan Documents. No Rents shall be collected for a period subsequent to the current one month rental period and first or last month's rent. Grantor's right to collect the Rents shall not constitute Beneficiary's consent to the use of cash collateral in any bankruptcy proceeding. 6 (b) If Grantor is in default under the Loan Documents, without notice to Grantor, Beneficiary or its agents, or a court appointed receiver, may collect the Rents. In doing so, Beneficiary may (i) evict lessees for nonpayment of rent, (ii) terminate in any lawful manner any tenancy or occupancy, (iii) lease the Property in the name of the then owner on such terms as it may deem best and (iv) institute proceedings against any lessee for past due Rents. The Rents received shall be applied to payment of the costs and expenses of collecting the Rents, including a reasonable fee to Beneficiary, a receiver or an agent, operating expenses for the Property and any sums due or payments required under the Loan Documents, in such order as Beneficiary may determine. Any excess shall be paid to Grantor, however, Beneficiary may withhold from any excess a reasonable amount to pay sums anticipated to become due which exceed the anticipated future Rents. Beneficiary's failure to collect or discontinuing collection at any time shall not in any manner affect the subsequent enforcement by Beneficiary of its rights to collect the Rents. Except in the case of a full reinstatement of the Secured Obligations, the collection of the Rents shall not cure or waive any default under the Loan Documents. Any Rents paid to Beneficiary or a receiver shall be credited against the amount due from the lessees under the Leases. In the event any lessee under the Leases becomes the subject of any proceeding under the Bankruptcy Code or any other federal, state or local statute which provides for the possible termination or rejection of the Leases assigned hereby, Grantor covenants and agrees that in the event any of the Leases are so rejected, no damages settlement shall be made without the prior written consent of Beneficiary; any check in payment of damages for rejection or termination of any such Lease will be made payable both to the Grantor and Beneficiary; and Grantor hereby assigns any such payment to Beneficiary and further covenants and agrees that upon request of Beneficiary, it will duly endorse to the order of Beneficiary any such check, the proceeds of which will be applied to any portion of the indebtedness secured hereunder in such manner as Beneficiary may elect. (c) Regardless of whether or not Beneficiary, in person or by agent, takes actual possession of the Property or any part thereof, Beneficiary is not and shall not be deemed to be: (i) "a mortgagee in possession" for any purpose; or (ii) responsible for performing any of the obligations of the lessor any Lease; or (iii) responsible for any waste committed by lessees or any other, any dangerous or defective condition of the Property, or any negligence in the, upkeep, repair or control of the Property; or (iv) liable in any manner for the Property or the use, occupancy, or operation of all or any part of it. In exercising its rights under this Section Beneficiary shall be liable only for the proper application of and accounting for the Rents collected by Beneficiary or its agents. 7 8. Leases. (a) Grantor shall fully comply with all of the terms, conditions and provisions of the Leases so that the same shall not become in default and to do all that is needful to preserve all said Leases in force. With respect to any Lease of the whole or any part of the Property, Grantor shall not, without the prior written consent of Beneficiary, which consent shall not be unreasonably withheld, (i) permit assignment or subletting of all or part of the lessee's rights under the Lease unless the right to assign or sublet is expressly reserved by the lessee under the Lease, (ii) execute an assignment of the rents or any part thereof from the Collateral without Beneficiary's prior consent, (iii) modify or amend any lease so as to shorten the unexpired term thereof or so as to decrease, waive or compromise in any manner the amount of rents payable thereunder or materially expand the obligations of the lessor thereunder, (iv) accept surrender of the Lease or terminate the Lease except in accordance with the terms of the Lease providing for termination in the event of a default, (v) accept prepayments of any installments of rents to become due under such leases, except prepayments in the nature of security for the performance of the lessees thereunder, (vi) modify, release or terminate any guaranties of any such lease or (vii) in any other manner impair the value of the Property or the security hereof. Any proceeds or damages resulting from a lessee's default under any such Lease, at Beneficiary's option, shall be paid to Beneficiary and applied against sums owed under the Loan Documents even though such sums may not be due and payable. Except for non-delinquent real estate taxes and assessments, Grantor shall not permit any lien to be created against the Property which may be or may become prior to any Lease. If the Property is partially condemned or suffers a casualty, Grantor shall promptly repair and restore the Property in order to comply with the Leases. (b) Grantor will not execute any lease of all or a substantial portion of the Property except for actual occupancy by the lessee thereunder, and will at all times promptly and faithfully perform, or cause to be performed, all of the covenants, conditions and agreements contained in all leases of the Property or portions thereof now or hereafter existing, on the part of the lessor thereunder to be kept and performed and will at all times do all things necessary to compel performance by the lessee under each lease of all obligations, covenants and agreements by such lessee to be performed thereunder. If any of such leases provide for the giving by the lessee of certificates with respect to the status of such leases, Grantor shall exercise its right to request such certificates within five (5) days of any demand therefor by Beneficiary and shall deliver copies thereof to Beneficiary promptly upon receipt. (c) Each lease of the Property, or of any part thereof, executed after the date hereof, shall provide that, in the event of the enforcement by Trustee or Beneficiary of the remedies provided for hereby or by law, the lessee thereunder will, upon request of any person succeeding to the interest of Grantor as a result of such enforcement, automatically become the lessee of said successor in interest, without change in the terms or other provisions of such lease, provided, however, that said successor in interest shall not be bound by (i) any payment of rent or additional rent for more than one (1) month in advance, except prepayments in the nature of security for the performance by said lessee of its obligations under said lease or (ii) any amendment or 8 modification of the lease made without the consent of Beneficiary or such successor in interest. Each lease shall also provide that, (x) the lease is subordinate to this Deed (but shall also provide that Beneficiary, at its option, may subordinate this Deed to such lease) and (y) upon request by said successor in interest, such lessee shall execute and deliver an instrument or instruments confirming such attornment. (d) Grantor shall furnish to Beneficiary upon request, but not more than semi-annually, a certified leasing status report in respect of the Property and a certified rent roll containing the names of all lessees of the Property, the terms of their respective leases, the space occupied and the rentals payable thereunder, together with copies, certified to be true and complete, of such leases as may be requested by Beneficiary. (e) Grantor shall, promptly upon Beneficiary's request, deposit all tenant security deposits in respect of the Property into an account with Beneficiary or as designated by Beneficiary, which deposits shall be held and disbursed to tenants as required under the terms of their respective leases. 9. Warranty of Title. Grantor warrants that it (i) has good and marketable title to an indefeasible fee simple estate in the Property, unless Grantor's present interest in the Property is described in Exhibits A through C as a leasehold interest, in which case Grantor warrants that it lawfully possesses and holds a valid leasehold interest in the Property as stated in Exhibits A through C, (ii) has good and marketable title to the personal property Collateral, and (iii) holds a valid leasehold interest as tenant under the leases described in Exhibit D, and that said leases are prior to all liens, charges and encumbrances on the lessor's interest thereunder, subject, in each case, to no liens, encumbrances, easements, assessments, security interests, claims or defects of any kind prior or subordinate to the lien of this Deed of Trust, except those listed in Beneficiary's title insurance policy, listed on Exhibit E hereto, or approved by Beneficiary in writing (the "Permitted Exceptions") and real estate taxes for the current year. Grantor warrants that the Permitted Exceptions and the real estate taxes are not delinquent or in default, and that Grantor has the right to convey the Property to Trustee for the benefit of Beneficiary, and the right to grant a security interest in the personal property Collateral. Grantor has the full power and authority to subject the Property to the lien hereof in the manner and form herein done and intended hereafter to be done. Grantor will preserve such title, and Grantor will forever warrant and defend title to the Collateral and will defend the validity and priority of the lien of this Deed of Trust and the security interest granted herein against any claims or demands. 10. Prohibited Liens. (a) Grantor shall not permit any governmental or statutory liens (including tax, mechanic's or materialmen's liens) to be filed against the Property except for real estate taxes and assessments not yet delinquent by non-payment and liens permitted by the Loan Documents or approved by Beneficiary in writing. Grantor will pay, from time to time when the same shall become due, all lawful claims and demands of mechanics, materialmen, laborers, and others which, if unpaid, might result in, or 9 permit the creation of, a lien on the Property or any part thereof, and in general will do or cause to be done everything necessary so that the lien and effect hereof shall be fully preserved, at the cost of Grantor and without expense to Trustee or Beneficiary. (b) Grantor will have the right to contest in good faith by an appropriate legal or administrative proceeding the validity of any prohibited lien, encumbrance or charge so long as (i) no default exists under the Loan Documents, (ii) Grantor first deposits with Beneficiary a bond or other security satisfactory to Beneficiary in the amount reasonably required by Beneficiary, but not more than one and one--half (1 1/2) (i.e., 150%) of the amount of the claim; (iii) Grantor immediately commences its contest of such lien, provided, however, that within twenty (20) days after the filing of such lien Grantor discharges said lien of record or records a bond which complies with the requirements of RCW 60.04.161 eliminating such lien as an encumbrance on the Property, and continuously pursues the contest in good faith and with due diligence; (iv) foreclosure of the lien, encumbrance or charge is stayed; and (v) Grantor pays any judgment rendered for the lien claimant or other third party within ten (10) days after the entry of the judgment. If the contested item is a mechanic's or materialmen's lien, Grantor will furnish Beneficiary with an endorsement to its title insurance policy which insures the priority of this Deed of Trust over the lien being contested. Grantor will discharge or elect to contest and post an appropriate bond or other security within twenty (20) days of written demand by Beneficiary. 11. Payment of Taxes and Other Encumbrances. Grantor will pay when due: (a) All taxes, assessments and other governmental or public charges affecting the Property, including assessments on appurtenant water stock, and any accrued interest, cost and/or penalty thereon and upon request by Beneficiary will submit receipts therefor to Beneficiary promptly following payment; (b) All encumbrances (including any debt secured by deeds of trust), ground rents, liens and/or charges, with interest, on the Property or any part thereof which appear to be prior, superior or on a parity hereto, and all costs and fees related thereto; (c) All charges for utilities or services, including, but not limited to, electricity, gas, sewer and water; (d) All costs, fees and expenses of this Deed of Trust, including cost of evidence of title, Trustee's fees and attorneys' fees in connection with sale pursuant to this Deed of Trust (whether completed or not) together with interest from and after ten (10) days following demand for repayment at the default interest rate set forth in the Note Purchase Agreement until paid in full. 12. Maintenance -- No Waste. (a) Keep the Property in good condition and repair and not commit or permit waste or deterioration of the Property; 10 (b) Not remove, demolish or substantially alter any portion of the Property, except as approved in writing by Beneficiary and except such alterations as may be required by laws, ordinances or regulations of governmental authorities; (c) Comply with all laws, ordinances, rules, regulations and orders of governmental authorities now or hereafter affecting the Property or requiring any alterations or improvements to be made thereon, and perform all of its obligations under any covenant, condition, restriction or agreement of record affecting the Property; (d) Complete promptly and in good and workmanlike manner any portion of the Property which may be constructed hereafter, and promptly restore in like manner as obligated in Section 14, any portion of the Property which may be damaged or destroyed, and pay, when due, all costs incurred and claims for labor performed and materials furnished therefor; (e) Not commit, suffer or permit any act to be done in, upon or to the Property in violation of any law or ordinance or any covenant, condition or restriction affecting the Property; (f) Do any and all acts which, from the character or use of the Property, may be reasonably necessary to protect and preserve the security of Beneficiary, the specific enumerations herein not excluding the general; (g) Not permit any construction liens against the Property; (h) Not take or permit to be taken any actions that might invalidate any insurance carried on the Property; (i) Maintain in full force and effect all licenses (including but not limited to any operating licenses or similar matters) required or permitted in the operation of the improvements on the Property. 13. Alterations Removal and Demolition. Grantor shall not structurally alter, remove or demolish any building or improvement on the Property without Beneficiary's prior written consent. Grantor shall not remove any fixture or other item of property which is part of the Collateral without Beneficiary's prior written consent unless the fixture or item of property is replaced by an article of equal suitability owned by Grantor free and clear of any lien or security interest. 14. Restoration. (a) After the happening of any casualty to the Property whether or not required to be insured against under the policies to be provided by Grantor hereunder, Grantor shall give prompt written notice thereof to Beneficiary generally describing the nature and cause of such casualty and the extent of the damage or destruction to the Property. 11 (b) Grantor hereby assigns to Beneficiary all proceeds of insurance ("Insurance Proceeds") which Grantor may be entitled to receive. In the event of any damage to or destruction of the Collateral, then, provided there is not an Event of Default under the Note Purchase Agreement, the Notes, the Deed of Trust or any of the Loan Documents (as defined in the Note Purchase Agreement) and Beneficiary has reasonably determined that its security has not been impaired, Grantor shall commence and diligently pursue to completion in accordance with this Section 14 the repair, restoration and rebuilding of any portion of the Collateral that has been partially damaged or destroyed in full compliance with all legal requirements and to the same condition, character and at least equal value and general utility as nearly as possible to that existing prior to such damage or destruction (the "Restoration"), and Beneficiary shall hold and disburse the Insurance Proceeds (less the cost, if any, to Beneficiary of recovering and paying out such proceeds (including, without limitation, attorneys' fees and expenses, adjuster's fees, and fees incurred in Beneficiary's performance of its obligations hereunder)) (the "Net Insurance Proceeds") in the manner hereinafter provided to the Restoration. In the event that the Collateral is substantially destroyed or Beneficiary has determined that its security has been impaired, the Beneficiary may, at its option, apply the Net Insurance Proceeds to the reduction of the Secured Obligations and secured by this Deed of Trust in such order as Beneficiary may determine and, at Beneficiary's option and in its sole discretion, Beneficiary, may declare the Secured Obligations immediately due and payable. (c) In the event the Net Insurance Proceeds are to be used for the Restoration, Grantor shall, prior to disbursement of any Net Insurance Proceeds for any work in connection with the Restoration (the "Work"), deliver or furnish to Beneficiary (i) complete plans and specifications for the Work which (A) have been approved by all governmental authorities whose approval is required, (B) bear the signed approval of an architect reasonably satisfactory to Beneficiary (the "Architect") and (C) are accompanied by Architect's signed estimate of the total estimated cost of the Restoration. Such plans and specifications shall be subject to Beneficiary's approval, which approval shall not be unreasonably withheld or delayed (the "Approved Plans and Specifications"); (ii) the amount of money which, as determined by Beneficiary, will be sufficient when added to the Net Insurance Proceeds, if any, to pay the entire cost of the Restoration (all money as held by Beneficiary is referred to herein as the "Restoration Funds"); (iii) copies of all permits and approvals required by law in connection with the commencement and conduct of the Restoration; and (iv) a contract for construction executed by Grantor and a contractor satisfactory to Beneficiary (the "Contractor") in form, scope and substance satisfactory to Beneficiary (including the customary retention) for performance of the Work. (d) After commencing the Work, Grantor shall perform or cause Contractor to perform the Work diligently and in good faith in accordance with the Approved Plans and Specifications approved by Beneficiary. So long as Grantor is not in default under any of the Loan Documents, Beneficiary shall disburse the Restoration Funds in increments to Grantor or as Grantor may direct, from time to time as the Work progresses, to pay (or reimburse Grantor for) the costs of the Restoration, but subject to the following conditions, any of which Beneficiary may waive in its sole discretion: 12 (i) Beneficiary shall make such payments only upon not less than ten (10) days' prior written notice from Grantor to Beneficiary and Grantor's delivery to Beneficiary of (A) Grantor's written request for payment (a "Request for Payment") accompanied by a certificate by Architect in form, scope and substance satisfactory to Beneficiary which states that all of the Work completed to that date has been done in compliance with the Approved Plans and Specifications and in accordance with all provisions of law, that the amount requested has been paid or is then due and payable and is properly a part of the cost of the Restoration and that when added to all sums, if any, previously paid out by Beneficiary, the requested amount does not exceed the value of the Work done to the date of such certificate; (B) evidence satisfactory to Beneficiary that there are no construction or similar liens for labor or material supplied in connection with the Work to date or that any such liens have been adequately provided for to Beneficiary's satisfaction; and (C) evidence satisfactory to Beneficiary that the balance of the Restoration Funds remaining after making the payments shall be sufficient to pay the balance of the cost of the Restoration not completed to date (giving in such reasonable detail as Beneficiary may require an estimate of the cost of such completion). Each Request for Payment shall be accompanied by waivers of liens satisfactory to Beneficiary covering that part of the Work previously paid for, if any, and by a search prepared by a title company or by other evidence satisfactory to Beneficiary that no construction liens or other liens or instruments for the retention of title in respect of any part of the Work have been filed against the Property and not discharged of record and that no encumbrance exists on or affecting the Property other than encumbrances, if any, which are set forth in the title policy issued to Beneficiary insuring the lien of this Deed of Trust; and (ii) Any Request for Payment after the Restoration has been completed shall be accompanied by a copy of any certificate or certificates required by law to render occupancy of the Property legal. (e) Upon Beneficiary's receipt of the certificate of occupancy for the Property and other customary evidence requested by Beneficiary that the Restoration has been completed and the costs thereof paid in full, and satisfactory evidence that no mechanic's or similar liens for labor or material supplied in connection with the Restoration are outstanding against the Property and Beneficiary's disbursement under the final Request for Payment, and provided that Grantor is not then in default under any of the Loan Documents (as defined in the Note Purchase Agreement), Beneficiary shall pay any remaining Restoration Funds then held by Beneficiary to Grantor; provided, however, nothing contained herein shall prevent Beneficiary from applying at any time the whole or any part of the Restoration Funds to the curing of any Event of Default under the Loan Documents. (f) If (i) within sixty (60) days after the occurrence of any damage or destruction to the Property requiring Restoration, Grantor fails to submit to Beneficiary and receive Beneficiary's approval of plans and specifications or fails to deposit with Beneficiary the additional amount necessary to accomplish the Restoration as provided in Section 14, or (ii) after such plans and specifications are approved by all such governmental authorities and Beneficiary, Grantor fails to commence promptly or 13 diligently continue to completion the Restoration, or (iii) Grantor becomes delinquent in payment to mechanics, materialmen or others for the costs incurred in connection with the Restoration, then, in addition to all of the rights herein set forth, Beneficiary may apply the Restoration Funds then or thereafter held by Beneficiary to reduce the unpaid indebtedness secured hereby in such order as Beneficiary may determine, and at Beneficiary's option and in its sole discretion, Beneficiary may declare the Secured Obligations immediately due and payable. (g) In the event that Beneficiary applies all or any portion of the Restoration Funds to reduce the unpaid indebtedness secured hereby as provided in this Section 14, after payment in full of all sums secured hereby, any remaining Restoration Funds shall be paid to Grantor. 15. Compliance with Laws. Grantor shall comply with all laws, ordinances, regulations, covenants, conditions, and restrictions affecting the Property, including, without limitation, all applicable requirements of the Fair Housing Act of 1968 (as amended) and the Americans With Disabilities Act of 1990 (as the same may be amended from time to time), and shall not commit or permit any act upon or concerning the Property in violation of any such laws, ordinances, regulations, covenants, conditions, and restrictions. Grantor agrees to protect, defend, indemnify and hold Beneficiary harmless from and against all liability threatened against or suffered by Beneficiary by reason of a breach by Grantor of the foregoing representations, warranties, covenants and agreements. The foregoing indemnity shall include the cost of all alterations to the Property (including architectural, engineering, legal and accounting costs), all fines, fees and penalties, and all legal and other expenses (including attorneys' fees) incurred in connection with the Property being in violation of any such laws, ordinances, regulations, covenants, conditions and restrictions, and for the cost of collection of the sums due under the indemnity. In the event that Beneficiary or its designee shall become the owner of or acquire an interest in or rights to the Property by foreclosure or deed in lieu of foreclosure of this Deed of Trust or by other means, the foregoing indemnification obligation shall survive such foreclosure or deed in lieu of foreclosure or other acquisition of the Property. 16. Leased Premises. Grantor shall undertake, and shall use its commercially reasonable efforts, to obtain, within sixty (60) days of the date hereof, (a) any and all required approvals by, and consents of, all landlords with respect to the assignment of leases to Beneficiary pursuant to Section 1(l) hereof, and (b) any and all subordination and non-disturbance agreements required by Beneficiary in connection with the Leased Premises, on terms and conditions reasonably satisfactory to Beneficiary. 17. Impairment of Collateral. Grantor will faithfully perform each and every covenant to be performed by Grantor under any lien or encumbrance, including, without limiting the generality hereof, mortgages, deeds of trust, leases, declarations or covenants, conditions and/or restrictions and other agreements which affect the Property, in law or in equity, which Beneficiary reasonably believes may be prior or superior to or on a parity with the lien or charge of this Deed of Trust. Grantor shall not, without Beneficiary's prior written consent, change the general nature of the occupancy of the 14 Property, initiate, acquire or permit any change in any public or private restrictions (including without limitation a zoning reclassification) limiting the uses which may be made of the Property, or take or permit any action which would impair the Collateral or Beneficiary's lien or security interest in the Collateral. A breach of or a default under any such lien or encumbrance, or a breach of any requirement of this Section 16 shall constitute an event of default under this Deed of Trust. 18. Inspection of Property. Beneficiary is authorized, by itself, its agents, employees or workmen, to enter at any reasonable time upon any part of the Property for the purpose of inspecting the same upon reasonable prior notice (except in the case of an emergency for which no prior notice need be given), and for the purpose of performing any of the acts it is authorized to perform under the terms of this Deed of Trust. Grantor agrees to cooperate with Beneficiary to facilitate such inspections. 19. Grantor's Defense of Collateral. Grantor shall appear in and defend any action or proceeding which may affect the Collateral or the rights or powers of Beneficiary or Trustee, and to pay all costs and expenses, including cost of evidence of title and attorneys' fees in a reasonable sum, in any action or proceeding in which Beneficiary and/or Trustee may appear or be made a party, including, but not limited to, foreclosure or other proceeding commenced by those claiming a right to any part of the Property under subordinate liens, in any action to partition or condemn all or part of the Property, whether or not pursued to final judgment, and in any exercise of the power of sale contained herein, whether or not the sale is actually consummated. 20. Beneficiary's Right to Protect Collateral. Beneficiary may commence, appear in, and defend any action or proceeding which may affect the Collateral or the rights or powers of Beneficiary or Trustee, and in such event, Beneficiary shall be allowed and paid all of Beneficiary's costs, charges and expenses, including cost of evidence of title and attorneys' fees incurred in such action or proceeding in which Beneficiary may appear. Beneficiary may pay, purchase, contest or compromise any encumbrance, charge or lien not listed as a Permitted Exception which in its judgment appears to be prior or superior to the lien of this Deed of Trust. If Grantor fails to make any payment or do any act required under the Loan Documents, Beneficiary, without any obligation to do so and without releasing Grantor from any obligations under the Loan Documents, may make the payment or cause the act to be performed in such manner and to such extent as Beneficiary may deem necessary to protect the Collateral. Beneficiary is authorized to enter upon the Property for such purposes. In exercising any of these powers Beneficiary may incur such expenses, in its absolute discretion, it deems necessary, including cost of evidence of title, employ an attorney, and pay said attorneys' reasonable fees. Grantor hereby agrees to pay immediately following demand, together with interest from and after ten (10) days following demand for payment at the default interest rate set forth in the Note Purchase Agreement until paid in full, all of Beneficiary's costs, charges, expenses and accounts referred to above in this Section 19, including cost of evidence of title and reasonable attorneys' fees incurred in such action or proceeding in which Beneficiary may appear. All costs, charges and expenses so incurred, together with interest thereon as aforesaid, shall be secured by the lien of this Deed of Trust. 15 21. Hazardous Substances. Grantor represents and warrants to Beneficiary that to the best of Grantor's knowledge after due and diligent inquiry, no hazardous or toxic waste or substances are being stored on the Property or any adjacent property except in strict compliance with all Environmental Laws nor have any such waste or substances been stored or used in, on, under, over or about the Property or any adjacent property prior to or during Grantor's ownership, possession or control of the Property. Grantor agrees to provide written notice to Beneficiary immediately upon Grantor becoming aware that the Property or any adjacent property is being or has been contaminated with hazardous or toxic waste or substances. Grantor will not cause nor permit any activities on the Property which directly or indirectly could result in the Property or any other property becoming contaminated with hazardous or toxic waste or substances. For purposes of this Deed of Trust, the term "hazardous or toxic waste or substances " means any substance or material defined or designated as hazardous or toxic wastes, hazardous or toxic material, hazardous, toxic or radioactive substance or other similar term by any applicable federal, state or local statute, regulation or ordinance now or hereafter in effect. 22. Insurance. (a) Grantor shall maintain insurance on the Property with premiums prepaid providing replacement cost coverage and insuring against loss by fire and such other risks covered by extended coverage insurance, flood (but only if the Property is in a federally-designated flood plain), and such other perils and risks, including loss of rents and business interruption as may be required by Beneficiary. Grantor shall also maintain commercial general liability insurance. All insurance shall be with companies satisfactory to Beneficiary and in such amounts as required by Beneficiary with lender's loss payable clauses in favor of and in form satisfactory to Beneficiary. At least thirty (30) days prior to the expiration of the term of any insurance policy, Grantor shall furnish Beneficiary with written evidence of renewal or issuance of a satisfactory replacement policy. If requested Grantor shall deliver copies of all policies to Beneficiary. If Grantor fails to maintain such insurance satisfactory to Beneficiary, Beneficiary may make the payment on behalf of Grantor and any sums expended shall be added to principal and bear interest at the default interest rate set forth in the Note Purchase Agreement. Each policy of insurance shall provide Beneficiary with no less than forty-five (45) days prior written notice of any cancellation, expiration, nonrenewal or modification. (b) In the event of any loss or damage to the Property, all Insurance Proceeds shall be payable to Beneficiary, and Grantor hereby authorizes and directs any affected insurance company to make payment of the Insurance Proceeds directly to Beneficiary. The application or release by Beneficiary of any Insurance Proceeds shall not cure or waive any default or notice of default hereunder or invalidate any act done pursuant to such notice. (c) In the event of the foreclosure of this Deed of Trust or other transfer of the title to the Property in extinguishment, in whole or in part, of the indebtedness secured hereby, all right, title and interest of Grantor in and to any insurance policy, or premiums or payments in satisfaction of claims or any other rights thereunder 16 then in force, shall pass to the purchaser or grantee notwithstanding the amount of any bid at such foreclosure sale. Nothing contained herein shall prevent accrual of interest as provided in the Note Purchase Agreement on any portion of the principal balance due under the Note Purchase Agreement until such time as the Insurance Proceeds are actually received and applied to reduce the principal balance outstanding. 23. Condemnation. Should the Property or any part thereof be taken or damaged by reason of any public improvement, condemnation proceeding, or conveyance in lieu thereof, or in any other manner, Beneficiary shall be entitled to all compensation, awards and other payments or relief therefor, and shall be entitled, at its option, to commence, appear in and prosecute in its own name any action or proceeding. Grantor shall have the right, with the prior written consent of the Beneficiary, to make a compromise or settlement in connection with such taking or damage. All such compensation, awards, damages, rights of action and proceeds (the "Condemnation Proceeds") are hereby assigned to Beneficiary, who shall, after deducting therefrom all its reasonable expenses, including attorneys' fees, apply or release the Condemnation Proceeds with the same effect as provided in Section 14 above with respect to disposition of insurance proceeds; provided, that if such Condemnation Proceeds are to be utilized for restoration of the Property and there are any excess Condemnation Proceeds after application thereof to the restoration of the Property, Beneficiary shall be entitled to apply such excess to the reduction of any indebtedness outstanding under the Note Purchase Agreement. Grantor agrees to execute such further assignments of the Condemnation Proceeds as Beneficiary may require. Nothing contained herein shall prevent the accrual of interest as provided in the Note Purchase Agreement on any portion of the Condemnation Proceeds to be applied to the principal balance due under the Note Purchase Agreement until such Condemnation Proceeds are actually received and applied. 24. Reserve Account. (a) If Beneficiary so requires, Grantor shall pay to Beneficiary monthly, together with and in addition to any payments of principal and/or interest due under the Note Purchase Agreement, a sum, as estimated by the Beneficiary, equal to the ground rents, if any, the real estate taxes and assessments next due on the Property and the premiums next due on insurance policies required under the Loan Documents, less all sums already paid therefor, divided by the number of months to elapse before two (2) months prior to the date when the ground rents, real estate taxes, assessments and insurance premiums will become delinquent. The monthly reserve account payments and any principal and/or interest payments due shall be paid in a single payment and applied by Beneficiary in the following order: (i) ground rents, real estate taxes, assessments and insurance premiums, (ii) expenditures made pursuant to the Loan Documents and interest thereon, (iii) interest on the obligations of Borrowers under Note Purchase Agreement, and (iv) principal due on the obligations of Borrowers under Note Purchase Agreement. Grantor shall promptly deliver to Beneficiary all bills and notices pertaining to the ground rents, taxes, assessments and insurance premiums. 17 (b) The reserve account is solely for the protection of Beneficiary. Beneficiary shall have no responsibility except to credit properly the sums actually received by it. No interest will be paid on the funds in the reserve account and Beneficiary shall have no obligation to deposit the funds in an interest-bearing account. Upon assignment of this Deed of Trust by Beneficiary, any funds in the reserve account shall be turned over to the assignee and any responsibility of Beneficiary with respect thereto shall terminate. Each transfer of the Property shall automatically transfer to the grantee all rights of Grantor to any funds in the reserve account. (c) If the total of the payments to the reserve exceeds the amount of payments actually made by Beneficiary, plus such amounts as have been reasonably accumulated in the reserve account toward payments to become due, such excess may, at Beneficiary's election, be (i) credited by Beneficiary against sums then due and payable under the Loan Documents or (ii) refunded to Grantor as its name appears on the records of Beneficiary. If, however, the reserve account does not have sufficient funds to make the payments when they become due, Grantor shall pay to Beneficiary the amount necessary to make up the deficiency within fifteen (15) days after written notice to Grantor. If this Deed of Trust is foreclosed or if Beneficiary otherwise acquires the Property, the Beneficiary shall, at the time of commencement of the proceedings or at the time the Property is otherwise acquired, apply the remaining funds in the reserve account, less such sums as will become due during the pendency of the proceedings, against the sums due under the Loan Documents and/or to make payments required under the Loan Documents. 25. Repayment of Beneficiary's Expenditures. Grantor shall pay within ten (10) days after written notice from Beneficiary all sums expended by Beneficiary and all costs and expenses incurred by Beneficiary in taking any actions pursuant to the Loan Documents, including attorneys' fees, accountants' fees, appraisal and inspection fees, and the costs for title reports. If any laws or regulations are passed subsequent to the date of this Deed of Trust which require Beneficiary to incur out-of-pocket expenses in order to maintain, modify, extend or foreclose this Deed of Trust, or revise the terms of the loan secured hereby, Grantor shall reimburse Beneficiary for such expenses within ten (10) days after written notice from Beneficiary. Expenditures by Beneficiary shall bear interest from the date of such advance or expenditure at the default interest rate set forth in the Note Purchase Agreement until paid, shall constitute advances made under this Deed of Trust and shall be secured by and have the same priority as the lien of this Deed of Trust. If Grantor fails to pay any such expenditures, costs and expenses and interest thereon, Beneficiary may, at its option, without foreclosing the lien of this Deed of Trust, commence an independent action against Grantor for the recovery of the expenditures and/or advance any undisbursed loan proceeds to pay the expenditures. 26. Additional Security Documents. Grantor shall within fifteen (15) days after request by Beneficiary execute and deliver any financing statement, renewal, affidavit, certificate, continuation statement, or other document as Beneficiary may request in order to perfect, preserve, continue, extend, or maintain security interests or liens previously granted and the priority of the security interests or liens. Grantor shall 18 pay all costs and expenses incurred by Beneficiary in connection with the preparation, execution, recording, filing, and refiling of any such document. 27. Conveyance of Property; Further Encumbrance. In the event that all or any part of or any interest in the Property shall be sold, transferred, leased (other than space leases without options to purchase), further encumbered, conveyed, or a contract of sale or other conveyance entered into with respect thereto, without the prior written consent of Beneficiary, then, upon the occurrence of any one or more of the foregoing events, and regardless of whether or not Grantor shall be in default under the Note Purchase Agreement or this Deed of Trust or any Loan Document, Beneficiary may, at its option, declare the then outstanding principal balance evidenced by the Note Purchase Agreement plus accrued interest thereon immediately due and payable or, at its sole option, it may consent to said conveyance or transfer in writing and may increase the rate of the loan to the interest rate which Beneficiary would then commit to make a mortgage loan to a borrower of comparable financial strength and managerial expertise, and secured by similar security of comparable value and character, and impose whatever other conditions it shall deem necessary to compensate it for such increased risk resulting from the breach of the foregoing covenants. Such increase in interest rate or imposition of additional terms shall entitle Beneficiary to increase monthly payments under the Notes so that the increased monthly installments will fully amortize the outstanding balance of the indebtedness evidenced thereby over the unexpired amortization term of the Notes. The execution and delivery by the Grantor of any joint venture agreement, partnership agreement, declaration of trust or option agreement whereunder any other person or corporation may become entitled, directly or indirectly, to the possession or enjoyment of the Property, or the income or other benefits derived or to be derived therefrom shall in each case be deemed to be a conveyance or assignment of the Grantor's interest in the Property for the purposes of this section, and shall require the prior written consent of the Beneficiary. 28. Release of Parties or Collateral. Without affecting the obligations of any party under the Loan Documents and without affecting the lien of this Deed of Trust and Beneficiary's security interest in the Collateral, Beneficiary and/or Trustee may, without notice (a) release all or any Grantor, any Borrower and/or any other party now or hereafter liable for any of the Secured Obligations (including guarantors), (b) release all or any part of the Collateral, (c) subordinate the lien of this Deed of Trust or Beneficiary's security interest in the Collateral, (d) take and/or release any other security for or guarantees of the Secured Obligations, (e) grant an extension of time for performance of the Secured Obligations, (f) modify, waive, forbear, delay or fail to enforce any of the Secured Obligations, (g) sell or otherwise realize on any other security or guaranty prior to, contemporaneously with or subsequent to a sale of all or any part of the Collateral, (h) make advances pursuant to the Loan Documents including advances in excess of the amount provided for under the Note Purchase Agreement, (i) consent to the making of any map or plat of the Property, and (j) join in the grant of any easement on the Property. Any subordinate lienholder shall be subject to all such releases, extensions or modifications without notice to or consent from the subordinate lienholder. Grantor shall pay any Trustee's, attorneys', title insurance, recording, inspection or other fees or 19 expenses incurred in connection with release of Collateral, the making of a map, plat or the grant of an easement. 29. Default--Remedies. The occurrence of any Event of Default (as defined in the Note Purchase Agreement) or Grantor's failure to comply with any term or condition of the Loan Documents, including without limitation, this Deed of Trust and payments due under the Note Purchase Agreement or other obligations secured by this Deed of Trust, shall constitute an Event of Default. Upon the occurrence of an Event of Default Beneficiary may declare all amounts owed under the Secured Obligations, and all accrued and unpaid interest and other sums in respect thereof, immediately due and payable after applicable notice as set forth herein and/or exercise its rights and remedies under the Loan Documents and applicable law including foreclosure of this Deed of Trust judicially or non judicially by the Trustee pursuant to the power of sale. In the event of any such Event of Default and upon written request of Beneficiary, Trustee shall sell the Property in accordance with the Deed of Trust Act of the state of Washington (RCW Chapter 61.24 as existing now or hereafter amended) and the Uniform Commercial Code of the state of Washington, where applicable, at public auction to the highest bidder. Any person except Trustee may bid at Trustee's sale. Trustee shall apply the proceeds of the sale as follows: (i) to the expenses of sale, including a reasonable Trustee's fee and attorneys' fee; (ii) to all the Secured Obligations (principal and interest) and all other indebtedness secured by this Deed of Trust or any other instrument, in such order and amounts as Beneficiary may elect; (iii) the surplus, if any, shall be distributed in accordance with said Deed of Trust Act. Trustee shall deliver to the purchaser at the sale its deed, without warranty, which shall convey to the purchaser the interest in the property which Grantor had or had the power to convey at the time of its execution of this Deed of Trust and such as it may have acquired thereafter. Trustee's deed shall recite the facts showing that the sale was conducted in compliance with all the requirements of the law and of this Deed of Trust, which recital shall be prima facie evidence of such compliance and conclusive evidence thereof in favor of bona fide purchasers and encumbrances for value. The power of sale conferred by this Deed of Trust and by the Deed of Trust Act of the state of Washington is not an exclusive remedy, and when not exercised Beneficiary may foreclose this Deed of Trust as a mortgage. Trustee is not obligated to notify any party hereto of pending sale under any other deed of trust or of any action or proceeding in which Grantor, Trustee or Beneficiary shall be a party, unless such action or proceeding is brought by Trustee. Beneficiary may proceed as to the Collateral which constitutes personal property in accordance with Beneficiary's rights and remedies in respect to the Property or sell the Personal Property Collateral separately and without regard to the remainder of the Property in accordance with Beneficiary's rights and remedies provided by the Washington Uniform Commercial Code as well as other rights and remedies available at law or in equity. Beneficiary's exercise of any of its rights and remedies shall not constitute a waiver or cure of a default. Beneficiary's failure to enforce any default shall not constitute a waiver of the default or any subsequent default. In the event of foreclosure, the cost of the title premium for the trustee sale guarantee (or equivalent policy) shall be paid for by Grantor. In the event the Loan Documents are referred to an 20 attorney for enforcement or preservation of Beneficiary's rights or remedies, whether or not suit is filed or any proceedings are commenced, Grantor shall pay all Beneficiary's costs and expenses including Trustee's and attorneys' fees (including attorneys' fees for any appeal, bankruptcy proceeding or any other proceeding), accountants' fees, appraisal and inspection fees and cost of a title report. 30. Cumulative Remedies. To the extent allowed by law, all Beneficiary's and Trustee's rights and remedies specified in the Loan Documents are cumulative, not mutually exclusive and not in substitution for any rights or remedies available in law or equity. In order to obtain performance of Grantor's obligations under the Loan Documents, without waiving its rights in the Collateral, Beneficiary may proceed against Grantor or any Borrower or may proceed against any other security or guaranty for the Secured Obligations, in such order and manner as Beneficiary may elect. The commencement of proceedings to enforce a particular remedy shall not preclude the discontinuance of the proceedings and the commencement of proceedings to enforce a different remedy. 31. Entry. Beneficiary, in person, by agent or by court appointed receiver, may enter, take possession of, manage and operate all or any part of the Property, and may also do any and all other things in connection with those actions that Beneficiary may in its sole discretion consider necessary and appropriate to protect the security of this Deed of Trust. Such other things may include: taking and possessing all of Grantor's or the then owner's books and records; entering into, enforcing, modifying, or canceling Leases on such terms and conditions as Beneficiary may consider proper; obtaining and evicting tenants; fixing or modifying Rents; collecting and receiving any payment of money owing to Grantor; completing any unfinished construction; and/or contracting for and making repairs and alterations. Grantor hereby irrevocably constitutes and appoints Beneficiary as its attorney-in-fact to perform such acts and execute such documents as Beneficiary in its sole discretion may consider to be appropriate in connection with taking these measures. 32. Appointment of Receiver. In the event of a default, Grantor consents to and Beneficiary shall be entitled, without notice, without bond, and without regard to the adequacy of the Collateral, to the appointment of a receiver for the Collateral. The receiver shall have, in addition to all the rights and powers customarily given to and exercised by a receiver, all the rights and powers granted to Beneficiary by the Loan Documents. The receiver shall be entitled to receive a reasonable fee for management of the Property. If Grantor is an occupant of the Property, Beneficiary has the right to require Grantor to pay rent at fair market rates and the right to remove Grantor from Property if Grantor fails to pay rent. 33. Sale of Property After Default. The Collateral may be sold separately or as a whole, at the option of Beneficiary following a default. In the event of a Trustee's sale of all the Collateral, Beneficiary hereby assigns its security interest in the personal property Collateral to the Trustee. Beneficiary may also realize on the personal property Collateral in accordance with the remedies available under the Uniform Commercial Code or at law. In the event of a Trustee's sale, Grantor, and the holder of any 21 subordinate liens or security interest with actual or constructive notice hereof, waive any equitable, statutory or other right they may have to require marshaling of assets in connection with the exercise of any of the remedies permitted by applicable law or provided herein, or to direct the order in which any of the Collateral will be sold in the event of any sale under this Deed of Trust or foreclosure in the inverse order of alienation. 34. Foreclosure of Lessee's Rights--Subordination. Beneficiary shall have the right, of its option, to foreclose this Deed of Trust subject to the rights of any lessees of the Property. Beneficiary's failure to foreclose against any lessee shall not be asserted as a claim against Beneficiary or as a defense against any claim by Beneficiary in any action or proceeding. Beneficiary at any time may subordinate this Deed of Trust to any or all of the Leases except that Beneficiary shall retain its priority claim to any condemnation or insurance proceeds. 35. Repairs During Redemption. In the event of a judicial foreclosure the purchaser during any redemption period may make such repairs and alterations to the Property as may be reasonably necessary for the proper operation, care, preservation, protection and insuring of the Property. Any sums so paid, together with interest from the date of the expenditure at the rate provided in the judgment, shall be added to the amount required to be paid for redemption of the Property. 36. Reconveyance After Payment. Upon written request of Beneficiary stating that all obligations secured by this Deed of Trust have been paid, Trustee shall reconvey, without warranty, the Property then subject to the lien of this Deed of Trust. The recitals in any reconveyance of any matters of fact shall be conclusive proof of the truthfulness thereof. The grantee in the reconveyance may be described as "the person or persons legally entitled thereto." Grantor shall pay any costs, Trustee's fees and recording fees incurred in so reconveying the Property. 37. Nonwaiver of Terms and Conditions. Time is of the essence with respect to performance of the obligations due under the Loan Documents. Beneficiary's failure to require prompt enforcement of any required obligation shall not constitute a waiver of the obligation due or any subsequent required performance of the obligation. No term or condition of the Loan Documents may be waived, modified or amended except by a written agreement signed by Grantor and Beneficiary. Any waiver of any term or condition of the Loan Documents shall apply only to the time and occasion specified in the waiver and shall not constitute a waiver of the term or condition at any subsequent time or occasion. 38. Waivers by Grantor. Without affecting any of Grantor's obligations under the Loan Documents, Grantor waives the following: (a) Any right to require Beneficiary to proceed against any specific party liable for sums due under the Loan Documents or to proceed against or exhaust any specific security for sums due under the Loan Documents. 22 (b) Diligence, demand for performance, notice of nonperformance, presentment, protest and notice of dishonor and notice of new or additional indebtedness of any Grantor, any Borrower or any other party liable for sums due under the Loan Documents to Beneficiary. (c) Any defense arising out of Beneficiary entering into additional financing or other arrangements with any Grantor, any Borrower or any party liable for sums due under the Loan Documents not relating to the Property and any action taken by Beneficiary in connection with any such financing or other arrangements or any pending financing or other arrangements not related to the Property. (d) Any defense arising out of the absence, impairment, or loss of any or all rights of recourse, reimbursement, contribution or subrogation or any other rights or remedies of Beneficiary against any Grantor, any Borrower or any other party liable for sums due under the Loan Documents or any Collateral. (e) Any obligation of Beneficiary to see to the proper use and application of any proceeds advanced pursuant to the Loan Documents. 39. Right of Subrogation. Beneficiary is subrogated to the rights, whether legal or equitable, of all beneficiaries, mortgagees, lienholders and owners directly or indirectly paid off or satisfied in whole or in part by any proceeds advanced by Beneficiary under the Loan Documents, regardless of whether these parties assigned or released of record their rights or liens upon payment. 40. Joint and Several Liability. If there is more than one Grantor of this Deed of Trust, their obligations shall be joint and several. 41. Statement of Amount Owing. Grantor upon request by Beneficiary will furnish a written statement duly acknowledged of the amount due under the Loan Documents and whether any offsets or defenses exist against the amount due. 42. Books and Records Financial Statements. Grantor will keep and maintain at Grantor's address stated above, or such other place as Beneficiary may approve in writing, books of accounts and records adequate to reflect correctly the results of the operation of the Property and copies of all written contracts, leases and other instruments which affect the Property. Such books, records, contracts, leases and other instruments shall be subject to examination, inspection and copying at any reasonable time by Beneficiary. Grantor shall provide to Beneficiary within ninety (90) days after the end of each of Grantor's fiscal years (or within twenty (20) days of Beneficiary's written request therefor if Grantor is in default), for each Grantor, each Borrower and for each guarantor of the Secured Obligations, a complete and current financial statement and copy of its most recent federal income tax return, together with a statement of income and expenses of the Property and a statement of changes in financial position with respect to the Property for the prior year, each in reasonable detail and certified by Grantor, each Borrower or guarantor, as the case may be, and if Beneficiary shall require, by an independent certified public accountant. At the same time, Grantor shall also furnish a 23 current rent roll for the Property, certified by Grantor, showing the name of each tenant, the space occupied, the lease expiration date, the monthly rent, a schedule of gross receipts for each tenant obligated to pay rent based on a percentage of receipts, the date to which rent has been paid and any deposit Grantor is holding. Grantor's compliance with these provisions shall not limit or affect Grantor's obligations to comply with financial, tax and operation covenants and reporting requirements under any other agreement between Grantor and Beneficiary whether or not such other agreement is related to the Secured Obligations. 43. Appraisals. In the event of a default Beneficiary may obtain a current appraisal of the Property which is to be paid for by Grantor. Appraisals may be commissioned by Beneficiary when required by laws and regulations which govern Beneficiary's lending practices. The cost of all such appraisals will be home by Grantor. 44. Maximum Interest Rate. If any payment of interest, fees and/or charges under the Loan Documents shall exceed the maximum amounts permitted by any applicable law of the State of Washington, then the payment made or to be made shall be reduced so that in no event shall any obligor pay or Beneficiary receive an amount in excess of the maximum amount permitted by any applicable law. If Beneficiary receives an excess amount, it shall be treated as a prepayment of principal or shall be returned to the payor, at Beneficiary's option. 45. Evasion of Prepayment Fee. If Grantor is in default, whether Beneficiary has accelerated the maturity of the indebtedness or not, any tender of payment sufficient to satisfy all sums due under the Loan Documents trade at any time prior to foreclosure sale shall constitute an evasion of the prepayment terms of the Note Purchase Agreement, if any, and shall be deemed a voluntary prepayment. Any such payment, to the extent permitted by law, shall include the additional payment required under the prepayment fee provision in the Note Purchase Agreement, if any. 46. Payment of New Taxes. If any federal, state or local law is passed subsequent to the date of this Deed of Trust which requires Beneficiary to pay any tax because of this Deed of Trust or the sums due under the Loan Documents (excluding income taxes), then Grantor shall pay to Beneficiary on demand any such taxes if it is lawful for Grantor to pay them, or, in the alternative Grantor may repay all sums due under the Loan Documents plus any prepayment fee within thirty (30) days of such demand. If it is not lawful for Grantor to pay such taxes, then at its option Beneficiary may declare a default under the Loan Documents. 47. Insolvency Proceedings. Grantor or any party liable on the Secured Obligations (including guarantors) shall not make any assignment for the benefit of creditors and shall not permit the institution of any proceedings under any federal or state statutes pertaining to bankruptcy, insolvency, arrangement, dissolution, liquidation or receivership whether or not an order for relief is entered. 24 48. Substitution of Trustee. Beneficiary may at any time discharge the Trustee and appoint a successor Trustee who shall have all of the powers of the original Trustee. 49. In-House Counsel Fees. Whenever Grantor is obligated to pay or reimburse Beneficiary or Trustee for any attorneys' fees, those fees shall include the allocated costs for services of in-house counsel. 50. Notices. Any notice given by Grantor, Trustee or Beneficiary shall be in writing and shall be effective (a) on personal delivery to the party receiving the notice, or (b) on the third day after deposit in the United States mail, postage prepaid with return receipt requested, addressed to the party at the address set forth above, or with respect to the Grantor, to the address at which Beneficiary customarily or last communicated with Grantor. 51. Time. Time is of the essence in connection with all obligations of Grantor herein. 52. Successors and Assigns. This Deed of Trust applies to, inures to the benefit of, and binds all parties hereto and their successors and assigns. The terms "Grantor," "Trustee" and "Beneficiary" include their successors and assigns. 53. Controlling Document; Definitions. In the event of a conflict or inconsistency between the terms and conditions of this Deed of Trust and the terms and conditions of any other of the Loan Documents (except for any separate assignment of rents and/or leases and any Note Purchase Agreement which shall prevail over this Deed of Trust), the terms and conditions of this Deed of Trust shall prevail. All capitalized terms not otherwise defined herein shall have the same meaning as in the Note Purchase Agreement. 54. Invalidity of Terms and Conditions. If any term or condition of this Deed of Trust is found to be invalid, the invalidity shall not affect any other term or condition of the Deed of Trust and the Deed of Trust shall be construed as if not containing the invalid term or condition. 55. Legislation Affecting Beneficiary's Rights. If enactment or expiration of applicable laws has the effect of rendering any provision of the Note Purchase Agreement or this Deed of Trust unenforceable according to its terms, Beneficiary, at its option, may require immediate payment in full of all sums secured by this Deed of Trust and may invoke any remedies permitted herein. 56. Rules of Construction. This Deed of Trust shall be construed so that, whenever applicable, the use of the singular shall include the plural, the use of the plural shall include the singular, and the use of any gender shall be applicable to all genders and shall include corporations, partnerships and limited partnerships. 25 57. Section Headlines. The headings to the various sections have been inserted for convenience of reference only and shall not be used to construe this Deed of Trust. 58. Applicable Law. This Deed of Trust shall be governed by and construed in accordance with the laws of the State of Washington. 59. Commercial Purposes. The Secured Obligations were incurred primarily for commercial, investment or business purposes and not for personal, family or household purposes. 60. Intentionally Omitted. 61. Counterpart Notice. This Deed of Trust encumbers real property situated in Chelan County and Clallam County in the State of Washington. In order to facilitate recording in each of the two counties at the same time, this Deed of Trust has been prepared in counterparts, each of which is identical to this counterpart, except that Exhibit B of this counterpart describe only the portion of the Mortgaged Property situated in the county in which this counterpart is recorded. Grantor and Beneficiary intend and agree that the two counterparts constitute one and the same deed of trust, that the lien thereof shall attach to all property encumbered thereby on execution and delivery of any one of the counterparts, and that to the extent permitted by law, foreclosure thereof may be accomplished in a single judicial or nonjudicial proceeding in any county in which any of the Mortgaged Property is located. 62. Washington State Notice. Beneficiary hereby notifies Grantor as follows: 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. 63. Prior Mortgages. If this Deed of Trust is subordinate to any other mortgage(s) or similar security document(s) on all or part of the Collateral, the following modifications shall apply hereto: 1. The following definition is added hereto: "Prior Mortgage" means the mortgage(s) or similar security document(s) of all or part of the Collateral, to which this Deed of Trust is subordinate, set forth in the title policy insuring the lien hereof together with the note(s) secured thereby and all other documents securing said note(s). 2. The following is added at the end of the Granting Clause: (m) all sums held by or under the control of the holder of the Prior Mortgage which were deposited on account of real estate taxes, insurance premiums or otherwise. 3. The following is added to the end of Section 9: 26 Grantor further represents that neither Grantor nor any of its affiliates (nor any person or entity acting on behalf of any of them) is the holder of the Prior Mortgage or any participation or other interest therein or is the owner of a legal or equitable interest in any such holder. 4. The following is added to the end of Section 14: (h) The foregoing provisions of this Section are subject to any provision of the Prior Mortgage requiring the application of insurance proceeds to restoration or requiring the payment of such proceeds to the holder of the Prior Mortgage. 5. The following is added to the end of Section 23: The foregoing provisions of this Section are subject to any provision of the Prior Mortgage requiring the application of condemnation proceeds to restoration or requiring the payment of such proceeds to the holder of the Prior Mortgage. 64. Additional Provisions Concerning Prior Mortgages. (a) Grantor shall perform or observe all covenants and conditions to be performed or observed by the Grantor or grantor under the Prior Mortgage. (b) Upon notice from Beneficiary, simultaneously with the making of each payment of principal and interest on the Prior Mortgage, Grantor shall deliver to Beneficiary a copy of the check in the amount of such payment delivered to the holder of the Prior Mortgage. Beneficiary shall have the right, exercisable by notice to Grantor, to require Grantor to make payment of principal and interest on the Prior Mortgage through Beneficiary and, if Beneficiary exercises such right, Grantor shall deliver to Beneficiary a check in the amount of each installment of such principal and interest, payable to the order of the holder of the Prior Mortgage, not later than three (3) days prior to the due date thereof and Beneficiary shall promptly forward such check to said holder. (c) Grantor hereby irrevocably designates Beneficiary its agent and attorney-in-fact to perform or observe on behalf of Grantor any covenant or condition which Grantor fails to perform or observe under the Prior Mortgage within any applicable grace period specified in the Prior Mortgage, and any advances made by Beneficiary in connection with such performance or observance shall be repaid by Grantor on demand with interest at the default interest rate set forth in the Note Purchase Agreement and the amount so advanced, with interest, shall be secured hereby. Beneficiary shall have the right, but not the obligation, to so perform or so observe. The performance or observance of such covenant or condition by Beneficiary shall not prevent Grantor's failure to so perform or observe from constituting an Event of Default. In performing or observing any such covenant or condition, Beneficiary shall have the right to enter upon the Collateral. Upon receipt by Beneficiary from the holder of the Prior Mortgage of any notice of default under the Prior Mortgage, Beneficiary may rely thereon and take any 27 action permitted by this Section to remedy such default notwithstanding that the existence of such default or the nature thereof may be questioned or denied by Grantor. (d) Grantor shall not enter into any modification, amendment or supplement to the Prior Mortgage nor acquire, whether directly or indirectly, any interest whatsoever in the Prior Mortgage. 28 The undersigned Grantor requests that a copy of any notices, including but not limited to any Notice of Sale, be mailed to it at the address herein before set forth. PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington corporation By: /s/ Donald A. Wright ------------------------------------------------ Name: Donald A. Wright Title: President and Chief Executive Officer CASHMERE MANUFACTURING CO., INC., a Washington corporation By: /s/ Donald A. Wright ------------------------------------------------ Name: Donald A. Wright Title: Executive Vice President NORTHWEST TECHNICAL INDUSTRIES, INC., a Washington corporation By: /s/ Donald A. Wright ------------------------------------------------ Name: Donald A. Wright Title: Executive Vice President STATE OF WASHINGTON ) )ss. COUNTY OF KING ) I certify that I know or have satisfactory evidence that Donald A. Wright is the person who appeared before me, and said person acknowledged that he/she signed this instrument, on oath stated that he/she was authorized to execute the instrument and acknowledged it as the President and Chief Executive Officer of PACIFIC AEROSPACE & ELECTRONICS, INC. to be the free and voluntary act of such party for the uses and purposes mentioned in the instrument. Dated: March 15, 2002 Notary Public: /s/ Susan R. Benson Print Name: Susan R. Benson My commission expires: October 11, 2002 (Use this space for notarial stamp/seal) STATE OF WASHINGTON ) )ss. COUNTY OF KING ) I certify that I know or have satisfactory evidence that Donald A. Wright is the person who appeared before me, and said person acknowledged that he/she signed this instrument, on oath stated that he/she was authorized to execute the instrument and acknowledged it as the Executive Vice President of CASHMERE MANUFACTURING CO., INC. to be the free and voluntary act of such party for the uses and purposes mentioned in the instrument. Dated: March 15, 2002 Notary Public: /s/ Susan R. Benson Print Name: Susan R. Benson My commission expires: October 11, 2002 (Use this space for notarial stamp/seal) STATE OF WASHINGTON ) )ss. COUNTY OF KING ) I certify that I know or have satisfactory evidence that Donald A. Wright is the person who appeared before me, and said person acknowledged that he/she signed this instrument, on oath stated that he/she was authorized to execute the instrument and acknowledged it as the Executive Vice President of NORTHWEST TECHNICAL INDUSTRIES, INC. to be the free and voluntary act of such party for the uses and purposes mentioned in the instrument. Dated: March 15, 2002 Notary Public: /s/ Susan R. Benson Print Name: Susan R. Benson My commission expires: October 11, 2002 (Use this space for notarial stamp/seal) EXHIBIT B Legal Description of Property That portion of the East half of the West half of Section 20, Township 30 North, Range 2 West, W.M., Clallam County, Washington, described as follows: Beginning at a portion which is the Northeast corner of the Northwest quarter of said Section 20; Thence South along the North-South center line of said Section 20 of a distance of 1,403 feet to the TRUE POINT OF BEGINNING of this description; Thence continuing South along said center line 2,755 feet to the intersection of the Northerly right of way boundary of the existing road designated as the DNR P-1200 Road; Thence North 68 degrees 00 minutes West along said boundary 615 feet; Thence North, parallel to said North-South center line, 2,525 feet; Thence East, parallel to the North East-West center line of said Section 20, a distance of 577.5 feet, more or less, to the TRUE POINT OF BEGINNING. EXHIBIT D Leases (1) Lease Agreement, Cashmere Manufacturing, Inc. 1994, dated November 4, 1994, between Port of Chelan County and Cashmere Manufacturing Co., Inc. (2) Lease Agreement, Pacific Coast Technologies, Inc. 1993, dated February 1, 1993, between Port of Chelan County and Pacific Coast Technologies, Inc. (3) Lease Agreement 1999, dated December 30, 1998, between Port of Chelan County and Pacific Aerospace & Electronics, Inc., as amended by that certain First Addendum to 1999 Lease, dated November 21, 2001, between Port of Chelan County and Pacific Aerospace & Electronics, Inc. (4) Lease Agreement - PA&E IB#9 2000, dated July 13, 2000, between Port of Chelan County and Pacific Aerospace & Electronics, Inc. (5) Lease Agreement, dated March 31, 1994, between Erickson Realty, Ltd. and Electronic Specialty Corporation. (6) Lease, dated April 3, 1998, between Sea-Land Development Corporation and Skagit Engineering & Manufacturing, Inc., as amended by that certain Amendment to Lease, dated June 19, 2000, between Sea-Land Development Corporation and Skagit Engineering & Manufacturing, Inc., as amended by that certain Amendment to Lease, dated January 25, 2002, between Sea-Land Development Corporation and Skagit Engineering & Manufacturing, Inc., as amended by that certain Amendment to Lease, dated January 31, 2002, Sea-Land Development Corporation and Skagit Engineering & Manufacturing, Inc. (7) Lease Agreement, dated June 2, 2000, between 220TH Street, LLC and Skagit Engineering Manufacturing, Inc. (d/b/a Pacific Aerospace Electronics, Inc. - Engineering & Fabrication Division). (8) Lease Agreement, dated August 6, 2001, between Pacific Aerospace & Electronics, Inc. and North Central Educational Service District, as amended by that certain Amendment No. 1 to Lease Agreement, dated December 17, 2001, between Pacific Aerospace & Electronics, Inc. and North Central Educational Service District. EXHIBIT E Encumbrances 1. Property described in Exhibit A, as to Certain Equipment: (a) Master Equipment Lease Agreement, dated as of May 27, 1999, between KeyCorp Leasing, A Division of Key Corporate Capital Inc., as Lessor, and Pacific Aerospace & Electronics, Inc., as Lessee, as amended by Equipment Schedule No. 02, dated as of June 14, 1999, between KeyCorp Leasing, A Division of Key Corporate Capital Inc. and Pacific Aerospace & Electronics, Inc., with a total cost of $233,443.08. 2. Lease Agreement, Pacific Coast Technologies, Inc. 1993, dated February 1, 1993, between Port of Chelan County and Pacific Coast Technologies, Inc.: (a) Commercial Security Agreement between Pacific Aerospace & Electronics, Inc., as Borrower, Pacific Coast Technologies, Inc., as Grantor, and KeyBank National Association, as Lender, securing the Promissory Note between Pacific Aerospace & Electronics, Inc. and KeyBank National Association in principal amount of $712,085.00, and (b) UCC-2 fixture filing between Pacific Coast Technologies, Inc., as Debtor, and KeyBank National Association, as Secured Party, dated March 18, 1998. EX-10.5 10 f80483ex10-5.txt EXHIBIT 10.5 EXHIBIT 10.5 After Recording Return To: Dewey Ballantine LLP 1301 Avenue of the Americas New York, New York 10019 Attention: Val A. Soupios, Esq. DEED OF TRUST, SECURITY AGREEMENT AND FIXTURE FILING WITH ASSIGNMENT OF LEASES AND RENTS GRANTOR: 1. PACIFIC AEROSPACE & ELECTRONICS, INC. 2. CASHMERE MANUFACTURING CO., INC. 3. NORTHWEST TECHNICAL INDUSTRIES, INC. GRANTEE: 1. FIRST UNION NATIONAL BANK, as collateral agent for Holders listed on Schedule A to Note Purchase Agreement (Beneficiary) 2. LAND TITLE COMPANY OF CHELAN -- DOUGLAS COUNTY, INC. (Trustee) Legal Description: Abbreviated form: Units 1-4 Confluence Pk Condo (Exhibit A) Portion of East half of West half of Section 20, Township 30 North, Range 2 West, Clallam County, Washington (Exhibit B) Lts 6-14, Block 1, Steward's Plat of Mission & ptn lot 16 & Lts 17-18 JF Woodring's Plat of Mission (Exhibit C) Additional legal on Exhibits A- C of document Assessor's Property Tax Parcel Account Number(s): 23-20-28-525-010 (Unit 1, Exhibit A) 23-20-28-525-020 (Unit 2, Exhibit A) 23-20-28-525-030 (Unit 3, Exhibit A) 23-20-28-525-040 (Unit 4, Exhibit A) 023020-31000 (Exhibit B) 23-19-04-850-065 (Portion of Exhibit C) 23-19-04-850-065 (Balance of Exhibit C) Reference number(s) of Related Document(s): 2 DEED OF TRUST, SECURITY AGREEMENT AND FIXTURE FILING WITH ASSIGNMENT OF LEASES AND RENTS THIS DEED OF TRUST is made this 25th day of March, 2002, between PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington corporation, CASHMERE MANUFACTURING CO., INC., a Washington corporation, and NORTHWEST TECHNICAL INDUSTRIES, INC., a Washington corporation (individually and collectively, as Grantor), whose address is 430 Olds Station Road, Wenatchee, Washington 98020 to LAND TITLE COMPANY OF CHELAN - DOUGLAS COUNTY, INC., as Trustee, whose address is 16 South Mission Street, P.O. Box 1726, Wenatchee, Washington 98807-1726 to FIRST UNION NATIONAL BANK, as collateral agent for the holders set forth on Schedule A (each a "Holder" and collectively the "Holders") to that certain Note Purchase Agreement dated as of March 19, 2002 (the "Note Purchase Agreement") by and among Pacific Aerospace & Electronics, Inc., a Washington corporation ("Grantor"), Jefferies & Company, Inc. ("Initial Purchaser") and First Union National Bank, as Collateral Agent ("Agent" or "Beneficiary") whose address is 401 South Tryon Street - Suite 1200, Mail Code NC-1179, Charlotte, North Carolina 28202. 1. Granting Clause. Grantor irrevocably grants, bargains, sells and conveys to Trustee and its successors and assigns in trust, with power of sale and with right of entry and possession as provided herein, all of Grantor's estate, right, title, interest, claim and demand, now owned or hereafter acquired, in and to the following: (a) The property in Chelan and Clallam Counties, Washington, described in Exhibits "A" -- "C" attached hereto and incorporated herein by this reference (individually and collectively, the "Property" which term shall include all or any part of the Property, any improvements thereon and all of the property described in this Section 1). (b) All land lying in streets and roads adjoining the Property, and all access rights and easements pertaining to the Property. (c) All the lands, tenements, privileges, reversions, remainders, irrigation and water rights and stock, oil and gas rights, royalties, minerals and mineral rights, all development rights and credits, air rights, hereditaments and appurtenances belonging or in any way pertaining to the Property. (d) All buildings, structures, improvements, fixtures, equipment and machinery and property now or hereafter attached to or used in connection with the use, occupancy or operation of the Property including, but not limited to, heating and incinerating apparatus and equipment, boilers, engines, motors, generating equipment, telephone and other communication systems, piping and plumbing fixtures, ranges, cooking apparatus and mechanical kitchen equipment, refrigerators, cooling, ventilating, sprinkling and vacuum cleaning systems, fire extinguishing apparatus, gas and electric fixtures, irrigation equipment, carpeting, underpadding, elevators, escalators, partitions, mantles, built-in mirrors, window shades, blinds, screens, storm sash, awnings, furnishings of public spaces, halls and lobbies, and shrubbery and plants. All property mentioned in this subsection 1(d) shall be deemed part of the realty and not severable wholly or in part without material injury to the Property. (e) All rents, royalties, issues, profits, revenue, income, recoveries, reimbursements and other benefits of the Property, all existing and future leases of the Property (including extensions, renewals and subleases), all agreements for use and occupancy of the Property (all such leases and agreements whether written or oral, are hereafter referred to as the "Leases"), and all right, title and interest of Grantor thereunder, including, without limitation, all guaranties of lessees' performance under the Leases, together with the immediate and continuing right to collect and receive all of the rents, income, receipts, revenues, issues, profits and other income of any nature now or hereafter due (including any income of any nature coming due during any redemption period) under the Leases or from or arising out of the Property including minimum rents, additional rents, percentage rents, parking or common area maintenance contributions, tax and insurance contributions, deficiency rents, liquidated damages following default in any Lease, all proceeds payable under any policy of insurance covering loss of rents resulting from untenantability caused by destruction or damage to the Property, all proceeds payable as a result of exercise of an option to purchase the Property, all proceeds derived from the termination or rejection of any Lease in a bankruptcy or other insolvency proceeding, all security deposits or other deposits for the performance of any lessee's obligations under the Leases, and all proceeds from any rights and claims of any kind which Grantor may have against any lessee under the Leases or any occupants of the Property (all of the above are hereafter collectively referred to as the "Rents"). This subsection 1(e) is in addition to other provisions of this Deed of Trust providing for the assignment of rents and leases to Beneficiary, and is subject to the right, power and authority given to the Beneficiary in Section 7 hereof to collect and apply the Rents. (f) All of Grantor's rights to further encumber said Property for debt and all Grantor's rights to enter into any lease agreement which would create a tenancy that is or may become subordinate in any respect to any mortgage or deed of trust other than this Deed of Trust. (g) All reciprocal easement agreements, declarations, development agreements, developer's or utility agreements, and any similar such agreements or declarations now or hereafter affecting the Collateral (as defined below) or any part thereof. (h) All (a) development work product prepared in connection with the Collateral, including, but not limited to, engineering, drainage, traffic, soil and other studies and tests; water, sewer, gas, electrical and telephone approvals, taps and connections; surveys, drawings, plans and specifications; and subdivision, zoning and platting materials; (b) building and other permits, rights, licenses and approvals relating to the Collateral; (c) contracts and agreements (including, without limitation, contracts with architects and engineers, construction contracts and contracts for the maintenance, management or leasing of the Collateral), contract rights, logos, trademarks, trade names, 2 copyrights and other general intangibles used or useful in connection with the ownership, operation or occupancy of the Collateral or any part thereof; (d) financing commitments (debt or equity) issued to Grantor in respect of the Collateral and all amounts payable to Grantor thereunder; (e) contracts for the sale of all or any portion of the Collateral, and all amounts payable by the purchasers thereunder; (f) operating and other bank accounts, and monies therein, of Grantor relating to the Collateral, including, without limitation, any accounts relating to real estate taxes or assessments; (g) interest rate protection agreements entered into by Grantor in respect of the loan, whether pursuant to the Note Purchase Agreement or otherwise; and (h) commercial tort claims related to the Collateral. (i) All rights of Grantor under promissory notes, letters of credit, electronic chattel paper, proceeds from accounts, payment intangibles, and general intangibles related to the Collateral, as the terms "accounts", "general intangibles", and "payment intangibles" are defined in the applicable Uniform Commercial Code Article 9, as the same may be modified or amended from time to time. (j) All other assets of Grantor related in any way to the Collateral, subject to certain limitations that may be set forth herein. (k) All proceeds of the conversion, voluntary or involuntary, of any of the foregoing into cash or liquidated claims, including, without limitation, proceeds of insurance and condemnation awards, and all rights of Grantor to refunds of real estate taxes and assessments. (l) All of Grantor's right, title and interest, as lessee, in, to and under the leases listed on Exhibit D hereto (the "Leased Property"), subject to Grantor's obtaining any required approvals by Landlord. The Property is not used principally or primarily for agricultural purposes. 2. Collateral. The following described estate, property and rights of Grantor are also included as security for the performance of each covenant and agreement of Grantor contained herein and the payment of all sums of money secured hereby: (a) All furniture, furnishings, appliances, machinery, vehicles, equipment and all other property of any kind now or hereafter located on the Property, used or intended to be used on the Property wherever actually located, or purchased with the proceeds of the Notes (as defined herein), and all rights of Grantor as lessee of any property described in this Section 2 and subsection 1(d) above. (b) All compensation, awards, damages, rights of action and proceeds (including insurance proceeds and any interest on any of the foregoing) arising out of or relating to a taking or damaging of the Property by reason of any public or private improvement, condemnation proceeding (including change of grade), fire, earthquake or other casualty, injury or decrease in the value of the Property. 3 (c) All returned premiums or other payments on any insurance policies pertaining to the Property and any refunds or rebates of taxes or assessments on the Property. (d) All rights to the payment of money, accounts receivable, deferred payments, refunds, cost savings, payments and deposits, whether now or later to be received from third parties (including all utility deposits), architectural and engineering plans, specifications and drawings, contract rights, governmental permits and licenses, and agreements and purchase orders which pertain to or are incidental to the design or construction of any improvements on the Property, Grantor's rights under any payment, performance, or other bond in connection with construction of improvements on the Property, and all construction materials, supplies, and equipment delivered to the Property or intended to be used in connection with the construction of improvements on the Property wherever actually located. (e) All contracts and agreements pertaining to or affecting the Property including, but not limited to, management, operating and franchise agreements, licenses, trade names and trademarks. (f) All of Grantor's interest in and to the loan account, the loan funds, whether disbursed or not, and Grantor's own funds now or later to be held on deposit as equity funds or for payment of bills relating to the Property. (g) All commitments or agreements, now or hereafter in existence, which will provide Grantor with proceeds to satisfy the Secured Obligations (defined below) and the right to receive the proceeds due under such commitments or agreements including refundable deposits and fees. (h) All books and records pertaining to any and all of the property described above, including computerreadable memory and any computer hardware or software necessary to access and process such memory. (i) All additions, accessions, replacements, substitutions, proceeds and products of the property described in this Section 2 and of any of the Property which is personal property. The Property and all of the property and rights described in Section 1 and 2 are referred to herein collectively as the "Collateral." 3. Security Agreement. To the extent that any of the Collateral may be determined to be personal property, Grantor as debtor hereby grants Holders and Beneficiary as agent for the Holders as secured party a security interest in all such personal property or fixtures to secure payment and performance of the Secured Obligations (defined below). This Deed of Trust constitutes a security agreement, a financing statement and fixture filing pursuant to the Uniform Commercial Code with respect to any and all property now or hereafter described in any Uniform Commercial Code Financing Statement naming Grantor as Debtor and Beneficiary as Secured Party affecting or related to the use and enjoyment of the Property. Grantor agrees that it will 4 not terminate or amend any financing statements filed in connection with the Secured Obligations (as hereinafter defined) without Beneficiary's prior consent. The remedies for any violation of the covenants, terms and conditions of the agreements herein contained shall be (a) as prescribed herein, or (b) by general law, or (c) as to such part of the security which is also reflected in any such Financing Statement by the specific statutory consequences now or hereafter enacted and specified in the Uniform Commercial Code, all at Beneficiary's sole election. Grantor and Beneficiary agree that the filing of such a Financing Statement in the records normally having to do with personal property shall never be construed as in anywise derogating from or impairing this declaration and hereby stated intention of the parties hereto, that everything used in connection with the production of income from the property that is the subject of this Deed of Trust and/or adapted for use therein and/or which is described or reflected in this Deed of Trust is, and at all times and for all purposes and in all proceedings both legal or equitable shall be, regarded as part of the real estate irrespective of whether (a) any such item is physically attached to the improvements, (b) serial numbers are used for the better identification of certain equipment items capable of being thus identified in any list filed with the Beneficiary, or (c) any such item is referred to or reflected in any such Financing Statement so filed at any time. 4. Financing Statement. This Deed of Trust shall also serve as a financing statement filed for record in the real estate records as a fixture filing pursuant to the Uniform Commercial Code. This Deed of Trust may be given to secure an obligation incurred to refinance an obligation incurred for the construction of an improvement on the Property, including the acquisition of the Property. 5. Obligations Secured. THIS DEED OF TRUST IS FOR THE PURPOSE OF SECURING the following ("Secured Obligations"): (a) Payment of the sum of up to THIRTY-SIX MILLION DOLLARS ($36,000,000) or so much thereof with interest thereon as shall be evidenced by all notes described in the Note Purchase Agreement or other instruments evidencing the indebtedness secured by this Deed of Trust including all renewals, amendments, modifications or extensions thereof and substitutions therefor. (b) Payment of any further sums now or hereafter advanced or loaned by Beneficiary or Holders (including any assignee of Beneficiary or Holders) to any Borrower under the Note Purchase Agreement or any of their successors or assigns, and payment of every other present and future obligation owing by any Borrower to Beneficiary or Holders (or any such assignee) of any kind, and all renewals, modifications, and extensions thereof, including any interest, fees, costs, service charges and expenses connected with such obligations (this Deed of Trust, the Note Purchase Agreement and all such other documents, evidencing or securing the loan are hereafter collectively referred to as the "Loan Documents") together with interest thereon at the rate set forth in the Note Purchase Agreement unless otherwise specified in the Loan Documents or agreed to in writing. 5 (c) Performance of each agreement, term and condition set forth or incorporated by reference in the Loan Documents, as such may be amended, including without limitation the Note Purchase Agreement, which are incorporated herein by reference, or contained herein. 6. Performance of Obligations. Grantor shall promptly and timely pay all sums due pursuant to the Loan Documents, strictly comply with all the terms and conditions of the Loan Documents, and perform each Secured Obligation in accordance with its terms. 7. Assignment of Rents and Leases. Grantor hereby absolutely and irrevocably assigns to Beneficiary all Grantor's interest in the Rents and Leases whether now due, past due or to become due, and hereby gives to and confers upon Beneficiary the right, power and authority to collect such Rents and proceeds, and Grantor, without limiting the generality of the Granting Clause hereof, specifically hereby presently, absolutely, unconditionally and irrevocably assigns, transfers and sets over all of the Rents now or hereafter accruing to Beneficiary. Grantor irrevocably appoints Beneficiary its true and lawful attorney at the option of Beneficiary at any time to demand, receive and enforce payment, to give receipts, releases and satisfactions, and to sue, either in the name of Grantor or in the name of Beneficiary, for all such Rents and proceeds. It is understood and agreed that neither the foregoing assignment of Rents and proceeds to Beneficiary nor the exercise by Beneficiary of any of its rights or remedies under this Deed of Trust shall be deemed to make Beneficiary a "mortgagee-in-possession" or otherwise responsible or liable in any manner with respect to the Property or the use, occupancy or enjoyment or operation of all or any portion thereof, unless and until Beneficiary, in person or by agent, assumes actual possession thereof; nor shall appointment of a receiver for the Property by any court at the request of Beneficiary or by agreement with Grantor or the entering into possession of the Property or any part thereof by such receiver be deemed to make Beneficiary a "mortgagee-in-possession" or otherwise responsible or liable in any manner with respect to the Property or the use, occupancy, enjoyment or operation of all or any portion thereof. This assignment is intended to be specific, perfected and choate upon the recording of this Deed of Trust as provided in RCW 7.28.230. This assignment shall be subject to the terms and conditions of any separate assignment of leases and/or rents, whenever executed, in favor of Beneficiary and covering the Property. Grantor warrants that it has made no prior assignment of the Rents or Leases and will make no subsequent assignment without the prior written consent of Beneficiary. (a) Unless otherwise provided in any separate assignment of leases and/or rents, and so long as Grantor is not in default under the Loan Documents, Grantor may collect the Rents as they become due and not more than one (1) month in advance. Grantor shall use the Rents to pay normal operating expenses for the Property and sums due and payments required under the Loan Documents. No Rents shall be collected for a period subsequent to the current one month rental period and first or last month's rent. Grantor's right to collect the Rents shall not constitute Beneficiary's consent to the use of cash collateral in any bankruptcy proceeding. 6 (b) If Grantor is in default under the Loan Documents, without notice to Grantor, Beneficiary or its agents, or a court appointed receiver, may collect the Rents. In doing so, Beneficiary may (i) evict lessees for nonpayment of rent, (ii) terminate in any lawful manner any tenancy or occupancy, (iii) lease the Property in the name of the then owner on such terms as it may deem best and (iv) institute proceedings against any lessee for past due Rents. The Rents received shall be applied to payment of the costs and expenses of collecting the Rents, including a reasonable fee to Beneficiary, a receiver or an agent, operating expenses for the Property and any sums due or payments required under the Loan Documents, in such order as Beneficiary may determine. Any excess shall be paid to Grantor, however, Beneficiary may withhold from any excess a reasonable amount to pay sums anticipated to become due which exceed the anticipated future Rents. Beneficiary's failure to collect or discontinuing collection at any time shall not in any manner affect the subsequent enforcement by Beneficiary of its rights to collect the Rents. Except in the case of a full reinstatement of the Secured Obligations, the collection of the Rents shall not cure or waive any default under the Loan Documents. Any Rents paid to Beneficiary or a receiver shall be credited against the amount due from the lessees under the Leases. In the event any lessee under the Leases becomes the subject of any proceeding under the Bankruptcy Code or any other federal, state or local statute which provides for the possible termination or rejection of the Leases assigned hereby, Grantor covenants and agrees that in the event any of the Leases are so rejected, no damages settlement shall be made without the prior written consent of Beneficiary; any check in payment of damages for rejection or termination of any such Lease will be made payable both to the Grantor and Beneficiary; and Grantor hereby assigns any such payment to Beneficiary and further covenants and agrees that upon request of Beneficiary, it will duly endorse to the order of Beneficiary any such check, the proceeds of which will be applied to any portion of the indebtedness secured hereunder in such manner as Beneficiary may elect. (c) Regardless of whether or not Beneficiary, in person or by agent, takes actual possession of the Property or any part thereof, Beneficiary is not and shall not be deemed to be: (i) "a mortgagee in possession" for any purpose; or (ii) responsible for performing any of the obligations of the lessor under any Lease; or (iii) responsible for any waste committed by lessees or any other parties, any dangerous or defective condition of the Property, or any negligence in the management, upkeep, repair or control of the Property; or (iv) liable in any manner for the Property or the use, occupancy, enjoyment or operation of all or any part of it. In exercising its rights under this Section Beneficiary shall be liable only for the proper application of and accounting for the Rents collected by Beneficiary or its agents. 7 8. Leases. (a) Grantor shall fully comply with all of the terms, conditions and provisions of the Leases so that the same shall not become in default and to do all that is needful to preserve all said Leases in force. With respect to any Lease of the whole or any part of the Property, Grantor shall not, without the prior written consent of Beneficiary, which consent shall not be unreasonably withheld, (i) permit assignment or subletting of all or part of the lessee's rights under the Lease unless the right to assign or sublet is expressly reserved by the lessee under the Lease, (ii) execute an assignment of the rents or any part thereof from the Collateral without Beneficiary's prior consent, (iii) modify or amend any lease so as to shorten the unexpired term thereof or so as to decrease, waive or compromise in any manner the amount of rents payable thereunder or materially expand the obligations of the lessor thereunder, (iv) accept surrender of the Lease or terminate the Lease except in accordance with the terms of the Lease providing for termination in the event of a default, (v) accept prepayments of any installments of rents to become due under such leases, except prepayments in the nature of security for the performance of the lessees thereunder, (vi) modify, release or terminate any guaranties of any such lease or (vii) in any other manner impair the value of the Property or the security hereof. Any proceeds or damages resulting from a lessee's default under any such Lease, at Beneficiary's option, shall be paid to Beneficiary and applied against sums owed under the Loan Documents even though such sums may not be due and payable. Except for non-delinquent real estate taxes and assessments, Grantor shall not permit any lien to be created against the Property which may be or may become prior to any Lease. If the Property is partially condemned or suffers a casualty, Grantor shall promptly repair and restore the Property in order to comply with the Leases. (b) Grantor will not execute any lease of all or a substantial portion of the Property except for actual occupancy by the lessee thereunder, and will at all times promptly and faithfully perform, or cause to be performed, all of the covenants, conditions and agreements contained in all leases of the Property or portions thereof now or hereafter existing, on the part of the lessor thereunder to be kept and performed and will at all times do all things necessary to compel performance by the lessee under each lease of all obligations, covenants and agreements by such lessee to be performed thereunder. If any of such leases provide for the giving by the lessee of certificates with respect to the status of such leases, Grantor shall exercise its right to request such certificates within five (5) days of any demand therefor by Beneficiary and shall deliver copies thereof to Beneficiary promptly upon receipt. (c) Each lease of the Property, or of any part thereof, executed after the date hereof, shall provide that, in the event of the enforcement by Trustee or Beneficiary of the remedies provided for hereby or by law, the lessee thereunder will, upon request of any person succeeding to the interest of Grantor as a result of such enforcement, automatically become the lessee of said successor in interest, without change in the terms or other provisions of such lease, provided, however, that said successor in interest shall not be bound by (i) any payment of rent or additional rent for more than one (1) month in advance, except prepayments in the nature of security for the performance by said lessee of its obligations under said lease or (ii) any amendment or 8 modification of the lease made without the consent of Beneficiary or such successor in interest. Each lease shall also provide that, (x) the lease is subordinate to this Deed (but shall also provide that Beneficiary, at its option, may subordinate this Deed to such lease) and (y) upon request by said successor in interest, such lessee shall execute and deliver an instrument or instruments confirming such attornment. (d) Grantor shall furnish to Beneficiary upon request, but not more than semi-annually, a certified leasing status report in respect of the Property and a certified rent roll containing the names of all lessees of the Property, the terms of their respective leases, the space occupied and the rentals payable thereunder, together with copies, certified to be true and complete, of such leases as may be requested by Beneficiary. (e) Grantor shall, promptly upon Beneficiary's request, deposit all tenant security deposits in respect of the Property into an account with Beneficiary or as designated by Beneficiary, which deposits shall be held and disbursed to tenants as required under the terms of their respective leases. 9. Warranty of Title. Grantor warrants that it (i) has good and marketable title to an indefeasible fee simple estate in the Property, unless Grantor's present interest in the Property is described in Exhibits A through C as a leasehold interest, in which case Grantor warrants that it lawfully possesses and holds a valid leasehold interest in the Property as stated in Exhibits A through C, (ii) has good and marketable title to the personal property Collateral, and (iii) holds a valid leasehold interest as tenant under the leases described in Exhibit D, and that said leases are prior to all liens, charges and encumbrances on the lessor's interest thereunder, subject, in each case, to no liens, encumbrances, easements, assessments, security interests, claims or defects of any kind prior or subordinate to the lien of this Deed of Trust, except those listed in Beneficiary's title insurance policy, listed on Exhibit E hereto, or approved by Beneficiary in writing (the "Permitted Exceptions") and real estate taxes for the current year. Grantor warrants that the Permitted Exceptions and the real estate taxes are not delinquent or in default, and that Grantor has the right to convey the Property to Trustee for the benefit of Beneficiary, and the right to grant a security interest in the personal property Collateral. Grantor has the full power and authority to subject the Property to the lien hereof in the manner and form herein done and intended hereafter to be done. Grantor will preserve such title, and Grantor will forever warrant and defend title to the Collateral and will defend the validity and priority of the lien of this Deed of Trust and the security interest granted herein against any claims or demands. 10. Prohibited Liens. (a) Grantor shall not permit any governmental or statutory liens (including tax, mechanic's or materialmen's liens) to be filed against the Property except for real estate taxes and assessments not yet delinquent by non-payment and liens permitted by the Loan Documents or approved by Beneficiary in writing. Grantor will pay, from time to time when the same shall become due, all lawful claims and demands of mechanics, materialmen, laborers, and others which, if unpaid, might result in, or 9 permit the creation of, a lien on the Property or any part thereof, and in general will do or cause to be done everything necessary so that the lien and effect hereof shall be fully preserved, at the cost of Grantor and without expense to Trustee or Beneficiary. (b) Grantor will have the right to contest in good faith by an appropriate legal or administrative proceeding the validity of any prohibited lien, encumbrance or charge so long as (i) no default exists under the Loan Documents, (ii) Grantor first deposits with Beneficiary a bond or other security satisfactory to Beneficiary in the amount reasonably required by Beneficiary, but not more than one and one--half (1 1/2) (i.e., 150%) of the amount of the claim; (iii) Grantor immediately commences its contest of such lien, provided, however, that within twenty (20) days after the filing of such lien Grantor discharges said lien of record or records a bond which complies with the requirements of RCW 60.04.161 eliminating such lien as an encumbrance on the Property, and continuously pursues the contest in good faith and with due diligence; (iv) foreclosure of the lien, encumbrance or charge is stayed; and (v) Grantor pays any judgment rendered for the lien claimant or other third party within ten (10) days after the entry of the judgment. If the contested item is a mechanic's or materialmen's lien, Grantor will furnish Beneficiary with an endorsement to its title insurance policy which insures the priority of this Deed of Trust over the lien being contested. Grantor will discharge or elect to contest and post an appropriate bond or other security within twenty (20) days of written demand by Beneficiary. 11. Payment of Taxes and Other Encumbrances. Grantor will pay when due: (a) All taxes, assessments and other governmental or public charges affecting the Property, including assessments on appurtenant water stock, and any accrued interest, cost and/or penalty thereon and upon request by Beneficiary will submit receipts therefor to Beneficiary promptly following payment; (b) All encumbrances (including any debt secured by deeds of trust), ground rents, liens and/or charges, with interest, on the Property or any part thereof which appear to be prior, superior or on a parity hereto, and all costs and fees related thereto; (c) All charges for utilities or services, including, but not limited to, electricity, gas, sewer and water; (d) All costs, fees and expenses of this Deed of Trust, including cost of evidence of title, Trustee's fees and attorneys' fees in connection with sale pursuant to this Deed of Trust (whether completed or not) together with interest from and after ten (10) days following demand for repayment at the default interest rate set forth in the Note Purchase Agreement until paid in full. 12. Maintenance -- No Waste. (a) Keep the Property in good condition and repair and not commit or permit any waste or deterioration of the Property; 10 (b) Not remove, demolish or substantially alter any portion of the Property, except as approved in writing by Beneficiary and except such alterations as may be required by laws, ordinances or regulations of governmental authorities; (c) Comply with all laws, ordinances, rules, regulations and orders of governmental authorities now or hereafter affecting the Property or requiring any alterations or improvements to be made thereon, and perform all of its obligations under any covenant, condition, restriction or agreement of record affecting the Property; (d) Complete promptly and in good and workmanlike manner any portion of the Property which may be constructed hereafter, and promptly restore in like manner as obligated in Section 14, any portion of the Property which may be damaged or destroyed, and pay, when due, all costs incurred and claims for labor performed and materials furnished therefor; (e) Not commit, suffer or permit any act to be done in, upon or to the Property in violation of any law or ordinance or any covenant, condition or restriction affecting the Property; (f) Do any and all acts which, from the character or use of the Property, may be reasonably necessary to protect and preserve the security of Beneficiary, the specific enumerations herein not excluding the general; (g) Not permit any construction liens against the Property; (h) Not take or permit to be taken any actions that might invalidate any insurance carried on the Property; (i) Maintain in full force and effect all licenses (including but not limited to any operating licenses or similar matters) required or permitted in the operation of the improvements on the Property. 13. Alterations Removal and Demolition. Grantor shall not structurally alter, remove or demolish any building or improvement on the Property without Beneficiary's prior written consent. Grantor shall not remove any fixture or other item of property which is part of the Collateral without Beneficiary's prior written consent unless the fixture or item of property is replaced by an article of equal suitability owned by Grantor free and clear of any lien or security interest. 14. Restoration. (a) After the happening of any casualty to the Property whether or not required to be insured against under the policies to be provided by Grantor hereunder, Grantor shall give prompt written notice thereof to Beneficiary generally describing the nature and cause of such casualty and the extent of the damage or destruction to the Property. 11 (b) Grantor hereby assigns to Beneficiary all proceeds of insurance ("Insurance Proceeds") which Grantor may be entitled to receive. In the event of any damage to or destruction of the Collateral, then, provided there is not an Event of Default under the Note Purchase Agreement, the Notes, the Deed of Trust or any of the Loan Documents (as defined in the Note Purchase Agreement) and Beneficiary has reasonably determined that its security has not been impaired, Grantor shall commence and diligently pursue to completion in accordance with this Section 14 the repair, restoration and rebuilding of any portion of the Collateral that has been partially damaged or destroyed in full compliance with all legal requirements and to the same condition, character and at least equal value and general utility as nearly as possible to that existing prior to such damage or destruction (the "Restoration"), and Beneficiary shall hold and disburse the Insurance Proceeds (less the cost, if any, to Beneficiary of recovering and paying out such proceeds (including, without limitation, attorneys' fees and expenses, adjuster's fees, and fees incurred in Beneficiary's performance of its obligations hereunder)) (the "Net Insurance Proceeds") in the manner hereinafter provided to the Restoration. In the event that the Collateral is substantially destroyed or Beneficiary has determined that its security has been impaired, the Beneficiary may, at its option, apply the Net Insurance Proceeds to the reduction of the Secured Obligations and secured by this Deed of Trust in such order as Beneficiary may determine and, at Beneficiary's option and in its sole discretion, Beneficiary, may declare the Secured Obligations immediately due and payable. (c) In the event the Net Insurance Proceeds are to be used for the Restoration, Grantor shall, prior to disbursement of any Net Insurance Proceeds for any work in connection with the Restoration (the "Work"), deliver or furnish to Beneficiary (i) complete plans and specifications for the Work which (A) have been approved by all governmental authorities whose approval is required, (B) bear the signed approval of an architect reasonably satisfactory to Beneficiary (the "Architect") and (C) are accompanied by Architect's signed estimate of the total estimated cost of the Restoration. Such plans and specifications shall be subject to Beneficiary's approval, which approval shall not be unreasonably withheld or delayed (the "Approved Plans and Specifications"); (ii) the amount of money which, as determined by Beneficiary, will be sufficient when added to the Net Insurance Proceeds, if any, to pay the entire cost of the Restoration (all money as held by Beneficiary is referred to herein as the "Restoration Funds"); (iii) copies of all permits and approvals required by law in connection with the commencement and conduct of the Restoration; and (iv) a contract for construction executed by Grantor and a contractor satisfactory to Beneficiary (the "Contractor") in form, scope and substance satisfactory to Beneficiary (including the customary retention) for performance of the Work. (d) After commencing the Work, Grantor shall perform or cause Contractor to perform the Work diligently and in good faith in accordance with the Approved Plans and Specifications approved by Beneficiary. So long as Grantor is not in default under any of the Loan Documents, Beneficiary shall disburse the Restoration Funds in increments to Grantor or as Grantor may direct, from time to time as the Work progresses, to pay (or reimburse Grantor for) the costs of the Restoration, but subject to the following conditions, any of which Beneficiary may waive in its sole discretion: 12 (i) Beneficiary shall make such payments only upon not less than ten (10) days' prior written notice from Grantor to Beneficiary and Grantor's delivery to Beneficiary of (A) Grantor's written request for payment (a "Request for Payment") accompanied by a certificate by Architect in form, scope and substance satisfactory to Beneficiary which states that all of the Work completed to that date has been done in compliance with the Approved Plans and Specifications and in accordance with all provisions of law, that the amount requested has been paid or is then due and payable and is properly a part of the cost of the Restoration and that when added to all sums, if any, previously paid out by Beneficiary, the requested amount does not exceed the value of the Work done to the date of such certificate; (B) evidence satisfactory to Beneficiary that there are no construction or similar liens for labor or material supplied in connection with the Work to date or that any such liens have been adequately provided for to Beneficiary's satisfaction; and (C) evidence satisfactory to Beneficiary that the balance of the Restoration Funds remaining after making the payments shall be sufficient to pay the balance of the cost of the Restoration not completed to date (giving in such reasonable detail as Beneficiary may require an estimate of the cost of such completion). Each Request for Payment shall be accompanied by waivers of liens satisfactory to Beneficiary covering that part of the Work previously paid for, if any, and by a search prepared by a title company or by other evidence satisfactory to Beneficiary that no construction liens or other liens or instruments for the retention of title in respect of any part of the Work have been filed against the Property and not discharged of record and that no encumbrance exists on or affecting the Property other than encumbrances, if any, which are set forth in the title policy issued to Beneficiary insuring the lien of this Deed of Trust; and (ii) Any Request for Payment after the Restoration has been completed shall be accompanied by a copy of any certificate or certificates required by law to render occupancy of the Property legal. (e) Upon Beneficiary's receipt of the certificate of occupancy for the Property and other customary evidence requested by Beneficiary that the Restoration has been completed and the costs thereof paid in full, and satisfactory evidence that no mechanic's or similar liens for labor or material supplied in connection with the Restoration are outstanding against the Property and Beneficiary's disbursement under the final Request for Payment, and provided that Grantor is not then in default under any of the Loan Documents (as defined in the Note Purchase Agreement), Beneficiary shall pay any remaining Restoration Funds then held by Beneficiary to Grantor; provided, however, nothing contained herein shall prevent Beneficiary from applying at any time the whole or any part of the Restoration Funds to the curing of any Event of Default under the Loan Documents. (f) If (i) within sixty (60) days after the occurrence of any damage or destruction to the Property requiring Restoration, Grantor fails to submit to Beneficiary and receive Beneficiary's approval of plans and specifications or fails to deposit with Beneficiary the additional amount necessary to accomplish the Restoration as provided in Section 14, or (ii) after such plans and specifications are approved by all such governmental authorities and Beneficiary, Grantor fails to commence promptly or 13 diligently continue to completion the Restoration, or (iii) Grantor becomes delinquent in payment to mechanics, materialmen or others for the costs incurred in connection with the Restoration, then, in addition to all of the rights herein set forth, Beneficiary may apply the Restoration Funds then or thereafter held by Beneficiary to reduce the unpaid indebtedness secured hereby in such order as Beneficiary may determine, and at Beneficiary's option and in its sole discretion, Beneficiary may declare the Secured Obligations immediately due and payable. (g) In the event that Beneficiary applies all or any portion of the Restoration Funds to reduce the unpaid indebtedness secured hereby as provided in this Section 14, after payment in full of all sums secured hereby, any remaining Restoration Funds shall be paid to Grantor. 15. Compliance with Laws. Grantor shall comply with all laws, ordinances, regulations, covenants, conditions, and restrictions affecting the Property, including, without limitation, all applicable requirements of the Fair Housing Act of 1968 (as amended) and the Americans With Disabilities Act of 1990 (as the same may be amended from time to time), and shall not commit or permit any act upon or concerning the Property in violation of any such laws, ordinances, regulations, covenants, conditions, and restrictions. Grantor agrees to protect, defend, indemnify and hold Beneficiary harmless from and against all liability threatened against or suffered by Beneficiary by reason of a breach by Grantor of the foregoing representations, warranties, covenants and agreements. The foregoing indemnity shall include the cost of all alterations to the Property (including architectural, engineering, legal and accounting costs), all fines, fees and penalties, and all legal and other expenses (including attorneys' fees) incurred in connection with the Property being in violation of any such laws, ordinances, regulations, covenants, conditions and restrictions, and for the cost of collection of the sums due under the indemnity. In the event that Beneficiary or its designee shall become the owner of or acquire an interest in or rights to the Property by foreclosure or deed in lieu of foreclosure of this Deed of Trust or by other means, the foregoing indemnification obligation shall survive such foreclosure or deed in lieu of foreclosure or other acquisition of the Property. 16. Leased Premises. Grantor shall undertake, and shall use its commercially reasonable efforts, to obtain, within sixty (60) days of the date hereof, (a) any and all required approvals by, and consents of, all landlords with respect to the assignment of leases to Beneficiary pursuant to Section 1(l) hereof, and (b) any and all subordination and non-disturbance agreements required by Beneficiary in connection with the Leased Premises, on terms and conditions reasonably satisfactory to Beneficiary. 17. Impairment of Collateral. Grantor will faithfully perform each and every covenant to be performed by Grantor under any lien or encumbrance, including, without limiting the generality hereof, mortgages, deeds of trust, leases, declarations or covenants, conditions and/or restrictions and other agreements which affect the Property, in law or in equity, which Beneficiary reasonably believes may be prior or superior to or on a parity with the lien or charge of this Deed of Trust. Grantor shall not, without Beneficiary's prior written consent, change the general nature of the occupancy of the 14 Property, initiate, acquire or permit any change in any public or private restrictions (including without limitation a zoning reclassification) limiting the uses which may be made of the Property, or take or permit any action which would impair the Collateral or Beneficiary's lien or security interest in the Collateral. A breach of or a default under any such lien or encumbrance, or a breach of any requirement of this Section 16 shall constitute an event of default under this Deed of Trust. 18. Inspection of Property. Beneficiary is authorized, by itself, its agents, employees or workmen, to enter at any reasonable time upon any part of the Property for the purpose of inspecting the same upon reasonable prior notice (except in the case of an emergency for which no prior notice need be given), and for the purpose of performing any of the acts it is authorized to perform under the terms of this Deed of Trust. Grantor agrees to cooperate with Beneficiary to facilitate such inspections. 19. Grantor's Defense of Collateral. Grantor shall appear in and defend any action or proceeding which may affect the Collateral or the rights or powers of Beneficiary or Trustee, and to pay all costs and expenses, including cost of evidence of title and attorneys' fees in a reasonable sum, in any action or proceeding in which Beneficiary and/or Trustee may appear or be made a party, including, but not limited to, foreclosure or other proceeding commenced by those claiming a right to any part of the Property under subordinate liens, in any action to partition or condemn all or part of the Property, whether or not pursued to final judgment, and in any exercise of the power of sale contained herein, whether or not the sale is actually consummated. 20. Beneficiary's Right to Protect Collateral. Beneficiary may commence, appear in, and defend any action or proceeding which may affect the Collateral or the rights or powers of Beneficiary or Trustee, and in such event, Beneficiary shall be allowed and paid all of Beneficiary's costs, charges and expenses, including cost of evidence of title and attorneys' fees incurred in such action or proceeding in which Beneficiary may appear. Beneficiary may pay, purchase, contest or compromise any encumbrance, charge or lien not listed as a Permitted Exception which in its judgment appears to be prior or superior to the lien of this Deed of Trust. If Grantor fails to make any payment or do any act required under the Loan Documents, Beneficiary, without any obligation to do so and without releasing Grantor from any obligations under the Loan Documents, may make the payment or cause the act to be performed in such manner and to such extent as Beneficiary may deem necessary to protect the Collateral. Beneficiary is authorized to enter upon the Property for such purposes. In exercising any of these powers Beneficiary may incur such expenses, in its absolute discretion, it deems necessary, including cost of evidence of title, employ an attorney, and pay said attorneys' reasonable fees. Grantor hereby agrees to pay immediately following demand, together with interest from and after ten (10) days following demand for payment at the default interest rate set forth in the Note Purchase Agreement until paid in full, all of Beneficiary's costs, charges, expenses and accounts referred to above in this Section 19, including cost of evidence of title and reasonable attorneys' fees incurred in such action or proceeding in which Beneficiary may appear. All costs, charges and expenses so incurred, together with interest thereon as aforesaid, shall be secured by the lien of this Deed of Trust. 15 21. Hazardous Substances. Grantor represents and warrants to Beneficiary that to the best of Grantor's knowledge after due and diligent inquiry, no hazardous or toxic waste or substances are being stored on the Property or any adjacent property except in strict compliance with all Environmental Laws nor have any such waste or substances been stored or used in, on, under, over or about the Property or any adjacent property prior to or during Grantor's ownership, possession or control of the Property. Grantor agrees to provide written notice to Beneficiary immediately upon Grantor becoming aware that the Property or any adjacent property is being or has been contaminated with hazardous or toxic waste or substances. Grantor will not cause nor permit any activities on the Property which directly or indirectly could result in the Property or any other property becoming contaminated with hazardous or toxic waste or substances. For purposes of this Deed of Trust, the term "hazardous or toxic waste or substances" means any substance or material defined or designated as hazardous or toxic wastes, hazardous or toxic material, hazardous, toxic or radioactive substance or other similar term by any applicable federal, state or local statute, regulation or ordinance now or hereafter in effect. 22. Insurance. (a) Grantor shall maintain insurance on the Property with premiums prepaid providing replacement cost coverage and insuring against loss by fire and such other risks covered by extended coverage insurance, flood (but only if the Property is in a federally-designated flood plain), and such other perils and risks, including loss of rents and business interruption as may be required by Beneficiary. Grantor shall also maintain commercial general liability insurance. All insurance shall be with companies satisfactory to Beneficiary and in such amounts as required by Beneficiary with lender's loss payable clauses in favor of and in form satisfactory to Beneficiary. At least thirty (30) days prior to the expiration of the term of any insurance policy, Grantor shall furnish Beneficiary with written evidence of renewal or issuance of a satisfactory replacement policy. If requested Grantor shall deliver copies of all policies to Beneficiary. If Grantor fails to maintain such insurance satisfactory to Beneficiary, Beneficiary may make the payment on behalf of Grantor and any sums expended shall be added to principal and bear interest at the default interest rate set forth in the Note Purchase Agreement. Each policy of insurance shall provide Beneficiary with no less than forty-five (45) days prior written notice of any cancellation, expiration, nonrenewal or modification. (b) In the event of any loss or damage to the Property, all Insurance Proceeds shall be payable to Beneficiary, and Grantor hereby authorizes and directs any affected insurance company to make payment of the Insurance Proceeds directly to Beneficiary. The application or release by Beneficiary of any Insurance Proceeds shall not cure or waive any default or notice of default hereunder or invalidate any act done pursuant to such notice. (c) In the event of the foreclosure of this Deed of Trust or other transfer of the title to the Property in extinguishment, in whole or in part, of the indebtedness secured hereby, all right, title and interest of Grantor in and to any insurance policy, or premiums or payments in satisfaction of claims or any other rights thereunder 16 then in force, shall pass to the purchaser or grantee notwithstanding the amount of any bid at such foreclosure sale. Nothing contained herein shall prevent accrual of interest as provided in the Note Purchase Agreement on any portion of the principal balance due under the Note Purchase Agreement until such time as the Insurance Proceeds are actually received and applied to reduce the principal balance outstanding. 23. Condemnation. Should the Property or any part thereof be taken or damaged by reason of any public improvement, condemnation proceeding, or conveyance in lieu thereof, or in any other manner, Beneficiary shall be entitled to all compensation, awards and other payments or relief therefor, and shall be entitled, at its option, to commence, appear in and prosecute in its own name any action or proceeding. Grantor shall have the right, with the prior written consent of the Beneficiary, to make a compromise or settlement in connection with such taking or damage. All such compensation, awards, damages, rights of action and proceeds (the "Condemnation Proceeds") are hereby assigned to Beneficiary, who shall, after deducting therefrom all its reasonable expenses, including attorneys' fees, apply or release the Condemnation Proceeds with the same effect as provided in Section 14 above with respect to disposition of insurance proceeds; provided, that if such Condemnation Proceeds are to be utilized for restoration of the Property and there are any excess Condemnation Proceeds after application thereof to the restoration of the Property, Beneficiary shall be entitled to apply such excess to the reduction of any indebtedness outstanding under the Note Purchase Agreement. Grantor agrees to execute such further assignments of the Condemnation Proceeds as Beneficiary may require. Nothing contained herein shall prevent the accrual of interest as provided in the Note Purchase Agreement on any portion of the Condemnation Proceeds to be applied to the principal balance due under the Note Purchase Agreement until such Condemnation Proceeds are actually received and applied. 24. Reserve Account. (a) If Beneficiary so requires, Grantor shall pay to Beneficiary monthly, together with and in addition to any payments of principal and/or interest due under the Note Purchase Agreement, a sum, as estimated by the Beneficiary, equal to the ground rents, if any, the real estate taxes and assessments next due on the Property and the premiums next due on insurance policies required under the Loan Documents, less all sums already paid therefor, divided by the number of months to elapse before two (2) months prior to the date when the ground rents, real estate taxes, assessments and insurance premiums will become delinquent. The monthly reserve account payments and any principal and/or interest payments due shall be paid in a single payment and applied by Beneficiary in the following order: (i) ground rents, real estate taxes, assessments and insurance premiums, (ii) expenditures made pursuant to the Loan Documents and interest thereon, (iii) interest on the obligations of Borrowers under Note Purchase Agreement, and (iv) principal due on the obligations of Borrowers under Note Purchase Agreement. Grantor shall promptly deliver to Beneficiary all bills and notices pertaining to the ground rents, taxes, assessments and insurance premiums. 17 (b) The reserve account is solely for the protection of Beneficiary. Beneficiary shall have no responsibility except to credit properly the sums actually received by it. No interest will be paid on the funds in the reserve account and Beneficiary shall have no obligation to deposit the funds in an interest-bearing account. Upon assignment of this Deed of Trust by Beneficiary, any funds in the reserve account shall be turned over to the assignee and any responsibility of Beneficiary with respect thereto shall terminate. Each transfer of the Property shall automatically transfer to the grantee all rights of Grantor to any funds in the reserve account. (c) If the total of the payments to the reserve exceeds the amount of payments actually made by Beneficiary, plus such amounts as have been reasonably accumulated in the reserve account toward payments to become due, such excess may, at Beneficiary's election, be (i) credited by Beneficiary against sums then due and payable under the Loan Documents or (ii) refunded to Grantor as its name appears on the records of Beneficiary. If, however, the reserve account does not have sufficient funds to make the payments when they become due, Grantor shall pay to Beneficiary the amount necessary to make up the deficiency within fifteen (15) days after written notice to Grantor. If this Deed of Trust is foreclosed or if Beneficiary otherwise acquires the Property, the Beneficiary shall, at the time of commencement of the proceedings or at the time the Property is otherwise acquired, apply the remaining funds in the reserve account, less such sums as will become due during the pendency of the proceedings, against the sums due under the Loan Documents and/or to make payments required under the Loan Documents. 25. Repayment of Beneficiary's Expenditures. Grantor shall pay within ten (10) days after written notice from Beneficiary all sums expended by Beneficiary and all costs and expenses incurred by Beneficiary in taking any actions pursuant to the Loan Documents, including attorneys' fees, accountants' fees, appraisal and inspection fees, and the costs for title reports. If any laws or regulations are passed subsequent to the date of this Deed of Trust which require Beneficiary to incur out-of-pocket expenses in order to maintain, modify, extend or foreclose this Deed of Trust, or revise the terms of the loan secured hereby, Grantor shall reimburse Beneficiary for such expenses within ten (10) days after written notice from Beneficiary. Expenditures by Beneficiary shall bear interest from the date of such advance or expenditure at the default interest rate set forth in the Note Purchase Agreement until paid, shall constitute advances made under this Deed of Trust and shall be secured by and have the same priority as the lien of this Deed of Trust. If Grantor fails to pay any such expenditures, costs and expenses and interest thereon, Beneficiary may, at its option, without foreclosing the lien of this Deed of Trust, commence an independent action against Grantor for the recovery of the expenditures and/or advance any undisbursed loan proceeds to pay the expenditures. 26. Additional Security Documents. Grantor shall within fifteen (15) days after request by Beneficiary execute and deliver any financing statement, renewal, affidavit, certificate, continuation statement, or other document as Beneficiary may request in order to perfect, preserve, continue, extend, or maintain security interests or liens previously granted and the priority of the security interests or liens. Grantor shall 18 pay all costs and expenses incurred by Beneficiary in connection with the preparation, execution, recording, filing, and refiling of any such document. 27. Conveyance of Property; Further Encumbrance. In the event that all or any part of or any interest in the Property shall be sold, transferred, leased (other than space leases without options to purchase), further encumbered, conveyed, or a contract of sale or other conveyance entered into with respect thereto, without the prior written consent of Beneficiary, then, upon the occurrence of any one or more of the foregoing events, and regardless of whether or not Grantor shall be in default under the Note Purchase Agreement or this Deed of Trust or any Loan Document, Beneficiary may, at its option, declare the then outstanding principal balance evidenced by the Note Purchase Agreement plus accrued interest thereon immediately due and payable or, at its sole option, it may consent to said conveyance or transfer in writing and may increase the rate of the loan to the interest rate which Beneficiary would then commit to make a mortgage loan to a borrower of comparable financial strength and managerial expertise, and secured by similar security of comparable value and character, and impose whatever other conditions it shall deem necessary to compensate it for such increased risk resulting from the breach of the foregoing covenants. Such increase in interest rate or imposition of additional terms shall entitle Beneficiary to increase monthly payments under the Notes so that the increased monthly installments will fully amortize the outstanding balance of the indebtedness evidenced thereby over the unexpired amortization term of the Notes. The execution and delivery by the Grantor of any joint venture agreement, partnership agreement, declaration of trust or option agreement whereunder any other person or corporation may become entitled, directly or indirectly, to the possession or enjoyment of the Property, or the income or other benefits derived or to be derived therefrom shall in each case be deemed to be a conveyance or assignment of the Grantor's interest in the Property for the purposes of this section, and shall require the prior written consent of the Beneficiary. 28. Release of Parties or Collateral. Without affecting the obligations of any party under the Loan Documents and without affecting the lien of this Deed of Trust and Beneficiary's security interest in the Collateral, Beneficiary and/or Trustee may, without notice (a) release all or any Grantor, any Borrower and/or any other party now or hereafter liable for any of the Secured Obligations (including guarantors), (b) release all or any part of the Collateral, (c) subordinate the lien of this Deed of Trust or Beneficiary's security interest in the Collateral, (d) take and/or release any other security for or guarantees of the Secured Obligations, (e) grant an extension of time for performance of the Secured Obligations, (f) modify, waive, forbear, delay or fail to enforce any of the Secured Obligations, (g) sell or otherwise realize on any other security or guaranty prior to, contemporaneously with or subsequent to a sale of all or any part of the Collateral, (h) make advances pursuant to the Loan Documents including advances in excess of the amount provided for under the Note Purchase Agreement, (i) consent to the making of any map or plat of the Property, and (j) join in the grant of any easement on the Property. Any subordinate lienholder shall be subject to all such releases, extensions or modifications without notice to or consent from the subordinate lienholder. Grantor shall pay any Trustee's, attorneys', title insurance, recording, inspection or other fees or 19 expenses incurred in connection with release of Collateral, the making of a map, plat or the grant of an easement. 29. Default -- Remedies. The occurrence of any Event of Default (as defined in the Note Purchase Agreement) or Grantor's failure to comply with any term or condition of the Loan Documents, including without limitation, this Deed of Trust and payments due under the Note Purchase Agreement or other obligations secured by this Deed of Trust, shall constitute an Event of Default. Upon the occurrence of an Event of Default Beneficiary may declare all amounts owed under the Secured Obligations, and all accrued and unpaid interest and other sums in respect thereof, immediately due and payable after applicable notice as set forth herein and/or exercise its rights and remedies under the Loan Documents and applicable law including foreclosure of this Deed of Trust judicially or non judicially by the Trustee pursuant to the power of sale. In the event of any such Event of Default and upon written request of Beneficiary, Trustee shall sell the Property in accordance with the Deed of Trust Act of the state of Washington (RCW Chapter 61.24 as existing now or hereafter amended) and the Uniform Commercial Code of the state of Washington, where applicable, at public auction to the highest bidder. Any person except Trustee may bid at Trustee's sale. Trustee shall apply the proceeds of the sale as follows: (i) to the expenses of sale, including a reasonable Trustee's fee and attorneys' fee; (ii) to all the Secured Obligations (principal and interest) and all other indebtedness secured by this Deed of Trust or any other instrument, in such order and amounts as Beneficiary may elect; (iii) the surplus, if any, shall be distributed in accordance with said Deed of Trust Act. Trustee shall deliver to the purchaser at the sale its deed, without warranty, which shall convey to the purchaser the interest in the property which Grantor had or had the power to convey at the time of its execution of this Deed of Trust and such as it may have acquired thereafter. Trustee's deed shall recite the facts showing that the sale was conducted in compliance with all the requirements of the law and of this Deed of Trust, which recital shall be prima facie evidence of such compliance and conclusive evidence thereof in favor of bona fide purchasers and encumbrances for value. The power of sale conferred by this Deed of Trust and by the Deed of Trust Act of the state of Washington is not an exclusive remedy, and when not exercised Beneficiary may foreclose this Deed of Trust as a mortgage. Trustee is not obligated to notify any party hereto of pending sale under any other deed of trust or of any action or proceeding in which Grantor, Trustee or Beneficiary shall be a party, unless such action or proceeding is brought by Trustee. Beneficiary may proceed as to the Collateral which constitutes personal property in accordance with Beneficiary's rights and remedies in respect to the Property or sell the Personal Property Collateral separately and without regard to the remainder of the Property in accordance with Beneficiary's rights and remedies provided by the Washington Uniform Commercial Code as well as other rights and remedies available at law or in equity. Beneficiary's exercise of any of its rights and remedies shall not constitute a waiver or cure of a default. Beneficiary's failure to enforce any default shall not constitute a waiver of the default or any subsequent default. In the event of foreclosure, the cost of the title premium for the trustee sale guarantee (or equivalent policy) shall be paid for by Grantor. In the event the Loan Documents are referred to an 20 attorney for enforcement or preservation of Beneficiary's rights or remedies, whether or not suit is filed or any proceedings are commenced, Grantor shall pay all Beneficiary's costs and expenses including Trustee's and attorneys' fees (including attorneys' fees for any appeal, bankruptcy proceeding or any other proceeding), accountants' fees, appraisal and inspection fees and cost of a title report. 30. Cumulative Remedies. To the extent allowed by law, all Beneficiary's and Trustee's rights and remedies specified in the Loan Documents are cumulative, not mutually exclusive and not in substitution for any rights or remedies available in law or equity. In order to obtain performance of Grantor's obligations under the Loan Documents, without waiving its rights in the Collateral, Beneficiary may proceed against Grantor or any Borrower or may proceed against any other security or guaranty for the Secured Obligations, in such order and manner as Beneficiary may elect. The commencement of proceedings to enforce a particular remedy shall not preclude the discontinuance of the proceedings and the commencement of proceedings to enforce a different remedy. 31. Entry. Beneficiary, in person, by agent or by court appointed receiver, may enter, take possession of, manage and operate all or any part of the Property, and may also do any and all other things in connection with those actions that Beneficiary may in its sole discretion consider necessary and appropriate to protect the security of this Deed of Trust. Such other things may include: taking and possessing all of Grantor's or the then owner's books and records; entering into, enforcing, modifying, or canceling Leases on such terms and conditions as Beneficiary may consider proper; obtaining and evicting tenants; fixing or modifying Rents; collecting and receiving any payment of money owing to Grantor; completing any unfinished construction; and/or contracting for and making repairs and alterations. Grantor hereby irrevocably constitutes and appoints Beneficiary as its attorney-in-fact to perform such acts and execute such documents as Beneficiary in its sole discretion may consider to be appropriate in connection with taking these measures. 32. Appointment of Receiver. In the event of a default, Grantor consents to and Beneficiary shall be entitled, without notice, without bond, and without regard to the adequacy of the Collateral, to the appointment of a receiver for the Collateral. The receiver shall have, in addition to all the rights and powers customarily given to and exercised by a receiver, all the rights and powers granted to Beneficiary by the Loan Documents. The receiver shall be entitled to receive a reasonable fee for management of the Property. If Grantor is an occupant of the Property, Beneficiary has the right to require Grantor to pay rent at fair market rates and the right to remove Grantor from Property if Grantor fails to pay rent. 33. Sale of Property After Default. The Collateral may be sold separately or as a whole, at the option of Beneficiary following a default. In the event of a Trustee's sale of all the Collateral, Beneficiary hereby assigns its security interest in the personal property Collateral to the Trustee. Beneficiary may also realize on the personal property Collateral in accordance with the remedies available under the Uniform Commercial Code or at law. In the event of a Trustee's sale, Grantor, and the holder of any 21 subordinate liens or security interest with actual or constructive notice hereof, waive any equitable, statutory or other right they may have to require marshaling of assets in connection with the exercise of any of the remedies permitted by applicable law or provided herein, or to direct the order in which any of the Collateral will be sold in the event of any sale under this Deed of Trust or foreclosure in the inverse order of alienation. 34. Foreclosure of Lessee's Rights--Subordination. Beneficiary shall have the right, of its option, to foreclose this Deed of Trust subject to the rights of any lessees of the Property. Beneficiary's failure to foreclose against any lessee shall not be asserted as a claim against Beneficiary or as a defense against any claim by Beneficiary in any action or proceeding. Beneficiary at any time may subordinate this Deed of Trust to any or all of the Leases except that Beneficiary shall retain its priority claim to any condemnation or insurance proceeds. 35. Repairs During Redemption. In the event of a judicial foreclosure the purchaser during any redemption period may make such repairs and alterations to the Property as may be reasonably necessary for the proper operation, care, preservation, protection and insuring of the Property. Any sums so paid, together with interest from the date of the expenditure at the rate provided in the judgment, shall be added to the amount required to be paid for redemption of the Property. 36. Reconveyance After Payment. Upon written request of Beneficiary stating that all obligations secured by this Deed of Trust have been paid, Trustee shall reconvey, without warranty, the Property then subject to the lien of this Deed of Trust. The recitals in any reconveyance of any matters of fact shall be conclusive proof of the truthfulness thereof. The grantee in the reconveyance may be described as "the person or persons legally entitled thereto." Grantor shall pay any costs, Trustee's fees and recording fees incurred in so reconveying the Property. 37. Nonwaiver of Terms and Conditions. Time is of the essence with respect to performance of the obligations due under the Loan Documents. Beneficiary's failure to require prompt enforcement of any required obligation shall not constitute a waiver of the obligation due or any subsequent required performance of the obligation. No term or condition of the Loan Documents may be waived, modified or amended except by a written agreement signed by Grantor and Beneficiary. Any waiver of any term or condition of the Loan Documents shall apply only to the time and occasion specified in the waiver and shall not constitute a waiver of the term or condition at any subsequent time or occasion. 38. Waivers by Grantor. Without affecting any of Grantor's obligations under the Loan Documents, Grantor waives the following: (a) Any right to require Beneficiary to proceed against any specific party liable for sums due under the Loan Documents or to proceed against or exhaust any specific security for sums due under the Loan Documents. 22 (b) Diligence, demand for performance, notice of nonperformance, presentment, protest and notice of dishonor and notice of new or additional indebtedness of any Grantor, any Borrower or any other party liable for sums due under the Loan Documents to Beneficiary. (c) Any defense arising out of Beneficiary entering into additional financing or other arrangements with any Grantor, any Borrower or any party liable for sums due under the Loan Documents not relating to the Property and any action taken by Beneficiary in connection with any such financing or other arrangements or any pending financing or other arrangements not related to the Property. (d) Any defense arising out of the absence, impairment, or loss of any or all rights of recourse, reimbursement, contribution or subrogation or any other rights or remedies of Beneficiary against any Grantor, any Borrower or any other party liable for sums due under the Loan Documents or any Collateral. (e) Any obligation of Beneficiary to see to the proper use and application of any proceeds advanced pursuant to the Loan Documents. 39. Right of Subrogation. Beneficiary is subrogated to the rights, whether legal or equitable, of all beneficiaries, mortgagees, lienholders and owners directly or indirectly paid off or satisfied in whole or in part by any proceeds advanced by Beneficiary under the Loan Documents, regardless of whether these parties assigned or released of record their rights or liens upon payment. 40. Joint and Several Liability. If there is more than one Grantor of this Deed of Trust, their obligations shall be joint and several. 41. Statement of Amount Owing. Grantor upon request by Beneficiary will furnish a written statement duly acknowledged of the amount due under the Loan Documents and whether any offsets or defenses exist against the amount due. 42. Books and Records Financial Statements. Grantor will keep and maintain at Grantor's address stated above, or such other place as Beneficiary may approve in writing, books of accounts and records adequate to reflect correctly the results of the operation of the Property and copies of all written contracts, leases and other instruments which affect the Property. Such books, records, contracts, leases and other instruments shall be subject to examination, inspection and copying at any reasonable time by Beneficiary. Grantor shall provide to Beneficiary within ninety (90) days after the end of each of Grantor's fiscal years (or within twenty (20) days of Beneficiary's written request therefor if Grantor is in default), for each Grantor, each Borrower and for each guarantor of the Secured Obligations, a complete and current financial statement and copy of its most recent federal income tax return, together with a statement of income and expenses of the Property and a statement of changes in financial position with respect to the Property for the prior year, each in reasonable detail and certified by Grantor, each Borrower or guarantor, as the case may be, and if Beneficiary shall require, by an independent certified public accountant. At the same time, Grantor shall also furnish a 23 current rent roll for the Property, certified by Grantor, showing the name of each tenant, the space occupied, the lease expiration date, the monthly rent, a schedule of gross receipts for each tenant obligated to pay rent based on a percentage of receipts, the date to which rent has been paid and any deposit Grantor is holding. Grantor's compliance with these provisions shall not limit or affect Grantor's obligations to comply with financial, tax and operation covenants and reporting requirements under any other agreement between Grantor and Beneficiary whether or not such other agreement is related to the Secured Obligations. 43. Appraisals. In the event of a default Beneficiary may obtain a current appraisal of the Property which is to be paid for by Grantor. Appraisals may be commissioned by Beneficiary when required by laws and regulations which govern Beneficiary's lending practices. The cost of all such appraisals will be home by Grantor. 44. Maximum Interest Rate. If any payment of interest, fees and/or charges under the Loan Documents shall exceed the maximum amounts permitted by any applicable law of the State of Washington, then the payment made or to be made shall be reduced so that in no event shall any obligor pay or Beneficiary receive an amount in excess of the maximum amount permitted by any applicable law. If Beneficiary receives an excess amount, it shall be treated as a prepayment of principal or shall be returned to the payor, at Beneficiary's option. 45. Evasion of Prepayment Fee. If Grantor is in default, whether Beneficiary has accelerated the maturity of the indebtedness or not, any tender of payment sufficient to satisfy all sums due under the Loan Documents trade at any time prior to foreclosure sale shall constitute an evasion of the prepayment terms of the Note Purchase Agreement, if any, and shall be deemed a voluntary prepayment. Any such payment, to the extent permitted by law, shall include the additional payment required under the prepayment fee provision in the Note Purchase Agreement, if any. 46. Payment of New Taxes. If any federal, state or local law is passed subsequent to the date of this Deed of Trust which requires Beneficiary to pay any tax because of this Deed of Trust or the sums due under the Loan Documents (excluding income taxes), then Grantor shall pay to Beneficiary on demand any such taxes if it is lawful for Grantor to pay them, or, in the alternative Grantor may repay all sums due under the Loan Documents plus any prepayment fee within thirty (30) days of such demand. If it is not lawful for Grantor to pay such taxes, then at its option Beneficiary may declare a default under the Loan Documents. 47. Insolvency Proceedings. Grantor or any party liable on the Secured Obligations (including guarantors) shall not make any assignment for the benefit of creditors and shall not permit the institution of any proceedings under any federal or state statutes pertaining to bankruptcy, insolvency, arrangement, dissolution, liquidation or receivership whether or not an order for relief is entered. 24 48. Substitution of Trustee. Beneficiary may at any time discharge the Trustee and appoint a successor Trustee who shall have all of the powers of the original Trustee. 49. In-House Counsel Fees. Whenever Grantor is obligated to pay or reimburse Beneficiary or Trustee for any attorneys' fees, those fees shall include the allocated costs for services of in-house counsel. 50. Notices. Any notice given by Grantor, Trustee or Beneficiary shall be in writing and shall be effective (a) on personal delivery to the party receiving the notice, or (b) on the third day after deposit in the United States mail, postage prepaid with return receipt requested, addressed to the party at the address set forth above, or with respect to the Grantor, to the address at which Beneficiary customarily or last communicated with Grantor. 51. Time. Time is of the essence in connection with all obligations of Grantor herein. 52. Successors and Assigns. This Deed of Trust applies to, inures to the benefit of, and binds all parties hereto and their successors and assigns. The terms "Grantor," "Trustee" and "Beneficiary" include their successors and assigns. 53. Controlling Document; Definitions. In the event of a conflict or inconsistency between the terms and conditions of this Deed of Trust and the terms and conditions of any other of the Loan Documents (except for any separate assignment of rents and/or leases and any Note Purchase Agreement which shall prevail over this Deed of Trust), the terms and conditions of this Deed of Trust shall prevail. All capitalized terms not otherwise defined herein shall have the same meaning as in the Note Purchase Agreement. 54. Invalidity of Terms and Conditions. If any term or condition of this Deed of Trust is found to be invalid, the invalidity shall not affect any other term or condition of the Deed of Trust and the Deed of Trust shall be construed as if not containing the invalid term or condition. 55. Legislation Affecting Beneficiary's Rights. If enactment or expiration of applicable laws has the effect of rendering any provision of the Note Purchase Agreement or this Deed of Trust unenforceable according to its terms, Beneficiary, at its option, may require immediate payment in full of all sums secured by this Deed of Trust and may invoke any remedies permitted herein. 56. Rules of Construction. This Deed of Trust shall be construed so that, whenever applicable, the use of the singular shall include the plural, the use of the plural shall include the singular, and the use of any gender shall be applicable to all genders and shall include corporations, partnerships and limited partnerships. 25 57. Section Headlines. The headings to the various sections have been inserted for convenience of reference only and shall not be used to construe this Deed of Trust. 58. Applicable Law. This Deed of Trust shall be governed by and construed in accordance with the laws of the State of Washington. 59. Commercial Purposes. The Secured Obligations were incurred primarily for commercial, investment or business purposes and not for personal, family or household purposes. 60. Partial Reconveyance. Upon Beneficiary's receipt from Grantor of copies of all executed and acknowledged transfer documents, conveying that portion of the Property described in Exhibit C ("Exhibit C Property") to Herman L. Jones, Beneficiary shall execute and deliver a partial reconveyance of this Deed of Trust with respect to that Exhibit C Property contemporaneously with the transfer of said Exhibit C Property by Section 4.1 of the Settlement Agreement, dated as of February 28, 2002, by and between Pacific Aerospace & Electronics, Inc. and Herman L. Jones., provided, however, that such obligation to reconvey said Exhibit C Property shall expire on June 1, 2002 and, thereafter, Beneficiary shall have no obligation to deliver such partial reconveyance of said Exhibit C Property. 61. Counterpart Notice. This Deed of Trust encumbers real property situated in Chelan County and Clallam County in the State of Washington. In order to facilitate recording in each of the two counties at the same time, this Deed of Trust has been prepared in counterparts, each of which is identical to this counterpart, except that Exhibits A and C of this counterpart describe only the portion of the Mortgaged Property situated in the county in which this counterpart is recorded. Grantor and Beneficiary intend and agree that the two counterparts constitute one and the same deed of trust, that the lien thereof shall attach to all property encumbered thereby on execution and delivery of any one of the counterparts, and that to the extent permitted by law, foreclosure thereof may be accomplished in a single judicial or nonjudicial proceeding in any county in which any of the Mortgaged Property is located. 62. Washington State Notice. Beneficiary hereby notifies Grantor as follows: 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. 63. Prior Mortgages. If this Deed of Trust is subordinate to any other mortgage(s) or similar security document(s) on all or part of the Collateral, the following modifications shall apply hereto: 1. The following definition is added hereto: "Prior Mortgage" means the mortgage(s) or similar security document(s) of all or part of the Collateral, to which this Deed of Trust is 26 subordinate, set forth in the title policy insuring the lien hereof together with the note(s) secured thereby and all other documents securing said note(s). 2. The following is added at the end of the Granting Clause: (m) all sums held by or under the control of the holder of the Prior Mortgage which were deposited on account of real estate taxes, insurance premiums or otherwise. 3. The following is added to the end of Section 9: Grantor further represents that neither Grantor nor any of its affiliates (nor any person or entity acting on behalf of any of them) is the holder of the Prior Mortgage or any participation or other interest therein or is the owner of a legal or equitable interest in any such holder. 4. The following is added to the end of Section 14: (h) The foregoing provisions of this Section are subject to any provision of the Prior Mortgage requiring the application of insurance proceeds to restoration or requiring the payment of such proceeds to the holder of the Prior Mortgage. 5. The following is added to the end of Section 23: The foregoing provisions of this Section are subject to any provision of the Prior Mortgage requiring the application of condemnation proceeds to restoration or requiring the payment of such proceeds to the holder of the Prior Mortgage. 64. Additional Provisions Concerning Prior Mortgages. (a) Grantor shall perform or observe all covenants and conditions to be performed or observed by the Grantor or grantor under the Prior Mortgage. (b) Upon notice from Beneficiary, simultaneously with the making of each payment of principal and interest on the Prior Mortgage, Grantor shall deliver to Beneficiary a copy of the check in the amount of such payment delivered to the holder of the Prior Mortgage. Beneficiary shall have the right, exercisable by notice to Grantor, to require Grantor to make payment of principal and interest on the Prior Mortgage through Beneficiary and, if Beneficiary exercises such right, Grantor shall deliver to Beneficiary a check in the amount of each installment of such principal and interest, payable to the order of the holder of the Prior Mortgage, not later than three (3) days prior to the due date thereof and Beneficiary shall promptly forward such check to said holder. (c) Grantor hereby irrevocably designates Beneficiary its agent and attorney-in-fact to perform or observe on behalf of Grantor any covenant or condition which Grantor fails to perform or observe under the Prior Mortgage within any applicable 27 grace period specified in the Prior Mortgage, and any advances made by Beneficiary in connection with such performance or observance shall be repaid by Grantor on demand with interest at the default interest rate set forth in the Note Purchase Agreement and the amount so advanced, with interest, shall be secured hereby. Beneficiary shall have the right, but not the obligation, to so perform or so observe. The performance or observance of such covenant or condition by Beneficiary shall not prevent Grantor's failure to so perform or observe from constituting an Event of Default. In performing or observing any such covenant or condition, Beneficiary shall have the right to enter upon the Collateral. Upon receipt by Beneficiary from the holder of the Prior Mortgage of any notice of default under the Prior Mortgage, Beneficiary may rely thereon and take any action permitted by this Section to remedy such default notwithstanding that the existence of such default or the nature thereof may be questioned or denied by Grantor. (d) Grantor shall not enter into any modification, amendment or supplement to the Prior Mortgage nor acquire, whether directly or indirectly, any interest whatsoever in the Prior Mortgage. 28 The undersigned Grantor requests that a copy of any notices, including but not limited to any Notice of Sale, be mailed to it at the address herein before set forth. PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington corporation By: /s/ Donald A. Wright ------------------------------------- Name: Donald A. Wright Title: President and Chief Executive Officer CASHMERE MANUFACTURING CO., INC., a Washington corporation By: /s/ Donald A. Wright ------------------------------------- Name: Donald A. Wright Title: Executive Vice President NORTHWEST TECHNICAL INDUSTRIES, INC., a Washington corporation By: /s/ Donald A. Wright ------------------------------------- Name: Donald A. Wright Title: Executive Vice President STATE OF WASHINGTON ) )ss. COUNTY OF KING ) I certify that I know or have satisfactory evidence that Donald A. Wright is the person who appeared before me, and said person acknowledged that he/she signed this instrument, on oath stated that he/she was authorized to execute the instrument and acknowledged it as the President and Chief Executive Officer of PACIFIC AEROSPACE & ELECTRONICS, INC. to be the free and voluntary act of such party for the uses and purposes mentioned in the instrument. Dated: March 15, 2002 Notary Public: /s/ Susan R. Benson Print Name: Susan R. Benson My commission expires: October 11, 2002 (Use this space for notarial stamp/seal) STATE OF WASHINGTON ) )ss. COUNTY OF KING ) I certify that I know or have satisfactory evidence that Donald A. Wright is the person who appeared before me, and said person acknowledged that he/she signed this instrument, on oath stated that he/she was authorized to execute the instrument and acknowledged it as the Executive Vice President of CASHMERE MANUFACTURING CO., INC. to be the free and voluntary act of such party for the uses and purposes mentioned in the instrument. Dated: March 15, 2002 Notary Public: /s/ Susan R. Benson Print Name: Susan R. Benson My commission expires: October 11, 2002 (Use this space for notarial stamp/seal) STATE OF WASHINGTON ) )ss. COUNTY OF KING ) I certify that I know or have satisfactory evidence that Donald A. Wright is the person who appeared before me, and said person acknowledged that he/she signed this instrument, on oath stated that he/she was authorized to execute the instrument and acknowledged it as the Executive Vice President of NORTHWEST TECHNICAL INDUSTRIES, INC. to be the free and voluntary act of such party for the uses and purposes mentioned in the instrument. Dated: March 15, 2002 Notary Public: /s/ Susan R. Benson Print Name: Susan R. Benson My commission expires: October 11, 2002 (Use this space for notarial stamp/seal) EXHIBIT A Legal Description of Project PARCEL "A" Units 1, 2, 3 and 4, Confluence Park Condominium, Chelan County, Washington, according to the plat thereof recorded November 6, 1998 under Auditor's No. 2040202, TOGETHER WITH limited common elements and garage spaces. EXHIBIT C Legal Description of Property Lots 6, 7, 8, 9, 10, 11, 12, 13 and 14, Block 1, Steward's Plat of Mission (now Cashmere), according to the plat thereof recorded in Book 1 of Plats, Page 19, records of Chelan County, and Lots 17 and 18 and that portion of Lot 16, hereinafter described, Block 1, J.F. Woodring's Plat of Mission (now Cashmere) according to the plat thereof recorded in Book 1 of Plats, Page 18, records of said county, said portion of Lot 16, described as follows: Beginning at the Northeast corner of said Lot 16; thence Westerly along the Northerly line thereof 29.25 feet to the Northwest corner of a building lying Easterly and the Northeast corner of a building lying Westerly and from said building corner the Northwest corner of said Lot 16 bears Westerly 0.75 feet; thence Southerly along the coincident line between said buildings, the Easterly and Westerly faces of which are the same or coincident line between said buildings, 104.67 feet to the Southwest corner and the Southeast corner of said buildings; thence continue along the extension of said coincident line Southerly 15.39 feet to a point of intersection with the Southerly line of said Lot 16 from which the Southwest corner of said Lot 16 bears Westerly 0.56 feet; thence from said point of intersection Easterly along the Southerly line of said Lot 16, 29.44 feet to the Southeast corner thereof; thence Northerly 120.05 feet to the Northeast corner thereof and the True Point of Beginning. EXHIBIT D Leases (1) Lease Agreement, Cashmere Manufacturing, Inc. 1994, dated November 4, 1994, between Port of Chelan County and Cashmere Manufacturing Co., Inc. (2) Lease Agreement, Pacific Coast Technologies, Inc. 1993, dated February 1, 1993, between Port of Chelan County and Pacific Coast Technologies, Inc. (3) Lease Agreement 1999, dated December 30, 1998, between Port of Chelan County and Pacific Aerospace & Electronics, Inc., as amended by that certain First Addendum to 1999 Lease, dated November 21, 2001, between Port of Chelan County and Pacific Aerospace & Electronics, Inc. (4) Lease Agreement -- PA&E IB#9 2000, dated July 13, 2000, between Port of Chelan County and Pacific Aerospace & Electronics, Inc. (5) Lease Agreement, dated March 31, 1994, between Erickson Realty, Ltd. and Electronic Specialty Corporation. (6) Lease, dated April 3, 1998, between Sea-Land Development Corporation and Skagit Engineering & Manufacturing, Inc., as amended by that certain Amendment to Lease, dated June 19, 2000, between Sea-Land Development Corporation and Skagit Engineering & Manufacturing, Inc., as amended by that certain Amendment to Lease, dated January 25, 2002, between Sea-Land Development Corporation and Skagit Engineering & Manufacturing, Inc., as amended by that certain Amendment to Lease, dated January 31, 2002, Sea-Land Development Corporation and Skagit Engineering & Manufacturing, Inc. (7) Lease Agreement, dated June 2, 2000, between 220TH Street, LLC and Skagit Engineering Manufacturing, Inc. (d/b/a Pacific Aerospace Electronics, Inc. - Engineering & Fabrication Division). (8) Lease Agreement, dated August 6, 2001, between Pacific Aerospace & Electronics, Inc. and North Central Educational Service District, as amended by that certain Amendment No. 1 to Lease Agreement, dated December 17, 2001, between Pacific Aerospace & Electronics, Inc. and North Central Educational Service District. EXHIBIT E Encumbrances 1. Property described in Exhibit A, as to Certain Equipment: (a) Master Equipment Lease Agreement, dated as of May 27, 1999, between KeyCorp Leasing, A Division of Key Corporate Capital Inc., as Lessor, and Pacific Aerospace & Electronics, Inc., as Lessee, as amended by Equipment Schedule No. 02, dated as of June 14, 1999, between KeyCorp Leasing, A Division of Key Corporate Capital Inc. and Pacific Aerospace & Electronics, Inc., with a total cost of $233,443.08. 2. Lease Agreement, Pacific Coast Technologies, Inc. 1993, dated February 1, 1993, between Port of Chelan County and Pacific Coast Technologies, Inc.: (a) Commercial Security Agreement between Pacific Aerospace & Electronics, Inc., as Borrower, Pacific Coast Technologies, Inc., as Grantor, and KeyBank National Association, as Lender, securing the Promissory Note between Pacific Aerospace & Electronics, Inc. and KeyBank National Association in principal amount of $712,085.00, and (b) UCC-2 fixture filing between Pacific Coast Technologies, Inc., as Debtor, and KeyBank National Association, as Secured Party, dated March 18, 1998. EX-10.6 11 f80483ex10-6.txt EXHIBIT 10.6 EXHIBIT 10.6 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made by and between PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington corporation having its principal place of business at 430 Olds Station Road, Wenatchee, Washington (the "Company"), and DONALD A. WRIGHT, a resident of Washington (the "Executive"). RECITALS 1. The Company desires to continue the employment of the Executive, who is presently the President and Chief Executive Officer and a shareholder and director of the Company, and the Executive is willing to continue his employment with the Company in accordance with the terms hereinafter set forth; 2. The Board of Directors of the Company (the "Board") and the Compensation Committee of the Board, by appropriate resolutions, have authorized the employment of the Executive as provided for in this Agreement; and 3. The parties desire to declare the employment agreement entered into between the Company and the Executive, as of June 1, 1997, as amended (the "Initial Employment Agreement"), null and void and to enter into this superseding Agreement. AGREEMENT The Company and the Executive agree as follows: ARTICLE 1 EMPLOYMENT; DUTIES 1.1 Employment. The Company hereby employs the Executive as the President and Chief Executive Officer of the Company, and the Executive accepts such employment, upon the terms and conditions set forth in this Agreement. 1.2 Duties. The duties to be performed by the Executive under this Agreement are as specified in the Company's Bylaws and as may be reasonably prescribed from time to time by the Board. 1.3 Hours. During the Term (as defined below), excluding any periods of vacation, sick leave or other time off to which the Executive is entitled, and without limiting the Executive's ability to participate in unrelated business or other activities on his personal time, the Executive agrees to devote his full attention and working time to the business and affairs of the Company and, to the extent necessary to discharge his duties hereunder, to use his best efforts to perform faithfully and efficiently such duties. ARTICLE 2 TERM OF AGREEMENT The term of this Agreement shall commence upon the consummation of an agreement by and among the Company, GSCP Recovery, Inc., Alliance Capital Management L.P., M.W. Post Advisory Group L.L.C. and William E. Simon & Sons Special Situation Partners II, L.P., resulting in the exchange of certain senior subordinated notes (the "Exchange") and end on the third anniversary of such date, or on such date as this Agreement may be earlier terminated pursuant to Article 6 (the "Term"); provided, however, that if the Exchange does not occur prior to June 1, 2002, this Agreement shall be null and void, and the Initial Employment Agreement shall continue in full force and effect according to its terms; and provided, further, that the covenants set forth in Article 5 shall survive termination of this Agreement according to their terms. ARTICLE 3 COMPENSATION 3.1 Base Salary. For services rendered by the Executive under this Agreement, the Company agrees to pay to the Executive, and the Executive agrees to accept, an initial annual base salary of $265,000, and for each year of the Term thereafter the Executive shall be entitled to an increase of five percent (5%) in his annual base salary (the initial base salary and any subsequent base salaries being referred to as the "Base Salary"). The Company shall pay the Executive's Base Salary in installments not less frequently than monthly, less all amounts required by law to be withheld, deducted or collected, in accordance with the Company's normal payroll policies for other executive officers, as such policies may be changed from time to time. 3.2 Stock Options. 3.2.1 Upon Consummation of Exchange Agreement. Immediately upon the occurrence of the Exchange all previously granted options to purchase shares of common stock of the Company shall be cancelled, and the Executive shall be entitled to receive new options to purchase shares of common stock of the Company ("Exchange Options"), pursuant to the Pacific Aerospace & Electronics, Inc. 2002 Stock Option Plan (the "Stock Option Plan") and an option agreement between the Executive and the Company. 3.2.2 Discretionary Grants. In addition to any Exchange Options granted pursuant to Section 3.2.1, the Executive may be granted stock options from time to time at the sole discretion of the Board, or a committee of the Board. ARTICLE 4 OTHER BENEFITS 4.1 Savings and Retirement Plan. The Executive shall be entitled to participate in all savings and retirement plans or programs generally applicable to other executive officers of the Company. - 2 - 4.2 Welfare Benefits. The Executive and qualified dependents shall be eligible for participation in, and shall be eligible to receive all benefits under, welfare benefit plans, practices, policies, and programs maintained by the Company generally for the benefit of other executive officers of the Company. These may, but will not necessarily, include medical, prescription, dental, optical, disability, severance, individual, dependent and group life, accidental death, and travel accident insurance plans and programs. 4.3 Fringe Benefits. The Executive shall be entitled to fringe benefits generally applicable to other executive officers of the Company. 4.4 Expenses. The Executive shall be entitled to receive prompt reimbursement for all reasonable business related expenses incurred by the Executive upon the Company's receipt of accountings of such expenses in accordance with practices, policies, and procedures generally applicable to other executive officers of the Company. 4.5 Vacation. The Executive shall be entitled to four (4) weeks of paid vacation time annually in accordance with the plans, policies, and programs generally applicable to other executive officers of the Company. 4.6 Automobile. The Executive shall have the use of an automobile of a make, size and model reasonably satisfactory to the Executive and to the Company. The Company shall pay all acquisition or rental costs for that automobile, as well as costs of operation, maintenance, and insurance. The Executive shall be responsible for all personal income taxes, if any, that may be determined to be due by any federal, state or local taxation authority. ARTICLE 5 DUTY OF LOYALTY 5.1 Protected Information. 5.1.1 Access to Protected Information. The Company has advised the Executive, and the Executive has acknowledged, that it is the policy of the Company to maintain as secret and confidential all Protected Information (as defined below) and that Protected Information has been and will be developed at substantial cost and effort to the Company. The Executive acknowledges that he will have access to Protected Information with respect to the Company, which information is a valuable, special, and unique asset of the Company's business and operations, and that disclosure of such Protected Information would cause irreparable damage to the Company. 5.1.2 Covenant. At all times during the Executive's employment and after the termination thereof, regardless of the reason for such termination, the Executive shall not, directly or indirectly, divulge, furnish or make accessible to any person, firm, corporation, association or other entity, or use in any manner, any Protected Information, or cause any Protected Information to enter the public domain, except as may be required in the regular course of the Executive's employment by the Company. 5.1.3 Employee-Created Protected Information. The Executive agrees to promptly disclose to the Company all Protected Information developed in whole or in part by the Executive - 3 - during his employment with the Company which relates to the Company's business. Such Protected Information is, and shall remain, the exclusive property of the Company. All writings created during the Executive's employment with the Company (excluding writings unrelated to the Company's business) are considered to be "works-for-hire" which were created for the benefit of the Company, and the Company shall own all rights in such writings. Washington law requires the following notice to be given to the Executive: This Agreement does not require the Executive to assign to the Company any invention by the Executive for which no equipment, supplies, facility or trade secret information of the Company was used and which was developed entirely on the Executive's own time unless (i) the invention related directly to the Company's business or to the Company's actual or demonstrably anticipated research or development, or (ii) the development results from any work performed by the Executive for the Company. 5.1.4 Return of Confidential Records. All forms of information containing or relating in any way to Protected Information and all physical property made or compiled by the Executive during his employment with the Company shall be the Company's exclusive property. All such information and any copies thereof and all physical property of the Company shall be held by the Executive in trust solely for the benefit of the Company and shall be delivered to the Company upon termination of the Executive's employment or at any other time upon the Company's request. 5.1.5 Protected Information. For the purposes of this Agreement, "Protected Information" means trade secrets, confidential and proprietary business information of the Company, any information of the Company other than information which has entered the public domain (unless the Executive wrongfully caused such information to enter the public domain) and all valuable and unique information and techniques acquired, developed or used by the Company relating to its business, operations, employees, customers and suppliers, which give the Company a competitive advantage over those who do not know the information and techniques and which are protected by the Company from unauthorized disclosure, including but not limited to, customer lists (including potential customers), sources of supply, processes, patented or proprietary technologies, plans, materials, pricing information, internal memoranda, marketing plans, internal policies, and products and services which may be developed from time to time by the Company and its agents or employees. 5.2 Non-Competition. 5.2.1Covenant. The Executive agrees that during his employment with the Company and for a period of twenty-four (24) months after the termination of his employment, regardless of the reason for such termination, he will not, directly or indirectly, in any capacity, (a) engage or participate in, or become employed by or render advisory or consulting or other services in connection with, any Prohibited Business, as defined below, or (b) make any financial investment, whether in the form of equity or debt, or own any interest, directly or indirectly, in any Prohibited Business. - 4 - 5.2.2 Exception. Nothing in this Section 5.2 shall prohibit the Executive from (a) owning any shares in a publicly traded mutual fund, regardless of the amount, or (b) owning a two percent (2%) or less interest in any private company or two percent (2%) or less of the outstanding equity securities of any entity whose equity securities are listed on a national securities exchange or publicly traded in any over-the-counter market. 5.2.3 Prohibited Business. For purposes of this Agreement, "Prohibited Business" means any business entity that is engaged in activities or produces products that are directly or indirectly competitive with those of the Company anywhere in the United States and which has contact, or seeks to establish contact (including without limitation by making or soliciting sales or submitting bids), with any business or governmental entity in the United States that is, at any time, a customer of the Company, for the purpose of engaging in any such competitive activity. 5.3 Non-Interference with Employment Relationships. The Executive agrees that during his employment with the Company and for a period of twenty-four (24) months after the termination of his employment, regardless of the reason for such termination, he will not directly or indirectly (a) solicit, induce, or encourage any employee, consultant, independent contractor or other service provider of the Company to leave his or her employment with the Company or to cease providing services to the Company, (b) interfere with any employment or service provider relationship between the Company and any of its employees, or (c) hire or encourage or assist any other person to hire any person who was an employee, consultant, independent contractor or other service provider of the Company within the previous three (3) months. 5.4 Disclosure of Business Opportunities. The Executive agrees to promptly and fully disclose to the Company, and not to divert to his own use or benefit or the use or benefit of others, any business opportunities involving any existing or prospective line of business, supplier, product or activity of the Company or any business opportunities that otherwise should be afforded to the Company. 5.5 Survival of Undertakings and Injunctive Relief. 5.5.1 Survival. The provisions of this Article 5 shall survive the Term of this Agreement and the termination of the Executive's employment, irrespective of the reasons therefor. In the event of any violation of this Article 5, the Executive further agrees that the time periods set forth in such Article shall be extended by the period of such violation. 5.5.2 Reasonableness. The Executive acknowledges and agrees that the restrictions imposed upon him by this Article 5 are reasonable in scope, duration and geography and are designed to protect the Protected Information and the continued success of the Company without unduly restricting the Executive's future employment by others. 5.5.3 Injunctive Relief and Other Remedies. The Executive acknowledges and agrees to the following: (a) In view of the Protected Information which the Executive has or will acquire or has or will have access to, and in view of the necessity of - 5 - the restrictions contained in this Article 5, any violation of any provision of this Article 5 will cause irreparable injury to the Company with respect to the resulting disruption in its operations. By reason of the foregoing, the Executive consents and agrees that if the Executive violates any of the provisions of this Article 5, the Company shall be entitled, in addition to any other remedies that it may have, including money damages, to an injunction to be issued by a court of competent jurisdiction, restraining the Executive from committing or continuing any violation of such sections of this Agreement. (b) The laws and public policies of the various states of the United States may differ as to the validity and enforceability of covenants set forth in this Agreement. It is the intention of the parties that the provisions of this Agreement be enforced to the fullest extent permissible under the laws and policies of each jurisdiction in which enforcement may be sought, and that the unenforceability of any provisions, or parts thereof, of this Agreement in one jurisdiction shall not render unenforceable or impair the remainder of the provisions, or parts thereof, of this Agreement in any other jurisdiction. Accordingly, if any provision, or part thereof, of this Agreement is determined to be invalid or unenforceable, such invalidity or unenforceability shall be deemed to apply only in the particular jurisdiction in which such determination is made and not with respect to any other jurisdiction. Further, any such provision or part thereof found to be invalid or unenforceable in a particular jurisdiction shall be modified to give the fullest effect to the intent of the parties' intention as is enforceable and valid under such laws and policies. 5.6 References to the Company. All references to the Company in this Article 5 shall be deemed to include any subsidiary, parent, successor in interest, or other affiliate of the Company. ARTICLE 6 TERMINATION OF EMPLOYMENT 6.1 Termination by Mutual Agreement. The Executive's employment may be terminated at any time during the Term by mutual agreement of the parties, or as otherwise provided in this Article 6. - 6 - 6.2 Termination Due to Death or Disability. 6.2.1 The Executive's employment shall be terminated immediately in the event of his death or Disability (as defined below). 6.2.2 In the event of a termination due to the Executive's death or Disability, the Executive or his estate, as the case may be, shall be entitled, in lieu of any other compensation whatsoever, to: (a) payment of the Base Salary through the date of his death or Disability; (b) any annual bonus awarded and payable but not yet paid; (c) reimbursement of expenses incurred but not paid prior to such termination of employment; and (d) such rights to other benefits as may be provided in applicable plans and programs of the Company, including, without limitation, applicable employee benefit plans and programs, according to the terms and provisions of such plans and programs. 6.2.3 In addition to the foregoing, if the Executive dies prior to the end of the Term, the Company shall pay to the beneficiary designated in writing by the Executive (the "Beneficiary") or, if no such Beneficiary is designated, to the Executive's estate, an amount equal to the lesser of (a) the Base Salary that would have been paid through the end of the Term, and (b) twelve (12) months of the Base Salary, which shall be payable in a lump sum. 6.2.4 For purposes of this Agreement, "Disability" means a physical or mental incapacity that prevents the Executive from performing the essential functions of his position with the Company for a period of ninety (90) days as determined: (a) in accordance with any long-term disability plan provided by the Company of which the Executive is a participant, and (b) by the following procedure (in the event that the Executive is not a participant in any long-term disability plan): the Executive agrees to submit to medical examinations by a licensed healthcare professional selected by the Company, in its sole discretion, to determine whether a Disability exists. In addition, the Executive may submit to the Company documentation of a Disability, or lack thereof, from a licensed healthcare professional of his choice. Following a determination of a Disability or lack of Disability by the Company's or the Executive's licensed healthcare professional, the other party may submit subsequent documentation relating to the existence of a Disability from a licensed healthcare professional selected by such other Party. In the event that the medical opinions of such licensed - 7 - healthcare professionals conflict, such licensed healthcare professionals shall appoint a third licensed healthcare professional to examine the Executive, and the opinion of such third licensed healthcare professional shall be dispositive. 6.3 Termination for Cause. 6.3.1 The Company may terminate the Executive's employment without notice at any time for Cause (as defined below). 6.3.2 Upon any termination for Cause, the Executive shall not be entitled to payment of any compensation other than his Base Salary and benefits accrued under this Agreement up to the date of such termination. 6.3.3 For purposes of this Agreement, "Cause" shall mean: (a) continued neglect, after notice thereof and failure to remedy within thirty (30) days, or willful misconduct by the Executive with respect to his duties and obligations under this Agreement; (b) unauthorized expenditure of the Company's funds; (c) unethical business practices in connection with the Company's business; (d) any material breach by the Executive of any term or provision of this Agreement; (e) any act or action of the Executive involving embezzlement or dishonesty related to the Company or the Company's business or misappropriation of the Company's assets, (f) abuse of alcohol or prescription drugs or use of any unlawful drugs; or (g) conviction of any felony. 6.4 Termination without Cause. 6.4.1 The Company may terminate the Executive's employment without notice at any time without Cause. 6.4.2 In the event of any such termination, the Executive shall be entitled to receive from the Company, in lieu of any other payments and benefits: (a) payment of the Base Salary through the date of termination; - 8 - (b) an amount equal to twenty-four (24) months of his Base Salary then in effect if his employment is terminated without Cause on or before December 31, 2002, and in an amount equal to twelve (12) months of his Base Salary then in effect if his employment is terminated without Cause after December 31, 2002, payable in each instance in accordance with the normal payroll practices of the Company for other executive officers, including deductions, withholdings, and collections as required by law; (c) continued participation for twelve (12) months after termination in all employee health and medical benefit plans and programs in which the Executive and his eligible dependents were participants immediately prior to termination, if such continued participation is permitted under the general terms and provisions of such plans and programs; provided, however, that if such participation is not permitted, the Company shall provide the Executive with the economic equivalent of such coverage; and provided further that if the Executive becomes eligible to participate in any other health and medical benefit plan or program which confers provides similar benefits, the Executive and his eligible dependents shall cease to receive benefits under this subparagraph in respect of the Company's plan or program; and (d) such rights to other benefits as may be provided in applicable plans and programs of the Company, including, without limitation, applicable employee benefit plans and programs, according to the terms and provisions of such plans and programs. 6.5 Termination for Good Reason. 6.5.1 The Executive may terminate his employment upon thirty (30) days written notice for Good Reason. 6.5.2 In the event of a termination for Good Reason, the Executive shall be entitled to receive from the Company, in lieu of any other payments and benefits, the payments and benefits to which he would have been entitled as if his employment was terminated without Cause on such date of termination. 6.5.3 For purposes of this Agreement, "Good Reason" means a demotion in title or office of the Executive such that he does not serve as President and Chief Executive Officer of the Company, which was not a result of his death, Disability or termination for Cause. 6.6 No Mitigation. The Executive shall not be required to mitigate the amount of any payment provided for in Sections 6.4.2(b) or 6.5 by seeking other employment or otherwise, nor shall the amount of any payment provided for in Sections 6.4.2(b) or 6.5 be reduced by any compensation earned by the Executive as a result of his employment by another entity or person, self-employment or otherwise. If the Executive's employment is terminated pursuant to Sections 6.4 or 6.5, the time - 9 - periods stated in Sections 5.2 and 5.3 shall be changed to equal the periods during which he is receiving payments pursuant to Sections 6.4.2(b) or 6.5. 6.7 Conditions to Payment. No payments provided for in Sections 6.4.2(b) or 6.5 shall be payable to the Executive unless and until the Executive signs a general release of claims and waiver of rights arising out of his employment with the Company or the termination of such employment in a form reasonably satisfactory to both parties. ARTICLE 7 MISCELLANEOUS 7.1 Assignment, Successors. The Company may freely assign its rights and obligations under this Agreement to a successor of the Company's business without the prior written consent of the Executive. This Agreement shall be binding upon and inure to the benefit of the Executive and the Executive's estate and the Company and any assignee of or successor to the Company. 7.2 Nonalienation of Benefits. Benefits payable under this Agreement shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution or levy of any kind, either voluntary or involuntary, prior to actually being received by the Executive, and any such attempt to dispose of any right to benefits payable hereunder shall be void. 7.3 Severability. If any part of this Agreement is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity shall not serve to invalidate any portion of this Agreement not declared to be unlawful or invalid. Any section or part of a section so declared to be unlawful or invalid shall, if possible, be construed in a manner which will give effect to the terms of such section or part of a section to the fullest extent possible while remaining lawful and valid. 7.4 Amendment and Waiver. This Agreement shall not be altered, amended or modified except by written instrument executed by the Company and the Executive. A waiver of any term, covenant, agreement or condition contained in this Agreement shall not be deemed a waiver of any other term, covenant, agreement or condition, and any waiver of any other term, covenant, agreement or condition, and any waiver of any default in any such term, covenant, agreement or condition shall not be deemed a waiver of any later default thereof or of any other term, covenant, agreement or condition. 7.5 Notices. All notices and other communications hereunder shall be in writing and either hand delivered or delivered by overnight courier or first class registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Company: PACIFIC AEROSPACE & ELECTRONICS, INC. 430 Olds Station Road Wenatchee, WA 98801 Attn: President - 10 - If to the Executive: Donald A. Wright 430 Olds Station Road, 4th Floor Wenatchee, WA 98801 Any party may from time to time designate a new address by notice given in accordance with this section. Notice and communications shall be effective when actually received by the addressee. 7.6 Applicable Law. The provisions of this Agreement shall be interpreted and construed in accordance with the laws of the State of Washington, without regard to its choice of law principles. 7.7 Effect on Other Agreements. This Agreement supersedes all prior agreements, promises, and representations regarding employment by the Company and severance or other payments contingent upon termination of employment, including, without limitation, any severance plan generally applicable to other executive officers of the Company. 7.8 Counterpart Originals. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 7.9 Entire Agreement. This Agreement forms the entire agreement between the parties hereto with respect to any severance payment and with respect to the subject matter contained in this Agreement. All prior agreements concerning the subject matter hereof, including, without limitation, the Initial Employment Agreement, shall be null and void and superseded by this Agreement. 7.10 Acknowledgment. The Executive represents and acknowledges the following: (a) he has carefully read this Agreement in its entirety; (b) he understands the terms and conditions contained herein; (c) he has had the opportunity to review this Agreement with legal counsel of his own choosing and has not relied on any statements made by the Company or its legal counsel as to the meaning of any term or condition contained herein or in deciding whether to enter into this Agreement; and (d) he is entering into this Agreement knowingly and voluntarily. - 11 - Executed as of the date first written above. PACIFIC AEROSPACE & ELECTRONICS, INC. By: /s/ Charles A. Miracle ------------------------------------------ Charles A. Miracle Vice President and Chief Financial Officer Date: March 19, 2002 ------------------------------------- THE EXECUTIVE: By: /s/ Donald A. Wright ------------------------------------------ Donald A. Wright Date: March 19, 2002 ------------------------------------- - 12 - EX-10.7 12 f80483ex10-7.txt EXHIBIT 10.7 EXHIBIT 10.7 PACIFIC AEROSPACE & ELECTRONICS, INC. 430 Olds Station Road Wenatchee, Washington 98801 5.0% Senior Secured Notes due May 1, 2007 Dated as of March 19, 2002 Jefferies & Company, Inc. 11100 Santa Monica Boulevard, 10th Floor Los Angeles, California 90025 Ladies and Gentlemen: Pacific Aerospace & Electronics, Inc., a Washington corporation (the "Company"), hereby agrees with the Initial Purchaser (as defined herein) and First Union National Bank, a national banking association, as Collateral Agent (in such capacity, the "Collateral Agent"), as follows: SECTION 1. AUTHORIZATION OF NOTES The Company will authorize the issuance and sale of $36,000,000 aggregate principal amount of its 5.0% Senior Secured Notes due May 1, 2007 (the "Notes", such term to include any Notes issued in substitution therefor or replacement thereof pursuant to Section 13.3). The Notes shall be substantially in the form of Exhibit A, with such changes therefrom, if any, as may be approved by the Holders and the Company. Certain capitalized terms used in this Note Purchase Agreement (as amended, restated or supplemented from time to time, this "Agreement") are defined in Section 12. SECTION 2. SALE AND PURCHASE OF NOTES; PAYMENTS ON THE NOTES 2.1 Sale and Purchase of the Notes. Subject to the terms and conditions of this Agreement, the Company will issue and sell to Jefferies & Company, Inc. (the "Initial Purchaser"), and the Initial Purchaser will purchase from the Company, at the Closing provided for in Section 3, Notes in the principal amount of $36,000,000 (the "Principal Amount"), at a purchase price equal to the Original Issue Price less the Initial Discount. From and after the Closing provided for in Section 3, the Company will use the proceeds of the sale of the Notes solely as provided in Section 5.20. 2.2 Payments of Principal. The Company shall repay the entire unpaid principal amount of the Notes, together with accrued and unpaid interest thereon, on May 1, 2007 (the "Maturity Date"). 2.3 Interest on the Notes. (a) The outstanding Principal Amount of the Notes shall bear interest at an annual rate equal to 5.0%, payable semi-annually in arrears in cash on each May 1 and November 1 commencing on May 1, 2002; provided, however, that during the occurrence and -1- continuance of an Event of Default, the Notes shall bear interest, payable on demand, at a rate per annum equal at all times to 8.0% per annum. All computations of interest shall be made on the basis of a year of 360 days, for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest is payable. (b) On or prior to April 27, 2007, the Company shall pay to the Holders an amount equal to all amounts constituting accrued but unpaid interest on the Notes for federal income tax purposes as of such date, including, without limitation, all original issue discount. 2.4 Payments Free of Taxes. Any and all payments by the Company under or in respect of the Notes (including by any repayment or repurchase of the Notes in accordance with the terms hereof) shall be made free and clear of and without deduction for any and all present or future Taxes and all liabilities with respect thereto, excluding Taxes measured by a Holder's net income and franchise taxes imposed on it by the jurisdiction under the laws of which such Holder is organized or is required to be qualified to do business or any political subdivision of either of the foregoing. If the Company shall be required by law to deduct any Taxes from or in respect of any sum payable under or in respect of the Notes (including by the repayment or repurchase thereof), (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including, without limitation, deductions applicable to additional sums payable under this Section 2.4), such Holder receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Company shall make such deductions and (iii) the Company shall pay the full amount deducted to the relevant taxing authority or other Governmental Authority in accordance with applicable law. SECTION 3. CLOSING The sale of the Notes to the Initial Purchaser shall take place at the offices of Milbank, Tweed, Hadley & McCloy, 1 Chase Manhattan Plaza, New York, New York 10005-1413 at 11:00 a.m., New York City time, at a closing (the "Closing") on March 19, 2002, or such later date as may be agreed upon by the Company and the Initial Purchaser (such date, the "Closing Date"). At the Closing, the Company will deliver to the Initial Purchaser Notes in the principal amount of the Principal Amount, in the form of a single Note (or such greater number of Notes as the Initial Purchaser may request; provided that each such Note shall be in a denomination of at least $1,000,000 or integral multiples of $100,000), each dated the Closing Date and registered in the Initial Purchaser's name (or in the name of its nominee or another Holder), against payment of the purchase price therefor on the Closing Date by transfer of immediately available funds to the Company, or as otherwise directed by the Company in writing (at least two (2) days prior to the Closing Date). If at the Closing the Company shall fail to tender such Notes to the Initial Purchaser as provided above in this Section 3 or if any of the conditions specified in Section 4 shall not have been fulfilled to the Initial Purchaser's satisfaction, the Initial Purchaser shall, at its election, be relieved of all further obligations under this Agreement, without thereby waiving any other rights it may have by reason of such failure or such nonfulfillment. -2- SECTION 4. CONDITIONS TO CLOSING The Initial Purchaser's obligation to purchase and pay for the Notes to be sold to it at the Closing is subject to the fulfillment to its satisfaction, prior to or at the Closing, of the following conditions: 4.1 Representations and Warranties. The representations and warranties of the Company and each of its Subsidiaries contained in this Agreement, the other Operative Agreements, and those other agreements otherwise made in writing by or on behalf of the Company or any of its Subsidiaries in connection with the transactions contemplated by this Agreement, shall be true and correct when made and at the time of the Closing, except for any representation and warranty that is expressly stated to relate to a specific date, in which case such representation and warranty shall be true and correct as of such earlier date. 4.2 Performance; No Default. The Company and each of its Subsidiaries shall have performed and complied with all agreements and conditions contained in this Agreement and each other Operative Agreement required to be performed or complied with by it prior to or at the Closing, and at the time of the Closing no Default or Event of Default under this Agreement or default by any party under any Operative Agreement shall have occurred and be continuing. 4.3 Compliance Certificates. The Initial Purchaser shall have received an Officer's Certificate of the Company, dated the Closing Date and satisfactory in substance and form to it, certifying that (i) the conditions specified in Sections 4.1 and 4.2 have been fulfilled and (ii) no Material Adverse Effect has occurred subsequent to November 30, 2001 other than (A) the Company's failure to pay (1) interest on the Old Notes and (2) amounts due under the DDJ Loan Agreement and (B) the breach by the Company and its Subsidiaries of certain covenants under the Old Notes Indenture, the DDJ Loan Agreement and the KeyBank Promissory Notes. 4.4 Opinions of Counsel. The Initial Purchaser shall have received favorable opinions from (a) Milbank, Tweed, Hadley and McCloy LLP, New York counsel for the Company and each of its Subsidiaries, substantially in the form of Exhibit B-1 and (b) Davis Wright Tremaine LLP, Washington counsel for the Company and each of its Subsidiaries, substantially in the form of Exhibit B-2, and in each case covering such other matters as the Initial Purchaser may reasonably request, each addressed to the Initial Purchaser, dated the Closing Date and otherwise reasonably satisfactory in substance and form to the Initial Purchaser. The Company and each of its Subsidiaries hereby direct their counsel referred to in clauses (a) and (b) above to deliver to the Initial Purchaser such opinions and letters to be delivered by it and authorize the Initial Purchaser to rely thereon. -3- 4.5 Legal Investment. On the Closing Date the Initial Purchaser's purchase of Notes shall be permitted by the laws and regulations of each jurisdiction to which the Initial Purchaser's investments are subject. If requested by the Initial Purchaser by prior written request to the Company, the Initial Purchaser shall have received, at least five (5) Business Days prior to the Closing, an Officers' Certificate of the Company or any of its Subsidiaries, as the case may be, certifying as to such matters of fact as the Initial Purchaser may reasonably specify to enable it to determine whether such purchase is so permitted. 4.6 Operative Agreements. Each of the Operative Agreements shall be in full force and effect, and shall constitute the legal, valid and binding and enforceable obligations of the respective parties thereto, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium and similar laws of general application relating to or affecting the rights and remedies of creditors and by general equitable principles, regardless of whether such enforceability is considered in a proceeding in equity or law. No default or accrued right of termination on the part of any of the parties to the Operative Agreements (other than the Initial Purchaser) shall exist thereunder as of the Closing Date, and the Initial Purchaser shall have received a fully executed original, or a true and complete copy, of each such document (other than the Notes). 4.7 Use of Proceeds. At the time of the Closing, the Company shall have used the net proceeds of the sale of the Notes to the Initial Purchaser, solely in accordance with Section 5.20. 4.8 Proceedings and Documents. All proceedings in connection with the transactions contemplated by this Agreement and the Operative Agreements and all documents and instruments incident to such transactions shall be reasonably satisfactory to the Initial Purchaser and its special counsel, and the Initial Purchaser and its special counsel shall have received all such counterpart originals or certified or other copies of such documents as the Initial Purchaser or such special counsel may reasonably request. 4.9 Rating. Prior to the Closing, the Notes shall have received an estimated rating of at least B3/B- from Moody's and S&P, which rating shall remain in effect as of the Closing. 4.10 Insurance. Insurance complying with the provisions of Section 8.4 hereof shall be in full force and effect. -4- 4.11 CUSIP Number. The Company shall have obtained for the Notes a CUSIP Number issued by Standard & Poor's CUSIP Service Bureau (in cooperation with the Securities Valuation Office of the National Association of Insurance Commissioners). 4.12 Exchange. The "Closing" (as defined in the Exchange Agreement) shall have occurred, and the Initial Purchaser shall have received an executed copy of the Exchange Agreement and each of the other documents executed and delivered in connection therewith, each of which shall be in full force and effect. 4.13 Release of Liens; Financing Statements. (a) The Initial Purchaser shall have received evidence reasonably satisfactory to it that upon payment by the Company of the outstanding amounts under the DDJ Loan Agreement with the proceeds of the Notes sold on the Closing Date, (i) the notes representing such indebtedness shall be cancelled, (ii) all obligations of the Company and its Subsidiaries and any of their respective Affiliates under such DDJ Loan Agreement and notes and any loan or other agreement related thereto shall be fully satisfied, and (iii) any and all Liens under such DDJ Loan Agreement shall be completely and irrevocably released. (b) The Initial Purchaser shall have received duly completed and executed Deeds of Trust and all relevant Uniform Commercial Code financing statements (Form UCC-1) for all jurisdictions as may be necessary or, in the reasonable opinion of the Initial Purchaser, desirable to perfect the Lien created by the Collateral Documents, and the Company shall have taken all other actions required or reasonably requested by the Initial Purchaser in respect of the creation and perfection of the Liens created pursuant to the Collateral Documents (including, without limitation, the delivery of all security certificates). 4.14 Corporate Documents. The Initial Purchaser shall have received a copy of the Certificate of Incorporation or other comparable organizational document of the Company and each of its Subsidiaries, certified as of a recent date by the Secretary of State of the state of incorporation (or other applicable Governmental Authority) of the Company and each such Subsidiary, together with certificates of such official attesting to the good standing (or its equivalent) of the Company and each such Subsidiary. 4.15 Secretary's Certificates. The Initial Purchaser shall have received copies of (i) the Company's and each of its Subsidiaries' Certificate of Incorporation and By-Laws (or other organizational documents), (ii) the resolutions of the Board of Directors (or other comparable governing body) of the Company and of each Subsidiary party to an Operative Agreement approving each Operative Agreement to which it is a party, and (iii) all documents evidencing other necessary corporate action and required governmental and third party approvals, licenses and consents with respect to each Operative Agreement and the transactions contemplated thereby, certified by the Secretary -5- of the Company and each such Subsidiary, as the case may be, as being true and correct and in full force and effect as of the Closing Date. 4.16 Offering Circular. The Initial Purchaser shall have received a final copy of the Offering Circular prepared in connection with the offer and sale of the Notes, dated as of the Closing Date, in a form reasonably satisfactory to the Initial Purchaser and the Company. SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to the Holders that as of the date hereof and the Closing (before and after giving effect to the transactions contemplated hereby): 5.1 Corporate Existence; Qualification; Power; Licenses and Permits. The Company and each of its Subsidiaries (i) is a corporation duly incorporated and validly existing under the laws of the jurisdiction of its incorporation and (ii) is duly qualified and is authorized to do business in every jurisdiction in which the failure to be so qualified could reasonably be expected to have a Material Adverse Effect. The Company and each of its Subsidiaries has (i) all corporate power and authority required to own its properties and assets and to carry on its business as now conducted and (ii) all licenses, authorizations, consents, approvals, franchises, leases, permits, certificates, qualifications, easements, rights of way and other rights required to carry on its business as now conducted except where the failure to have such licenses, authorizations, consents, approvals, franchises, leases, permits, certificates, qualifications, easements, rights of way and other rights could not reasonably be expected to have a Material Adverse Effect. None of the Company nor any of its Subsidiaries is in violation of the terms of any such license, authorization, consent, approval, franchise, lease, permit, certificate, qualification, easement, right of way or other right in any such case which would have a Material Adverse Effect. 5.2 Corporate and Governmental Authorization; Contravention. The execution, delivery and performance by the Company and each of its Subsidiaries of this Agreement and each Operative Agreement to which it is a party and the consummation by the Company and each such Subsidiary of the transactions contemplated hereby and thereby, (i) are within the Company's and each such Subsidiary's corporate powers, (ii) have been duly authorized by all necessary corporate action, (iii) except as provided herein or in the Operative Agreements, require no action by or in respect of, or filing with, any Governmental Authority, other than the filing of a Form D with the Securities and Exchange Commission and the "blue sky" filings in all applicable states in connection with this Agreement and the transactions contemplated hereby, (iv) do not contravene, or constitute a default under, any provision of any applicable law, statute, ordinance, regulation, rule, order or other governmental restriction or of the Articles of Incorporation or By-Laws or other organizational documents of the Company or any of its Subsidiaries, (v) do not contravene, or constitute a default under, any agreement, judgment, injunction, order, decree, indenture, contract, lease, instrument or other commitment to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries or any of their respective assets are bound which could reasonably be expected to have a Material Adverse Effect, and (vi) will not result in the -6- creation or imposition of any Lien upon any asset of the Company or any of its Subsidiaries under any existing indenture, mortgage, deed of trust, loan or credit agreement or other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the or any of their assets may be bound or affected (except as contemplated herein). 5.3 Binding Effect. This Agreement and each of the other Operative Agreements has been duly executed and delivered by the Company and each of its Subsidiaries to which it is a party and is a legal, valid and binding agreement of the Company and each such Subsidiary, and is or will be enforceable against the Company and each such Subsidiary in accordance with their terms except as the enforceability thereof may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or similar laws affecting creditors' rights generally and general principles of equity, and except to the extent that the indemnification provisions of Section 15 hereof may be limited by federal and/or state securities laws and public policy considerations. 5.4 Information. The Company has furnished to the Holders as of the date of this Agreement the following financial statements (the "Financials") of the Company: (i) except as described on Schedule 5.4, consolidated balance sheets as of, and consolidated statements of earnings, changes in consolidated shareholders' equity and changes in consolidated cash flow for the fiscal year ended May 31, 2001 audited by independent certified public accountants, and (ii) unaudited consolidated balance sheets as of the end of the most recent fiscal quarter ending prior to the Closing and the related unaudited consolidated statements of earnings, changes in shareholders' equity and changes in consolidated cash flow for the three months then ended. The Financials fairly present the consolidated financial condition of the Company and its Subsidiaries at the dates thereof and the results of operations for the periods indicated (subject, in the case of unaudited financial statements, to normal year-end adjustments), and such financial statements have been prepared in conformity with GAAP consistently applied throughout the periods involved (except for omission of notes to the unaudited Financials). 5.5 Litigation and Judgments. Except as set forth on Schedule 5.5, there is no (i) injunction, stay, decree, judgment, writ or order issued and outstanding by any court or arbitrator or any Governmental Authority or official against the Company or any of its Subsidiaries or (ii) action, suit, proceeding, litigation, contested claim, investigation or arbitration pending, or threatened, against or affecting the Company or any of its Subsidiaries, in each case, which could reasonably be expected to have a Material Adverse Effect, or which in any manner impairs the validity of this Agreement or any other Operative Agreement. 5.6 Compliance with ERISA. None of the Company, any of its Subsidiaries nor any ERISA Affiliate maintains or contributes to any Benefit Plan or Multiemployer Plan except for the Benefit Plans and Multiemployer Plans set forth on Schedule 5.6. Each Plan is maintained and is funded in all material respects in accordance with its terms and in compliance with all provisions of ERISA and the Code applicable thereto, and the Company and each of its Subsidiaries and each ERISA -7- Affiliate has fulfilled in all material respects its obligations related to the minimum funding standards of ERISA and the Code for each Plan, is in compliance in all material respects with the currently applicable provisions of ERISA and of the Code relating to the qualification with respect to each Plan intended to be so qualified and has not incurred any material liability (other than routine liability for premiums) under Title IV of ERISA. No Termination Event has occurred which has resulted in liability which either has not been satisfied or is not reflected on the Company's financial statements, nor has any other event occurred that is likely to result in a Termination Event which could reasonably be expected to have a Material Adverse Effect. No event or events have occurred in connection with which the Company or any of its Subsidiaries, any ERISA Affiliate, or any Plan, directly or indirectly, is likely to be subject to any liability under ERISA, the Code or any other law, regulation or governmental order or under any agreement, instrument, statute, rule of law or regulation pursuant to or under which any such entity has agreed to indemnify or is required to indemnify any person against liability incurred under, or for a violation or failure to satisfy the requirements of, any such statute, regulation or order which could reasonably be expected to have a Material Adverse Effect. The Company has made available to the Holders true, correct and complete copies of the following documents: each Plan and all amendments thereto, all written interpretations thereof and written descriptions thereof that have been distributed to employees or former employees of the Company and each of its Subsidiaries or the ERISA Affiliates, the most recent determination letter issued by the Internal Revenue Service with respect to each Plan, for the three most recent plan years, Annual Reports on Form 5500 Series required to be filed with any Governmental Authority for each Plan, all actuarial reports prepared for the last three plan years for each Benefit Plan, a listing of all Multiemployer Plans, with the aggregate amount of the most recent annual contributions required to be made by the Company or any of its Subsidiaries or any ERISA Affiliate to each such plan and copies of the collective bargaining agreements requiring such contributions, any information that has been provided to the Company or any of its Subsidiaries or any ERISA Affiliate regarding withdrawal liability under any Multiemployer Plan. None of the Company or any of its Subsidiaries has made, or has any obligation to make, annual payments to former employees of the Company or any of its Subsidiaries or any ERISA Affiliate under any Retiree Health Plan. 5.7 Taxes. (a) Except as set forth on Schedule 5.7(a), the Company and each of its Subsidiaries has timely filed (inclusive of any permitted extensions) with the appropriate taxing authorities all Tax Returns (including, without limitation, information returns and other material information) in respect of Taxes required to be filed through the date hereof. The information filed on such Tax Returns is complete and accurate in all material respects. To the Company's knowledge and to each of its Subsidiaries' knowledge, all material deductions taken by the Company and each such Subsidiary as reflected in such Tax Returns have been taken in accordance with applicable laws and regulations. (b) All Taxes, in respect of periods beginning prior to the date hereof, have been timely paid when due, except where the same are being contested in good faith by appropriate proceedings and appropriate reserves therefor have been established and maintained in accordance with GAAP for the accrual thereof as reflected on the audited consolidated financial statements for the Company's fiscal year ended May 31, 2000, and, to the extent such -8- reserves are maintained for periods after May 31, 2000, consistent with the Company's past practice. (c) (i) No material deficiencies for Taxes have been claimed, proposed or assessed by any taxing or other governmental authority against the Company or any of its Subsidiaries other than such deficiencies of which the Holders have been notified in writing and which are being contested in good faith by appropriate proceedings, and appropriate reserves therefor have been established and maintained as reflected on the audited consolidated financial statements for the Company's fiscal year ended May 31, 2001 and in accordance with GAAP, and, to the extent such reserves are maintained for periods after May 31, 2001, consistent with the Company's and each of its Subsidiaries' past practice and (ii) no tax liens have been filed against any of the Collateral. There are no pending or threatened audits, investigations or claims for or relating to any material liability in respect of Taxes, and there are no matters under discussion with any governmental authorities with respect to Taxes which are likely to result in a material additional liability for Taxes. For all years up to and including the fiscal year ended May 31, 1998, either the period during which any assessments may be made by the Internal Revenue Service have expired without waiver or extension or the federal income Tax Returns of the Company and each of its Subsidiaries has been audited by the Internal Revenue Service and such audits have been closed. (d) Neither the Company nor any of its Subsidiaries has incurred, or will incur any material tax liability in connection with (i) the Exchange, (ii) the other transactions contemplated by the Exchange Agreement or (iii) the transactions contemplated by this Agreement. 5.8 Subsidiaries. The Subsidiaries of the Company as of the date of this Agreement are those listed on Schedule 5.8 attached hereto. The Company is the record and beneficial owner, either directly or indirectly, of all of the shares of Capital Stock of each of its Subsidiaries listed on such schedule as being owned by the Company, and there are no proxies, irrevocable or otherwise, with respect to such shares. No Capital Stock of any of the Company's Subsidiaries are or may become required to be issued by reason of any options, warrants, scripts, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exchangeable for, shares of Capital Stock of any such Subsidiary, and there are no contracts, commitments, understandings or arrangements by which any such Subsidiary is or may become bound to issue additional shares of its Capital Stock or Stock Equivalents. All of such respective shares so owned (whether directly or indirectly) by the Company are owned by it free and clear of any Liens, and all such shares are validly issued, fully paid and non-assessable. 5.9 Not Investment Companies. None of the Company or any of its Subsidiaries is (i) an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, (ii) a "holding company" or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended, or (iii) subject to any other law which purports to regulate or restrict its ability to -9- borrow money or to consummate the transactions contemplated by this Agreement or any other Operative Agreement or to perform its obligations hereunder or thereunder. 5.10 No Conflicting Requirements. Except as set forth on Schedule 5.10, none of the Company nor any of its Subsidiaries has violated or is in default under any term or provision of any charter, by-law, mortgage, indenture, agreement, instrument, statute, rule, regulation, judgment, decree, order, writ, injunction, contract, lease or other commitment to which any of them is a party or by which any of them is bound such that such violations or defaults in the aggregate could reasonably be expected to have a Material Adverse Effect. None of the Company nor any of its Subsidiaries know of any dispute regarding any indenture, contract, lease, agreement, instrument or other commitment which would individually, or when aggregated with other such disputes, be reasonably likely to have a Material Adverse Effect. 5.11 Debt. Schedule 5.11 attached hereto sets forth as of January 31, 2002 all of the Debt of the Company and each of its Subsidiaries and a pro forma schedule of such Debt as of January 31, 2002, assuming the application of the proceeds of the Notes in accordance with this Agreement. After application of the proceeds of the Notes as set forth herein, the Company and each of its Subsidiaries will have no Debt that is senior, pari passu or subordinated in right of payment to their Obligations under the Notes or under this Agreement, except for Debt permitted pursuant to Section 9.1 of this Agreement. 5.12 Title to Properties and Assets. (a) Except for (i) Liens permitted pursuant to Section 9.4 hereof and (ii) such imperfections of title that represent imperfections of title or easements of record, if any, which do not materially detract from the value or interfere with the use of the properties subject thereto or affected thereby, or otherwise materially impair business operations, the Company and each of its Subsidiaries has (a) good and marketable fee simple title to the Owned Real Property material to their respective businesses and the Owned Real Property on which a Lien has been granted to the Collateral Agent for the benefit of the Holders, (b) valid leasehold interests in all of its Leased Real Property material to their businesses, and (c) good and marketable title to all of the other material property and assets owned by the Company and each of its Subsidiaries at any time (including, without limitation, all of their Accounts and Inventory). Schedule 5.12(a) attached hereto sets forth the Owned Real Property and the Leased Real Property held by the Company and each of its Subsidiaries. The Company and each of its Subsidiaries enjoy peaceful and undisturbed possession of all their material Real Estate and there is no pending or threatened condemnation proceeding relating to any Real Estate which could reasonably be expected to have a Material Adverse Effect. No default exists under any Lease which could reasonably be expected to have a Material Adverse Effect. All of the Structures and other tangible assets owned, leased or used by the Company and each of its Subsidiaries in the conduct of their respective businesses are (a) insured as required by the terms of this Agreement and the other Operative Agreements, (b) sufficient for the operation of the businesses of the Company and each such Subsidiary as presently conducted and (c) in conformity with all applicable laws, ordinances, orders, regulations and other requirements (including applicable zoning, environmental, motor vehicle safety, occupational safety and health laws and regulations) -10- relating thereto, except where the failure to conform could not reasonably be expected to have a Material Adverse Effect. (b) The Company and each of its Subsidiaries possess adequate assets, licenses, patents, patent applications, copyrights, service marks, trademarks, trademark applications and tradenames to continue to conduct its business as presently conducted. Schedule 5.12(b) attached hereto sets forth as of the date of this Agreement (i) all of the federal, state and foreign registrations of the registered trademarks of the Company and each of its Subsidiaries and all pending applications for any such registrations and (ii) all of the patents of the Company and each of its Subsidiaries and all pending applications therefor (collectively, together with all service marks and other marks and all applications therefor, tradenames and other trade rights of the Company and each of its Subsidiaries, the "Proprietary Rights"). The Company and each of its Subsidiaries are the owners of each of the trademarks and patents listed on Schedule 5.12(b) as indicated on such Schedule and except as set forth on such Schedule and, except pursuant to licenses granted in the ordinary course of business, no other Person has the right to exploit such patents or use any of such marks in commerce either in the identical form or in such near resemblance thereto as may be likely to cause confusion or to cause mistake or to deceive. As of the date of this Agreement each of the trademarks listed on Schedule 5.12(b) is a valid and subsisting federally registered trademark of the Company or one or more of its Subsidiaries having the registration number and issue date set forth on Schedule 5.12(b), and each of the patents listed on Schedule 5.12(b) is a valid and subsisting patent of the Company or its Subsidiaries having the patent number and issue date set forth on Schedule 5.12(b). Except as disclosed on Schedule 5.12(b), no Person has a right to receive any material royalty or similar payment from the Company or any of its Subsidiaries in respect of any such registered Propriety Rights. None of the Company nor any of its Subsidiaries has granted any material license, except such licenses as were granted in the ordinary course of the Company's and each such Subsidiary's businesses, or sold or otherwise transferred any interest in any of the Proprietary Rights to any other Person. None of the Company nor any of its Subsidiaries is aware that the use of any of the material Proprietary Rights by the Company or any of its Subsidiaries is infringing upon or otherwise violating the rights of any third party in or to such Proprietary Rights which violation or infringement could reasonably be expected to result in a material liability to the Company or any of its Subsidiaries, as the case may be, and no proceeding has been instituted against or notice received by the Company or any of its Subsidiaries that are presently outstanding alleging that the use of any of the material Proprietary Rights infringes upon or otherwise violates the rights of any third party in or to any of the material Proprietary Rights which, if successful, could reasonably be expected to materially adversely affect the fair market value of any such material Proprietary Rights or the rights granted therein to the Collateral Agent for the benefit of the Holders, including, without limitation, the validity, priority or perfection of the security interest granted therein to the Collateral Agent for the benefit of the Holders under the Collateral Documents or the remedies therein or in this Agreement. All of the material Proprietary Rights of the Company and each of its Subsidiaries are valid and enforceable rights of the Company and each such Subsidiary and will not cease to be valid and in full force and effect by reason of the execution and delivery of this Agreement or the other Operative Agreements or the consummation of the transactions contemplated hereby or thereby. (c) As of the Closing Date, the Capital Stock of each Subsidiary (including, without limitation, each Foreign Subsidiary) has been pledged to the Collateral Agent for the -11- benefit of the Holders in accordance with the terms of the Pledge Agreement. The owners of all such Capital Stock are parties as pledgors under the Pledge Agreement, and each such pledgor has delivered the stock certificates representing the Capital Stock owned by each such pledgor in accordance with the Pledge Agreement. 5.13 Compliance with Law. None of the Company nor any of its Subsidiaries has violated or failed to comply with any statute, law, ordinance, regulation, rule or order of any foreign, federal, state or local government or any other governmental department or agency or any self regulatory organization, or any judgment, decree or order of any court, applicable to its business or operations or properties except where the aggregate of all such violations or failures to comply would not have a Material Adverse Effect. The conduct of the businesses of Company and each of its Subsidiaries is in conformity with all securities, commodities, energy, public utility, zoning, building code, health, OSHA and environmental requirements and all other foreign, federal, state and local governmental and regulatory requirements and requirements of any self regulatory organizations, except where the aggregate of all such non-conformities could not reasonably be expected to have a Material Adverse Effect. None of Company nor any of its Subsidiaries has received any notice to the effect that, or otherwise been advised that, they are not in compliance with, and none of the Company nor any of its Subsidiaries has any reason to anticipate that any presently existing circumstances are likely to result in the violation of, any such statute, law, ordinance, regulation, rule, judgment, decree or order which failure or violation could reasonably be expected to have a Material Adverse Effect. 5.14 Compliance with Environmental Laws. (a) The Company and each of its Subsidiaries has complied with and is currently in compliance with all applicable Environmental Laws, except where noncompliance could not reasonably be expected to have a Material Adverse Effect. (b) No Hazardous Substances are generated, processed, discharged, stored, treated, disposed of, or managed at any facility owned, leased or operated by the Company or any of its Subsidiaries or, at the request or behest of the Company or any of its Subsidiaries, at any other site, so as to require a license, permit or authorization of any type from any governmental authority, other than licenses, permits and authorizations which have been obtained and are in full force and effect or where the failure to obtain such a license, permit or authorization could not reasonably be expected to have a Material Adverse Effect. No governmental or private actions to enforce environmental or pollution control laws or arising under any Environmental Law are pending against the Company or any of its Subsidiaries or against or with respect to any facility owned, operated or leased by the Company or any of its Subsidiaries. None of the Company nor any of its Subsidiaries has received from any Person any complaint, notice of violation, alleged violation, investigation or advisory action or of potential liability or of potential responsibility regarding environmental protection matters or permit compliance or under any Environmental Law, and none of the Company nor any of its Subsidiaries has any contingent liability of which the Company or any such Subsidiary has knowledge under any Environmental Law or in connection with any Release or threatened Release of any Hazardous Substance, nor has the Company or any of its Subsidiaries received from any Person any notice, letter or other indication of potential liability arising from the Release or threatened Release of any Hazardous Substance. There are no circumstances or -12- conditions (including, without limitation, any Release or threatened Release of any Hazardous Substance) that could reasonably be expected to result in any claims, liability, investigation or cost pursuant to any Environmental Law against or relating to the Company, any of its Subsidiaries or any facility owned, leased or operated by the Company or any of its Subsidiaries, except where the existence of such circumstance or condition could not reasonably be expected to have a Material Adverse Effect. (c) Other than any pending workers' compensation claims which individually and in the aggregate are not material to the Company or any of its Subsidiaries, no action, suit or proceeding brought by any employee of the Company or any of its Subsidiaries or any other person involving (i) a claim for damages in excess of $100,000 or (ii) claims for damages under $100,000 and which in the aggregate could reasonably be expected to have a Material Adverse Effect, in each case based on alleged damage to health or property caused by any Hazardous Substance, is pending before any court or arbitrator or any governmental body, agency or official. 5.15 Security Interests and Liens; Inventory and Equipment. After the application of the proceeds of the sale of the Notes as set forth herein, there will be no Liens in favor of third parties with respect to any of the Collateral, including, without limitation, with respect to the Inventory, wherever located, other than Liens permitted pursuant to Section 9.4 hereof. Upon the proper filing of financing statements and the proper recordation of other applicable documents with the appropriate filing or recordation offices in each of the necessary jurisdictions (all of which the Company undertakes to do or cause to be done), the security interests granted pursuant to the Collateral Documents constitute and shall at all times constitute a valid and enforceable first priority perfected Lien on such Collateral, subject only to Liens permitted pursuant to Section 9.4 hereof. The Company and each of its Subsidiaries are or will be at the time additional Collateral is acquired by them, the absolute owners of the Collateral with full right to pledge, sell, consign, transfer and create a Lien therein, free and clear of any and all Liens in favor of third parties, except for Liens permitted pursuant to Section 9.4 hereof. Except as set forth on Schedule 5.15, no consents, filings or recordings are required in order to perfect the security interests created by the Collateral Documents. 5.16 Labor Relations. None of the Company nor any of its Subsidiaries is engaged in any material unfair labor practices which could reasonably be expected to result in a material liability to the Company or any of its Subsidiaries, materially increase the costs of operations or materially decrease the revenue generated from the Company's or any of its Subsidiaries' operations or which could otherwise reasonably be expected to have a Material Adverse Effect. There is (i) no unfair labor practice complaint pending against the Company or any of its Subsidiaries or, to the best knowledge of the Company and any of its Subsidiaries, threatened against, before the National Labor Relations Board, and no material grievance or significant arbitration proceeding arising out of or under collective bargaining agreements is so pending against the Company or any of its Subsidiaries or, threatened against them, (ii) no strike, labor dispute, slowdown or stoppage pending against the Company or any of its Subsidiaries threatened against it which, in the case of the items described in the preceding clauses (i) and (ii) could reasonably be expected to result in a material liability to the Company or any of its Subsidiaries, materially increase the costs of the Company's or any of its Subsidiaries' operations or materially decrease the revenue -13- generated from the Company's or any of its Subsidiaries' operations or which could otherwise reasonably be expected to have a Material Adverse Effect, and (iii) no union representation question with respect to the employees of the Company or any of its Subsidiaries and, to the knowledge of the Company and each of its Subsidiaries, no union organizing activities which representation question or organizing activity could reasonably be expected to have a Material Adverse Effect. There are no controversies pending or threatened between the Company or any of its Subsidiaries and any of their respective employees, other than (i) employee grievances and other controversies arising in the ordinary course of business which could not, in the aggregate, be reasonably expected to have a Material Adverse Effect and (ii) employee grievances and other controversies arising outside the ordinary course of business of which the Holders have received written notice and could not reasonably be expected to have a Material Adverse Effect. 5.17 UCC Filing Information. As of the date of this Agreement the jurisdiction of incorporation of the Company and each of its Subsidiaries is as set forth on Schedule 5.17, which jurisdiction is the place where the Company and such Subsidiary is "located" for the purposes of Section 9-301 of the UCC. Schedule 5.17 is a true, correct and complete list as of the date of this Agreement of the address of all offices where records and books of account each the Company and each of its Subsidiaries is kept. None of the receipts received by the Company or any of its Subsidiaries from any warehouseman, filler, processor or packer states that the goods covered thereby are to be delivered to bearer or to the order of a named person or to a named person and such named person's assignees. 5.18 Solvency. The fair saleable value of the Company's and each of its Subsidiaries' assets exceeds all probable liabilities, including those to be incurred pursuant to this Agreement. The Company and each of its Subsidiaries, taken as a whole (i) do not have unreasonably small capital in relation to the business in which they are or propose to be engaged and (ii) have not incurred, and do not believe that they will incur after giving effect to the transactions contemplated by this Agreement, debts beyond their ability to pay such debts as they become due. 5.19 Fictitious Business Names. Except as set forth on Schedule 5.19, none of the Company nor any of its Subsidiaries has conducted any material amount of business on or after August 1, 1993 under any corporate or fictitious name other than the corporate name shown on the Company's and each such Subsidiary's respective organizational documents. 5.20 Use of Proceeds. The proceeds of the Notes will be used solely (i) to repay on the Closing Date in full all Debt of the borrowers outstanding under the DDJ Loan Agreement, (ii) to repay certain fees and expenses owed by the Company in connection with (A) this Agreement and the transactions contemplated hereby and (B) the Company's recapitalization pursuant to the Exchange and (iii) for general corporate purposes. -14- 5.21 Margin Stock. Neither the Company nor any of its Subsidiaries owns any "margin stock" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, or any regulations, interpretations or rulings thereunder, nor is the Company or any of its Subsidiaries engaged principally or as one of its important activities in extending credit which is used for the purpose of purchasing or carrying margin stock. 5.22 Affiliate Transactions. Except as set forth on Schedule 5.22 hereto, none of the Company nor any of its Subsidiaries is a party to or bound by any agreement or arrangement (whether oral or written) to which any Affiliate of the Company or any Subsidiary is a party. 5.23 Accuracy and Completeness of Information. All factual information heretofore, contemporaneously or hereafter furnished by or on behalf of the Company and each of its Subsidiaries in writing to the Holders or the Auditors for purposes of or in connection with this Agreement or any other Operative Agreement, including all information contained in the Offering Circular, or any transaction contemplated hereby or thereby is or will be (in the case of factual information provided after the Closing) true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any material fact necessary to make such information not misleading at such time. There is no fact now known to any officer of the Company or any of its Subsidiaries which has, or would have, a Material Adverse Effect, which fact has not been set forth herein, in the Financials, or some certificate, opinion or other written statement made or furnished by the Company or any of its Subsidiaries to the Holders. 5.24 Capital Stock. There are presently issued by the Company and each of its Subsidiaries and outstanding the shares of Capital Stock indicated on Schedule 5.24. All of the issued and outstanding Capital Stock of each Subsidiary of the Company listed is owned of record and beneficially by the entity set forth on such Schedule. The Company and each of its Subsidiaries has received at least the consideration for which such Capital Stock was authorized to be issued and have otherwise complied in all material respects with all legal requirements relating to the authorization and issuance of shares of Capital Stock and all such shares are validly issued, fully paid and non-assessable. The Company and each of its Subsidiaries has no other Capital Stock of any class outstanding other than as set forth on Schedule 5.24 hereto. Except as set forth on Schedule 5.24, none of the Company or any of its Subsidiaries has outstanding any Stock Equivalents or any other equity interest nor does the Company or any of its Subsidiaries have outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreement providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, its Capital Stock or other obligations or commitments of any kind whatsoever to issue, sell or otherwise dispose of, any shares of or other equity interest in the Company or any of its Subsidiaries. Except as contemplated by the Operative Agreements, none of the Company or any of its Subsidiaries is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any of its Capital Stock. There are no voting trusts or -15- other agreement or understandings to which the Company or any of its Subsidiaries is a party with respect to the voting of its Capital Stock. 5.25 Private Offering by the Company. Neither the Company nor any Person acting on its behalf has (i) engaged, in connection with the issuance and sale of the Notes, in any "general solicitation" or "general advertising" within the meaning of such terms used in Rule 502 promulgated pursuant to the Securities Act or (ii) offered the Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any Person other than the Holders, which have been offered the Notes at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of Section 5 of the Securities Act, any state securities or "Blue Sky" laws or any other similar any law, treaty, rule or regulation of any jurisdiction. SECTION 6. INITIAL PURCHASER'S REPRESENTATIONS 6.1 Initial Purchaser's Representations. The Initial Purchaser represents and warrants to, and agrees with, the Company that: (i) It is a "qualified institutional buyer" ("QIB") within the meaning of Rule 144A under the Securities Act with such knowledge and experience in financial and business matters as is necessary in order to evaluate the merits and risks of an investment in the Notes. (ii) It is not acquiring the Notes with a view to any distribution thereof or with any present intention of offering or selling any of the Notes in a transaction that would violate the Securities Act or the securities laws of any State of the United States or any other applicable jurisdiction. In connection with any Exempt Resales, it will solicit offers to buy the Notes only from, and will offer and sell the Notes only to (A) persons reasonably believed by the Initial Purchaser to be QIBs or (B) persons reasonably believed by the Initial Purchaser to be accredited investors (within the meaning of Rule 501 under the Securities Act) (each such person, an "Eligible Purchaser"). (iii) It agrees that no form of general solicitation or general advertising has been or will be used by the Initial Purchaser or any of its representatives in connection with the offer and sale of any of the Notes. SECTION 7. PREPAYMENT OF NOTES 7.1 Required Prepayments of the Notes. (a) Upon the receipt by the Company or any of its Subsidiaries of Net Cash Proceeds from any Asset Disposition, the Company shall prepay the outstanding Accreted Principal Amount of the Notes, together with accrued and unpaid interest thereon, at a premium equal to the then applicable Premium Amount, in an amount equal to such Net Cash Proceeds. -16- (b) Upon the receipt by the Company or any of its Subsidiaries of net proceeds from any sale or issuance of their respective Capital Stock or Stock Equivalents, the Company shall prepay the outstanding Accreted Principal Amount of the Notes, together with accrued and unpaid interest thereon, at a premium equal to the then applicable Premium Amount, in an amount equal to such net proceeds. (c) Upon the receipt by the Company or any of its Subsidiaries of any proceeds of insurance maintained pursuant to Section 8.4(b), the Company shall prepay the outstanding Accreted Principal Amount of the Notes, together with accrued and unpaid interest thereon, at a premium equal to the then applicable Premium Amount, in an amount equal to such proceeds to the extent such proceeds are not applied pursuant to Section 8.4(b). 7.2 Optional Prepayments of the Notes. Upon notice as provided in Section 7.4, the Company may prepay, in whole or in part, at any time or from time to time, the outstanding Accreted Principal Amount of the Notes at the prices (expressed as percentages of the Accreted Principal Amount of the Notes on the date of such prepayment) corresponding to the relevant period set forth in the table below (the "Premium Amount"), plus accrued and unpaid interest thereon to the applicable prepayment date.

Premium to Accreted Period Principal Amount - ------------------------ ------------------------ Closing Date - November 30, 2002 104.0% December 1, 2002 - November 30, 2003 103.0% December 1, 2003 - November 30, 2004 102.0% December 1, 2004 - Maturity Date 100.0%

7.3 Offers to Purchase Notes upon Certain Events. (a) Change of Control Offer. The Company shall, within ninety (90) days after any Change of Control, give written notice of such Change of Control to the Holders. Such notice shall contain and constitute an offer (a "Change of Control Offer") to all Holders to repurchase, within 30 days after the date of such notice, all or, at the option of any Holder, any part (equal to $1,000,000 or an integral multiple thereof) of the outstanding Accreted Principal Amount of Notes held by such Holder. The offer price in any Change of Control Offer will be equal to the outstanding Accreted Principal Amount of the Notes, together with accrued and unpaid interest to the date of repurchase, at a premium equal to the then applicable Premium Amount, and will be payable in cash (the "Change of Control Payment") on the Proposed Repurchase Date. -17- (b) Excess Cash Flow Offer. As soon as practicable after the end of each fiscal year of the Company, and in any event no later than August 31 of each year, the Company shall make an offer to all Holders to purchase the maximum outstanding Accreted Principal Amount of Notes that may be purchased with 100% of the Excess Cash Flow of the Company for the immediately preceding fiscal year (each such offer, an "Excess Cash Flow Offer"). The offer price in any Excess Cash Flow Offer will be equal to the Accreted Principal Amount of the Notes, together with accrued and unpaid interest to the date of repurchase, at a premium equal to the then applicable Premium Amount, and will be payable in cash (the "Excess Cash Flow Payment"). If the aggregate Accreted Principal Amount of Notes tendered into such Excess Cash Flow Offer exceeds the amount of Excess Cash Proceeds, the Notes shall be purchased on a pro rata basis, based upon the respective share of the outstanding Notes held by the Holders thereof. (c) Procedures for Offers and Purchases. (i) The offer to repurchase the Notes contemplated by this Section 7.3 shall be an offer to repurchase, in accordance with and subject to this Section 7.3, each Note held by the Holders on the Business Day specified in such offer (the "Proposed Repurchase Date"). (ii) Each Holder may accept the Offer to repurchase the Notes made pursuant to this Section 7.3 by causing a notice of such acceptance to be delivered to the Company at least five (5) days prior to the Proposed Repurchase Date. A failure by any Holder to respond to an Offer to repurchase the Notes made pursuant to this Section 7.3 shall be deemed to constitute a rejection of such Offer by such Holder. (iii) On each Proposed Repurchase Date, the Company shall (i) accept for payment all Notes or portions thereof validly tendered and not properly withdrawn pursuant to an Offer and (ii) pay to the tendering Holders (by wire transfer of immediately available funds to an account designated by such Holder) an amount equal to the Offer Payment in respect of all Notes or portions thereof so validly tendered and not properly withdrawn. The Company shall promptly mail to each Holder, which has so validly tendered and not properly withdrawn a Note, a new Note equal in principal amount to any unpurchased portion of the Notes surrendered, if any, provided that each such new Note will be in a principal amount of $1,000,000 or an integral multiple thereof. (iv) Each Offer to repurchase the Notes pursuant to this Section 7.3 shall be accompanied by a certificate, executed by a senior financial officer of the Company and dated the date of such Offer, specifying: (i) the Proposed Repurchase Date; (ii) that such Offer is made pursuant to this Section 7.3; (iii) the Accreted Principal Amount of each Note offered to be repurchased; (iv) the applicable Premium Amount on each Note in connection with such prepayment (calculated as of the date of such Proposed Repurchase Date); (v) the interest that would be due on each Note offered to be repurchased, accrued to the Proposed Repurchase Date; (vi) that the conditions of this Section 7.3 have been fulfilled; (vii) with respect to a Change in Control Offer, in reasonable detail, the nature and date of the Change of Control; and (viii) that a failure to respond to such notice shall be deemed a rejection of such Offer to repurchase the Notes. -18- 7.4 Notice of Prepayments; Officers' Certificate. The Company will give each Holder irrevocable written notice of each prepayment under Section 7.2 not less than ten (10) days and not more than thirty (30) days prior to the Business Day fixed for such prepayment, in each case specifying such prepayment date, the aggregate Accreted Principal Amount of the Notes, the Accreted Principal Amount of each Note held by such Holder to be prepaid, and the applicable Premium Amount to be paid in connection with such prepayment (calculated as of the date of such prepayment). Notice of prepayment having been given as aforesaid the aggregate Accreted Principal Amount, together with accrued and unpaid interest until the proposed date of prepayment, at a premium equal to the then applicable Premium Amount, shall become due and payable on such prepayment date. The Company shall, on or before the Business Day next succeeding the date on which the Company sends such written notice, give telephonic notice (immediately followed by written notice sent by facsimile transmission) of the items set forth in the first sentence of this paragraph and the prepayment date to each Holder at the telephone and facsimile numbers specified in Section 19 hereof. Each Holder shall receive, on the Business Day immediately preceding the date scheduled for any such prepayment, an Officers' Certificate setting forth and certifying the calculations of the amounts to be prepaid to such Holder on the prepayment date. 7.5 Allocation of Partial Prepayments. Upon any partial prepayment of the Notes pursuant to Section 7.1 or 7.2, the principal amount so prepaid shall be allocated (as nearly as practicable) to all Notes at the time outstanding in proportion to the respective outstanding Accreted Principal Amounts thereof not theretofore prepaid, with adjustments, to the extent practicable, to compensate for any prior prepayments not made exactly in such proportion. 7.6 Maturity; Surrender, etc. In the case of each prepayment, the Accreted Principal Amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment. Payment of the total Accreted Principal Amount at a premium equal to the then applicable Premium Amount shall be deemed payment of the total principal amount then outstanding. From and after such date, unless the Company shall fail to pay such Accreted Principal Amount at a premium equal to the then applicable Premium Amount, as aforesaid, interest on such Accreted Principal Amount shall cease to accrue. Any Note paid, prepaid or repurchased in full shall, after such payment, prepayment or repurchase in full, be surrendered to the Company and canceled and shall not be reissued, and no Note shall be issued in lieu of any such paid or prepaid principal amount of any Note. 7.7 Acquisition of Notes. The Company shall not and shall not permit any of its Subsidiaries to, prepay or otherwise retire in whole or in part prior to their stated final maturity (other than by prepayment or repurchase pursuant to Section 7.1, 7.2, or 7.3 or upon acceleration of such final maturity pursuant to Section 10.2), or purchase or otherwise acquire, directly or indirectly, Notes held by the Holders, except, in the case of such purchase or acquisition, pursuant to an offer to purchase made pro rata to all Holders on the same terms and conditions. Any Notes prepaid in full or otherwise retired or purchased or otherwise acquired by the Company or any of its Subsidiaries -19- shall not be deemed to be outstanding for any purpose under this Agreement or any other Operative Agreement, shall be canceled and shall not be reissued. Any Notes prepaid or otherwise purchased or otherwise acquired by any Affiliate of the Company shall not be deemed outstanding for the purpose of any vote of the holders of the Notes (including, without limitation, the calculation of any percentage of principal amount of the Notes outstanding with respect to any such vote) pursuant to this Agreement or any other Operative Agreement but shall be deemed outstanding with respect to the calculation of any future payment of principal, premium and interest on the Notes. SECTION 8. AFFIRMATIVE COVENANTS OF THE COMPANY In order to induce the Holders to enter into this Agreement and to purchase the Notes as contemplated hereby, as long as any of the Obligations remain outstanding, the Company covenants and agrees that: 8.1 Financial Statements. The Company will deliver to the Holders: (a) as soon as available and in any event within ninety (90) days after the end of each fiscal year of the Company, consolidated and consolidating balance sheets of the Company and its Subsidiaries as of the end of such fiscal year and the related consolidated and consolidating statements of earnings, changes in consolidated shareholders equity and changes in consolidated cash flow for such fiscal year, setting forth in the case of each consolidated financial statement in comparative form the figures for the previous fiscal year, including the previous fiscal year budget (if such budget was prepared); all (except for the consolidating statements) accompanied by (A) a certificate of the Auditors stating that (1) in the course of the regular audit of the business of the Company and its Subsidiaries, which audit was conducted by such Auditors in accordance with generally accepted auditing standards, such accounting firm has obtained no knowledge that a Default or Event of Default has occurred and is continuing, or, if in the opinion of such Auditors, a Default or Event of Default has occurred and is continuing, a statement as to the nature thereof and (2) such financial statements present fairly in all material respects the financial position of the Company and its Subsidiaries and the results of its operations and cash flows for such fiscal year in conformity with GAAP and otherwise reported on in a manner acceptable to the Securities and Exchange Commission and (B) a schedule in form reasonably satisfactory to the Holders of the computations used by such accountants in determining, as of the end of such fiscal year, the Company's compliance with all financial covenants contained herein; (b) as soon as available and in any event within forty-five (45) days after the end of each of the first three quarters of each fiscal year of the Company, consolidated and consolidating balance sheets of the Company and its Subsidiaries as of the end of such quarter and the related consolidated and consolidating statements of earnings, changes in consolidated shareholders equity and changes in consolidated cash flow for such quarter and for the portion of the Company's fiscal year ended at the end of such quarter, setting forth in the case of each consolidated financial statement in comparative form the figures for the corresponding quarter and the corresponding portion of the Company's previous fiscal year, including the previous fiscal year budget (if such budget was prepared), all certified (subject to normal year-end -20- adjustments) as to fairness of presentation, GAAP and consistency by the chief financial officer or the chief accounting officer of the Company; and (c) as soon as available and in any event within thirty (30) days after the end of each of the first two months of each fiscal quarter (forty-five (45) days in the case of the last month of each fiscal year of the Company), statements of earnings and consolidated and consolidating balance sheets of the Company and its Subsidiaries as of the end of such month, and related changes in consolidated cash flow for such month and for the portion of the Company's fiscal year ended at the end of such month, all certified (subject to normal year-end adjustments) as to fairness of presentation, GAAP and consistency by the chief financial officer or chief accounting officer of the Company. 8.2 Reporting Requirements. The Company shall furnish to the Holders: (a) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto unless the securities covered thereby are held or distributed by the Company, other than any registration statement on Form S-3 to the extent that it relates to a secondary offering, and other than any registration statement on Form S-8 or its equivalent) and reports on Form 10-K, 10-Q and 8-K (or their equivalents) which the Company or any of its Subsidiaries shall have filed with the Securities and Exchange Commission, and promptly upon the mailing thereof to the shareholders of the Company and each of its Subsidiaries generally, copies of all financial statements, reports and proxy statements so mailed; (b) no later than forty-five (45) days after the end of each of the first three quarters of each fiscal year and no later than ninety (90) days after the end of each fiscal year, (A) a certificate of the chief financial officer or chief accounting officer of the Company setting forth in reasonable detail any calculations required to establish whether the Company was in compliance with the requirements of Sections 8.16 and 9.6 hereof as of the end of such quarter or year, as the case may be, and (B) a compliance certificate in the form of Exhibit C attached hereto (the "Compliance Certificate"). (c) as soon as available and in any event no later than sixty (60) days after the last day of each fiscal year of the Company, copies of annual budgets and other similar materials prepared by or for the Company and each of its Subsidiaries, which budgets and other information shall be presented on a monthly basis for the then current fiscal year and on an annual basis for each subsequent fiscal year; and (d) within three Business Days of any executive officer of the Company obtaining knowledge of any Default or Event of Default, a certificate of the chief financial officer or the chief accounting officer of the Company setting forth the details thereof and the action which is being taken or proposed to be taken with respect thereto; (e) within three Business Days after the Company's or any of its Subsidiaries' knowledge thereof, notice, in reasonable detail, of any material change relating to the type, quality or quantity of any material portion of the Collateral, or any event which could have a material adverse effect on the value of the Collateral or any event affecting the validity or -21- priority of the security interests granted to the Collateral Agent for the benefit of the Holders in the Collateral; (f) within three Business Days of the chief executive officer, chief financial officer, chief accounting officer, controller or other senior financial officer of the Company or any of its Subsidiaries obtaining knowledge of any Material Adverse Effect, a certificate of the chief financial officer or accounting officer of the Company setting forth details thereof and the action which is being taken or proposed to be taken with respect thereto; (g) promptly following, and in no event more than five Business Days of any executive officer of the Company or any of its Subsidiaries obtaining knowledge of (i) any litigation or proceeding affecting the Company or any of its Subsidiaries in which the amount involved is $250,000 or more and is not covered by insurance or in which injunctive or similar relief is sought, or (ii) any order, judgment or decree in excess of $250,000 which shall have been entered against the Company or any of its Subsidiaries or any of their respective properties or assets, the Company will deliver a certificate of the chief financial officer or accounting officer setting forth details thereof and the action which is being taken or proposed to be taken with respect thereto; (h) prompt notice of any notification of a violation of any law or regulation received by the Company or any of its Subsidiaries from any local, state, federal or foreign Governmental Authority which violation could reasonably be expected to have a Material Adverse Effect; and (i) from time to time such additional information or analyses regarding the financial position or business of the Company or any of its Subsidiaries as the Holders may reasonably request. 8.3 Payment of Obligations. The Company shall pay and discharge, and shall cause each of its Subsidiaries to pay and discharge, at or before maturity, all of its material obligations and liabilities, including, without limitation, Tax liabilities, except where the same may be contested in good faith by appropriate proceedings, and will maintain, in accordance with GAAP, appropriate reserves for the accrual of any of the same. 8.4 Maintenance of Property; Insurance. (a) The Company shall keep, and shall cause each of its Subsidiaries to keep, all material property useful and necessary in its businesses in good working order and condition (ordinary wear and tear, casualty and condemnation excepted) and not commit or suffer any material waste with respect to any of its material properties. (b) The Company shall maintain, and shall cause each of its Subsidiaries to maintain, public liability insurance, third party property damage and replacement cost insurance on the Collateral under such policies of insurance, and the Company and each such Subsidiary agrees to maintain insurance on their material assets in such amounts and covering such risks as is customary for similarly situated corporations. Such insurance may include levels of self insurance comparable to those in place on the date of this Agreement or as shall be customary for -22- corporations similarly situated in the industry. All policies covering the Collateral are to name the Holders as additional insureds and loss payees in case of loss, as the Holders' interests may appear, and are to contain such other provisions as the Holders may reasonably require to fully protect the Holders' interest in the Collateral and to any payments to be made under such policies. Certificates of all insurance policies are to be delivered to the Holders (with true copies of such policies to be made available to the Holders) on or within five (5) Business Days prior to the Closing, and such policies shall have all premiums with respect thereto currently paid and contain loss payable endorsements in the Holders' favor, and shall provide for not less than ten (10) days' prior written notice to the Holders, of the exercise of any right of cancellation. In the event the Company or any of its Subsidiaries fails to respond in a timely and appropriate manner (as determined by the Holders in the Holders' reasonable discretion) with respect to collecting under any insurance policies required to be maintained under this Section 8.4, the Holders shall have the right, in the name of the Company or any such Subsidiary, to file claims under such insurance policies, to receive and give acquaintance for any payments that may be payable thereunder, and to execute any and all endorsements, receipts, releases, assignments, reassignments or other documents that may be necessary to effect the collection, compromise or settlement of any claims under any such insurance policies. The Company and each of its Subsidiaries shall provide written notice to the Holders of the occurrence of any of the following events within five (5) Business Days after the occurrence of any such event: any material asset or property owned or used by the Company or any such Subsidiary (i) is damaged or destroyed, or suffers any other loss, or (ii) is, or the Company or any of its Subsidiaries receives notice of the institution of any proceeding pursuant to which any such asset or property could reasonably be expected to be, condemned, confiscated or otherwise taken, in whole or in part, or the use thereof is otherwise diminished so as to render impracticable or unreasonable the use of such asset or property for the purposes to which such asset or property were used immediately prior to such condemnation, confiscation or taking, by exercise of the powers of condemnation or eminent domain or otherwise, and in either case the amount of the damage, destruction, loss or diminution in value is in excess of $250,000 (collectively, a "Casualty Loss"). The Company and each of its Subsidiaries shall diligently file and prosecute its claim or claims for any award or payment in connection with a Casualty Loss. In the event of a Casualty Loss with respect to any of the Collateral, if directed by the Collateral Agent, the Company and each of its Subsidiaries shall pay to the Collateral Agent for payment to the Holders in accordance with the Collateral Documents, promptly upon receipt thereof, any and all insurance proceeds and payments received by the Company or such Subsidiary on account of damage, destruction, loss, condemnation or eminent domain proceedings (excluding, however, business interruption insurance and the proceeds thereof). So long as no Default or Event of Default shall have occurred and be continuing, the Company and each of its Subsidiaries may use such proceeds and payments to repair, replace or rebuild the asset or property or portion thereof that was the subject of the Casualty Loss. After the occurrence and during the continuance of any Default or Event of Default the Holders may, at the Holders' election in the Holders' sole discretion either (a) apply ratably the proceeds realized from Casualty Losses to payment of accrued and unpaid interest or outstanding principal under the Notes or (b) direct the insurance company to pay such proceeds to the Holders to be used to repair, replace or rebuild the asset or property or portion thereof that was the subject of the Casualty Loss. After the occurrence and during the continuance of an Event of Default, (i) no settlement on account of any such Casualty Loss shall be made without the Holders' written consent and (ii) the Holders may participate in any such proceedings and the Company and each of its Subsidiaries shall deliver to the Holders such documents as may be requested by the Holders to permit such participation and shall consult -23- with the Holders, the Holders' attorneys and agents in the making and prosecution of such claim or claims. 8.5 Compliance with Laws. The Company shall comply, and shall cause each of its Subsidiaries to comply, with all acts, regulations, orders, directions and ordinances of any legislative, administrative or judicial body or official, applicable to the Collateral or any part thereof, or to the operation of their respective business (including, without limitation, ERISA and the rules and regulations thereunder) except where the failure to so comply could not reasonably be expected to have a Material Adverse Effect. 8.6 Inspection of Property, Books and Records; Change of Name, Principal Place of Business, Location of Collateral, Etc. The Company shall keep, and shall cause each of its Subsidiaries to keep, proper books of record and account in which full, true and correct entries in conformity with GAAP shall be made of all dealings and transactions in relation to their respective businesses and activities; the Company and each of its Subsidiaries shall make no significant change in their accounting practices except as permitted or required by GAAP. The Company shall permit the Holders to enter upon the premises of the Company and each of its Subsidiaries at any time and from time to time, during normal business hours and upon reasonable prior notice, and at any time during normal business hours and without notice on and after the occurrence and during the continuance of an Event of Default, for the purpose of (i) inspecting the Collateral, (ii) inspecting and/or copying (at Company's expense) any and all records pertaining thereto, and (iii) discussing the affairs, finances, business operations, properties and financial and other conditions of the Company and each Subsidiary with any officers, employees and directors of the Company or any such Subsidiary or with the Auditors. The Holders shall have the right to (A) discuss the affairs, finances, business operations, properties and conditions of the Company and each Subsidiary with management and make suggestions to the Company's and each Subsidiary's management and management will discuss such proposals or suggestions made by the Holders within a reasonable period after such submission, (B) tour the Company's and each Subsidiary's business premises and other properties, (C) receive financial statements, operating reports, budgets or other financial reports, (D) request information at reasonable times and intervals concerning the general status of the Company's and each Subsidiary's financial condition and operations. The Company shall, and shall cause each of its Subsidiaries to, afford the Holders ten (10) Business Days' prior written notice of (a) any new or additional location of any Collateral at which location Collateral having an aggregate value in excess of $250,000 will be located, (b) any change in the jurisdiction of incorporation of the Company or any of its Subsidiaries from the jurisdictions specified in Schedule 5.17, and (c) any change in any corporate name and, in each such case, the Company and each such Subsidiary further agree to execute in advance of such addition or change and cause to be filed and/or delivered to the Holders or the Holders' counsel any financing statements or other documents required by the Holders to maintain their perfected first priority Lien on the Collateral. 8.7 Compliance with Operative Agreements. The Company shall comply, and shall cause each of its Subsidiaries to comply, with the terms of each of the Operative Agreements to which it is a party. -24- 8.8 Corporate Existence. Except as otherwise permitted pursuant to Section 9.5 and except for the liquidation or dissolution of the Company's inactive Subsidiaries set forth on Schedule 9.5, the Company shall, and shall cause each of its Subsidiaries to, (i) maintain its corporate existence, maintain in full force and effect all material licenses, bonds, franchise, leases, qualifications to do business, Proprietary Rights, contracts and other rights necessary for the conduct of its business, (ii) continue in, and limit their operations to, the same general lines of business as that presently conducted by it and reasonable extensions thereof and (iii) comply with all applicable laws and regulations of any federal, state or local governmental authority, except in each case where noncompliance with such laws and regulations would not, in the aggregate, have a Material Adverse Effect. 8.9 ERISA. (a) The Company shall deliver to the Holders, at the Company's expense, the following information at the times specified below: (i) within twenty (20) Business Days after the Company or any ERISA Affiliate has actual knowledge that a Termination Event has occurred which could reasonably be expected to result in a liability to the Company or any of its Subsidiaries of $300,000 or more, a written statement of the chief financial officer describing such Termination Event and the action, if any, which the Company or such ERISA Affiliate or any other entities have taken, are taking or propose to take with respect thereto, and when actually known, any action taken or threatened by the Internal Revenue Service, DOL or PBGC with respect thereto; (ii) within sixty (60) Business Days after the Company or any ERISA Affiliate has actual knowledge that a prohibited transaction (as defined in Sections 406 of ERISA and 4975 of the Code) has occurred which could reasonably be expected to result in a liability to the Company or any such ERISA Affiliate of $300,000 or more, a statement of the chief financial officer describing such transaction and the action which the Company or any such ERISA Affiliate or other such entities have taken, are taking or propose to take with respect thereto; (iii) at any time that the Holders may reasonably request, copies of each annual report (form 5500 series), including Schedule B thereto, filed with respect to each Benefit Plan; (iv) at any time that the Holders may reasonably request, copies of each actuarial report for any Benefit Plan or Multiemployer Plan and each annual report for any Multiemployer Plan; (v) within three (3) Business Days after the filing thereof with the Internal Revenue Service, a copy of each funding waiver request filed with respect to any Benefit Plan with respect to any funding of $300,000 or more and all communications received by the Company or any of its Subsidiaries or any ERISA Affiliate with respect to such request; -25- (vi) within twenty (20) Business Days upon the occurrence thereof, notification of any increase in the benefits of any existing Plan or the establishment of any new Benefit Plan or the commencement of contributions to any Benefit Plan to which the Company or any ERISA Affiliate was not previously contributing, in either case, which could reasonably be expected to result in an increase in the annual contributions necessary to satisfy the minimum funding requirements of ERISA or the terms of such Benefit Plan to the Company or any such ERISA Affiliate of $300,000 or more; (vii) within three (3) Business Days after receipt by the Company or any ERISA Affiliate of the PBGC's intention to terminate a Benefit Plan or to have a trustee appointed to administer a Benefit Plan, in either case which could reasonably be expected to result in a liability to the Company or any such ERISA Affiliate of $300,000 or more, copies of each such notice; (viii) if and when any ERISA Affiliate (i) gives or is required to give notice to the PBGC of any Reportable Event with respect to any Benefit Plan which could reasonably be expected to constitute grounds for a termination of such Benefit Plan under Title IV of ERISA, or knows that the plan administrator of any Benefit Plan has given or is required to give notice of any such Reportable Event, a copy of the notice of such Reportable Event given or required to be given to the PBGC; or (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA, a copy of such notice; (ix) within ten (10) Business Days after receipt by the Company or any ERISA Affiliate of any unfavorable determination letter from the Internal Revenue Service regarding the qualification of a Benefit Plan under Section 401(a) of the Code which could reasonably be expected to result in a liability to the Company or any such ERISA Affiliate of $300,000 or more, copies of each such letter; (x) within ten (10) Business Days after receipt by the Company or any ERISA Affiliate of a notice regarding the imposition of withdrawal liability of $300,000 or more under Section 4203, 4204 or 4205 of ERISA, copies of each such notice; (xi) within ten (10) Business Days after the Company or any ERISA Affiliate fails to make a required installment or any other required payment of $300,000 or more under Section 412 of the Code on or before the due date for such installment or payment, a notification of such failure; and (xii) within ten (10) Business Days after the Company or any ERISA Affiliate has actual knowledge that (a) a Multiemployer Plan has been terminated, (b) the administrator or plan sponsor of a Multiemployer Plan intends to terminate a Multiemployer Plan, or (c) the PBGC has instituted or will institute proceedings under Section 4042 of ERISA to terminate a Multiemployer Plan, in any such case, which could reasonably be expected to result in a liability to the Company or any such ERISA Affiliate of $300,000 or more, a written statement setting forth any such event or information. (b) The Company shall, and shall cause each of its Subsidiaries to, establish, maintain and operate all Plans to comply with the applicable provisions of ERISA, the Code, and -26- all other applicable laws, other than to the extent that the Company and each such Subsidiary are in good faith contesting by appropriate proceedings the validity or application of any such provision or law, except to the extent failure to so comply could not reasonably be expected to result in the Company or any such Subsidiary incurring a liability, individually or in the aggregate equal to or in excess of $300,000. 8.10 Environmental Matters. (a) The Company shall, and shall cause each of its Subsidiaries to, use commercially reasonable efforts to conduct its businesses so as to comply with all Environmental Laws in all jurisdictions in which it is or may at any time be doing business, except to the extent that the Company and each such Subsidiary is contesting, in good faith by appropriate legal proceedings, any such Environmental Law or interpretation thereof or application thereof and except where the failure to so comply could not reasonably be expected to have a Material Adverse Effect; provided, further, that the Company and each such Subsidiary shall comply with the order of any court or other Governmental Authority or applicable jurisdiction relating to such Environmental Laws unless the Company or any such Subsidiary shall currently be prosecuting an appeal or proceedings for review and shall have secured a stay of enforcement or execution or other arrangement postponing enforcement or execution pending such appeal or proceedings for review. If the Company or any of its Subsidiaries shall (a) receive written notice that any material violation of any Environmental Law may have been committed or is about to be committed by the Company or any such Subsidiary, (b) receive written notice that any administrative or judicial complaint or order has been filed or is about to be filed against the Company or any such Subsidiary under any Environmental Law or alleging material violations of any Environmental Law or requiring the Company or any such Subsidiary to take any action in connection with the Release or threatened Release of Hazardous Substances or (c) receive any written notice from a Governmental Authority or private party alleging that the Company or any such Subsidiary may be liable under any Environmental Law or in connection with any Release or threatened Release of a Hazardous Substance, the Company and each such Subsidiary shall provide the Holders with a copy of such notice within thirty (30) days after the receipt thereof by the Company or such Subsidiary, as the case may be. The Company and each of its Subsidiaries shall promptly take all actions necessary to prevent the imposition of any Liens on any of their properties arising out of or related to any environmental matters. (b) In the event that any investigation, site monitoring, containment, cleanup, response, removal, restoration or other remedial work of any kind or nature (the "Remedial Work") with respect to any Real Estate owned, operated or leased by the Company or any of its Subsidiaries is required to be performed by the Company or such Subsidiary under any applicable local, state or federal law or regulation, any judicial order, or by any governmental or non-governmental entity or Person because of, or in connection with, the current or future presence, suspected presence, Release or threatened Release of a Hazardous Substance, the Company or such Subsidiary, as the case may be, shall within thirty (30) days after written demand for performance thereof by the Holders (or such shorter period of time as may be required under any applicable law, regulation, order or agreement), commence during and after such 30-day period diligently prosecute to completion, all such Remedial Work unless the requirement to perform such Remedial Work is being contested in good faith by the Company or such Subsidiary. -27- 8.11 Collateral Records. The Company shall, and shall cause each of its Subsidiaries to, promptly execute and deliver to the Holders, from time to time, solely for the Holders' convenience in maintaining a record of the Collateral, such written statements and schedules as the Holders may reasonably require, designating, identifying or describing the Collateral pledged to the Holders. If the Company or any of its Subsidiaries fail, however, to promptly give the Holders such statements or schedules, such failure shall not affect, diminish, modify or otherwise limit the Holders' security interests in the Collateral. In addition, upon any Holder's reasonable request, the Company and each of its Subsidiaries will make available to such Holder copies of agreements with, or purchase orders from, the customers of the Company and each such Subsidiary, and copies of invoices to customers, proof of shipment or delivery and such other documentation and information relating to said Collateral as such Holder may reasonably require. Failure to provide the Holders with any of the foregoing shall in no way affect, diminish, modify or otherwise limit the security interests granted herein. The Company and each of its Subsidiaries hereby authorizes the Holders to regard its printed name or rubber stamp signature on assignment schedules or invoices as the equivalent of a manual signature by such Person's authorized officers or agents. 8.12 Security Interests. (a) The Company shall defend, and shall cause each of its Subsidiaries to defend, the Collateral against all claims and demands of all Persons at any time claiming the same or any interest therein. The Company shall comply, and shall cause each of its Subsidiaries to comply, with the requirements of all state and federal laws in order to grant to the Collateral Agent for the benefit of the Holders valid and perfected security interests in the Collateral, subject only to Liens permitted pursuant to Section 9.4 hereof, and except to the extent such Lien is in cash held by the Company or any such Subsidiary as petty cash or till cash in the ordinary course of their businesses consistent with past practices shall not remain perfected. Without limiting the generality of the foregoing, upon the Closing, the Company shall, and shall cause each of its Subsidiaries to, at its own expense, execute, acknowledge and deliver, or cause the execution, acknowledgment and delivery of, and thereafter register, file or record, or cause to be registered, filed or recorded, in all necessary and appropriate governmental offices, all documents or instruments as may be necessary or desirable for the perfection and priority of the Liens on the Collateral covered by the Collateral Documents, and thereafter, the Company shall, and shall cause each of its Subsidiaries to, promptly, upon the reasonable request of the Holders, at the Company's expense, execute, acknowledge and deliver, or cause the execution, acknowledgment and delivery of, and thereafter register, file or record, or cause to be registered, filed or recorded, in an appropriate governmental office, any document or instrument supplemental to or confirmatory of the Collateral Documents or otherwise reasonably deemed by the Holders necessary or desirable for the continued validity, perfection and priority of the Liens on the Collateral covered thereby to the extent required by the immediately preceding sentence. (b) The Collateral Agent and each of the Holders is hereby authorized by the Company for itself and on behalf of each of its Subsidiaries to file any financing statements covering the Collateral whether or not the Company's or any of its Subsidiaries' signatures appear thereon. The Company shall do, and shall cause each of its Subsidiaries to do, whatever the Collateral Agent or any of the Holders may reasonably request, from time to time, by way of filing notices of Liens, financing statements, fixture filings and amendments, renewals and -28- continuations thereof; cooperating with the Holders' custodians; keeping stock records; using commercially reasonable efforts to obtain waivers from landlords and mortgagees and from warehousemen, fillers, processors and packers and their respective landlords and mortgagees; paying claims, which might if unpaid, become a Lien on the Collateral; and performing such further acts as the Holders may reasonably require in order to effect the purposes of this Agreement and the Operative Agreements. Any and all reasonable fees, costs and expenses, of whatever kind and nature (including any Taxes, reasonable attorneys' fees or costs for insurance of any kind), which the Collateral Agent or the Holders may incur with respect to the Collateral or the Obligations under the Operative Agreements, (i) in filing public notices, (ii) in preparing or filing documents, (iii) making title examinations or rendering opinions, (iv) in protecting, maintaining, or preserving the Collateral or its interest therein, (v) in enforcing or foreclosing the Liens hereunder, whether through judicial procedures or otherwise or (vi) in defending or prosecuting any actions or proceedings arising out of or relating to its transactions with the Company or any of its Subsidiaries under this Agreement or any other Operative Agreements, shall be borne and paid by the Company. If same are not promptly paid by the Company, the Holders may pay the same on the Company's behalf, and the amount thereof shall be an Obligation secured under the Operative Agreements and due to the Holders on demand. (c) The Company shall deliver, and shall cause each of its Subsidiaries to deliver, to the Collateral Agent title insurance policies, in a form reasonably satisfactory to the Holders, with respect to the Deeds of Trust delivered hereunder at the Closing. 8.13 Taxes. The Company shall pay, and shall cause each of its Subsidiaries to pay, when due, all Taxes levied or assessed against the Company and each such Subsidiary or any of the Collateral; provided, however, that, unless such Taxes have become a federal tax Lien or ERISA Lien on any of the assets of such Person, no such Tax need be paid if the same is being contested, in good faith, by appropriate proceedings promptly instituted and diligently conducted and if an adequate reserve or other appropriate provision shall have been made therefor as reflected on the audited financial statements for the relevant fiscal year in accordance with GAAP, and, to the extent such reserves shall be taken thereafter, consistent with the Company's and each such Subsidiary's past practices. 8.14 Accounts. (a) The Company shall, and shall cause each of its Subsidiaries to, cause to be mailed, by the respective payors thereof, directly into the post office lockbox opened in accordance with the terms of the Lockbox Agreement or if the Company or any of its Subsidiaries opens a post office lockbox and lockbox account with another commercial bank or financial institution in accordance with subsection (c) of this Section, such post office lockbox (each such lockbox, a "Lockbox"), all revenues, receipts and other amounts which the Company or any of its Subsidiaries is entitled to receive from any source whatsoever (including, without limitation, all payments received in respect of its Contractual Obligations and all dividends and other distributions paid to the Company or any of its Subsidiaries by any of the Company's Subsidiaries). The Company shall open and maintain a lockbox account in accordance with the terms of the Lockbox Agreement (such account and the lockbox account opened with another commercial bank or financial institution in accordance with subsection (c) of this Section, a -29- "Lockbox Account"). The Company and its Subsidiaries shall maintain no more than two Lockboxes and two Lockbox Accounts at any one time. (b) The Company, for itself and on behalf of its Subsidiaries, the Collateral Agent and KeyBank shall execute the Lockbox Agreement stating, among other things, that (i) the Lockbox Account is deemed to be a "deposit account" as such term is defined in Article 9 of the UCC and (ii) KeyBank agrees that it will comply with the instructions directing disposition of the funds in the Lockbox Account originated by the Collateral Agent without further consent by the Company or any of its Subsidiaries. (c) The Company or any of its Subsidiaries may, upon 30 days' notice to the Collateral Agent, open another Lockbox and Lockbox Account with another commercial bank or financial institution into which all of the items described in clause (a) of this Section that are not mailed to any other Lockbox shall be mailed. If the Company or any of its Subsidiaries elects to open a new Lockbox and Lockbox Account with another commercial bank or financial institution, the Company or such Subsidiary and the Collateral Agent shall execute a security agreement, substantially in the form of the Security Agreement or such form as the Collateral Agent may, in its reasonable discretion, approve, and the Company or such Subsidiary, the Collateral Agent and the commercial bank or financial institution maintaining such Lockbox Account shall execute an agreement, in form and substance as the Collateral Agent may, in its reasonable discretion, approve, stating that (i) such Lockbox Account is deemed to be a "deposit account" as such term is defined in Article 9 of the UCC and (ii) such commercial bank or financial institution will comply with the instructions directing disposition of the funds in the Lockbox Account originated by the Collateral Agent without further consent by the Company or such Subsidiary. (d) So long as no Event of Default has occurred or is continuing or would result therefrom, the Company may transfer funds from any of the Lockbox Accounts to any other account maintained by the Company or any of its Subsidiaries or for any other purpose. 8.15 Proprietary Rights. The Company shall do, and shall cause each of its Subsidiaries to do, all things reasonably necessary to preserve and keep in full force and effect all Proprietary Rights, except to the extent any such Proprietary Rights is no longer in use or is of immaterial value and except as set forth on Schedule 8.15 hereto. 8.16 Minimum EBITDA. The Company shall maintain at the end of each fiscal quarter consolidated EBITDA of not less than the amount set forth below for such fiscal quarter; provided that consolidated EBITDA shall be determined in each case on the last date of each fiscal quarter on the basis of the rolling four fiscal quarters ending on the date of determination:

For each Period Ending On: Minimum EBITDA ------------------------- -------------- May 31, 2002 $ 4,000,000 August 31, 2002 4,000,000 November 30, 2002 4,000,000

-30- February 28, 2003 6,000,000 May 31, 2003 7,000,000 August 31, 2003 8,000,000 November 30, 2003 9,000,000 February 29, 2004 10,000,000 May 31, 2004 10,500,000 August 31, 2004 11,000,000 November 30, 2004 11,500,000 February 28, 2005 12,000,000 ; and for each period ending on each fiscal quarter thereafter, $13,000,000. 8.17 Repayment of Certain Debt. Simultaneously upon the receipt of the proceeds from the issuance and sale of the Notes hereunder, the Company shall use a portion of such proceeds to repay or cause to be repaid in full the outstanding Debt of the borrowers under the DDJ Loan Agreement. 8.18 Collateral Agent Fees. The Company shall pay to the Collateral Agent, for its own account, the collateral agency fee payable in the amount and at the times set forth in the Collateral Agent Fee Agreement, dated as of March 19, 2002, entered into by the Company and the Collateral Agent. SECTION 9. NEGATIVE COVENANTS OF THE COMPANY In order to induce the Holders to enter into this Agreement and to purchase the Notes as contemplated hereby, as long as any of the Obligations remain outstanding, the Company covenants and agrees that: 9.1 Debt and Guarantees. The Company shall not create, incur, assume or permit to be outstanding, and shall not permit any Subsidiary to create, incur, assume or permit to be outstanding, any Debt other than: (a) Debt incurred pursuant to this Agreement; (b) Debt outstanding on the Closing Date and identified on Schedule 5.11; (c) Debt incurred under the New Notes; (d) Refinancing of Debt with respect to Debt that was incurred on or prior to the Closing Date (other than the Debt incurred hereunder or under the Notes); provided, however, that (i) the principal amount of the Debt refinanced (plus the amount of fees, costs, and expenses incurred and the amount of any premium, penalties, breaking costs and other similar amounts required to be paid, in connection with such refinancing pursuant to the terms of the instrument governing the Debt being refinanced) shall (i) not be greater than the amount of the Debt being refinanced, (ii) not extend the maturity date of the Debt being refinanced, (iii) have a -31- Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of the Debt being refinanced, (iv) rank no more senior than the Debt being refinanced, and (v) contain terms and conditions at least as favorable to the Company as the terms and conditions of the Debt being refinanced; (e) Debt secured by Liens permitted by Sections 9.4(d) and 9.4(e); and (f) Intercompany Debt owed to the Company or its Subsidiaries (other than the Foreign Subsidiaries). The Company shall not, and shall not permit any of its Subsidiaries to, refinance, amend, restructure, reconstitute, replace or otherwise alter any tenor, covenant, condition or provision of any instrument evidencing any Debt outstanding on the Closing Date without the prior written consent of the Holders (which consent shall not be unreasonably withheld or delayed); provided that the Company and its Subsidiaries may refinance such Debt as permitted pursuant to Section 9.1(d) above without such consent. 9.2 Restricted Payments. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, (i) declare or pay any dividend or make any distribution on its Capital Stock or Stock Equivalents to the holders of its Capital Stock or Stock Equivalents other than (A) dividends or distributions payable in its Capital Stock or dividends or distributions (or series of dividends of distributions) made by any of the Subsidiaries of the Company to the Company or any other Subsidiary of the Company or (B) non-cash dividends or distributions payable on the Series C Convertible Preferred Stock issued by the Company in connection with the Exchange or (ii) redeem, repurchase or otherwise acquire or retire for value any such Capital Stock or Stock Equivalents (except shares acquired upon the conversion thereof into other shares of Capital Stock or rights to acquire such Capital Stock, odd lot shares, and except for the repurchase or acquisition of such Capital Stock held by directors, officers or employees of the Company or any of its Subsidiaries upon death, disability, retirement or termination of employment not to exceed $100,000 in the aggregate in any fiscal year) or rights to acquire such Capital Stock or Stock Equivalents, or (iii) directly or indirectly redeem, repurchase, defease or otherwise acquire or retire for value, prior to any scheduled or mandatory maturity, scheduled or mandatory repayment or scheduled sinking fund payment (after giving effect to the exercise of any and all unconditional (other than as to the giving of notice) options to extend the maturity), Debt of the Company or any of its Subsidiaries (other than Notes pursuant to this Agreement or as set forth in the Section 5.20 (Use of Proceeds) of this Agreement). 9.3 Investments. The Company shall not make or acquire, or permit any of its Subsidiaries to make or acquire, any Investment in any Person other than: (a) Investments by the Company or any of its Subsidiaries (other than Foreign Subsidiaries) in any Subsidiary (other than Foreign Subsidiaries); (b) Permitted Investments; -32- (c) Investments consisting of purchase money notes received in connection with the sale or disposition of any asset, provided that such sale or disposition was made in accordance with the terms of this Agreement; and (d) Investments in Foreign Subsidiaries which Investments are existing on the Closing Date and disclosed on Schedule 9.3. 9.4 Negative Pledge. The Company shall not, and shall not permit any of its Subsidiaries to, create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it except: (a) Liens existing on the Closing Date and listed in Schedule 9.4 hereto; (b) any Lien arising pursuant to any order of attachment, distrain or similar legal process arising in connection with court proceedings so long as the execution or other enforcement thereof is effectively stayed and the claims secured thereby are being contested in good faith by appropriate proceedings and adequate reserves in accordance with GAAP have been set aside; (c) Liens created by and existing under the Operative Agreements; (d) Purchase money Liens or purchase money security interests upon or in any property acquired or held by the Company or any such Subsidiary of the Company in the ordinary course of business to secure the purchase price of such property or to secure Debt incurred solely for the purpose of financing the acquisition of such property, and Liens existing on such property at the time of its acquisition (other than any such Lien created in contemplation of such acquisition); provided, however, that the aggregate principal amount of the Debt secured by the Liens referred to in this clause (d) and in clause (e) below shall not exceed $5,000,000 in the aggregate at any time outstanding; (e) Liens to secure Capitalized Lease Obligations; provided, however, that: (i) any such Lien is created solely for the purpose of securing Debt representing, or incurred to finance, refinance or refund, the cost (including, without limitation, the cost of construction) of the property subject thereto, (ii) the principal amount of the Debt secured by such Lien does not exceed 100% of such cost, and (iii) such Lien does not extend to or cover any other property other than such item of property and any improvements on such item and (iv) the aggregate principal amount of Debt secured by the Liens referred to in this clause (e) and in clause (d) above shall not exceed $5,000,000 in the aggregate at any time outstanding; (f) any Permitted Liens; and (g) any extension, renewal or substitution of or for any of the foregoing Liens described in clauses (a) and (f) above or this clause (g); provided in each case that (i) the Debt or other obligation or liability secured by the applicable Lien shall not exceed the Debt or other obligation or liability existing immediately prior to such extension, renewal, or substitution and (ii) the Lien securing such Debt or other obligation or liability shall be limited to the property which, immediately prior to such extension, renewal or substitution, secured such Debt or other obligation or liability, and improvements on or additions to such property. -33- 9.5 Consolidations, Mergers and Sales of Assets. (a) The Company shall not complete (or agree to complete), and shall not permit any Subsidiary to complete (or agree to complete), an Asset Disposition unless (i) prior to such Asset Disposition, the Company or such Subsidiary, as the case may be, has received the written consent of the Required Holders and (ii) the Company or such Subsidiary, as the case may be, applies the Net Cash Proceeds from such Asset Disposition in accordance with Section 7.1(a) of this Agreement. Notwithstanding the foregoing and in addition to the liquidation and dissolution of the Company's inactive Subsidiaries set forth on Schedule 9.5 permitted by Section 8.8, the Company and its Subsidiaries may complete an Asset Disposition with respect to its inactive Subsidiaries set forth on Schedule 9.5 without the consent of the Required Holders; provided that the Company or such Subsidiary, as the case may be, apply the Net Cash Proceeds from such Asset Disposition in accordance with Section 7.1(a) of this Agreement. (b) The Company shall, and shall cause each of its Subsidiaries to: (a) conduct, its business in the ordinary course and consistent with past practice; (b) use, and cause each of its Subsidiaries to use, its reasonable efforts, in the ordinary course and consistent with past practice, to (i) preserve its business and the goodwill and business of the customers, suppliers and others having business relations with the Company or any of its Subsidiaries, and (ii) keep available the services and goodwill of its present employees; and (c) shall continue to operate, and shall cause each of its Subsidiaries to continue to operate, only in the same general types of businesses as now conducted thereby and reasonable extensions thereof. (c) The Company shall not merge or consolidate, and shall not permit any Subsidiary to merge or consolidate, with or into any other Person. 9.6 Capital Expenditures. Consolidated Capital Expenditures shall not, for each of the periods ending on the dates set forth below, exceed:

Consolidated Capital For each Fiscal Year Ending On: Expenditures ------------------------------- ------------ May 31, 2002 $3,000,000 May 31, 2003 3,500,000 May 31, 2004 4,000,000 Thereafter 4,500,000

; provided, however, that to the extent the actual Consolidated Capital Expenditures in any period are less than the maximum permitted amount of Consolidated Capital Expenditures set forth above for such period (such difference shall hereinafter be referred to as the "Unused Capital Expenditures"), the Company and each of its Subsidiaries may make additional Consolidated Capital Expenditures in the immediately succeeding period (the "Immediately Succeeding Period") equal to the sum of: (i) the Unused Capital Expenditures and (ii) the maximum permitted amount of Consolidated Capital Expenditures for the Immediately Succeeding Period. -34- 9.7 Transactions with Affiliates. The Company shall not, and shall not permit any of its Subsidiaries to, enter into or suffer to exist any contract, agreement, arrangement or transaction with any Affiliate (an "Affiliate Transaction"), or any series of related Affiliate Transactions, (other than Exempted Affiliate Transactions), (i) unless the Company reasonably and in good faith determines that the terms of such Affiliate Transaction are fair and reasonable to the Company, and no less favorable to the Company than could have been obtained in an arm's length transaction with a non-Affiliate, and (ii) if involving consideration to either party in excess of $1,000,000, unless such Affiliate Transaction(s) is evidenced by an Officers' Certificate addressed and delivered to the Holders certifying that such Affiliate Transaction (or Transactions) has been approved by a majority of the members of the Board of Directors that are disinterested in such transaction and (iii) if involving consideration to either party in excess of $5,000,000, unless in addition the Company, prior to the consummation thereof, obtains a written favorable opinion as to the fairness of such transaction to the Company from a financial point of view from an independent investment banking firm of national reputation or, if pertaining to a matter for which such investment banking firms do not customarily render such opinions, an appraisal or valuation firm of national reputation. Notwithstanding the foregoing, the Company and its Subsidiaries shall be permitted to enter into transactions with Affiliates pursuant to agreements or other documents entered into simultaneously herewith on the Closing Date, including without limitation, the agreements and other documents relating to the New Notes and the issuance of the Company's Series C Preferred Stock and those existing Affiliate transactions set forth on Schedule 5.22 hereof. 9.8 Restrictions on Foreign Subsidiary Support. The Company shall not permit to exist, and shall not permit any of its Subsidiaries to permit to exist, any transfers by the Company or any of its Subsidiaries of goods of any kind, loans, capital contributions or any other financial support to any Foreign Subsidiary. 9.9 Environmental Matters. The Company shall not, and shall not permit any of its Subsidiaries to, use, generate, manufacture, produce, store, Release, discharge or dispose of, on, under or about any real property owned, operated or leased by the Company or any such Subsidiary or transport to or from any such property, any Hazardous Substance, or (to the extent within the Company's or any such Subsidiary's control) permit any other Person to do so except in the ordinary course and in compliance with applicable law, and where such non-compliances could not reasonably be expected to have a Material Adverse Effect. 9.10 Amendments to Certificates of Incorporation and By-Laws. The Company shall not alter or modify, and shall not permit any of its Subsidiaries to alter or modify, its Articles of Incorporation or Certificate of Incorporation or By-Laws or other organizational documents in any manner which could reasonably be expected to have a Material Adverse Effect; provided that the Company may amend its Certificate of Incorporation to increase the number of its authorized shares of common stock as contemplated by the Exchange and the Company may liquidate or dissolve its inactive Subsidiaries set forth on Schedule 9.5. The Company shall not change, and shall not permit any of its Subsidiaries to -35- change, its corporate name, mailing address, or principal place of business or jurisdiction of incorporation, unless it shall have complied with the requirements of Section 8.12 hereof. 9.11 ERISA. The Company shall not, and shall not permit any of its Subsidiaries to, do any of the following if such action could reasonably be expected to result in the Company or any such Subsidiary incurring a liability, individually or in the aggregate equal to or in excess of $300,000: (a) Engage, or permit any ERISA Affiliate to engage, in any prohibited transaction which is reasonably likely to result in a civil penalty or excise tax described in Sections 502(i) of ERISA or 4975 of the Code for which a statutory or class exemption is not available or a private exemption has not been previously obtained from the DOL; (b) permit to exist with respect to any Benefit Plan any accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of the Code), whether or not waived; (c) fail, or permit any ERISA Affiliate to fail, to pay timely required contributions or annual installments due with respect to any Benefit Plan; (d) terminate, or permit any ERISA Affiliate to terminate, any Benefit Plan; (e) fail, or permit any ERISA Affiliate to fail, to make any required contribution or payment to any Multiemployer Plan; (f) fail, or permit any ERISA Affiliate to fail, to pay any required installment or any other payment required under Section 412 of the Code on or before the due date for such installment or other payment; (g) amend, or permit any ERISA Affiliate to amend, a Benefit Plan resulting in an increase in current liability for the plan year such that the Company or any of its Subsidiaries or any ERISA Affiliate is required to provide security to such Benefit Plan under Section 401(a)(29) of the Code; (h) withdraw, or permit any ERISA Affiliate to withdraw, from any Multiemployer Plan; or (i) permit any Termination Event to occur. 9.12 No Additional Bank Accounts. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, open, maintain or otherwise have any checking, savings or other accounts at any bank or other financial institution, or any other account where money is or may be deposited or maintained with any Person, other than the accounts set forth on Schedule 9.12, except to the extent permitted hereunder. -36- 9.13 No Additional Subsidiaries. The Company shall not, and shall not permit any Subsidiary to, directly or indirectly, incorporate, form or acquire any new Subsidiaries or purchase or otherwise acquire all or substantially all of the assets of any Person. SECTION 10. EVENTS OF DEFAULT; ACCELERATION 10.1 Events of Default. The occurrence of any of the following events shall constitute an "Event of Default" hereunder: (a) failure of the Company to pay any principal or Offer Payment, if any, on any Note when due, whether at stated maturity or at a date fixed for payment, prepayment, by an acceptance of an Offer, by acceleration or otherwise; or (b) failure of the Company to pay any other Obligation when due, whether at stated maturity, or at a date fixed for payment, prepayment, by an acceptance of an Offer by acceleration or otherwise and such failure shall continue for a period of five (5) days; or (c) (i) failure of the Company to perform, comply with or observe any term, covenant or agreement applicable to it contained in Section 9; or (ii) failure of the Company or any of its Subsidiaries to perform, comply with or observe any other term, covenant or agreement applicable to it in this Agreement (other than a provision covered by subparagraph (i) above) or in any other Operative Agreement and the failure shall continue unremedied for five (5) Business Days after the delivery by the Holders of written notice to the Company of such failure; or (d) any representation or warranty made or deemed made by the Company or any of its Subsidiaries in this Agreement, the other Operative Agreements or any other agreement, document, instrument or in any certificate furnished to the Holders pursuant to the terms of any thereof shall prove to have been false or misleading as of the time made or furnished in any material respect; or (e) (i) the Company or any of its Subsidiaries shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or the Company or any of its Subsidiaries shall make a general assignment for the benefit of creditors; or (ii) there shall be commenced against the Company or any of its Subsidiaries any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for sixty (60) days after the entry thereof; or (iii) there shall be commenced against the Company or any of its Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distrain or similar process -37- against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal for sixty (60) days; or (f) the Company or any of its Subsidiaries shall (i) default in any payment of principal of or interest on any Debt or in the payment of any Guarantee the aggregate principal amount of the series of Debt under which such Debt is issued and the aggregate principal amount of the obligation guaranteed by such Guarantee equals or exceeds $200,000; or (ii) default in the observance or performance of any other agreement or condition relating to any such Debt or Guarantee or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Debt or beneficiary or beneficiaries of such Guarantee (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such Debt to become due prior to its stated maturity or such Guarantee to become due prior to its stated maturity or such Guarantee to become payable; or (g) any covenant, agreement or obligation of any party contained in or evidenced by any Operative Agreement shall cease to be enforceable in accordance with its terms, or the Company or any of its Subsidiaries shall deny or disaffirm its obligations under any Operative Agreement, or any Operative Agreement shall be cancelled, terminated, revoked or rescinded without the Holders' express prior written consent; or (h) any of the other Operative Agreements shall cease for any reason to be in full force and effect (other than in accordance with the terms hereof or thereof) or any action or proceeding shall have been commenced by any Person seeking to cancel, revoke, rescind or disaffirm the obligations of any party to any Operative Agreement; or (i) any court or other governmental authority shall issue a final judgment, order, decree or ruling for the payment of money (a "Judgment"), and such Judgment is in an amount (determined after an allowance for the application of any insurance proceeds to such Judgment) in excess of $200,000 and enforcement proceedings shall have been commenced upon any such Judgment or any such Judgment shall remain unpaid after a period of ten (10) consecutive days during which a stay of such enforcement of any such Judgment, including, without limitation, by reason of a pending appeal or otherwise, shall not be in effect; or (j) any security interest or Lien purported to be created by any of the Collateral Documents shall cease to be valid and (to the extent required by the Collateral Documents) perfected or the Company or any of its Subsidiaries shall so have asserted, except that the failure of any security interest or Lien purported to be created by the Collateral Documents to be valid and perfected shall not in itself constitute a default hereunder if the value of the Collateral purported to be covered thereby is, in the aggregate, not in excess of $200,000; or (k) the holders of all or any of the New Notes shall accelerate the maturity of all or any the New Notes or any of the New Notes shall be prepaid, redeemed or repurchased in whole or part. -38- 10.2 Acceleration. Upon the occurrence of an Event of Default which has not been cured within the applicable cure period, if any, or waived by the Required Holders, by delivery of written notice to Company, the Required Holders may take any or all of the following actions: declare all or any part of the Obligations hereunder to be immediately due and payable (except with respect to any Event of Default set forth in Section 10.1(e) hereof, in which case all such Obligations shall automatically become immediately due and payable without the necessity of any notice or other demand) without presentment, demand, protest or any other action or obligation of the Required Holders. If at any time after acceleration of the Obligations hereunder, the Company or any of its Subsidiaries shall pay all arrears of interest and all payments on account of principal of such Notes which shall have become due otherwise than by acceleration (with interest on principal and, to the extent permitted by law, on overdue interest, at the rates specified in this Agreement) and any Default and all Events of Default (other than nonpayment of principal of and accrued interest on such Notes and other Obligations hereunder due and payable solely by virtue of acceleration) shall be remedied or waived, then by written notice to Company, the Required Holders may elect, in the Required Holders' sole discretion, to rescind and annul the acceleration and its consequences; but such action shall not affect any subsequent Default or Event of Default or impair any right or remedy consequent thereon. The provisions of the preceding sentence are not intended to benefit the Company or any of its Subsidiaries and do not give the Company or any of its Subsidiaries the right to require the Holders to rescind or annul any acceleration hereunder, even if the conditions set forth herein are met. SECTION 11. COLLATERAL AGENT 11.1 Appointment of Collateral Agent; Powers and Immunities. (a) Subject to Section 11.8 hereof, each Holder in its capacity as such hereby irrevocably appoints and authorizes the Collateral Agent to act as its agent hereunder, under the Collateral Documents and under all other Operative Agreements to which the Collateral Agent is a party, with such powers as are expressly delegated to the Collateral Agent by the terms of this Agreement, the Collateral Documents and such other Operative Agreements, together with such other powers as are reasonably incidental thereto. (b) The Collateral Agent (which term, when used in this sentence, the next two sentences of this Section 11.1 and in Sections 11.5 and 11.7 hereof shall include reference to its Affiliates and to its own and its Affiliates' officers, directors, employees and agents) shall not have any duties or responsibilities except those expressly set forth in this Agreement, the Collateral Documents or any other Operative Agreement to which the Collateral Agent is a party, or be a trustee for or have any fiduciary obligation to any Holder, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement, the Collateral Documents or any other Operative Agreement or otherwise exist against the Collateral Agent. Notwithstanding anything to the contrary contained herein, the Collateral Agent shall not be required to take any action which is contrary to this Agreement, any Collateral Document or any other Operative Agreement to which the Collateral Agent is a party or applicable law. The Collateral Agent shall not be responsible for any action taken or omitted to be taken by it hereunder, under any Collateral Document or under any other Operative Agreement to which the -39- Collateral Agent is a party or in connection herewith or therewith, except for its own gross negligence or willful misconduct. In no event shall the Collateral Agent be liable for indirect, punitive, special or consequential damage or loss (including but not limited to lost profits) whatsoever, even if the Collateral Agent has been informed of the likelihood of such loss or damage and regardless of the form of action. Except as otherwise provided under this Agreement or as expressly provided in the Collateral Documents or the other Operative Agreements to which the Collateral Agent is a party, the Collateral Agent shall take such action with respect to the Collateral Documents and the other Operative Agreements to which it is a party as it shall be directed by the Required Holders, it being understood, however, that all such Collateral Documents shall continue at all times to secure, on the terms and conditions set forth therein, the Obligations. (c) In connection with performing its duties under this Agreement, any Collateral Document or any other Operative Agreement to which it is a party, the Collateral Agent may employ agents, counsel and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents, counsel or attorneys-in-fact selected by it in good faith and may consult with and rely on the advise of its agents, counsel, attorneys-in-fact and advisors. Any such agent may do all acts and things and exercise all discretion which it is authorized or permitted to do or exercise for and on behalf and in the name of the Collateral Agent. In the event the Collateral Agent shall assign any of its rights or obligations to an agent pursuant to this Section 11.1(c), such agent shall be subject to, and shall have the benefits of, the provisions of this Agreement insofar as they apply to the Collateral Agent. 11.2 Reliance by Collateral Agent. The Collateral Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation reasonably believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of any Holder, legal counsel (including counsel to the Company and its Subsidiaries, and including the Collateral Agent's own in-house counsel), independent accountants and other experts selected by the Collateral Agent. The Collateral Agent shall be fully justified in failing or refusing to take any action under this Agreement, the Collateral Documents or any other Operative Agreement unless it shall first receive such advice or concurrence of the Holders as it deems appropriate. The Collateral Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement, the Collateral Documents or any other Operative Agreement in accordance with a request or consent of the Required Holders (except where the consent of all of the Holders is required per Section 11.9, and in any such event, the Collateral Agent shall be fully protected as provided in this sentence when acting or refraining from acting in accordance with the instructions of all of the Holders) and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Holders. 11.3 Default Events. (a) The Collateral Agent shall not be deemed to have knowledge or notice of the occurrence of an Event of Default unless the Collateral Agent has received written notice from a Holder or the Company referring to this Agreement, describing such Event of Default and stating that such notice is a "Notice of an Event of Default". In the event that the Collateral -40- Agent receives a notice from a Holder, the Company or any other Person of the occurrence of an Event of Default, the Collateral Agent shall give notice thereof to the Holders; provided, however, that the Collateral Agent shall not incur any liability to any Holder on account of any failure to provide such notice, except for its own gross negligence or willful misconduct. The Collateral Agent shall take such action with respect to such Event of Default as so directed by the Required Holders pursuant to this Agreement; provided that, unless and until the Collateral Agent shall have received such directions and, if it so requests, an indemnification from the Holders satisfactory to the Collateral Agent, the Collateral Agent may (but shall not be obligated to) take such action, or refrain from taking any action, with respect to such Event of Default as it shall deem advisable in the best interest of the Holders. (b) If the Collateral Agent does not receive any amount due it from the Company hereunder or under any Collateral Document or other Operative Agreement, the Collateral Agent may notify the Holders, and the Holders shall notify the Company that failure to pay such amount shall constitute a Event of Default. 11.4 Rights as a Secured Party. With respect to its Notes, if any, the Collateral Agent shall have the same rights and powers hereunder as any Holder and may exercise the same as though it was not acting as the Collateral Agent. All defined terms contained herein that would include a Person notwithstanding that such Person is acting in the capacity of the Collateral Agent shall, unless the context otherwise indicates, include such Person in its individual capacity. The Person acting in the capacity of the Collateral Agent and its Affiliates may (without having to account therefor to any Holder) make loans to, issue letters of credit for the account of, accept deposits from, extend credit (on a secured or unsecured basis) to, acquire equity interests in and generally engage in any kind of banking, trust, financial, advisory, underwriting or other business with the Company or any of its Affiliates, as if it was not acting as the Collateral Agent. 11.5 Indemnification. The Collateral Agent shall be fully justified in refusing to take or to continue to take any action hereunder, under any Collateral Document or under any other Operative Agreement to which the Collateral Agent is a party unless it shall first be indemnified to its satisfaction by the Holders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. 11.6 Documents. The Collateral Agent will forward to each Holder, promptly after the Collateral Agent's receipt thereof (and will use commercially reasonable efforts to forward within five (5) Business Days of such receipt), a copy of each document furnished to the Collateral Agent by any Holder or the Company under the Collateral Documents. The Collateral Agent will forward to each Holder, promptly upon such Holder's request therefor, a copy of any other document furnished to the Collateral Agent under the Collateral Documents or any other Operative Agreement to which the Collateral Agent is a party. -41- 11.7 Non-Reliance on Collateral Agent and Other Secured Parties. Each Holder acknowledges that the Collateral Agent has not made any representation or warranty to it on or prior to the date hereof. Each Holder represents that it has, independently and without reliance on the Collateral Agent or any other Holder, and based on such documents and information as it has deemed appropriate, made its own appraisal of the financial condition and affairs of the Company and its Subsidiaries and decision to enter into this Agreement and the other Operative Agreements to which it is a party and agrees that it will, independently and without reliance upon the Collateral Agent or any other Holder, and based on such documents and information as it shall deem appropriate at the time, continue to make its own appraisals and decisions in taking or not taking action under this Agreement and the other Operative Agreements to which it is a party. Neither the Collateral Agent nor any Holder nor any of their respective Affiliates shall be responsible to any other Holder for any recitals, statements, representations or warranties made by the Company or any of its Subsidiaries contained in this Agreement or any Operative Agreement or in any certificate or other document referred to or provided for in, or received by any Holder under, this Agreement or any other Operative Agreement, for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Operative Agreement or any other document referred to or provided for herein or therein or for any failure by the Company to perform its obligations hereunder or thereunder. Neither the Collateral Agent nor any Holder shall be required to monitor or otherwise inform itself as to the performance or observance by the Company or any of its Subsidiaries under this Agreement or any other document referred to or provided for herein or to make inquiry of, or to inspect the properties or books of, the Company or any of its Subsidiaries. Except for notices, reports and other documents and information expressly required to be furnished to the Holders by the Collateral Agent hereunder and under the Collateral Documents, the Collateral Agent shall not have any duty or responsibility to provide any Holder with any credit or other information concerning the Company or any of its Subsidiaries, or any of their respective Affiliates, which may come into the possession of the Collateral Agent or any of its Affiliates. 11.8 Resignation or Removal of Collateral Agent. (a) Subject to the appointment and acceptance of a successor Collateral Agent as provided in this Section 11.8, the Collateral Agent may resign at any time as Collateral Agent under this Agreement and any Collateral Document and any other Operative Agreement to which it is a party by giving 30 days' written notice thereof to the Holders and the Company, and the Collateral Agent may be removed at any time with or without cause by the vote of the Required Holders. Upon any such resignation or removal, the Required Holders shall have the right to appoint a successor Collateral Agent. If no successor Collateral Agent shall have been appointed by the Required Holders and shall have accepted such appointment prior to the scheduled effective date of the resignation or removal of the Collateral Agent, then the retiring Collateral Agent may, on behalf of the Holders appoint a successor Collateral Agent, which shall be a Holder acceptable to the Required Holders or a bank or trust company reasonably acceptable to the Required Holders. If no successor Collateral Agent shall have been appointed by the Required Holders and shall have accepted such appointment prior to the scheduled effective date of the resignation of the Collateral Agent, then the Collateral Agent may petition any court of competent jurisdiction for the appointment of a successor Collateral Agent. Such court may thereupon, after such notice, if any, as it may deem proper and as it may prescribe, appoint a -42- successor Collateral Agent, and such determination shall be binding upon all the parties hereto and shall not be appealable. The Holders agree to pay or reimburse the Collateral Agent for all fees, charges and expenses, including attorneys' fees, relating to or incurred by the Collateral Agent in connection with any such court proceedings. (b) Upon the acceptance of any appointment as Collateral Agent hereunder by a successor Collateral Agent, (i) such successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Collateral Agent, and the retiring Collateral Agent shall be discharged from its duties and obligations hereunder and (ii) the retiring Collateral Agent shall promptly transfer all Collateral within its possession or control to the possession or control of the successor Collateral Agent and shall execute and deliver such notices, instructions and assignments as the Required Holders shall instruct based on their conclusion that such notices, instructions and assignments are necessary or desirable to transfer the rights of the Collateral Agent with respect to the Collateral to the successor Collateral Agent. After any retiring Collateral Agent's resignation or removal hereunder as Collateral Agent, the provisions of this Section 11 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Collateral Agent. Notwithstanding anything in this Agreement to the contrary, the Collateral Agent shall not be required in any event or under any circumstance, including its resignation or removal, to provide (nor be deemed to have provided) to any successor Collateral Agent any indemnity (or similar obligation) of any kind whatsoever. 11.9 Authorization. The Collateral Agent is hereby authorized by the Holders to execute, deliver and perform each of the Collateral Documents and other Operative Agreements to which the Collateral Agent is or is intended to be a party, and each Holder agrees to be bound by all of the agreements of the Collateral Agent contained in, and all of the other terms and conditions of, the Collateral Documents and other Operative Agreements to which the Collateral Agent is a party. Without receiving prior written consent from the Required Holders, the Collateral Agent will not consent to any modification, supplement or waiver under any of the Collateral Documents or under any other Operative Agreement to which the Collateral Agent is a party, provided that without the prior written consent of each Holder, the Collateral Agent shall not (a) release any Collateral or otherwise terminate any Lien under any Collateral Document, (b) consent to any modification of this Section 11.9 or of the definition of the terms "Obligations", "Required Holders" or "Holders" or (c) consent to any Lien under any Collateral Document securing obligations other than the Obligations. For the avoidance of doubt, nothing in this Section 11.9 or elsewhere in this Agreement or in any Collateral Document or other Operative Agreement shall limit the obligations of the Company or any of its Subsidiaries under any Operative Agreement, including, without limitation, any obligation of the Company to obtain any consent or approval of one or more Holders required to be obtained by the Company prior to any amendment of, modification or supplement to or waiver under any Operative Agreement, and the Collateral Agent shall not consent to any amendment of, modification or supplement to or waiver under any Operative Agreement unless and until the Company shall have first obtained all such required consents and approvals. -43- SECTION 12. DEFINITIONS 12.1 Defined Terms. As used herein the following terms have the following respective meanings: "Account" or "Accounts" means all of the Company's or any of its Subsidiaries' accounts, whether now existing or existing in the future, including, without limitation, all (i) accounts receivable (whether or not specifically listed on schedules furnished to the Holders), including, without limitation, all accounts created by or arising from all of the Company's or any of its Subsidiaries' sales of goods or rendition of services made under the Company's or any of its Subsidiaries' trade names or styles, or through the Company's or any of its Subsidiaries' divisions; (ii) unpaid or unexercised seller's rights (including any right of rescission, replevin, reclamation and stopping in transit) relating to the foregoing or arising therefrom; (iii) rights to any goods represented by any of the foregoing, including returned or repossessed goods; (iv) reserves and credit balances held by the Company or any of its Subsidiaries with respect to any such accounts receivable or account debtors; (v) guarantees or collateral for any of the foregoing; (vi) insurance policies; or (vii) rights relating to any of the foregoing. "Accreted Principal Amount" of any Note, at any date, shall equal the (i) the Original Issue Price of such Note plus (ii) the accrued amortization of the Original Issue Discount attributable ratably on a daily basis, using a daily level yield, to the period from and including the Closing Date to (but excluding) the Maturity Date. "Affiliate" or "Affiliates" means with respect to any Person, (i) any Subsidiary of such Person and any other Person which, directly or indirectly, controls, is controlled by or is under common control with such Person and (ii) each director, officer or general partner of such Person. For purposes of the Agreement, control of a Person means the power, direct or indirect, (a) to vote 20% or more of the outstanding stock or other ownership interests having ordinary voting power for the election of directors of such Person or (b) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. "Affiliate Transaction" has the meaning specified in Section 9.7. "Agreement" has the meaning specified in Section 1. "Asset Disposition" means any sale or other disposition, or series of sales or other dispositions (including, without limitation, by merger or consolidation, and whether by operation of law or otherwise), made on or after the Closing Date by the Company or any of its Subsidiaries to any Person of (a) all or substantially all of the outstanding Capital Stock of any of its Subsidiaries, (b) all or substantially all of its assets or the assets of any division of the Company or any of its Subsidiaries, or (c) any other asset or assets which, when taken together with all sales or other dispositions of assets not covered by the foregoing clauses (a) and (b) yield proceeds or involve assets having a fair market value in excess of $150,000 in any twelve-month period; provided, however, that (i) any sale or disposition by the Company or any of its Subsidiaries of Inventory in the ordinary course of business, and (ii) any sale or disposition of the Company or any of its Subsidiaries of assets, not in the ordinary course of business in instances where the proceeds of such dispositions do not exceed $50,000 for any individual -44- transaction or $150,000 in the aggregate following the Closing shall not constitute an Asset Disposition for purposes of this Agreement. "Auditors" means a nationally-recognized firm of independent public accountants selected by the Company and satisfactory to the Holders in the Holders' reasonable discretion. "Benefit Plan" means a defined benefit plan as defined in Section 3(35) of ERISA (other than a Multiemployer Plan) that is subject to Title IV of ERISA and in respect of which the Company or any of its Subsidiaries or any ERISA Affiliate is, or within the immediately preceding six (6) years was, an "employer" as defined in Section 3(5) of ERISA. "Business Day" means any day other than a Saturday, Sunday or any other day on which commercial banks are required by law or authorized to close in New York, New York. "Capital Lease" means, as to any Person, any lease of property, real or personal, by such Person as lessee which would be capitalized on the balance sheet of such Person prepared in conformity with GAAP. "Capital Lease Obligation" means, as to any Person, the capitalized amount of all obligations of such Person or any of its Subsidiaries under Capitalized Leases, as determined on a consolidated basis in accordance with GAAP. "Capital Stock" means shares of capital stock, beneficial, partnership or limited liability company interests, participations or other equivalents (regardless of how designated) of or in a corporation, partnership, limited liability company or equivalent entity, whether voting or non-voting, and includes, without limitation, common stock and preferred stock. "Cash Equivalent" means (a) securities with maturities of one year or less from the date of acquisition issued or fully guaranteed or insured by the United States government or any agency thereof, (b) certificates of deposit, eurodollar time deposits, overnight bank deposits and bankers' acceptances of any financial institution having maturities of one year or less from the date of acquisition, (c) commercial paper of an issuer rated at least "A-1" by S&P or "P-1" by Moody's, or carrying an equivalent rating by a nationally recognized rating agency if both of S&P and Moody's cease publishing ratings of investments, and (d) mutual funds investing solely in investments of the type described in the foregoing clauses (a) through (c). "Casualty Loss" shall have the meaning specified in Section 8.4(b). "Change of Control" means any transaction or series of transactions in which any of the following occurs: (a) any "person" or "group" (as such terms are used for purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable) (other than any of the Excluded Persons) becomes following the date of the first issuance of the New Notes (the "Issue Date") the "beneficial owner," directly or indirectly, of more than 50% of the issued and outstanding Capital Stock entitled to vote in the election of directors, managers, or trustees, as applicable, of the Company or any Subsidiary Guarantor or the surviving entity or entities (if other than the Company or any Subsidiary Guarantor); or (b) individuals who immediately following the Issue Date after giving effect to the transactions contemplated by Section 6.6 of the Exchange Agreement constituted the Board of Directors of the Company or any Subsidiary Guarantor (together with any new directors whose election by such Board of Directors or whose -45- nomination for election by the shareholders of the Company or any Subsidiary Guarantor, as applicable, was approved by a vote of at least a majority of the directors of the Company or any Subsidiary Guarantor then still in office who were either directors at the Issue Date or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company or any Subsidiary Guarantor then in office. Notwithstanding the foregoing to the contrary, a "Change of Control" shall expressly exclude the Exchange and subsequent conversion of the Company's Series C Preferred Stock into common stock. "Change of Control Offer" has the meaning specified in Section 7.3(a). "Change of Control Payment" has the meaning specified in Section 7.3(a). "Closing" has the meaning specified in Section 3. "Closing Date" has the meaning specified in Section 3. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time, and any successor statute. "Collateral" means any and all assets and rights and interests in or to property and proceeds thereof, whether now owned or hereafter acquired by the Company or any of its Subsidiaries, upon which a Lien is granted under any of the Collateral Documents. "Collateral Agent" has the meaning specified in the Introduction. "Collateral Documents" means the Security Agreement, each of the Deeds of Trust, the Pledge Agreement, the Lockbox Agreement and any other document or instrument executed and delivered by a Person granting a Lien on any of its property to secure payment of the Obligations. "Company" has the meaning specified in the Introduction. "Company Indemnified Person" has the meaning specified in Section 15(c). "Compliance Certificate" shall have the meaning specified in Section 8.2(b). "Confidential Information" has the meaning specified in Section 25. "Consolidated Capital Expenditures" means, for any period, the additions to property, plant and equipment and other capital expenditures of the Company and each of its Subsidiaries for such period, as the same are (or, in accordance with GAAP, would be) set forth in the consolidated statement of cash flows of the Company and its Subsidiaries for such period. "Consolidated Net Income" means, for any period, the consolidated net income (or loss) of the Company and its Subsidiaries for such period, excluding (i) gains or losses from dispositions of assets, (ii) any extraordinary items, and (iii) other non-recurring items not related to operations, in the case of (i), (ii) and (iii), as determined in accordance with GAAP. -46- "Contractual Obligation" of any Person means any obligation, agreement, undertaking or similar provision of any security issued by such Person or of any agreement, undertaking, contract, lease, indenture, mortgage, deed of trust or other instrument (excluding an Operative Agreement) to which such Person is a party or by which it or any of its property is bound or to which any of its properties is subject. "DDJ Loan Agreement" means the Loan Agreement dated as of March 1, 2001, as amended, between the Company and Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety Products, Inc., Skagit Engineering & Manufacturing Inc., and PA&E International, Inc., as borrowers, and Pacific A&E Limited, Pacific Aerospace & Electronics (UK) Limited and Aeromet International PLC, as foreign subsidiaries, each of the lenders set forth on Schedule I thereto, as lenders and DDJ Capital Management, LLC, as agent for the lenders. "Debt" means of any Person at any date, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations of such Person to pay the deferred purchase price of property or services, (d) all obligations of such Person under Capital Leases, (e) all contingent or non-contingent obligations of such Person to reimburse any Person in respect of amounts paid or payable (currently or in the future, on a contingent or non-contingent basis) under a letter of credit or similar instrument, (f) all Debt of others secured by a Lien on any asset of such Person, and (g) all Debt of others Guaranteed by such Person. "Deeds of Trust" means the mortgages or the deed of trust, security agreement and fixture filings, deeds to secured debt, assignment or rent or other similar instruments or documents, as the case may be, substantially in the form of Exhibit E. "Default" means an event, condition or default which with the giving of notice, the passage of time or both would be an Event of Default. "DOL" means the United States Department of Labor and any successor department or agency. "Dollar" and sign "$" means lawful money of the United States of America. "EBITDA" means, with respect to any period, Consolidated Net Income for such period before payment or provision of taxes measured by income plus, without duplication, all interest charges (to the extent deducted in computing Consolidated Net Income), all fees payable in connection with this Agreement and the Exchange Agreement, amortization and depreciation expense (including any amortization and depreciation associated with "fresh start accounting") and other gains or losses arising from extraordinary items or from any other non-recurring item that reduces Consolidated Net Income for such period, in each case determined on a consolidated basis for the Company and its Subsidiaries in accordance with GAAP or as agreed to by the Holders. "Eligible Purchaser" has the meaning specified in Section 6.1(ii). -47- "Environmental Law" means any federal, state or local law, statute, ordinance, regulation, rule, order, decree, judgment, ordinance, permit, license, registration, approval or requirement or authorization of any government or governmental department or agency or court pertaining to health, industrial hygiene, or environmental or natural resources. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute thereto and all final or temporary regulations promulgated thereunder, and all published, generally applicable rulings entitled to precedential effect. "ERISA Affiliate" means any (i) corporation which is or was at any time during the immediately preceding six years a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Company or any of its Subsidiaries; (ii) partnership or other trade or business (whether or not incorporated) at any time during the immediately preceding six years under common control (within the meaning of Section 414(c) of the Code) with the Company or any of its Subsidiaries; and (iii) member of the same affiliated service group (within the meaning of Section 414(m) of the Code) as the Company or any of its Subsidiaries, any corporation described in clause (i) above, or any partnership or trade or business described in clause (ii) above. "Event of Default" or "Events of Default" shall have the meaning provided for in Section 10.1 of this Agreement. "Excess Cash Flow" means for the Company for any period, 50% of EBITDA for such Period minus the sum of (without duplication ) (i) optional, mandatory and scheduled cash principal payments of the Notes during such period and optional, mandatory and scheduled cash principal payments on other Debt made by the Company or any of its Subsidiaries during such period to the extent such other Debt is permitted herein and such payments are permitted herein to be made, (ii) scheduled payments made by the Company or any of its Subsidiaries on Capital Lease Obligations to the extent such Capital Lease Obligations are permitted herein, (iii) Non-Financed Capital Expenditures made by the Borrower or any of its Subsidiaries during such period to the extent permitted herein, (iv) all cash interest expenses of the Company and its Subsidiaries for such period and (v) all cash tax expenses of the Company and its Subsidiaries for such period. "Excess Cash Flow Offer" shall have the meaning specified in Section 7.3(b). "Excess Cash Flow Payment" shall have the meaning specified in Section 7.3(b). "Exchange" shall have the meaning specified in the Exchange Agreement. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Agreement" means the Exchange Agreement, dated as of March 19, 2002, among the Company, certain of its Subsidiaries and the holders of the Old Notes. "Excluded Persons" means any officer or director of the Company, the other Persons listed on Exhibit I hereto, any Persons related to such Persons by kinship or marriage, -48- and any trust, corporation, partnership or other entity which is beneficially owned 80% or more by any such Persons. "Exempt Resale" means the sales or offers to sell some or all of the Notes purchased by the Initial Purchaser pursuant to Rule 144A of the Securities Act. "Exempted Affiliate Transactions" means (a) customary employee compensation arrangements approved by a majority of independent (as to such transactions) members of the Board of Directors of the Company, (b) dividends permitted pursuant to Section 9.2 hereof and payable, in form and amount, on a pro rata basis to all holders of common stock of the Company and (c) transactions solely between the Company and any of its wholly owned Subsidiaries or solely among wholly owned Subsidiaries of the Company. "Financials" has the meaning specified in Section 5.4. "Foreign Subsidiary" means any Subsidiary of a Person not incorporated in or having material assets or operations in the United States. "GAAP" means generally accepted accounting principles in the United States of America, as in effect from time to time and with respect to the Foreign Subsidiaries, accounting principles used in the United Kingdom as in effect from time to time. "Governmental Authority" means any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Hazardous Substance" means those substances included within the definitions of "hazardous substances", "hazardous materials", "toxic substances", or "solid waste" under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et seq., the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Sections 6901 et seq. and the Hazardous Materials Transportation Act, 49 U.S.C. Sections 1801 et seq., and in the regulations promulgated pursuant to said laws, and such other substances, materials and wastes which are or become regulated, restricted or addressed by or under any Environmental Law. "Holder" means the Initial Purchaser and each other Person which acquires or becomes the owner of a Note. -49- "Immediately Succeeding Period" shall have the meaning specified in Section 9.6. "Indemnified Party" has the meaning specified in Section 15(b). "Initial Discount" means the greater of 0.25% of the Original Issue Price and $55,000. "Initial Purchaser" has the meaning specified in Section 2.1. "Institutional Investor" means (a) any original purchaser of a Note, (b) any holder of a Note holding $1,000,000 or more of the aggregate principal amount of the Notes then outstanding, and (c) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form. "Internal Revenue Service" means the Internal Revenue Service and any successor agency. "Inventory" means all of the Company's and each of its Subsidiaries' inventory as defined by GAAP, including without limitation: (i) all raw materials, work in process, parts, components, assemblies, supplies and materials used or consumed in the Company's or any of its Subsidiaries' businesses; (ii) all goods, wares and merchandise, finished or unfinished, held for sale or lease or leased or furnished or to be furnished under contracts of service; and (iii) all goods returned or repossessed by the Company or any of its Subsidiaries net of any reserves required by GAAP. "Investment" means any investment in any Person, whether by means of share purchase, capital contribution, loan, advance, time deposit or otherwise. "Judgment" shall have the meaning set forth in Section 10.1(i). "KeyBank" means KeyBank National Association. "KeyBank Promissory Notes" means, collectively, that certain Promissory Note, dated as of September 30, 1998, made by the Company in favor of KeyBank in the aggregate principal amount of $1,200,000 and that certain Promissory Note, dated as of March 18, 1998, made by the Company in favor of KeyBank in the aggregate principal amount of $712,086. "Leased Real Property" means all of the real property leased by the Company and each of its Subsidiaries at any time, including, without limitation, all of the material real property leased by the Company and each of its Subsidiaries as of the date of this Agreement as set forth on Schedule 5.12(a) hereto. "Leases" shall mean the leases with respect to the Leased Real Property. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. For the purposes of the Agreement, the Company and each of its Subsidiaries shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, Capital Lease or other title retention agreement relating to such asset. -50- "Lockbox" has the meaning specified in Section 8.14(a). "Lockbox Account" has the meaning specified in Section 8.14(a). "Lockbox Agreement" means the 3rd Party Lockbox Agreement executed by the Company, the Collateral Agent and KeyBank in favor of the Holders in the form attached to this Agreement as Exhibit D. "Material Adverse Effect" means a material adverse effect on (a) the business, operations, property, condition (financial or otherwise) or prospects (financial or otherwise) of the Company and its Subsidiaries, taken as a whole, (b) the ability of the Company or any of its Subsidiaries to perform its obligations under this Agreement or any other Operative Agreement to which it is a party, (c) the validity or enforceability of this Agreement or any other Operative Agreement or of the rights or remedies of the holder of any Notes, or (d) the perfection or priority of the Liens granted pursuant to the Collateral Documents. "Maturity Date" has the meaning specified in Section 2.2. "Moody's" means Moody's Investors Service, Inc. "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA and (i) which is, or within the immediately preceding six (6) years was, contributed to by the Company or any of its Subsidiaries or any ERISA Affiliate or (ii) with respect to which the Company or any of its Subsidiaries or any ERISA Affiliate may incur any liability. "Net Cash Proceeds" means, with respect to any Asset Disposition, the aggregate amount of cash received by the Company and each of its Subsidiaries (including cash payments received in respect of deferred payment pursuant to any note or installment receivable or otherwise and state or federal income tax refunds attributable to such sale or disposition, but in each case only as and when received and any amount eliminated from any reserve referred to in clause (b) below, but only as and when eliminated) in respect of such Asset Disposition net of (a) all fees, commissions, expenses and taxes incurred in connection with such sale or disposition, (b) deduction of appropriate amounts, in an amount determined by the Company and agreed to by the Required Holders, in their sole judgment exercised reasonably, to be provided by the Company or any of its Subsidiaries as a reserve, in conformity with GAAP, against any liabilities retained by the Company or any or its Subsidiaries associated with such assets after such Asset Disposition, including, without limitation, any indemnification associated with such Asset Disposition, and (c) proceeds that are reinvested in similar capital assets of any of the Company's wholly owned Subsidiaries within 180 days of the date of such Asset Disposition or receipt of cash payment therefor (if later); provided that the Company has certified to the Holders promptly, and in any event within 30 days after the date of such Asset Disposition or receipt of such proceeds (if later), that such proceeds are to be reinvested. For purposes of this definition, (i) if taxes or other expenses payable in connection with the sale or disposition of any asset are not known as of the date of such sale or disposition, then such fees, commissions, expenses or taxes shall be estimated by the Company or its Subsidiaries, as the case may be, in good faith, and agreed to by the Required Holders, in their sole judgment exercised reasonably, and such estimated amounts shall be deducted therefrom, and (ii) Net Cash Proceeds shall be deemed to include, without limitation, any award of compensation for any asset or property or -51- group thereof taken by condemnation or eminent domain and insurance proceeds for the loss of or damage to any asset or property if such award or proceeds equals or exceeds $250,000 (per occurrence) and within 180 days after the receipt thereof replacement or repair of such asset or property has not commenced or reasonable steps have not been taken to commence such replacement or repair, except that in the event that at any time such replacement or repair is abandoned or is otherwise discontinued or is not diligently pursued, the remaining award or proceeds, as the case may be, shall constitute Net Cash Proceeds at such time. "New Notes" means the Company's 10% Senior Subordinated Pay-in-Kind Notes due 2007, together with any additional notes that may be issued to the holders thereof as payment for accrued interest on such notes. "New Notes Indenture" has the meaning specified in the Exchange Agreement. "Non-Financed Capital Expenditures" shall mean any and all expenditures (net of any trade-ins, rebates or discounts) in respect of the purchase, lease or other acquisition of fixed or capital assets for which there is no specific funding through a loan, capital lease or other financing that directly finances such assets. "Notes" has the meaning specified in Section 1. "Obligations" means the Notes and all other advances, debts, liabilities, obligations, covenants and duties owing by the Company to the Collateral Agent, any Holder, any Affiliate of any of them or any Indemnified Party, of every type and description, present or future, whether or not evidenced by any note, guaranty or other instrument, arising under this Agreement or under any other Operative Agreement, whether or not for the payment of money, whether arising by reason of an extension of credit, loan, guaranty, indemnification, foreign exchange transaction or interest rate contract or in any other manner, whether direct or indirect (including, without limitation, those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising and however acquired. The term "Obligations" includes, without limitation, all interest, charges, expenses, fees, reasonable attorneys' fees and disbursements and any other sum chargeable to the Company under this Agreement or any other Operative Agreement. "Offer" means an Excess Cash Flow Offer or a Change of Control Offer, as applicable. "Offer Payment" means an Excess Cash Flow Payment or a Change of Control Payment, as applicable. "Offering Circular" means the Offering Circular, dated as of the Closing Date, prepared by the Company and provided to the Initial Purchaser, and any amendment or supplement thereto. "Officers' Certificate" means, as to any corporation, a certificate executed on its behalf by the Chairman of the board of directors (if an officer) or its President or one of its Vice Presidents and its Treasurer, or Controller, or one of its Assistant Treasurers or Assistant Controllers, and, as to any partnership, a certificate executed on behalf of such partnership by its -52- managing general partner in a manner which would qualify such certificate as an Officers' Certificate of such managing general partner hereunder. "Old Notes" has the meaning specified in the Exchange Agreement. "Old Notes Indenture" means that certain Indenture, dated as of July 30, 1998, by any among the Company, the Guarantors (as defined therein) and the Bank of New York (as successor to IBJ Schroeder Bank & Trust Company), as Trustee. "Operative Agreements" means this Agreement, the Notes, the Subsidiary Guaranty, and the Collateral Documents, in each case, as the same may be modified, amended, extended, restated or supplemented from time to time. "Original Issue Discount" means $14,000,000. "Original Issue Price" means, for any Note, and amount equal to the product of the face amount of such Note on the Closing Date and 61.11%. "OSHA" means the Occupational Safety and Health Act, as amended from time to time, and any successor statute thereto and all final or temporary regulations promulgated thereunder, and all published, generally applicable rulings entitled to precedential effect. "Owned Real Property" means the real property owned by the Company and each of its Subsidiaries at any time, including, without limitation, all of the material real property owned by the Company and each of its Subsidiaries as of the date of the Agreement as set forth on Schedule 5.12(a). "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto. "Permitted Investments" means (i) Cash Equivalents, (ii) interest-bearing demand or time deposits (including certificates of deposit) which are insured by the Federal Deposit Insurance Corporation ("FDIC") or a similar federal insurance program; (iii) securities distributed in connection with the confirmation of a plan of reorganization following the bankruptcy of any Person indebted to the distributee at the time such bankruptcy is filed and (iv) such other investments as the Holders may approve in the Holders' sole discretion. "Permitted Liens" means, without duplication: (a) Liens for taxes, assessments, governmental charges or levies not yet due or which are being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained on the books of the Company and each of its Subsidiaries, as the case may be, in accordance with GAAP; (b) statutory Liens of landlords and carriers', or other warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than sixty (60) days or which are being contested in good faith and by appropriate proceedings in a manner which is not reasonably likely to jeopardize or diminish the Holders' interest in any of the Collateral -53- subject to the other Operative Agreements or materially interfere with the ordinary conduct of the businesses of the Company and each of its Subsidiaries; (c) pledges or deposits and Liens (other than any Lien imposed by ERISA) under bonds required in connection with workers compensation, unemployment insurance and other social security legislation; (d) Liens (other than any Lien imposed by ERISA or by Environmental Laws) incurred on deposits to secure the performance of tenders, bids, leases, statutory obligations, surety and appeal bonds, performance and return-of-money bonds and other obligations of alike nature incurred in the ordinary course of business; (e) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which do not in the aggregate materially detract from the value of the property subject thereto or interfere, in any material manner, with the ordinary conduct of the business of the Company or any of its Subsidiaries; and (f) Liens affecting assets existing at the time such assets are acquired provided that such Liens are not created in contemplation of such acquisition. "Person" means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, institution, entity, party or government (including any division, agency or department thereof), and, as applicable, the successors, heirs and assigns of each. "Plan" means any "employee benefit plan" as defined in Section 3(3) of ERISA, maintained or contributed to by the Company or any of its Subsidiaries or with respect to which the Company or any of its Subsidiaries may incur liability. "Pledge Agreement" means the Stock Pledge Agreement executed by the Company and certain of its Subsidiaries in favor of the Collateral Agent for the benefit of the Holders, in the form attached to the Agreement as Exhibit F. "Premium Amount" has the meaning specified in Section 7.2. "Principal Amount" has the meaning specified in Section 2.1. "Proposed Repurchase Date" has the meaning specified in Section 7.3(c). "Proprietary Rights" has the meaning specified in Section 5.12(b). "QIB" has the meaning specified in Section 6.1. "Real Estate" means, collectively, the Owned Real Property and the Leased Real Property. "Release" means any release, pumping, pouring, emptying, injecting, escaping, leaching, migrating, dumping, seepage, spill, leak, flow, discharge, disposal or emission. "Remedial Work" shall have the meaning specified in Section 8.10(b). -54- "Reportable Event" means any of the events described in Section 4043 of ERISA and the regulations thereunder. "Required Holders" means the holders of more than 50% in principal amount of the Notes at the time outstanding (exclusive of Notes then owned by the Company or any of its Affiliates other than GSC Partners CDO Fund, Limited or any of GSC Partners CDO Fund, Limited's Affiliates). "Retiree Health Plan" means an "employee welfare benefit plan" within the meaning of Section 3(1) of ERISA that provides health care benefits to persons after termination of employment, other than as required by Section 601 of ERISA. "S&P" means Standard and Poor's Ratings Services, a division of McGraw-Hill, Inc. "Scheduled Closing Date" has the meaning specified in Section 15(f). "Securities Act" means the Securities Act of 1933, as amended. "Security Agreement" means the Security Agreement between the Collateral Agent and the Company and certain of its Subsidiaries, in the form attached to the Agreement as Exhibit G. "Stock Equivalent" means all securities convertible into or exchangeable for Capital Stock and all warrants, options or other rights to purchase or subscribe for any Capital Stock, whether or not presently convertible, exchangeable or exercisable. "Structures" means all plants, offices, manufacturing facilities, warehouses, administration buildings and related facilities of the Company and each of its Subsidiaries located at the Real Property. "Subsidiary" means, with respect to any Person, a corporation, partnership or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other persons performing similar functions are at the time, directly or indirectly through one or more intermediaries, or both, owned or controlled, by such Person. Unless otherwise expressly indicated to the contrary herein, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to any direct or indirect Subsidiary or Subsidiaries of the Company and each Subsidiary Guarantor and shall include the Foreign Subsidiaries. "Subsidiary Guaranty" means each of the Subsidiary Guaranties of the Subsidiary Guarantors in the form specified in Exhibit H. "Subsidiary Guarantor" means Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., PA&E International, Inc., Seismic Safety Products, Inc., Skagit Engineering & Manufacturing, Inc. and any other Subsidiaries of the Company that executes a Subsidiary Guaranty guaranteeing the Notes. -55- "Tax" or "Taxes" shall mean any and all federal, state, local and foreign taxes, assessments and other governmental charges, duties, impositions, levies and liabilities, including, without limitation, taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, and value added, ad valorem, transfer, gains, franchise, withholding, payroll, recapture, employment, excise, unemployment, insurance, social security, business license, occupation, business organization, stamp, environmental and property taxes, together with all interest, penalties and additions imposed with respect to such amounts. For purposes of this Agreement, "Taxes" also includes any obligations under any agreements or arrangements with any Person with respect to the liability for, or sharing of, Taxes (including pursuant to Treas. Reg. Section 1.1502-6 or comparable provisions of state, local or foreign Tax law) and including any liability for Taxes as a transferee or successor, by contract or otherwise. "Tax Return" means any report, return, election, notice, estimate, declaration, information statement and other forms and documents (including, without limitation, all schedules, exhibits and other attachments thereto) related to and filed or required to be filed with a taxing authority in connection with any Taxes (including, without limitation, estimated Taxes) "Termination Event" means (i) a Reportable Event with respect to any Benefit Plan or Multiemployer Plan which is likely to constitute grounds for termination of such Benefit Plan or Multiemployer Plan; (ii) the withdrawal (within the meaning of Section 4063 of ERISA) of the Company or any of its Subsidiaries or any ERISA Affiliate from a Benefit Plan during a plan year in which such entity was a "substantial employer" as defined in Section 4001(a)(2) of ERISA; (iii) the providing of notice of intent to terminate a Benefit Plan in a distress termination described in Section 4041(c) of ERISA; (iv) the institution by the PBGC of proceedings to terminate a Benefit Plan or Multiemployer Plan; (v) any event or condition (a) described in Section 4042(a) of ERISA and which could reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Benefit Plan or Multiemployer Plan, or (b) described in Section 4041A(a) of ERISA and that could reasonably be expected to result in termination of a Multiemployer Plan pursuant to Section 4041A of ERISA; or (vi) the partial or complete withdrawal within the meaning of Sections 4203 and 4205 of ERISA, of the Company or any of its Subsidiaries or any ERISA Affiliate from a Multiemployer Plan. "Unused Capital Expenditures" shall have the meaning specified in Section 9.6. "Weighted Average Life to Maturity" means, when applied to any Debt at any date, the number of years obtained by dividing (a) the sum of the products obtained by multiplying (i) the amount of each then remaining installment, sinking fund, serial maturity or other required scheduled payment of principal including payment at final maturity in respect thereof, and (ii) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (b) the then outstanding aggregate principal amount of such Debt. 12.2 Terms Generally. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" -56- shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, restated, supplemented or otherwise modified (subject to any restrictions on such amendments, restatements, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person's successors and permitted assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein or in any other Operative Agreement to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement or such other Operative Agreement, as applicable, (e) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights, (f) any reference to time herein shall be to New York City time; and (g) any reference to a law includes any amendment, supplement, or modification thereto and any rules and regulations issued thereunder or any law enacted in substitution or replacement therefor. SECTION 13. REGISTRATION, TRANSFER AND SUBSTITUTION OF NOTES 13.1 Note Register; Ownership of Notes. Any Notes issued in substantially the form of Exhibit A are in "registered form". The Company will keep at its principal office a register in which the Company will provide for the registration of Notes in registered form and the registration of transfers of Notes in registered form. The Company may treat the Person in whose name any Note is registered on such register as the owner thereof for the purpose of receiving payment of the principal of and the Premium Amount, if any, and interest on such Note and for all other purposes, whether or not such Note shall be overdue, and the Company shall not be affected by any notice to the contrary. All references in this Agreement or in a Note to a "Holder" of any Note shall mean the Person in whose name such Note is at the time registered on such register. 13.2 Transfer and Exchange of Notes. Upon surrender of any Note for registration of transfer or for exchange to the Company at its principal office (and in the case of a surrender for registration of transfer, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered Holder or its attorney duly authorized in writing and accompanied by the address for notices of each transferee of such Note or part thereof), the Company at its expense will execute and deliver in exchange therefor a new Note or Notes in denominations of at least $1,000,000 (except one Note may be issued in a lesser principal amount if the unpaid principal amount of the surrendered Note is not evenly divisible by, or is less than, $1,000,000), as requested by the holder or transferee, which aggregate the unpaid principal amount of such surrendered Note. Each such new Note shall be in registered form. Each such Note shall be dated so that there will be no loss of interest on such surrendered Note and otherwise of like tenor, and shall be registered in the name or names of such Person as such Holder or transferee may request. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. Any Note in lieu of which any such -57- new Note has been executed and delivered shall not be deemed to be an outstanding Note for any purpose of this Agreement. 13.3 Replacement of Notes. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Note and, in the case of any such loss, theft or destruction of any Note, upon delivery of an indemnity bond in such reasonable amount as the Company may determine (or, in the case of any Note held by a Holder or another Institutional Investor or such Holder's or Institutional Investor's nominee, of an unsecured indemnity agreement from such Holders or such Institutional Investor), or, in the case of any such mutilation, upon the surrender of such Note for cancellation to the Company at its principal office, the Company at its expense will execute and deliver, in lieu thereof, a new Note in the unpaid principal amount of such lost, stolen, destroyed or mutilated Note, dated so that there will be no loss of interest on such Note and otherwise of like tenor. Any Note in lieu of which any such new Note has been so executed and delivered by the Company shall not be deemed to be an outstanding Note for any purpose of this Agreement. 13.4 Notes Held by Company, Etc. Deemed Not Outstanding. For the purposes of determining whether the Holders of the Notes of the requisite principal amount at the time outstanding have taken any action authorized by this Agreement or any Operative Agreement with respect to the giving of consents or approvals or with respect to the acceleration upon an Event of Default, any Notes directly or indirectly owned by the Company or any of its Subsidiaries shall be disregarded and deemed not to be outstanding. SECTION 14. PAYMENTS ON NOTES 14.1 Place of Payment. Payments of principal, Premium Amount or premium, if any, and interest becoming due and payable on the Notes shall be made to the Holders at their respective addresses referred to in Section 19 by 2:00 p.m. (New York City time) on the date when due, in Dollars, in immediately available funds without set-off or counterclaim, unless such Holder, by written notice to the Company, shall designate another address as such place of payment, in which case such address shall thereafter be such place of payment. 14.2 Home Office Payment. So long as any Holder or its nominee shall be the holder of any Note, and notwithstanding anything contained in Section 14.1 or in such Note to the contrary, the Company will pay all sums becoming due on such Note for principal and Premium Amount, if any, and interest no later than 2:00 p.m. (New York City time) and by the method and at the address specified in Section 19, or by such other reasonable method or at such other address as such Holder shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that any Note paid or prepaid in full shall, after such payment or prepayment in full, be surrendered to the Company at its principal office or at the place of payment maintained by the Company pursuant to Section 14.1 for cancellation. Prior to any sale or other disposition of any -58- Note held by a Holder or its nominee, such Holder will, at its election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such Note to the Company in exchange for a new Note or Notes pursuant to Section 13.2. The Company will afford the benefits of this Section 14.2 to any Institutional Investor which is the direct or indirect transferee of any Note purchased by a Holder under this Agreement and which has made the same agreement relating to such Note as such Holder has made in this Section 14.2. SECTION 15. EXPENSES, INDEMNIFICATION, ETC. (a) Whether or not the transactions contemplated hereby shall be consummated, the Company will pay all reasonable expenses in connection with such transactions and in connection with any amendments or waivers (whether or not the same become effective) under or in respect of this Agreement or the other Operative Agreements, including, without limitation: (i) the cost and expenses of preparing and reproducing this Agreement and the other Operative Agreements, of furnishing all opinions by counsel for the Company or its Subsidiaries (including any opinions requested by the Holders' special counsel, Mayer, Brown, Rowe & Maw and Dewey Ballantine LLP, as to any legal matter arising hereunder) and all certificates on behalf of the Company or any of its Subsidiaries, and of the Company's or any of its Subsidiaries' performance of and compliance with all agreements and conditions contained herein on its part to be performed or complied with; (ii) the cost of delivering to each Holder's principal office, insured to such Holder's reasonable satisfaction, the Notes issued in exchange for the Notes sold to such Holder hereunder and any Notes delivered to such Holder upon any substitution thereof pursuant to this Agreement and of a Holder's delivery of any Notes, insured to such Holder's reasonable satisfaction, upon any such substitution; (iii) the reasonable fees, expenses and disbursements of the Holders' special counsel, Mayer, Brown, Rowe & Maw and Dewey Ballantine LLP (or such other counsel as may be selected by the Holders) and the Holders' local counsel in connection with such transactions and any such amendments or waivers; (iv) the costs and expenses, including reasonable attorneys' fees, incurred by the Collateral Agent and the Holders or any subsequent Holder of a Note in enforcing or defending any rights under this Agreement or any other Operative Agreement or in responding to any subpoena or other legal process in connection with (A) this Agreement, (B) any Operative Agreement, (C) the Notes, or (D) the transactions contemplated hereby; and (v) the reasonable out-of-pocket expenses incurred by the Collateral Agent and the Holders in connection with such transactions and any such amendments or waivers; provided that the Company shall be required to pay the cost and expenses of only one firm (and any local counsel) retained by the Holders in connection with any waivers or amendments. The Company also will pay, and will save each Holder harmless from, all claims in respect of the fees, if any, of brokers and finders (unless engaged by the Holders) and any and all liabilities with respect to any Taxes (including interest and penalties) (other than income taxes) which may be payable in respect of the execution and delivery hereof, the issuance of the Notes hereunder, any payment of principal, interest, Premium Amount, if any, arising under the Notes and any amendment or waiver under or in respect hereof or of the Notes. (b) The Company will protect, indemnify and save harmless the Collateral Agent, Initial Purchaser and each Person who controls the Initial Purchaser within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, and each present, future and former Holder of any Note and their respective officers, directors, trustees, employees, -59- agents and representatives (individually, an "Indemnified Party" and collectively, the "Indemnified Parties") from and against all losses, liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) imposed upon or incurred by or asserted against any Indemnified Party by reason of (i) any failure on the part of the Company or any of its Subsidiaries to perform or comply with any of the terms of this Agreement or any other Operative Agreement, (ii) any negligence or tortious act on the part of the Company or any of its Subsidiaries or any of their respective agents, contractors, sublessees, licensees or invitees, (iii) any untrue statement or alleged untrue statement of any material fact contained in the Offering Circular, (iv) the omission or alleged omission to state in the Offering Circular, a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, (v) any breach by the Company or any of its Subsidiaries of their respective representations, warranties and agreements set forth herein, (vi) the execution or delivery of any of the Operative Agreements or any agreement or instrument contemplated thereby or any of the transactions contemplated thereby or (vii) any investigation, litigation or other proceeding (whether or not any Indemnified Party is a party thereto) related to the entering into and or performance of any Operative Agreement or the consummation of any transactions contemplated by any of the Operative Agreements, including the reasonable fees and disbursements of counsel incurred in connection with any such investigation, litigation or proceeding; provided that nothing contained herein shall be deemed to require the Company to indemnify the Indemnified Parties for their respective gross negligence, bad faith or willful misconduct, or for their breach of their respective obligations under this Agreement or the other Operative Agreements. This indemnity agreement will be in addition to any liability that the Company may otherwise have to the Indemnified Parties. Notwithstanding, anything in this Section 15(b) to the contrary, the Company shall not be liable in any such case for any indemnification to the extent (but only to the extent) that any such loss, liability, obligation, claim, damage, penalty, cause of action, cost or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Offering Circular in reliance upon and in conformity with written information furnished to the Company by the Initial Purchaser, about the Initial Purchaser, expressly for use therein. (c) The Initial Purchaser will indemnify and hold harmless the Company, its officers, directors, employees, agents, representatives, and each Person who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (each, a "Company Indemnified Person") against any losses, liabilities, obligations, claims, damages, penalties, causes of action, costs or expenses to which any Company Indemnified Party may become subject, under the Securities Act or otherwise, insofar as such losses, liabilities, obligations, claims, damages, penalties, causes of action, costs or expenses (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in the Offering Circular, or arise out of or are based upon the omission or alleged omission to state therein a material fact necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Offering Circular in reliance upon and in conformity with written information furnished to the Company by the Initial Purchaser, about the Initial Purchaser, expressly for use therein; and will reimburse any Company Indemnified Party for any legal or other expenses reasonably incurred by any Company Indemnified Party in connection with investigating or defending any such action or claim as such expenses are incurred. -60- (d) Promptly after receipt by an Indemnified Party of notice of the commencement of any action (including governmental action), such Indemnified Party will, if a claim in respect thereof is to be made against the Company under this Section 15, deliver to the Company a written notice of the commencement thereof. The Company may, and upon the request of such Indemnified Party will, at the Company's expense resist and defend such action, suit or proceeding or cause the same to be resisted and defended by counsel for the insurer of the liability or by counsel designated by the Company and reasonably satisfactory to the Indemnified Party, as the case may be; provided that any Indemnified Party shall be entitled to participate in any such action, suit or proceeding with counsel of its own choice but at its own expense; and provided, further, that if any Indemnified Party reasonably determines that a conflict of interest exists with respect to the representation by such counsel of such Indemnified Party, the Company shall pay the reasonable fees and expenses of counsel selected by such Indemnified Party. In any event, if the Company fails to assume the defense within a reasonable time after any such request, the Indemnified Party may assume such defense or other indemnification obligation and the reasonable fees and expenses of its attorney will be paid by the Company. The failure to deliver written notice to the Company within a reasonable time of the commencement of any such action, if materially prejudicial to its ability to defend such action, shall relieve the Company of any liability to the Indemnified Party under this Section 15(b), but the omission to so deliver written notice to the Company will not relieve it of any liability that it may have to any Indemnified Party otherwise than under this Section 15. The obligations of the Company under this Section 15 shall survive any termination or satisfaction of this Agreement. Any amounts payable to any Indemnified Party under this Section 15 which are not paid within fifteen (15) days after written demand therefor by any Indemnified Party shall bear interest at a rate per annum equal to the rate of interest stated on the face of the Notes plus 3.0% from the date of such demand. In the event that the Company shall be required to pay any indemnity under this Section 15, the Company shall pay the Indemnified Party an amount which, after deduction of all Taxes required to be paid by such Indemnified Party in respect of the receipt or accrual thereof (but not for any taxes payable with respect to amounts received for the payment of income taxes), shall be equal to the amount of such indemnity. (e) The Company shall not, without the prior written consent of an Indemnified Party (which consent shall not be unreasonably withheld or delayed), effect any settlement or compromise of any pending or threatened proceeding in respect of which an Indemnified Party is a party, or indemnity is sought hereunder by such Indemnified Party, unless such settlement (A) includes an unconditional written release of such Indemnified Party, in form and substance reasonably satisfactory to such Indemnified Party, from all liability on claims that are the subject matter of such proceeding and (B) does not include any statement as to an admission of fault, culpability or failure to act by or on behalf of the Indemnified Party. (f) In circumstances in which the indemnity agreement provided for in the preceding paragraphs of this Section 15 is unavailable to, or insufficient to hold harmless, an Indemnified Party in respect of any loss, liability, obligation, claim, damage, penalty, cause of action, cost or expense (or actions in respect thereof), the Company, in order to provide for just and equitable contributions, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, obligation, claim, damage, penalty, cause of action, cost or expense (or actions in respect thereof) in such proportion as is appropriate to reflect (i) the relative benefits received by the Company on the one hand and the Indemnified Party on the other from the offering of the Notes or (ii) if the allocation provided by the foregoing clause (i) is -61- not permitted by applicable law, not only such relative benefits but also the relative fault of the Company on the one hand and the Indemnified Party on the other in connection with the statements or omissions or alleged statements or omissions that resulted in such loss, liability, obligation, claim, damage, penalty, cause of action, cost or expense (or actions in respect thereof). The relative benefits received by the Company on the one hand and the Initial Purchaser on the other shall be deemed to be in the same proportion as the total proceeds from the offering of the Notes (before deducting expenses) received by the Company bear to the total discounts and commissions received by the Initial Purchaser. The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand, or the Initial Purchaser on the other, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission or alleged statement or omissions, and any other equitable considerations appropriate in the circumstances. (g) The Company and the Initial Purchaser agree that it would not be equitable if the amount of such contribution determined pursuant to the immediately preceding paragraph (f) were determined by pro rata or per capita allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the first sentence of the immediately preceding paragraph (f). Notwithstanding any other provision of this Section 15, the Initial Purchaser shall not be obligated to make contributions hereunder that in the aggregate exceed the total discounts, commissions and other compensation received by such Initial Purchaser under this Agreement, less the aggregate amount of any damages that such Initial Purchaser has otherwise been required to pay by reason of the untrue or alleged untrue statements or the omissions or alleged omissions to state a material fact. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of the immediately preceding paragraph (f), each person, if any, who controls the Initial Purchaser within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as the Initial Purchaser, and each director of the Company, each officer of the Company and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, shall have the same rights to contribution as the Company. (h) In connection with the Closing, the Company is requesting that the Initial Purchaser make available for funding an amount equal to the Original Issue Price less the Initial Discount. If, for any reason, on the date scheduled by the Company as the date for the Closing (such date, the "Scheduled Closing Date"), the Initial Purchaser shall at the Company's request have made such amount available, and (i) the closing conditions are not satisfied by 11:00 a.m. on such scheduled date, (ii) the Company did not, by 11:00 a.m. on such scheduled date reschedule such Closing for a subsequent date, and (iii) the Closing in fact does not occur on such scheduled date, the Company shall return to the Initial Purchaser, promptly but in any event no later than the Business Day following the Scheduled Closing Date, the amount so funded by the Initial Purchaser, unless otherwise directed by the Initial Purchaser. The Company will protect, indemnify and hold the Initial Purchaser harmless from and against any and all losses resulting from its failure or inability to invest on the Scheduled Closing Date, and if directed by the Initial Purchaser to hold such funds, for each subsequent day that the Closing does not occur, the purchase price of the Notes to be purchased by it, for the period commencing on the -62- Scheduled Closing Date and ending on the date the purchase price is returned to the Initial Purchaser, at a rate of interest equal to the rate of interest on the Notes. SECTION 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES All representations and warranties, covenants, indemnities and expense reimbursement provisions contained in this Agreement and each of the other Operative Agreements, or made in writing by or on behalf of the Company or any of its Subsidiaries in connection with the transactions contemplated by this Agreement or the other Operative Agreements, shall survive the execution and delivery of this Agreement and the other Operative Agreements, any investigation, or statement as to the results thereof, at any time made by the Holders or on the Holders' behalf, the purchase of the Notes by the Holders under this Agreement and any disposition or payment of the Notes and any termination of this Agreement. SECTION 17. AMENDMENTS AND WAIVERS Any term of this Agreement or of the Notes may be amended and the observance of any term of this Agreement or of the Notes may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and the Required Holders; provided that, without the prior written consent of the holders of all the Notes at the time outstanding, no such amendment or waiver shall (a) change the maturity or the principal amount of, or change the rate of interest or the time of payment of interest on, or change the amount or the time of payment of any principal or Premium Amount on any prepayment of, any Note, (b) reduce the percentage of the principal amount of the Notes the Holders of which are required to consent to any such amendment or waiver or change the rights of the Holders of a Note with respect thereto, (c) change the percentage of the principal amount of the Notes the Holders of which may declare the Notes to be due and payable as provided in Section 10.2 or change the rights of the Holders of a Note with respect thereto, (d) change the percentage of the principal amount of the Notes the Holders of which may rescind and annul any such declaration as provided in Section 10.2, (e) release any of the Collateral except as shall otherwise be provided herein, (f) change any of the terms or provisions of the Subsidiary Guaranties or (g) modify the provisions of this Section 17. Any amendment or waiver effected in accordance with this Section 17 shall be binding upon each Holder of any Note at the time outstanding, each future Holder of any Note and the Company. No amendment, waiver or consent shall, unless in writing and signed by the Collateral Agent in addition to the Holders required above to take such action, affect the rights or duties of the Collateral Agent under this Agreement or the other Operative Agreements. SECTION 18. TERMINATION The Initial Purchaser may terminate this Agreement at any time prior to the Closing Date by written notice to the Company if any of the following has occurred: (a) since the date of the Offering Circular, any Material Adverse Effect or development involving or reasonably expected to result in a prospective Material Adverse Effect that could, in the Initial Purchaser's judgment, be expected to (i) make it impracticable or inadvisable to proceed with the offering or delivery of the Notes on the terms and in the manner contemplated hereby, or (ii) materially impair the investment quality of any of the Notes; -63- (b) the failure of the Company to satisfy the conditions contained in Section 4 hereof on or prior to the Closing Date; (c) any outbreak or escalation of hostilities or other national or international calamity or crisis, including acts of terrorism, or material adverse change or disruption in economic conditions in, or in the financial markets of, the United States or elsewhere (it being understood that any such change or disruption shall be relative to such conditions and markets as in effect on the date hereof), if the effect of such outbreak, escalation, calamity, crisis or material adverse change in the economic conditions in, or in the financial markets of, the United States or elsewhere could be reasonably expected to make it, in the Initial Purchaser's judgment, impracticable or inadvisable to market or proceed with the offering or delivery of the Notes on the terms and in the manner contemplated hereby or to enforce contracts for the sale of any of the Notes; or (d) the enactment, publication, decree or other promulgation after the date hereof of any law that in the Initial Purchaser's counsel's opinion materially and adversely affects, or could be reasonably expected to materially and adversely affect, the properties, business, prospects, operations, earnings, assets, liabilities or condition (financial or otherwise) of the Company and its Subsidiaries, taken as a whole. SECTION 19. NOTICES, ETC. Except as otherwise provided in this Agreement, notices and other communications under this Agreement shall be in writing and shall be delivered by hand, by express courier service or by registered or certified mail, return receipt requested, postage prepaid, addressed, (a) if to the Initial Purchaser, at 11100 Santa Monica Boulevard, 10th Floor, Los Angeles, California 90025, Attention: Jerry M. Gluck, Esq., Telephone No.: (310) 575-5200, Facsimile No.: (301) 575-5299, or at such other address as the Initial Purchaser shall have specified to the Company and the Collateral Agent in writing, with a copy to Mayer, Brown, Rowe & Maw, 1675 Broadway, New York, New York 10019-5820, Attention: Ronald S. Brody, Esq., Telephone No.: (212) 506-2500, Facsimile No.: (212) 262-1910, (b) if to any other Holder of any Note, to such Holder at such address as such other Holder shall have specified to the Company and the Collateral Agent in writing, if to the Collateral Agent, at, 401 South Tryon Street - Suite 1200, Mail Code NC-1179, Charlotte, North Carolina 28202, Attention: Greta Barthell, Trust Administration, Telephone No.: (704) 374-6995, Facsimile No.: (704) 715-6995, or at such other address as the Collateral Agent shall have specified to the Company in writing, or (c) if to the Company, at the address specified at the beginning of this Agreement to the attention of the President or the Chief Financial Officer, Telephone No.: (509) 667-9600, Facsimile No.: (509) 667-9696, or at such other address as the Company shall have specified to the Collateral Agent in writing or at such other address, or to the attention of such other officer, as the Company shall have furnished to the Holders in writing. All notices and other communications provided for under this Section 19 will be deemed given and effective only when actually received. -64- SECTION 20. REPRODUCTION OF DOCUMENTS This Agreement, each other Operative Agreement and all documents relating thereto, including, without limitation, (a) consents, waivers and notifications which may hereafter be executed, (b) documents received by the Holders at the Closing (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to the Holders, may be reproduced by the Holders by any photographic, photostatic, microfilm, microcard, miniature photographic or other similar process and the Holders may destroy any original document so reproduced. The Company agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by the Holders in the regular course of business) and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. This Section 20 shall not prohibit the Company, the Collateral Agent or any Holder from contesting any such reproduction to the same extent that it could contest the original, or from introducing evidence to demonstrate the inaccuracy of any such reproduction. SECTION 21. MISCELLANEOUS This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, whether so expressed or not, and, in particular, shall inure to the benefit of and be enforceable by any Holder or Holders at the time of the Notes or any part thereof. This Agreement embodies the entire agreement and understanding among the Holders, the Collateral Agent and the Company and supersedes all prior agreements and understandings, either oral or written, relating to the subject matter hereof. The headings in this Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. SECTION 22. SUBMISSION TO JURISDICTION For the purpose of assuring that any Holder of Notes may enforce its rights under this Agreement, the Notes and the other Operative Agreements, the Company for itself and its successors and assigns, hereby, to the fullest extent permitted by applicable law, irrevocably (a) agrees that any legal or equitable action, suit or proceeding brought against it arising out of or relating to this Agreement or any other Operative Agreement, or any transaction contemplated hereby or the subject matter of any of the foregoing or for recognition or enforcement of any judgment rendered in any such action, suit or proceeding may be instituted in any state or federal court sitting in the Borough of Manhattan in the State of New York, (b) waives any objection which it may now or hereafter have to the laying of venue of any such action, suit or proceeding brought in any such court, and hereby further irrevocably and unconditionally waives and agrees not to plead or claim that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum, or any right to require the proceeding to be conducted in any other jurisdiction by reason of its present or future domicile, (c) irrevocably submits itself to the non-exclusive jurisdiction of any state or federal court of competent jurisdiction sitting in the Borough of Manhattan in the State of New York for purposes of any such action, suit or proceeding, and (d) irrevocably waives any immunity from jurisdiction to which it might -65- otherwise be entitled in any such action, suit or proceeding which may be instituted in any state or federal court sitting in the Borough of Manhattan in the State of New York, and irrevocably waives any immunity from, or objection to, the maintaining of an action against it to enforce any judgment for money obtained in any such action, suit or proceeding and any immunity from execution. SECTION 23. WAIVER OF JURY TRIAL EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY LEGAL OR EQUITABLE ACTION, SUIT OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE NOTES OR ANY OTHER OPERATIVE AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY OR THEREBY OR THE SUBJECT MATTER OF ANY OF THE FOREGOING. SECTION 24. GOVERNING LAW THIS AGREEMENT HAS BEEN EXECUTED AND DELIVERED IN THE CITY OF NEW YORK, STATE OF NEW YORK, UNITED STATES OF AMERICA. THIS AGREEMENT AND (UNLESS OTHERWISE EXPRESSLY PROVIDED) ALL AMENDMENTS AND SUPPLEMENTS TO, AND ALL CONSENTS AND WAIVERS PURSUANT TO, THIS AGREEMENT SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF (OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW). SECTION 25. CONFIDENTIAL INFORMATION For the purposes of this Section 25, "Confidential Information" means materials, documents and other information delivered to the Holders by or on behalf of the Company or any of its Subsidiaries in connection with the transactions contemplated by or otherwise pursuant to this Agreement, whether before or after the Closing, that is proprietary in nature and that was, prior to the Closing, clearly marked or orally represented, and after the Closing, is clearly marked or labeled or otherwise adequately identified when received by the Holders as being confidential information of the Company or such Subsidiary; provided that such term does not include information that (a) was publicly known or otherwise known to the Holders prior to the time of such disclosure, (b) subsequently becomes publicly known through no act or omission by the Holders or any person acting on the Holders' behalf or any other Person breaching any obligation of confidentiality or fiduciary duty to the Company, (c) otherwise becomes known to the Holders other than through disclosure by the Company or any of its Subsidiaries or any other Person breaching any obligation of confidentiality or fiduciary duty to the Company or (d) constitutes financial statements delivered to the Holders hereunder that are otherwise publicly available. The Holders will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by the Holders in good faith to protect confidential information of third parties delivered to the Holders; provided that the Holders may deliver or disclose Confidential Information to (i) the Holders' directors, trustees, officers, employees, agents, attorneys and affiliates (to the extent such disclosure reasonably relates to the -66- administration of the investment represented by the Holders' Notes), (ii) the Holders' financial advisors and other professional advisors who agree in writing prior to its receipt of the Confidential Information to be bound by the provisions of this Section 25, (iii) any other Holder of any Note, (iv) any Institutional Investor to which the Holders sell or offer to sell such Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 25), (v) any Person from which the Holders offer to purchase any security of the Company (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 25), (vi) any federal or state regulatory authority having jurisdiction over the Holders, (vii) the National Association of Insurance Commissioners or any similar organization, or any nationally recognized rating agency that requires access to information about the Holders' investment portfolio or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate and who agrees in writing to be bound by the provisions of this Section 25 (w) to effect compliance with any law, rule, regulation or order applicable to the Holders, (x) in response to any subpoena or other legal process; provided, however, that the Holders shall cooperate with the Company or any of its Subsidiaries if the Company or any such Subsidiary seeks to have such information requested pursuant to such subpoena or other legal process subject to a protective order, (y) in connection with any litigation to which the Holders are a party or (z) if an Event of Default has occurred and is continuing, to the extent the Holders may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under the Holders' Notes and this Agreement. Each Holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 25 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any Holder of a Note of information required to be delivered to such Holder under this Agreement or requested by such Holder (other than a Holder that is a party to this Agreement or its nominee), such Holder will enter into an agreement with the Company embodying the provisions of this Section 25. [SIGNATURE PAGE FOLLOWS] -67- If you are in agreement with the foregoing, please sign the accompanying counterpart of this Agreement and return the same to the undersigned, whereupon this Agreement shall become a binding agreement among the Holders, the Collateral Agent and the undersigned. Very truly yours, THE COMPANY: PACIFIC AEROSPACE & ELECTRONICS, INC. By: /s/ Donald A. Wright ------------------------------------- Name: Donald A. Wright Title: Chief Executive Officer and President The foregoing Agreement is hereby accepted and agreed to as of he date first above written. THE INITIAL PURCHASER: JEFFERIES & COMPANY, INC. By: /s/ Thane W. Carlston ------------------------------------- Name: Thane W. Carlston Title: Managing Director THE COLLATERAL AGENT: FIRST UNION NATIONAL BANK, as Collateral Agent By: /s/ Paul Thompson ------------------------------------- Name: Paul Thompson Title: Vice President S-1 TABLE OF CONTENTS

PAGE ---- SECTION 1. AUTHORIZATION OF NOTES.......................................................1 SECTION 2. SALE AND PURCHASE OF NOTES; PAYMENTS ON THE NOTES............................1 2.1 Sale and Purchase of the Notes....................................................1 2.2 Payments of Principal.............................................................1 2.3 Interest on the Notes.............................................................1 2.4 Payments Free of Taxes............................................................2 SECTION 3. CLOSING......................................................................2 SECTION 4. CONDITIONS TO CLOSING........................................................3 4.1 Representations and Warranties....................................................3 4.2 Performance; No Default...........................................................3 4.3 Compliance Certificates...........................................................3 4.4 Opinions of Counsel...............................................................3 4.5 Legal Investment..................................................................4 4.6 Operative Agreements..............................................................4 4.7 Use of Proceeds...................................................................4 4.8 Proceedings and Documents.........................................................4 4.9 Rating............................................................................4 4.10 Insurance.........................................................................4 4.11 CUSIP Number......................................................................5 4.12 Exchange..........................................................................5 4.13 Release of Liens; Financing Statements............................................5 4.14 Corporate Documents...............................................................5 4.15 Secretary's Certificates..........................................................5 4.16 Offering Circular.................................................................6 SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY................................6 5.1 Corporate Existence; Qualification; Power; Licenses and Permits...................6 5.2 Corporate and Governmental Authorization; Contravention...........................6 5.3 Binding Effect....................................................................7

i TABLE OF CONTENTS (Continued)

PAGE ---- 5.4 Information.......................................................................7 5.5 Litigation and Judgments..........................................................7 5.6 Compliance with ERISA.............................................................7 5.7 Taxes.............................................................................8 5.8 Subsidiaries......................................................................9 5.9 Not Investment Companies..........................................................9 5.10 No Conflicting Requirements......................................................10 5.11 Debt.............................................................................10 5.12 Title to Properties and Assets...................................................10 5.13 Compliance with Law..............................................................12 5.14 Compliance with Environmental Laws...............................................12 5.15 Security Interests and Liens; Inventory and Equipment............................13 5.16 Labor Relations..................................................................13 5.17 UCC Filing Information...........................................................14 5.18 Solvency.........................................................................14 5.19 Fictitious Business Names........................................................14 5.20 Use of Proceeds..................................................................14 5.21 Margin Stock.....................................................................15 5.22 Affiliate Transactions...........................................................15 5.23 Accuracy and Completeness of Information.........................................15 5.24 Capital Stock....................................................................15 5.25 Private Offering by the Company..................................................16 SECTION 6. INITIAL PURCHASER'S REPRESENTATIONS.........................................16 6.1 Initial Purchaser's Representations..............................................16 SECTION 7. PREPAYMENT OF NOTES.........................................................16 7.1 Required Prepayments of the Notes................................................16 7.2 Optional Prepayments of the Notes................................................17 7.3 Offers to Purchase Notes upon Certain Events.....................................17

ii TABLE OF CONTENTS (Continued)

PAGE ---- 7.4 Notice of Prepayments; Officers' Certificate.....................................19 7.5 Allocation of Partial Prepayments................................................19 7.6 Maturity; Surrender, etc.........................................................19 7.7 Acquisition of Notes.............................................................19 SECTION 8. AFFIRMATIVE COVENANTS OF THE COMPANY........................................20 8.1 Financial Statements.............................................................20 8.2 Reporting Requirements...........................................................21 8.3 Payment of Obligations...........................................................22 8.4 Maintenance of Property; Insurance...............................................22 8.5 Compliance with Laws.............................................................24 8.6 Inspection of Property, Books and Records; Change of Name, Principal Place of Business, Location of Collateral, Etc.........................................24 8.7 Compliance with Operative Agreements.............................................24 8.8 Corporate Existence..............................................................25 8.9 ERISA............................................................................25 8.10 Environmental Matters............................................................27 8.11 Collateral Records...............................................................28 8.12 Security Interests...............................................................28 8.13 Taxes............................................................................29 8.14 Accounts.........................................................................29 8.15 Proprietary Rights...............................................................30 8.16 Minimum EBITDA...................................................................30 8.17 Repayment of Certain Debt........................................................31 8.18 Collateral Agent Fees............................................................31 SECTION 9. NEGATIVE COVENANTS OF THE COMPANY...........................................31 9.1 Debt and Guarantees..............................................................31 9.2 Restricted Payments..............................................................32 9.3 Investments......................................................................32

iii TABLE OF CONTENTS (Continued)

PAGE ---- 9.4 Negative Pledge..................................................................33 9.5 Consolidations, Mergers and Sales of Assets......................................34 9.6 Capital Expenditures.............................................................34 9.7 Transactions with Affiliates.....................................................35 9.8 Restrictions on Foreign Subsidiary Support.......................................35 9.9 Environmental Matters............................................................35 9.10 Amendments to Certificates of Incorporation and By-Laws..........................35 9.11 ERISA............................................................................36 9.12 No Additional Bank Accounts......................................................36 9.13 No Additional Subsidiaries.......................................................37 SECTION 10. EVENTS OF DEFAULT; ACCELERATION.............................................37 10.1 Events of Default................................................................37 10.2 Acceleration.....................................................................39 SECTION 11. COLLATERAL AGENT............................................................39 11.1 Appointment of Collateral Agent; Powers and Immunities...........................39 11.2 Reliance by Collateral Agent.....................................................40 11.3 Default Events...................................................................40 11.4 Rights as a Secured Party........................................................41 11.5 Indemnification..................................................................41 11.6 Documents........................................................................41 11.7 Non-Reliance on Collateral Agent and Other Secured Parties.......................42 11.8 Resignation or Removal of Collateral Agent.......................................42 11.9 Authorization....................................................................43 SECTION 12. DEFINITIONS.................................................................44 12.1 Defined Terms....................................................................44 12.2 Terms Generally..................................................................56 SECTION 13. REGISTRATION, TRANSFER AND SUBSTITUTION OF NOTES............................57

iv TABLE OF CONTENTS (Continued)

PAGE ---- 13.1 Note Register; Ownership of Notes................................................57 13.2 Transfer and Exchange of Notes...................................................57 13.3 Replacement of Notes.............................................................58 13.4 Notes Held by Company, Etc. Deemed Not Outstanding...............................58 SECTION 14. PAYMENTS ON NOTES...........................................................58 14.1 Place of Payment.................................................................58 14.2 Home Office Payment..............................................................58 SECTION 15. EXPENSES, INDEMNIFICATION, ETC..............................................59 SECTION 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES..................................63 SECTION 17. AMENDMENTS AND WAIVERS......................................................63 SECTION 18. TERMINATION.................................................................63 SECTION 19. NOTICES, ETC................................................................64 SECTION 20. REPRODUCTION OF DOCUMENTS...................................................65 SECTION 21. MISCELLANEOUS...............................................................65 SECTION 22. SUBMISSION TO JURISDICTION..................................................65 SECTION 23. WAIVER OF JURY TRIAL........................................................66 SECTION 24. GOVERNING LAW...............................................................66 SECTION 25. CONFIDENTIAL INFORMATION....................................................66

v Schedule 5.4 -- Information Schedule 5.5 -- Litigation and Judgments Schedule 5.6 -- ERISA Schedule 5.7(a) -- Tax Returns Schedule 5.8 -- Subsidiaries Schedule 5.10 -- Defaults Schedule 5.11 -- Debt Schedule 5.12(a) -- Real Estate Schedule 5.12(b) -- Proprietary Rights Schedule 5.15 -- Consents Schedule 5.17 -- UCC Filing Information Schedule 5.19 -- Fictitious Business Names Schedule 5.22 -- Affiliate Transactions Schedule 5.24 -- Capital Stock Schedule 8.15 -- Excluded Proprietary Rights Schedule 9.3 -- Investments in Foreign Subsidiaries Schedule 9.4 -- Liens Schedule 9.5 -- Inactive Subsidiaries Schedule 9.12 -- Bank Accounts Exhibit A -- Form of Note Exhibit B-1 -- Form of Opinion of New York Counsel Exhibit B-2 -- Form of Opinion of Washington Counsel Exhibit C -- Form of Compliance Certificate Exhibit D -- Form of Lockbox Agreement Exhibit E -- Form of Deed of Trust, Security Agreement and Fixture Filing Exhibit F -- Form of Pledge Agreement Exhibit G -- Form of Security Agreement Exhibit H -- Form of Subsidiary Guaranty Exhibit I -- List of Excluded Persons -1- PACIFIC AEROSPACE & ELECTRONICS, INC. DISCLOSURE SCHEDULE TO NOTE PURCHASE AGREEMENT DATED AS OF MARCH 19, 2002 This Disclosure Schedule is furnished by Pacific Aerospace & Electronics, Inc., a Washington corporation ("PA&E," "PACIFIC AEROSPACE" or the "COMPANY") on behalf of itself and each of its Subsidiaries, as of the date hereof pursuant to and as part of the Note Purchase Agreement dated as of March 19, 2002 (the "AGREEMENT"), by and between the Company, the initial purchaser identified therein (the "Initial Purchaser") and First Union National Bank, a national banking association, as Collateral Agent for the Holders (as defined therein). Unless otherwise provided herein, the defined terms in this Disclosure Schedule have the same meaning as under the Agreement. All attachments hereto are incorporated into this Disclosure Schedule. Headings have been provided for the sections of this Disclosure Schedule for convenience of reference only and shall to no extent have the effect of amending or changing any express description of the sections set forth in the Agreement. This Disclosure Schedule relates to certain matters concerning the disclosures required and transactions contemplated by the Agreement. This Disclosure Schedule is qualified in its entirety by reference to specific provisions of the Agreement, and is not intended to constitute, and shall not be construed as an admission that such information is material except to the extent required by the Agreement. Copies of all agreements, contracts and documents referenced in this Disclosure Schedule have been made available for inspection by the Holders. SCHEDULE 5.4 INFORMATION In KPMG's report on the Company's consolidated financial statements for the fiscal year ended May 31, 2001, KPMG's opinion was a disclaimer of opinion. SCHEDULE 5.5 LITIGATION AND JUDGMENTS LITIGATION The Company has the three following litigation matters outstanding: 1. BONKOWSKI V. PACIFIC AEROSPACE & ELECTRONICS, INC., CHELAN COUNTY (WA) SUPERIOR COURT CAUSE NO. 00-2-00523-1 Date filed: June 2000 Location: Wenatchee, WA Nature of dispute: A former employee whose position was eliminated in 1999 has asserted claims for, among other things, unlawful termination and age discrimination. This matter is in the discovery stage, and trial is currently scheduled on June 17, 2002. The Company took Bonkowski's deposition on January 15 and 16, 2002, and is in the process of preparing a summary judgment motion. Amount at issue: Unknown Settlement: The Company has made a settlement offer of $10,000, which was rejected. The plaintiff also agreed to mediate and then changed his mind. 2. BOTHELL, D/B/A ATLAS TECHNOLOGIES V. HITACHI ZOSEN CORP., NORTHWEST TECHNICAL INDUSTRIES, INC., AND K. SHIMOTSUMA ASSOCIATES, INC., JEFFERSON COUNTY (WA) SUPERIOR COURT CAUSE NO. 99-2-00230-9 Date filed: August 1999 Location: Port Angeles, WA Nature of dispute: Northwest Technical Industries, Inc. ("NTI"), a wholly owned subsidiary of the Company, was sued on a 1994/1995 contract under which NTI bonded metals for vacuum flanges produced by Atlas for Hitachi prior to the Company's acquisition of NTI. Hitachi did not accept or pay for all of the flanges. Atlas claims that, if it is proved that the flanges were defective, NTI must have provided Atlas with defective materials and that NTI violated provisions of a confidentiality agreement. NTI produced discovery materials for plaintiff's counsel in approximately November 1999, which plaintiff's counsel has yet to pick up. A trial date was set recently for Fall 2002 after the Court threatened to dismiss the case for lack of activity, but the plaintiff's counsel has not yet followed up regarding discovery. Amount at issue: Unknown Settlement: N/A 3. SUPERIOR FORGE, INC. V. PACIFIC AEROSPACE & ELECTRONICS, INC., SUPERIOR COURT OF THE STATE OF CALIFORNIA, COUNTY OF ORANGE, CENTRAL JUSTICE CENTER, CASE NO. 02CC02864 Served on PA&E February 19, 2002 Collection claim for $51,631.04 SCHEDULE 5.6 COMPLIANCE WITH ERISA The Company maintains the following Plans: Mutual of Omaha Medical, Dental & Vision Insurance ADP 401(k) Retirement Plan Conover Flexible Benefits Plan SCHEDULE 5.7(a) TAX RETURNS The Company is in the process of discussions with the Inland Revenue service in the United Kingdom regarding the amount of taxes owing in the United Kingdom. The main issue concerns the interest on the loan of Sterling Pounds 23,700,000 from the Company to Pacific A&E (UK) Limited. The Company has not filed U.S. federal income tax returns for the years ending May 31, 2000 and May 31, 2001. Both returns are currently being completed by KPMG; and it is anticipated that no tax or penalties will be due with respect to either of these returns. SCHEDULE 5.8 SUBSIDIARIES

Subsidiary 100% Parent Shares Outstanding - ---------- ----------- ------------------ Aeromet America, Inc. PA&E 100,000 Balo Precision Parts, Inc. PA&E 100,000 Cashmere Manufacturing Co., Inc. PA&E 1,000 Ceramic Devices, Inc. PA&E 1,000 Electronic Specialty Corporation PA&E 100,000 Northwest Technical Industries, Inc. PA&E 100,000 Pacific Coast Technologies, Inc. PA&E 10,714,726 Seismic Safety Products, Inc. PA&E 100,000 Skagit Engineering & Manufacturing, Inc. PA&E 100 PA&E International, Inc. PA&E 100,000 Pacific A & E Limited PA&E International, Inc. 1 Pacific Aerospace & Electronics (UK) Limited Pacific A&E Ltd. 1 Aeromet International PLC Pacific Aerospace & Electronics (UK) Limited 1,000,000 PA&E Engineering, Inc. PA&E 100,000

Aeromet International PLC also has several wholly-owned dormant U.K. subsidiaries. They are:

Subsidiary 100% Parent Shares O/S - ---------- ----------- ---------- Frank Ford (Aircraft Components) Limited Aeromet International PLC 1,000 Kent Aerospace Limited Aeromet International PLC 100 TKR Aerospace Limited Aeromet International PLC 13,520 TKR Group Limited Aeromet International PLC 30,000 TKR International Limited Aeromet International PLC 9,272,000 (two classes of stock) 6,600,000 Truflo Gas Turbines Limited Aeromet International PLC 250,000

SCHEDULE 5.10 DEFAULTS The Company failed to make a semi-annual interest payment of approximately $3.6 million as required under the terms of its 11 1/4% Senior Subordinated Notes (the "Subordinated Notes") that was due on August 1, 2001, and the Company also failed to make that payment within the 30-day grace period that expired on August 31, 2001. The Company also failed to make a payment of interest that was due on the Subordinated Notes on February 1, 2002 and did not make such payment during the 30-day grace period provided therein. The Subordinated Notes will be exchanged for the New Notes on the Closing Date. In addition, the Company did not make a quarterly interest payment of approximately $618,000 that was due on its existing senior secured loan (the "Senior Debt") on September 30, 2001, or before the expiration of the 5-day grace period. The Company has entered into a forbearance agreement with the holders of the Senior Debt to waive payment defaults and certain other defaults on the Senior Debt. This agreement expired on December 31, 2001. Additionally, the Company failed to repay the Senior Debt on December 31, 2001, its maturity date. The Senior Debt will be repaid in full on the Closing Date with a portion of the proceeds of the Notes issued and sold under this Agreement. The Company has been notified by KeyBank National Association ("KeyBank") that it is not in compliance with certain covenants of loans that are secured by the Company's headquarters building and certain fixtures and improvements on what is known as "Building #7". KeyBank has agreed pursuant to a forbearance letter dated March 15, 2002, to forbear from exercising its remedies under the KeyBank Promissory Notes until May 31, 2003. Such forbearance is conditioned upon there being no loan or lease payment delinquency or defaults after April 1, 2002. SCHEDULE 5.11 DEBT PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES ACTUAL DETAIL DEBT LISTING AS OF JANUARY 31, 2002

Creditor Balance -------- ------------ PACIFIC AEROSPACE: Term Debt: KeyBank $ 1,111,090 Ford Credit 19,707 Ford Credit 29,078 Ford Credit 15,634 Ford Credit 24,878 Ford Credit 12,411 Ford Credit 18,731 DDJ 13,731,446 Senior Subordinated Notes 63,700,000 CASHMERE MANUFACTURING: Term Debt: KeyBank 121,959 Ford Credit 25,447 Ellison Machinery Company 54,197 Ellison Machinery Company 43,549 Ellison Machinery Company 42,112 Ellison Machinery Company 42,112 Ellison Machinery Company 47,327 Ellison Machinery Company 47,327 Ellison Machinery Company 11,189 Ellison Machinery Company 337,525 Ellison Machinery Company 198,995 Capital Leases: GE Capital 41,980 GE Capital 41,980 NEC 83,999 Amada Leasing Corp. 34,078 PACIFIC COAST TECHNOLOGIES: Term Debt: KeyBank $ 487,839 Capital Leases: GE Capital 35,256 GE Capital 35,744 GE Capital 41,196 ============

Creditor Balance -------- ------------ GE Capital 98,759 CIT Group 70,397 CIT Group 98,444 PACIFIC A&E LIMITED: Term Debt: PA&E International, Inc. 38,908,000 PACIFIC AEROSPACE & ELECTRONICS (UK) LIMITED: Term Debt: Pacific A&E Limited 29,481,000 AEROMET INTERNATIONAL: Capital Lease: Lloyds Bowmaker 476,000 ------------ Total term debt and capital leases $149,569,386 ============

PRO FORMA DEBT* Pacific Aerospace & Electronics, Inc. ProForma Debt Listing (AS OF JANUARY 31, 2002)

Creditor Balance ------- ------------ PACIFIC AEROSPACE: Term Debt: KeyBank $ 1,111,090 Ford Credit 19,707 Ford Credit 29,078 Ford Credit 15,634 Ford Credit 24,878 Ford Credit 12,411 Ford Credit 18,731 Herman Jones Note** 750,000 DDJ -- Old Notes 1,000,000 New Notes 15,000,000 Notes 22,000,000 CASHMERE MANUFACTURING: Term Debt: KeyBank 121,959 Ford Credit 25,447 Ellison Machinery Company 54,197 Ellison Machinery Company 43,549 Ellison Machinery Company 42,112 Ellison Machinery Company 42,112 Ellison Machinery Company 47,327 Ellison Machinery Company 47,327 Ellison Machinery Company 11,189 Ellison Machinery Company 337,525 Ellison Machinery Company 198,995 Capital Leases: GE Capital 41,980 GE Capital 41,980 NEC 83,999 Amada Leasing Corp. 34,078

- -------- * This pro forma Schedule has been prepared as if the Debt incurred by the issuance of the Notes had been incurred as of the date hereof and the existing Debt under the DDJ Loan Agreement has been repaid in full. ** This promissory note will be issued pursuant to a Settlement Agreement between the Company and Herman L. Jones dated February 28, 2002 (the Settlement Agreement"). Although this obligation was not outstanding as of January 31, 2002, we have included it in this table. The amount of this promissory note could increase by $200,000 if the Company fails to transfer its Cashmere, WA warehouse to Mr. Jones pursuant to the Settlement Agreement by June 1, 2002.

Creditor Balance ------- ------------ PACIFIC COAST TECHNOLOGIES: Term Debt: KeyBank $ 487,839 Capital Leases: GE Capital 35,256 GE Capital 35,744 GE Capital 41,196 GE Capital 98,759 Jules and Associates 70,397 CIT Group 98,444 PACIFIC A & E LIMITED: Term Debt: PA&E International, Inc. 38,908,000 PACIFIC AEROSPACE & ELECTRONICS (UK) LIMITED: Term Debt: Pacific A & E Limited 29,481,000 AEROMET INTERNATIONAL: Capital Lease: ------------ Lloyds Bowmaker 476,000 ------------ Total term debt and capital leases $110,887,940 ============

SCHEDULE 5.12(a) REAL PROPERTY OWNED AND LEASED OWNED REAL PROPERTY (U.S.):

Owner Location Use ----- -------- --- 1. PA&E 430 Olds Station Road PA&E headquarters Wenatchee, WA 98801 2. Cashmere 209 Mission Street Warehouse Manufacturing Co., Inc. Cashmere, WA 98815 3. Northwest Technical 2249 Diamond Point Road Bonded Metals Div. Industries, Inc. Sequim, WA 98382 operations

LEASED REAL PROPERTY (U.S.):

Date Lessee and Address Lessor Leased Use ------------------ ------ ------ --- 1. Cashmere Manufacturing Co., Inc. Port of Chelan 9/1/95 Mach. Div. Operations 432 Olds Station Rd. Wenatchee, WA 98801 2. Pacific Coast Technologies, Inc. Port of Chelan 8/1/93 Electr. Group Operations 434 Olds Station Rd. Wenatchee, WA 98801 3. PA&E Port of Chelan 1/1/99 Mach. Div. Operations 200 Olds Station Rd. Wenatchee, WA 98801 4. PA&E Port of Chelan 6/13/00 Mach. Div. Operations 2605 Chester Kimm Road Wenatchee, WA 98801 5. Electronic Specialty Corporation Erickson Realty, Ltd. 3/31/94 Display Div. 14511 NE 13th Ave. Operations (not in Vancouver, WA 98685 use) 6. Skagit Engineering & Manufacturing, Inc. Sea-Land Development 7/1/98 Eng. & Fab. Div. 500 Metcalf Street Operations (not in Sedro-Woolley, WA 98284 use. Partially terminated)

Date Lessee and Address Lessor Leased Use ------------------ ------ ------ --- 7. Skagit Engineering & Manufacturing, Inc. 220th Street LLC 11/1/00 Eng. & Fab. Office 6808 220th St. SW (subleased to Nova-Tech, Suite 200 Inc. pursuant to a sublease Mountlake Terrace, WA 98043 agreement dated as of 12/21/01)

RIGHTS OF OTHERS WITH RESPECT TO REAL PROPERTY (EXCLUDING LIENS):

Agreement Description Lessee Lessor Date ----------- ------ ------ ---- 1. Option to Purchase condo Donald A. Wright PA&E 1/29/99 Unit 4 430 Olds Station Road Wenatchee, WA 98801 2. Co-Location Agreement Northwest PA&E 8/1/00 (use of roof space) Telephone, Inc. 430 Olds Station Road Wenatchee, WA 98801 3. Right of First Refusal Northwest Explosive Northwest Technical 4/30/97 2249 Diamond Point Road Bonding, Inc. Industries, Inc. Sequim, WA 98382 4. Sublease of #7 above Nova-Tech, Inc. Skagit Engineering & 12/21/01 6808 220th SW Manufacturing, Inc. Mountlake Terrace, WA 5. Remote blasting site Northwest Technical Rayonier, Inc. 3/15/00 (site has no address) Industries, Inc. 6. Sublease of second floor and part North Central PA&E 8/6/01 of first floor of headquarters Educational Service building District 430 Olds Station Road Wenatchee, WA 98801

SCHEDULE 5.12(b) PATENTS AND TRADEMARKS PACIFIC COAST TECHNOLOGIES, INC. PATENT STATUS CHART

- ------------------------------------------------------------------------------------------------------------- APPLICANT/ PATENTEE/ ATTORNEY ASSIGNEE DOCKET FILING PATENT ISSUE COUNTRY NO. INVENTORS SERIAL NO. DATE NO. DATE - ------------------------------------------------------------------------------------------------------------- PCT, Inc. 42474/5 James C. Kyle 07.16.81 4,507,522 03.26.85 USA Kyle 12 - ------------------------------------------------------------------------------------------------------------- PCT, Inc. 42474/5 James C. Kyle 05.02.84 4,512,791 04.23.85 USA Kyle 13 - ------------------------------------------------------------------------------------------------------------- PCT, Inc. 42474/5 James C. Kyle 05.02.84 4,514,207 04.30.85 USA Kyle 14 - ------------------------------------------------------------------------------------------------------------- PCT, Inc. 42474/5 James C. Kyle 10.08.82 4,514,590 04.30.85 USA Kyle 15 - ------------------------------------------------------------------------------------------------------------- PCT, Inc. 42474/5 James C. Kyle 11.04.82 4,518,820 05.21.85 USA Kyle 16 - ------------------------------------------------------------------------------------------------------------- PCT, Inc. 42474/5 James C. Kyle 05.02.84 4,593,758 06.10.86 USA Kyle 17 - ------------------------------------------------------------------------------------------------------------- PCT, Inc. 42474/5 James C. Kyle 12.04.84 4,654,752 03.31.87 USA Kyle 18 - ------------------------------------------------------------------------------------------------------------- PCT, Inc. 42474/5 James C. Kyle 06.29.84 4,657,337 04.14.87 USA Kyle 19 - ------------------------------------------------------------------------------------------------------------- PCT, Inc.(1) 42474/5 James C. Kyle 10.20.83 4,925,607 5.15.90 USA Kyle 20 - -------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------- APPLICANT/ PATENTEE/ ASSIGNEE EXPIRATION MAINTENANCE COUNTRY DATE TITLE STATUS FEE DUE DATES - ------------------------------------------------------------------------------------------------------------------- PCT, Inc. 03.26.02 TERMINAL ASSEMBLY IN FORCE No further fees USA due - ------------------------------------------------------------------------------------------------------------------- PCT, Inc. 04.23.02 HERMETICALLY SEALED INSULATING IN FORCE No further fees USA ASSEMBLY due - ------------------------------------------------------------------------------------------------------------------- PCT, Inc. 04.30.02 METHOD FOR MAKING TERMINAL ASSEMBLY IN FORCE No further fees USA FOR HEART PACEMAKER due - ------------------------------------------------------------------------------------------------------------------- PCT, Inc. 10.08.02 ELECTRICAL TERMINAL ASSEMBLY IN FORCE No further fees USA due - ------------------------------------------------------------------------------------------------------------------- PCT, Inc. 11.04.02 TERMINAL ASSEMBLY FOR HEART PACEMAKER IN FORCE No further fees USA due - ------------------------------------------------------------------------------------------------------------------- PCT, Inc. 06.10.03 HERMETICALLY SEALED INSULATING IN FORCE No further fees USA ASSEMBLY due - ------------------------------------------------------------------------------------------------------------------- PCT, Inc. 12.04.04 TERMINAL ASSEMBLY AND METHOD OF IN FORCE No further fees USA MAKING TERMINAL ASSEMBLY due - ------------------------------------------------------------------------------------------------------------------- PCT, Inc. 06.29.04 ELECTRICAL CONNECTOR & METHOD OF IN FORCE No further fees USA PRODUCING ELECTRICAL CONNECTOR due - ------------------------------------------------------------------------------------------------------------------- PCT, Inc.(1) 05.15.07 ELECTRICAL INSULATING MATERIAL IN FORCE Release of Sec'y USA FORMED FROM AT LEAST ONE FLUX AND A Int. sent to CRYSTALLINE STUFFING MATERIAL Kyle for signature 01.02. Sec'y Int. not yet released; need to correct fee payment. - -------------------------------------------------------------------------------------------------------------------

- -------- (1) Assignment to PCT, Inc. included security interest to Kyle. Obligation to Kyle has been satisfied. Requested and have not yet received the executed release of the security interest.

- ------------------------------------------------------------------------------------------------------------- APPLICANT/ PATENTEE/ ATTORNEY ASSIGNEE DOCKET FILING PATENT ISSUE COUNTRY NO. INVENTORS SERIAL NO. DATE NO. DATE - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- PCT, Inc. 42474/5 James C. Kyle 09.20.82 4,935,583 06.19.90 USA Kyle 21 - ------------------------------------------------------------------------------------------------------------- PCT, Inc. 42474/6 Edward A. Taylor 01.07.92 5,298,683 03.29.94 USA Taylor 1 - ------------------------------------------------------------------------------------------------------------- PCT, Inc. 42474/7 Edward A. Taylor 06.02.94 5,433,260 07.18.95 USA Taylor 2 - ------------------------------------------------------------------------------------------------------------- PCT, Inc. 42474/7 Edward A. Taylor 06.19.95 5,675,122 10.07.97 USA Taylor 3 - ------------------------------------------------------------------------------------------------------------- PCT, Inc. 42474/19c1 Edward 09/006,696 01.14.98 5,986,208 11.16.99 USA Taylor 5 A.Taylor; Marshall Neal Hulbert - ------------------------------------------------------------------------------------------------------------- PCT, Inc. 42474/801 Brian Lasater 09/076,230 5.12.98 6,221,513 04.24.01 USA Lasater 1 - ------------------------------------------------------------------------------------------------------------- PCT, Inc. 42474/801 Brian Lasater 99 921 874.6 Priority EUROPE PCT Date 05.11.99 Lasater 1 PCT/US99/10313 PCT Int'l Published 11.18.99 as WO 99/58332. - ------------------------------------------------------------------------------------------------------------- PCT, Inc. 42474/80 Brian Lasater 09/235,223 01.22.99 6,232,004 05.15.01 USA 2a Lasater 4 - -------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------- APPLICANT/ PATENTEE/ ASSIGNEE EXPIRATION MAINTENANCE COUNTRY DATE TITLE STATUS FEE DUE DATES - ------------------------------------------------------------------------------------------------------------------- PCT, Inc. 06.19.07 INSULATED CONDUCTOR WITH IN FORCE No further fees USA CERAMIC-CONNECTED ELEMENTS due - ------------------------------------------------------------------------------------------------------------------- PCT, Inc. 01.07.12 DISSIMILAR METAL CONNECTORS IN FORCE 09.29.05 USA - ------------------------------------------------------------------------------------------------------------------- PCT, Inc. 07.27.12 SEALABLE ELECTRONIC PACKAGES & IN FORCE 01.18.03, USA METHODS OF PRODUCING & SEALING SUCH 01.18.07 PACKAGES - ------------------------------------------------------------------------------------------------------------------- PCT, Inc. 07.27.12 SEALABLE ELECTRONIC PACKAGES IN FORCE 04.07.05 USA 04.07.09 - ------------------------------------------------------------------------------------------------------------------- PCT, Inc. 03.19.16 WAVEGUIDE WINDOW ASSEMBLY AND IN FORCE 05.16.03, USA MICROWAVE ELECTRONICS PACKAGE 05.16.07, 05.16.11 - ------------------------------------------------------------------------------------------------------------------- PCT, Inc. 05.12.18 METHODS FOR HERMETI-CALLY SEALING IN FORCE BROADENING USA CERAMIC TO METALLIC SURFACES AND REISSUE DEADLINE ASSEMBLIES INCORPORATING SUCH SEALS 04.24.03; MAINT. FEES DUE: 10.24.04, 10.24.08, 10.24.12 - ------------------------------------------------------------------------------------------------------------------- PCT, Inc. METHODS AND MATERIALS FOR SEALING Pending; Designated Maintenance fee EUROPE CERAMIC TO METALLIC SURFACES countries are: due annually. Switzerland- Liechtenstein, Germany; Denmark France, Great Britain, Italy, Netherlands and Sweden. - ------------------------------------------------------------------------------------------------------------------- PCT, Inc. 05.06.18 METHODS FOR TREATING CERAMIC IN FORCE BROADENING USA MATERIALS AND CERAMIC MATERIALS REISSUE DEADLINE PRODUCED THEREBY (Zirconia treatment 05.15.03; MAINT. with metals) FEES DUE: 11.15.04; 11.15.08; 11.15.12 - -------------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------- APPLICANT/ PATENTEE/ ATTORNEY ASSIGNEE DOCKET FILING PATENT ISSUE COUNTRY NO. INVENTORS SERIAL NO. DATE NO. DATE - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- PCT, Inc. 2474/802 PCT Brian Lasater 99 920 345.8 Priority EUROPE Lasater 3 Date 05.05.99 PCT/US99/09819 Published 11.18.99 as WO 99/58690. - ------------------------------------------------------------------------------------------------------------- PCT, Inc. 42474/17-5 Edward J. Rapoza 07.09.91 5,110,307 05.05.92 USA Rapoza 1 - ------------------------------------------------------------------------------------------------------------- PCT, Inc. 42474/17 Edward J. Rapoza 05.04.92 5,405,272 04.11.95 USA Rapoza 2 - ------------------------------------------------------------------------------------------------------------- UK(2) 42474/17 Edward J. Rapoza 92303983.8 05.01.92 EP 0 522 687 03.05.97 Rapoza 3 B1 - ------------------------------------------------------------------------------------------------------------- PCT, Inc. 42474/17 Edward J. Rapoza Can. 20676671 04.30.92 2,067,667 12.25.01 Rapoza 4 - ------------------------------------------------------------------------------------------------------------- PCT, Inc. 42474/17 William F. 11.01.90 5,041,019 08.20.91 USA Sharp 1 Sharp, et al. - ------------------------------------------------------------------------------------------------------------- PCT, Inc. 42474/17 William F. 03.18.91 5,109,594 05.05.92 USA Sharp 2 Sharp, et al. - ------------------------------------------------------------------------------------------------------------- PCT, Inc. 42474/17 Wayne R. Snow, 09.26.85 4,690,480 09.01.87 USA Snow 1 et. al. - -------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------- APPLICANT/ PATENTEE/ ASSIGNEE EXPIRATION MAINTENANCE COUNTRY DATE TITLE STATUS FEE DUE DATES - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- PCT, Inc. METHODS FOR TREATING CERAMIC Pending; Maintenance fee EUROPE MATERIALS AND IMPROVED TREATED Switzerland- due annually CERAMIC MATERIALS PRODUCED THEREBY Liechtenstein (Zirconia staining with titanium) Germany; Denmark France, Great Britain, Italy, Netherlands and Sweden - ------------------------------------------------------------------------------------------------------------------- PCT, Inc. 07.09.11 LASER WELDABLE HERMETIC CONNECTOR IN FORCE 11.05.03 USA - -------------------------------------------------------------------------------------------------------------------- PCT, Inc. 04.11.12 LASER WELDABLE HERMETIC CONNECTOR IN FORCE 10.11.02, USA 10.11.06 - -------------------------------------------------------------------------------------------------------------------- UK(2) 05.01.12 LASER WELDABLE HERMETIC CONNECTOR EU patent ANNUALLY ON MAY enforceable in UK 3RD - -------------------------------------------------------------------------------------------------------------------- PCT, Inc. 04.30.12 LASER WELDABLE HERMETIC CONNECTOR IN FORCE ANNUALLY ON APRIL 30TH - -------------------------------------------------------------------------------------------------------------------- PCT, Inc. 11.01.10 TRANSITION JOINT FOR MICROWAVE IN FORCE 02.20.03 USA PACKAGE - -------------------------------------------------------------------------------------------------------------------- PCT, Inc. 11.01.10 METHOD OF MAKING SEALED TRANSITION IN FORCE 11.05.03 USA JOINT - -------------------------------------------------------------------------------------------------------------------- PCT, Inc. 09.26.05 TUBULAR BI-METAL CONNECTOR IN FORCE No further fees USA due - -------------------------------------------------------------------------------------------------------------------

- -------- (2) Assignment to PCT, Inc. not yet recorded in UK; we are following up to record. PACIFIC AEROSPACE & ELECTRONICS, INC. PATENT STATUS CHART

- ------------------------------------------------------------------------------------------------------------------ APPLICANT/ PATENTEE/ ASSIGNEE ATTORNEY FILE PATENT ISSUE COUNTRY DOCKET NO. INVENTORS SERIAL NO. DATE NO. DATE - ------------------------------------------------------------------------------------------------------------------ Pacific Aerospace & 42474/900 David N. Crane 09/200,204 11.25.98 6,150,772 11.21.00 Electronics, Inc. USA - ------------------------------------------------------------------------------------------------------------------ Pacific Aerospace & 42474/901 Herman L. 09/302,590 04.30.99 Electronics, Inc.(3) ("Jack") Jones; USA Edward A. Taylor - ------------------------------------------------------------------------------------------------------------------ Pacific Aerospace & 42474/902 Herman L. 09/303,196 04.30.99 6,284,389 09.04.01 Electronics, Inc. ("Jack") Jones; USA Edward A. Taylor - ------------------------------------------------------------------------------------------------------------------ Pacific Aerospace & 42474/ Herman L. EP 00 11.15.01 Electronics, Inc. 901-2.EP ("Jack") Jones; '928'580.0 Edward A. Taylor Nat'l phase of EUROPE PCT/US00/ 11579 - ------------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------ ----------------------------------------- APPLICANT/ PATENTEE/ MAINTENANCE ASSIGNEE EXPIRATION FEE DUE COUNTRY DATE TITLE STATUS DATES - ------------------------------------------------------------------------------ ----------------------------------------- Pacific Aerospace & 11.25.18 GAS DISCHARGE LAMP CONTROLLER IN FORCE BROADENING Electronics, Inc. REISSUE USA DEADLINE 11.21.02; MAINT. FEES DUE: 05.21.04, 05.21.08, 05.21.12 - ------------------------------------------------------------------------------ ----------------------------------------- Pacific Aerospace & ELECTRONICS PACKAGES HAVING A PENDING; Claims Electronics, Inc.(3) COMPOSITE STRUCTURE AND METHODS FOR allowed; Issue Fee USA MANUFACTURING SUCH ELECTRONICS paid and formal PACKAGES drawings submitted. IN NEGOTIATIONS WITH JONES. - ------------------------------------------------------------------------------ ----------------------------------------- Pacific Aerospace & 04.30.19 COMPOSITE MATERIALS AND METHODS FOR IN FORCE BROADENING Electronics, Inc. MANUFACTURING COMPOSITE MATERIALS REISSUE USA IN NEGOTIATIONS WITH DEADLINE JONES. 09.04.03; MAINT. FEES DUE: 03.04.05 03.04.09 03.04.13 - ------------------------------------------------------------------------------ ----------------------------------------- Pacific Aerospace & COMPOSITE ELECTRONICS PACKAGES AND PENDING. Electronics, Inc. METHODS FOR MANUFACTURE IN NEGOTIATIONS WITH EUROPE JONES. - ------------------------------------------------------------------------------ -----------------------------------------

- -------- (3) Mr. Jones holds a Security Interest in these applications but has consented to the granting by the Company of a second priority perfected security interest in these applications. SEISMIC SAFETY PRODUCTS, INC. PATENT STATUS CHART

- -------------------------------------------------------------------------------------------------------------- APPLICANT/ PATENTEE/ ATTORNEY ASSIGNEE DOCKET ISSUE COUNTRY NO. INVENTORS SERIAL NO. FILE DATE PATENT NO. DATE - -------------------------------------------------------------------------------------------------------------- Seismic Safety 42474/28 James C. McGill 03.07.88 4,903,720 02.27.90 Prods., Inc. McGill 1 USA - -------------------------------------------------------------------------------------------------------------- Seismic Safety 42474/28 James C. McGill 02.26.91 5,119,841 06.09.92 Prods., Inc. McGill 2 USA - -------------------------------------------------------------------------------------------------------------- Seismic Safety 42474/28 James C. 11.09.93 5,409,031 04.25.95 Prods., Inc. McGill 3 McGill, Antonio USA F. Fernandez - -------------------------------------------------------------------------------------------------------------- Seismic Safety 42474/28 James C. 03.13.95 5,704,385 01.06.98 Prods., Inc. McGill 4 McGill, Antonio USA F. Fernandez - --------------------------------------------------------------------------------------------------------------

- ---------------------------------------------------------------------------------------------------------------------- APPLICANT/ PATENTEE/ ASSIGNEE EXPIRATION MAINTENANCE COUNTRY DATE TITLE STATUS FEE DUE DATES - ---------------------------------------------------------------------------------------------------------------------- Seismic Safety 03.07.08 SAFETY SHUTOFF DEVICE IN FORCE All fees paid Prods., Inc. USA - ---------------------------------------------------------------------------------------------------------------------- Seismic Safety 02.26.11 SAFETY SHUT OFF APPARATUS IN FORCE 12.09.03 Prods., Inc. USA - ---------------------------------------------------------------------------------------------------------------------- Seismic Safety 04.25.12 SAFETY SHUT OFF VALVE IN FORCE 10.25.02, Prods., Inc. 10.25.06 USA - ---------------------------------------------------------------------------------------------------------------------- Seismic Safety 01.06.15 AUTOMATIC AND MANUALLY OPERABLE IN FORCE 07.06.05, Prods., Inc. SAFETY SHUTOFF VALVE 07.06.09 USA - ----------------------------------------------------------------------------------------------------------------------

AEROMET INTERNATIONAL PLC PATENT STATUS CHART

- ----------------------------------------------------------------------------------------------------------------- APPLICANT/ PATENTEE/ ATTORNEY ASSIGNEE DOCKET FILING ISSUE COUNTRY NO. INVENTORS SERIAL NO. DATE PATENT NO. DATE - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- Aeromet Int'l PLC 9804599.0 03.05.98 (initial) 9904741.7 (final) - ----------------------------------------------------------------------------------------------------------------- Aeromet Int'l PLC 99104277.1 EUROPE - ----------------------------------------------------------------------------------------------------------------- Aeromet Int'l PLC 2264214 CANADA - ----------------------------------------------------------------------------------------------------------------- Aeromet Int'l A00009359US Butler 09/262,446 03.04.99 6,126,898 10.03.00 USA priority to 03.05.98 - ----------------------------------------------------------------------------------------------------------------- Aeromet Int'l 11-57989 JAPAN - -----------------------------------------------------------------------------------------------------------------

- ---------------------------------------------------------------------------------------------------------------- APPLICANT/ PATENTEE/ MAINTENANCE ASSIGNEE EXPIRATION FEE DUE COUNTRY DATE TITLE STATUS DATES - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- Aeromet Int'l PLC CAST ALUMINUM-COPPER ALLOY PENDING; no further information. - ---------------------------------------------------------------------------------------------------------------- Aeromet Int'l PLC CAST ALUMINUM-COPPER ALLOY PENDING; no further EUROPE information. - ---------------------------------------------------------------------------------------------------------------- Aeromet Int'l PLC CAST ALUMINUM-COPPER ALLOY PENDING; no further CANADA information. - ---------------------------------------------------------------------------------------------------------------- Aeromet Int'l 03.04.19 CAST ALUMINUM-COPPER ALLOY IN FORCE BROADENING USA REISSUE DEADLINE 10.03.02; MAINT. FEES DUE: 04.03.04, 04.03.08, 04.03.12 - ---------------------------------------------------------------------------------------------------------------- Aeromet Int'l CAST ALUMINUM-COPPER ALLOY PENDING; no further JAPAN information. - ----------------------------------------------------------------------------------------------------------------

TRADEMARK STATUS REPORT FOR PACIFIC AEROSPACE & ELECTRONICS, INC.

- ------------------------------------------------------------------------------------------------------ CLIENT/ MATTER SERIAL FILING ASSIGNEE NO. MARK COUNTRY NO. DATE - ------------------------------------------------------------------------------------------------------ PCT, Inc. 42174/10 KRYOFLEX USA 73/117,580 03.01.77 - ------------------------------------------------------------------------------------------------------ PCT, Inc. 42174/11 HERMETIC ADVANTAGE USA 74/521,789 05.03.94 - ------------------------------------------------------------------------------------------------------ PCT, Inc. 42174/12 PARTNERS WITH USA 74/522,844 05.03.94 TOMORROW - ------------------------------------------------------------------------------------------------------ Seismic Safety 42174/16 NORTHRIDGE VALVE USA 75/169,974 09.23.96 Products, Inc. - ------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------- REGISTRATION INT'L ASSIGNEE NO./DATE GOODS/SERVICES CLASS STATUS - ------------------------------------------------------------------------------------------------------------------------- PCT, Inc. 1,114,452 CERAMIC MATERIALS SOLD AS A COMPONENT 10;21 REGISTERED; Mar. 6, 1979 OF HEART PACEMAKERS Next renewal due 03.06.09 - ------------------------------------------------------------------------------------------------------------------------- PCT, Inc. 1,998,984 ELECTRONIC COMPONENTS, NAMELY 9 REGISTERED; Sept. 10, 1996 ELECTRONIC CONNECTORS AND HERMETIC SEC. 8/15 DECL due SEALING DEVICES 9.10.01 - 9.10.02; Renewal due 3.10.06 - 9.10.06 - ------------------------------------------------------------------------------------------------------------------------- PCT, Inc. 1,998,986 ELECTRONIC COMPONENTS, NAMELY 9 REGISTERED; Sept. 10, 1996 ELECTRONIC CONNECTORS AND HERMETIC Sec 8/15 Decl due SEALING DEVICES FOR ELECTRONIC 9.10.01 - 9.10.02; PACKAGES AND CONNECTORS Renewal due 3.10.06 - 9.10.06 - ------------------------------------------------------------------------------------------------------------------------- Seismic Safety 2,119,389 VALVES FOR NATURAL GAS DISTRIBUTION 7 REGISTERED; Products, Inc. Dec. 9, 1997 SYSTEMS Sec 8/15 Decl due 12.9.02 - 12.9.03; RENEWAL due 6.9.07 - 12.9.07 - -------------------------------------------------------------------------------------------------------------------------

SCHEDULE 5.15 SECURITY INTERESTS CONSENTS Consent of KeyBank dated March 19, 2002 made by KeyBank in favor of the Company and Pacific Coast Technologies, Inc. (relating to the KeyBank Promissory Notes) Consent of Herman L. Jones dated March 19, 2002 (relating to the Settlement Agreement) (the "Jones Consent") SCHEDULE 5.17 UCC FILING INFORMATION The Company and each of its Subsidiaries (other than its Foreign Subsidiaries) is incorporated in the State of Washington. OWNED REAL PROPERTY (U.S.):

- --------------------------------------------------------------------------------------------------------------------- Owner Location Use - --------------------------------------------------------------------------------------------------------------------- 1. PA&E 430 Olds Station Road P&E headquarters Wenatchee, WA 98801 - --------------------------------------------------------------------------------------------------------------------- 2. Northwest Industries, Inc. 2249 Diamond Point Road Bonded Metals Div. Technical operations Sequim, WA 98382 - ---------------------------------------------------------------------------------------------------------------------

LEASED REAL PROPERTY (U.S.):

- --------------------------------------------------------------------------------------------------------------------- Lessee and Address Lessor Use - --------------------------------------------------------------------------------------------------------------------- 1. Cashmere Manufacturing Co., Inc. Port of Chelan Mach. Div. Operations 432 Olds Station Road Wenatchee, WA 98801 - --------------------------------------------------------------------------------------------------------------------- 2. Pacific Coast Technologies, Inc. Port of Chelan Electr. Group operations 434 Olds Station Rd. Wenatchee, WA 98801 - --------------------------------------------------------------------------------------------------------------------- 3. PA&E Port of Chelan Mach. Div operations 200 Olds Station Rd. Wenatchee, WA 98801 - --------------------------------------------------------------------------------------------------------------------- 4. PA&E Port of Chelan Mach. Div operations 2605 Chester Kimm Road Wenatchee, WA 98801 - --------------------------------------------------------------------------------------------------------------------- 5. Electronic Specialty Corporation Erickson Realty, Ltd Display Div operations 14511 NE 13th Ave Vancouver WA 98685 - ---------------------------------------------------------------------------------------------------------------------

- --------------------------------------------------------------------------------------------------------------------- Lessee and Address Lessor Use - --------------------------------------------------------------------------------------------------------------------- 6. Skagit Engineering & Sea-Land Development Eng. & Fab. Div. Operations (not in use. Manufacturing, Inc. Partially terminated) 500 Metcalf Street Sedro-Woolley, WA 98284 - --------------------------------------------------------------------------------------------------------------------- 7. Skagit Engineering & 220th Street LLC Eng. & Fab. Office (subleased) Manufacturing, Inc. 6808 220th St. SW Suite 200 Mountlake Terrace, WA 98043 - ---------------------------------------------------------------------------------------------------------------------

SCHEDULE 5.19 FICTITIOUS BUSINESS NAMES DBA'S The following is a list of trade names that are registered with the State of Washington, and are the names currently used by the Subsidiaries of the Company in their operations. Pacific Aerospace & Electronics, Inc. - U.S. Aerospace Group - Casting Division (Aeromet America) Pacific Aerospace & Electronics, Inc. - Electronics Group - Interconnect Division (Balo Precision Parts) Pacific Aerospace & Electronics, Inc. - U.S. Aerospace Group - Machining Division (Cashmere Manufacturing Co., Inc.) Pacific Aerospace & Electronics, Inc. - U.S. Electronics Group - Filter Division (Ceramic Devices, Inc.) Pacific Aerospace & Electronics, Inc. - U.S. Electronics Group - Display Division (Electronic Specialty Corporation) Pacific Aerospace & Electronics, Inc. - U.S. Electronics Group - Bonded Metals Division (Northwest Technical Industries, Inc.) Pacific Aerospace & Electronics, Inc. - U.S. Electronics Group - Interconnect Division (Pacific Coast Technologies, Inc.) Pacific Aerospace & Electronics, Inc. - U.S. Aerospace Group - Machining Division (Seismic Safety Products, Inc.) Pacific Aerospace & Electronics, Inc. - U.S. Aerospace Group - Engineering & Fabrication Division (Skagit Engineering & Manufacturing, Inc.) Pacific Aerospace & Electronics, Inc. - European Aerospace Group (Aeromet International PLC) PREVIOUS NAMES USED IN OPERATIONS: Morel Industries, Inc. (former name of Aeromet America, Inc.) Lyden Castparts, Inc. (name of company whose assets were acquired by Aeromet America, Inc.) Displays & Technologies, Inc. (name of company merged into Electronic Specialty Corporation) Nova-Tech Engineering, Inc. (name of company whose assets were acquired by Skagit Engineering & Manufacturing, Inc.) PCT Holdings, Inc. (former name of PA&E) SCHEDULE 5.22 AFFILIATE TRANSACTIONS Employment agreement with Donald A. Wright. The existing employment agreement employs Mr. Wright through fiscal 2003. On August 15, 2001, Nick Gerde, who served as Vice President Finance of the Company, as well as Treasurer and Assistant Secretary, left his employment with the Company. In accordance with Mr. Gerde's employment agreement and separation letter executed by Mr. Gerde and the Company, Mr. Gerde will receive severance pay of $150,000, which is the equivalent of one year's salary. This severance is payable on regular payroll days over a 12-month period. Mr. Gerde will also receive medical benefits for one year. On February 28, 2002, Sheryl A. Symonds, who served as Vice President Administration and General Counsel, left her employment with the Company. In accordance with Ms. Symonds' employment agreement and separation letter executed by Ms. Symonds and the Company, Ms. Symonds will receive $205,710, which is the equivalent of one year's salary. This severance is payable on regular payroll days over a 12-month period. Ms. Symonds will also receive medical benefits for one year. Werner Hafelfinger who is currently the Vice President Operations and Chief Operating Officer, will continue serving as the Vice President Operations and Chief Operating Officer until May 17, 2002. In accordance with Mr. Hafelfinger's employment agreement and separation letter executed by Mr. Hafelfinger and the Company, Mr. Hafelfinger will receive $210,000, which is the equivalent of one year's salary. This severance is payable on regular payroll days over a 12-month period. Mr. Hafelfinger will also receive medical benefits for one year. Donald A. Wright rents the fourth floor condominium in the headquarters building from the Company and has an option to purchase the condominium for $250,000. The option terminates ten business days after Mr. Wright's employment with the Company ceases for any reason other than death. GSC Partners CDO Fund, Limited, GSC Partners CDO Fund II, Limited, GSC Recovery II, L.P. and GSC Recovery IIA, L.P., affiliates of GSCP Recovery, Inc, and as applicable, GSC Recovery II, L.P. (participating noteholders in the Exchange), which will collectively own approximately 54% of the Company's Common Stock on a fully-diluted basis following the Exchange, intend to purchase the Notes from the Initial Purchaser. In August 2001, the Company entered into a lease agreement with the North Central Educational Services District (the "NCESD"), pursuant to which the NCESD leased the second floor of the Company's Wenatchee headquarters building from the Company for $6,183 per month for a term of 24 months. In authorizing the lease, the Board of Directors determined that the lease was made for fair market value. Gene C. Sharratt, a director of the Company, is Superintendent of the NCESD. SCHEDULE 5.24 CAPITAL STOCK PA&E CAPITALIZATION 1. Authorized Capital: 100,000,000 shares of common stock, $.001 par value 5,000,000 shares of preferred stock, $.001 par value 2. Issued and Outstanding: 39,315,309 shares of common stock No shares of preferred stock 3. Options Outstanding under Stock Incentive Plan: 3,599,948 4. Warrants Outstanding: Pacific Aerospace & Electronics, Inc. Warrant Ledger

- ------------------------------------------------------------------------------------------------------------------------------- WARRANT WARRANT #/OTHER WARRANT EXERCISE NON EXPIRATION SHARES DATE ISSUED WARRANT HOLDER INFO SHARES PRICE VESTED VESTED DATE REMAINING - ------------------------------------------------------------------------------------------------------------------------------- PUBLIC WARRANTS - ------------------------------------------------------------------------------------------------------------------------------- 6/01/96 Interwest Transfer Co. 693259-11-1 2,295,000 4.6875 0 6/15/03 - ------------------------------------------------------------------------------------------------------------------------------- NON-PUBLIC WARRANTS - ------------------------------------------------------------------------------------------------------------------------------- 11/30/96(1) Donald A. Wright 001 100,000 $2.0000 100,000 0 12/24/04 100,000 - ------------------------------------------------------------------------------------------------------------------------------- 11/30/96(1) Nick A. Gerde 001 25,000 $2.0000 25,000 0 02/01/05 25,000 - ------------------------------------------------------------------------------------------------------------------------------- 11/30/96(2) Edward A. Taylor 003 35,000 $2.0000 35,000 0 05/31/02 35,000 - ------------------------------------------------------------------------------------------------------------------------------- 06/03/97 Gregory K. Smith 20,000 $3.4500 50,000 0 06/03/02 20,000 - ------------------------------------------------------------------------------------------------------------------------------- 06/03/97 Nestor Wiegand 5,000 $3.4500 5,000 0 06/03/02 5,000 - ------------------------------------------------------------------------------------------------------------------------------- Continental Capital & 04/17/00 Equity Corporation CCEC1 50,000 $3.5000 50,000 0 04/17/03 50,000 - ------------------------------------------------------------------------------------------------------------------------------- Continental Capital & 04/17/00 Equity Corporation CCEC2 50,000 $5.5000 50,000 0 04/17/03 50,000 - ------------------------------------------------------------------------------------------------------------------------------- Continental Capital & 04/17/00 Equity Corporation CCEC3 50,000 $7.5000 50,000 0 04/17/03 50,000 - -------------------------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------------- WARRANT WARRANT #/OTHER WARRANT EXERCISE NON EXPIRATION SHARES DATE ISSUED WARRANT HOLDER INFO SHARES PRICE VESTED VESTED DATE REMAINING - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- Continental Capital & 04/17/00 Equity Corporation CCEC4 50,000 $9.5000 50,000 0 04/17/03 50,000 - ------------------------------------------------------------------------------------------------------------------------------- Rochon Capital Group, 07/27/00 Ltd. RCG 1 79,150 $1.7688 79,150 0 07/26/04 79,150 - ------------------------------------------------------------------------------------------------------------------------------- Strong River 07/27/00 Investments CW 1 192,500 $2.0100 192,500 0 07/27/03 192,500 - ------------------------------------------------------------------------------------------------------------------------------- Bay Harbor 07/27/00 Investments, Inc. CW 2 192,500 $2.0100 192,500 0 07/27/03 192,500 - ------------------------------------------------------------------------------------------------------------------------------- B-III Capital 03/01/01 Partners, L.P. DDJ-1 1,883,923 $0.0010 1,883,923 0 03/01/06 1,883,923 - ------------------------------------------------------------------------------------------------------------------------------- B-III A Capital 03/01/01 Partners, L.P. DDJ-2 807,396 $0.0010 807,396 0 03/01/06 807,396 - ------------------------------------------------------------------------------------------------------------------------------- DDJ Canadian High 03/01/01 Yield Fund DDJ-3 538,263 $0.0010 538,263 0 03/01/06 538,263 - ------------------------------------------------------------------------------------------------------------------------------- State Street Bank & 03/01/01 Trust, Custodian DDJ-4 807,396 $0.0010 807,396 03/01/06 807,396 - ------------------------------------------------------------------------------------------------------------------------------- First Albany 04/09/01 Corporation FAC-1 692,074 $0.4062 692,074 04/09/06 692,074 - -------------------------------------------------------------------------------------------------------------------------------

5. Capitalization of Subsidiaries of PA&E

Subsidiaries 100% Parent Shares O/S - ------------ ----------- ---------- Aeromet America, Inc. PA&E 100,000 Balo Precision Parts, Inc. PA&E 100,000 Cashmere Manufacturing Co., Inc. PA&E 1,000 Ceramic Devices, Inc. PA&E 1,000 Electronic Specialty Corporation PA&E 100,000 Northwest Technical Industries, Inc. PA&E 100,000 Pacific Coast Technologies, Inc. PA&E 10,714,726 Seismic Safety Products, Inc. PA&E 100,000 Skagit Engineering & Manufacturing, Inc. PA&E 100 PA&E International, Inc. PA&E 100,000 Pacific A & E Limited PA&E International, Inc. 1 Pacific Aerospace & Electronics (UK) Pacific A&E Limited 1 Limited Aeromet International PLC Pacific Aerospace & 1,000,000 Electronics (UK) Limited PA&E Engineering, Inc. PA&E 100,000

Aeromet International PLC also has several wholly-owned dormant U.K. subsidiaries:

Subsidiary 100% Parent Shares O/S - ---------- ----------- ---------- Frank Ford (Aircraft Components) Limited Aeromet International PLC 1,000 Kent Aerospace Limited Aeromet International PLC 100 TKR Aerospace Limited Aeromet International PLC 13,520 TKR Group Limited Aeromet International PLC 30,000 TKR International Limited Aeromet International PLC 9,272,000 (two classes of stock) 6,600,000 Truflo Gas Turbines Limited Aeromet International PLC 250,000

SCHEDULE 8.15 EXCLUDED PROPRIETARY RIGHTS The Company was in default under a technology transfer agreement dated December 30, 1998 with Herman L. Jones relating to the following U.S. patent applications and one European patent application: (i) U.S. Serial No. 09/302,590, (ii) U.S. Serial No. 09/303,196 (now U.S. Patent No. 6,284,389) and (iii) E.P. Serial No. 99'920'345.8 (the "Patents"). However, a settlement was reached between Mr. Jones and the Company. Pursuant to the Settlement Agreement, the Company is permitted to retain the Patents upon payment by the Company to Mr. Jones of an amount equivalent to $950,000 (the "Purchase Price"). $200,000 of the Purchase Price will be paid by the Company transferring to Mr. Jones the building owned by the Company in Cashmere, WA. The remaining sum of $750,000 will be paid pursuant to a promissory note. If the building is not transferred to Mr. Jones by June 1, 2002, $200,000 of the Purchase Price will be added to the outstanding principal balance of the promissory note. Mr. Jones will retain a security interest in the Patents until the promissory note is fully paid. Pursuant to the Jones Consent, the Holders will be permitted to take a second priority lien on the Patents. SCHEDULE 9.3 INVESTMENTS IN FOREIGN SUBSIDIARIES Pacific Aerospace & Electronics, Inc. Investments in Foreign Subsidiaries as of January 31, 2001

Common Intercompany Total Stock Investments Investment ---------- ------------ ---------- Subsidiary PA&E International, Inc. 33,709,232 -- 33,709,232 ---------- ---------- Total investment in foreign subsidiaries 33,709,232 33,709,232

Intercompany investments change on a daily basis due to PA&E's cash management system which transfers funds to and from subsidiaries as needed. SCHEDULE 9.4 LIENS Below is a list of Liens that will exist after application of the proceeds from the issuance of the Notes: - -------------------------------------------------------------------------------- DETAIL DEBT LISTING/LIENS/SECURITY INTERESTS - --------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------------ Creditor Balance Security UCC Filing Information ($) - ------------------------------------------------------------------------------------------------------------------------------ PACIFIC AEROSPACE & ELECTRONICS, INC.: - ------------------------------------------------------------------------------------------------------------------------------ Term Debt: - ------------------------------------------------------------------------------------------------------------------------------ KeyBank 1,111,090 Real Estate - Corporate HQ Building N.A. - ------------------------------------------------------------------------------------------------------------------------------ Ford Credit 19,707 Vehicle N.A. - ------------------------------------------------------------------------------------------------------------------------------ Ford Credit 29,078 Vehicle N.A. - ------------------------------------------------------------------------------------------------------------------------------ Ford Credit 15,634 Vehicle N.A. - ------------------------------------------------------------------------------------------------------------------------------ Ford Credit 24,878 Vehicle N.A. - ------------------------------------------------------------------------------------------------------------------------------ Ford Credit 12,411 Vehicle N.A. - ------------------------------------------------------------------------------------------------------------------------------ Ford Credit 18,731 Vehicle N.A. - ------------------------------------------------------------------------------------------------------------------------------ Herman L. Jones 750,000 Technology Patents 99-130-0246 5/10/1999 - ------------------------------------------------------------------------------------------------------------------------------ Capital Leases: - ------------------------------------------------------------------------------------------------------------------------------ KeyCorp Leasing (a division -- Equipment 99-180-0281 of Key Corporate Capital, 6/12/1999 Inc.) - ------------------------------------------------------------------------------------------------------------------------------ Toyota Motor Credit Corporation -- Forklift 99-286-0323 Finance 10/13/1999 - ------------------------------------------------------------------------------------------------------------------------------ Toyota Motor Credit Corp. -- Forklift 99-312-0548 11/08/1999 - ------------------------------------------------------------------------------------------------------------------------------ U.S. Bancorp Leasing & Financial - -- Equipment - HAAS VF-3 Machine 99-323-0139 Machine Tool Finance Group Center (operating lease assumed by 11/19/1999 U.S. Castings, the purchaser of the Casting Division) - ------------------------------------------------------------------------------------------------------------------------------ Transamerica Equipment Financial -- Equipment - machinery 2000-109-0048 Services Corporation 4/18/2000 - ------------------------------------------------------------------------------------------------------------------------------ Polaris Industries, Inc. -- Th MB-1060c High Resolution SVHS 2000-132-0055 - ------------------------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------------ Creditor Balance Security UCC Filing Information ($) - ------------------------------------------------------------------------------------------------------------------------------ Digital color cameras secured by 5/11/2000 Inventory at Display Division) - ------------------------------------------------------------------------------------------------------------------------------ Jules and Associates, Inc. -- Equipment - Machinery 98-168-0035 (Assignee:CIT Group/ 6/7/2000 Equipment Financing, Inc.) (Lease is also secured by Pacific Coast Technologies, Inc.) - ------------------------------------------------------------------------------------------------------------------------------ Jules and Associates, Inc. -- Equipment - Machinery 98-149-0125 (Assignee:CIT Group/ 6/7/2000 Equipment Financing, Inc.) (Lease is also secured by Pacific Coast Technologies, Inc.) - ------------------------------------------------------------------------------------------------------------------------------ IBM Credit Corporation -- Equipment - Computers (operating 2000-234-0246 lease) 8/21/2000 - ------------------------------------------------------------------------------------------------------------------------------ De Lage Landen Financial Services -- Equipment - Mazak FH-5800 Original (assigned by United International 2000-264-0248 (9/20/2000) L.L.C.) Assignment 200-301-0213 10/27/2000 - ------------------------------------------------------------------------------------------------------------------------------ De Lage Landen Financial Services -- Equipment - Mazak FH-5800 Original (assigned by United International 2000-264-0249 L.L.C.) 9/20/2000 Assignment 200-301-0214 10/27/2000 - ------------------------------------------------------------------------------------------------------------------------------ The CIT Group -- Equipment - Mazak FH-5800 Original 2000-280-0158 10/6/2000 Amendment 2001-155-0529 6/4/2001 - ------------------------------------------------------------------------------------------------------------------------------ Amada Leasing Corp. 34,078 Equipment - Hydraulic press brake 2000-304-0502 10/30/2000 (Lease is also secured by Cashmere Manufacturing Co., Inc.) - ------------------------------------------------------------------------------------------------------------------------------ CASHMERE MANUFACTURING CO., INC.: - ------------------------------------------------------------------------------------------------------------------------------ Term Debt: - ------------------------------------------------------------------------------------------------------------------------------ Ford Credit 25,447 Vehicle N.A. - ------------------------------------------------------------------------------------------------------------------------------ Ellison Machinery Company 54,197 Fadal CNC machining center Original 95-152-0359 - ------------------------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------------ Creditor Balance Security UCC Filing Information ($) - ------------------------------------------------------------------------------------------------------------------------------ 6/1/1995 Continuation 2000-153-0135 6/1/2000 - ------------------------------------------------------------------------------------------------------------------------------ LCA a division of Associates 43,549 Fadal CNC machining center Original Commercial Corporation 97-279-0445 (assigned by 10/6/1997 Ellison Machinery Company) Assignment 97-301-0192 10/28/1977 - ------------------------------------------------------------------------------------------------------------------------------ Metlife Capital Corporation 42,112 Fadal CNC machining center Original (assigned by 98-020-0473 Ellison Machinery Company) 10/20/1998 Assignment 98-099-0050 4/9/1998 - ------------------------------------------------------------------------------------------------------------------------------ Metlife Capital Corporation 42,112 Fadal CNC machining center Original (assigned by 98-020-0474 Ellison Machinery Company) 1/20/1998 Assignment 98-099-0049 4/9/1998 - ------------------------------------------------------------------------------------------------------------------------------ Metlife Capital Corporation 47,327 Fadal CNC machining center Original (assigned by 98-020-0475 Ellison Machinery Company) 1/20/1998 Assignment 98-099-0048 4/9/1998 - ------------------------------------------------------------------------------------------------------------------------------ Metlife Capital Corporation 47,327 Fadal CNC machining center Original assigned by 98-090-0130 Ellison Machinery Company 3/31/1998 Assignment 98-146-0022 5/26/1998 - ------------------------------------------------------------------------------------------------------------------------------ Ellison Machinery Company 11,189 Komo CNC machining center Original 97-069-0691 3/10/1997 Assignment 97-129-0237 5/8/1997 - ------------------------------------------------------------------------------------------------------------------------------ Mitsui Vendor Leasing 337,525 2 Mori Seiki Horizontal Original (U.S.A.) Inc. (assigned by CNC Machine Centers 97-167-0543 Ellison Machinery Company) 6/16/1997 Assignment 97-234-0160 8/22/1997 - ------------------------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------------ Creditor Balance Security UCC Filing Information ($) - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ Metlife Capital Corporation 198,995 Mori Seiki machining cell Original (assigned by Ellison Machinery 98-058-0083 Company) 2/27/1998 Assignment 98-099-0089 4/9/1998 - ------------------------------------------------------------------------------------------------------------------------------ Metlife Capital Corporation -- Equipment - Fadal CNC Machine Original (assigned by Ellison Machinery Center 98-090-0131 Corporation)** 3/31/1998 Assignment 98-146-0023 5/26/1998 - ------------------------------------------------------------------------------------------------------------------------------ Capital Leases: - ------------------------------------------------------------------------------------------------------------------------------ GE Capital 41,980 Okuma cadet Original 96-275-0061 10/1/1998 Continuation 2000-153-0135 5/10/2001 - ------------------------------------------------------------------------------------------------------------------------------ GE Capital 41,980 Okuma cadet Original 96-275-0062 10/1/1996 Continuation 2001-130-0021 5/10/2001 - ------------------------------------------------------------------------------------------------------------------------------ NEC America 83,999 Phone system 2000-301-0233 10/27/2000 - ------------------------------------------------------------------------------------------------------------------------------ Amada Leasing Corp. 34,078 Amada press break 2000-304-0502 10/30/2000 (Lease is also secured by Pacific Aerospace & Electronics, Inc.) - ------------------------------------------------------------------------------------------------------------------------------ PACIFIC COAST TECHNOLOGIES, INC.: - ------------------------------------------------------------------------------------------------------------------------------ Term Debt: - ------------------------------------------------------------------------------------------------------------------------------ KeyBank 609,798 Real estate - building #7 expansion N.A. - ------------------------------------------------------------------------------------------------------------------------------ Capital Leases: - ------------------------------------------------------------------------------------------------------------------------------ GE Capital 35,256 Okuma cadet 97-196-0052 7/15/1997 - ------------------------------------------------------------------------------------------------------------------------------ GE Capital 35,744 Okuma cadet 97-261-0077 9/18/1977 - ------------------------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------------ Creditor Balance Security UCC Filing Information ($) - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ GE Capital 41,195 Okuma crown 97-237-0047 8/25/1997 (Lease is also secured by Cashmere Manufacturing Co. Inc.) - ------------------------------------------------------------------------------------------------------------------------------ GE Capital 98,759 Okuma CNC machining center N.A. - ------------------------------------------------------------------------------------------------------------------------------ CIT Group 70,397 Tornos screw machine 98-168-0035 6/7/2000 (Lease is also secured by Pacific Aerospace & Electronics, Inc.) - ------------------------------------------------------------------------------------------------------------------------------ CIT Group 98,444 Okuma crown 98-149-0125 6/7/2000 (Lease is also secured by Pacific Aerospace & Electronics, Inc.) - ------------------------------------------------------------------------------------------------------------------------------ Copelco Capital Inc. -- Copier system (operating lease) 97-066-0369 3/7/1997 - ------------------------------------------------------------------------------------------------------------------------------ General Electric Capital -- Accounts Receivables for which 98-065-0033 Corporation*** Allied Signal, Inc, is Account Debtor 7/15/1997 (pursuant to Purchase Agreement dated 2/12/1998) - ------------------------------------------------------------------------------------------------------------------------------ AEROMET INTERNATIONAL PLC: - ------------------------------------------------------------------------------------------------------------------------------ Capital Lease: - ------------------------------------------------------------------------------------------------------------------------------ Lloyds Bowmaker 476,000 Equipment N.A. - ------------------------------------------------------------------------------------------------------------------------------ CERAMIC DEVICES INC.: - ------------------------------------------------------------------------------------------------------------------------------ General Electric Capital -- Accounts Receivables for which 98-084-0103 Corporation** Allied Signal, Inc. is Account Debtor 3/25/1998 (pursuant to Purchase Agreement dated 2/12/1998) - ------------------------------------------------------------------------------------------------------------------------------ ELECTRONIC SPECIALTY CORPORATION: - ------------------------------------------------------------------------------------------------------------------------------ IKON Capital Inc. -- Copier (operating lease) 98-040-0579 2/9/1998 - ------------------------------------------------------------------------------------------------------------------------------ SKAGIT ENGINEERING & MANUFACTURING, INC.: - ------------------------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------------ Creditor Balance Security UCC Filing Information ($) - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ AT&T Capital Leasing Service -- Equipment - Programmable Milling Original (assigned by Intech Funding Corp.)*** Matching and other parts and 96-101-0080 software 4/10/1996 Assignment 96-164-0157 6/12/1996 Continuation 2001-058-0222 2/27/2001 - ------------------------------------------------------------------------------------------------------------------------------ CIT Group/Equipment Financing, Inc. -- Equipment-Cadet mate Vert. Machine 97-198-0083 *** Center; Planer Mill 7/17/1997 - ------------------------------------------------------------------------------------------------------------------------------ Kenco Equipment Lease Co. (and Bank -- Equipment - Saw with Blade Break 97-223-0098 of America NT & SA as assignee)*** 8/11/1997 - ------------------------------------------------------------------------------------------------------------------------------ Theodore R. Davis *** -- Furniture, fixture, equipment, 97-311-0321 inventory and proceeds therefrom 11/7/1997 - ------------------------------------------------------------------------------------------------------------------------------ Toyota Motor Credit Corporation -- Forklift (operating lease) 99-286-0323 Equipment Finance 10/13/1999 - ------------------------------------------------------------------------------------------------------------------------------

DDJ Capital Management, LLC, as agent for the Lenders under the DDJ Loan Agreement, has a security interest in substantially all of the Company's and its U.S. Subsidiaries' assets. These Liens will be released on the Closing Date. All the UCC liens listed in this schedule are filed in the Washington State Department of Licensing. * This promissory note was issued pursuant to a settlement agreement made between the Company and Herman L. Jones dated February 28, 2002 whereby the Company is permitted to retain the Jones Patents upon payment by the Company to Mr. Jones of an amount equivalent to $950,000 (the "Purchase Price"). $200,000 of the Purchase Price will be paid by the Company transferring to Mr. Jones the building owned by the Company in Cashmere, WA. The remaining sum of $750,000 will be paid pursuant to a promissory note. If the building in Cashmere, W.A. is not transferred to Mr. Jones by June 1, 2002, the $200,000 of the Purchase Price will be added to the outstanding principal balance of the promissory note. Mr. Jones will retain a security interest in the Jones Patents until the promissory note is fully paid. ** The Company is unaware of why this filing was made or is or what it secures or secured. *** The underlying debt was paid off when the Company acquired Skagit Engineering & Manufacturing, Inc. SCHEDULE 9.5 INACTIVE SUBSIDIARIES The following U.S. subsidiaries no longer have operations: Aeromet America, Inc. Balo Precision Parts, Inc. Electronic Speciality Corporation PA&E Engineering, Inc. Skagit Engineering & Manufacturing Inc. SCHEDULE 9.12 BANK ACCOUNTS KEYBANK ACCOUNTS

ACCOUNT NUMBER COMPANY ACCOUNT - ------------------------------------------------------------------------------------------- 472131002629 PACIFIC COAST TECHNOLOGIES, INC. GENERAL - ------------------------------------------------------------------------------------------- 472131002611 PACIFIC COAST TECHNOLOGIES, INC. PAYROLL - ------------------------------------------------------------------------------------------- 472131002645 CERAMIC DEVICES, INC. GENERAL - ------------------------------------------------------------------------------------------- 472131002637 CERAMIC DEVICES, INC. PAYROLL - ------------------------------------------------------------------------------------------- 472131002595 NORTHWEST TECHNICAL INDUSTRIES, INC. GENERAL - ------------------------------------------------------------------------------------------- 472131002603 NORTHWEST TECHNICAL INDUSTRIES, INC. PAYROLL - ------------------------------------------------------------------------------------------- 472131002678 CASHMERE MANUFACTURING CO., INC. GENERAL - ------------------------------------------------------------------------------------------- 472131002660 CASHMERE MANUFACTURING CO., INC. PAYROLL - ------------------------------------------------------------------------------------------- 472131002652 SEISMIC SAFETY PRODUCTS, INC. GENERAL - ------------------------------------------------------------------------------------------- 472131001738 AEROMET AMERICA, INC. GENERAL - ------------------------------------------------------------------------------------------- 472131001894 AEROMET AMERICA, INC. PAYROLL - ------------------------------------------------------------------------------------------- 472131003890 AEROMET AMERICA, INC. GENERAL & PAYROLL - ------------------------------------------------------------------------------------------- 473451001951 SKAGIT ENGINEERING & MANUFACTURING, INC. PETTY CASH FUND - ------------------------------------------------------------------------------------------- 472131003700 ELECTRONIC SPECIALTY CORPORATION GENERAL - ------------------------------------------------------------------------------------------- 472131003718 ELECTRONIC SPECIALTY CORPORATION PAYROLL - ------------------------------------------------------------------------------------------- 472131002389 PA&E GENERAL - ------------------------------------------------------------------------------------------- 472131002694 PA&E PAYROLL - ------------------------------------------------------------------------------------------- 472131005259 PA&E HEALTH INS - ------------------------------------------------------------------------------------------- 472131003932 PA&E CLAIMS - ------------------------------------------------------------------------------------------- 472131002686 PA&E BENEFITS - -------------------------------------------------------------------------------------------

Exhibit A Form of Note [Filed Separately] Exhibit B-1 Form of Opinion of New York Counsel [Intentionally Omitted] Exhibit B-2 Form of Opinion of Washington Counsel [Intentionally Omitted] Exhibit C Form of Compliance Certificate [Intentionally Omitted] Exhibit D Form of Lockbox Agreement [Intentionally Omitted] Exhibit E Form of Deed of Trust, Security Agreement and Fixture Filing [Filed Separately] Exhibit F Form of Pledge Agreement [Filed Separately] Exhibit G Form of Security Agreement [Filed Separately] Exhibit H Form of Subsidiary Guaranty [Filed Separately] Exhibit I EXCLUDED PERSONS GSCP Recovery, Inc. GSC Recovery II, L.P. William E. Simon & Sons Special Situation Partners II, L.P. M.W. Post Advisory Group L.L.C. Alliance Capital Management L.P. HBK Master Fund L.P. ================================================================================ PACIFIC AEROSPACE & ELECTRONICS, INC. $36,000,000 5.0 % Senior Secured Notes due May 1, 2007 (CUSIP Number: 693758 AD 6) ------------------------- NOTE PURCHASE AGREEMENT ------------------------- Dated as of March 19, 2002 ================================================================================ EX-10.8 13 f80483ex10-8.txt EXHIBIT 10.8 Exhibit 10.8 CUSIP No.: 693758 AD 6 PACIFIC AEROSPACE & ELECTRONICS, INC. 5.0% SENIOR SECURED NOTES DUE 2007 FOR VALUE RECEIVED, the undersigned, PACIFIC AEROSPACE & ELECTRONICS, INC., a corporation organized under the laws of the State of Washington (the "Company"), hereby unconditionally promises to pay to the order of JEFFERIES & COMPANY, INC. or its registered assigns, the principal amount of THIRTY-SIX MILLION UNITED STATES DOLLARS ($36,000,000.00) (the "Principal Amount"). Interest Payment Dates: May 1 and November 1 Reference is made to the further provisions of this Note contained herein, which will for all purposes have the same effect as if set forth at this place. THIS NOTE IS BEING ISSUED WITH "ORIGINAL ISSUE DISCOUNT" AS SUCH TERM IS DEFINED UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED. FOR INFORMATION REGARDING THE ORIGINAL ISSUE PRICE, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT AND THE YIELD TO MATURITY WITH RESPECT TO THE NOTES, A HOLDER OF A NOTE MAY CONTACT THE PRESIDENT OR THE CHIEF FINANCIAL OFFICER OF PACIFIC AEROSPACE & ELECTRONICS, INC., 430 OLDS STATION ROAD, WENATCHEE, WASHINGTON 98801. THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT), AND (2) AGREES NOT TO OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY PRIOR TO THE DATE THAT IS TWO YEARS A-1 (OR SUCH OTHER PERIOD THAT MAY HEREAFTER BE PROVIDED UNDER RULE 144(k) AS PERMITTING RESALES BY NON-AFFILIATES OF RESTRICTED SECURITIES WITHOUT RESTRICTION OR AS MAY BE REQUIRED BY APPLICABLE LAW) AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY) (THE "RESALE RESTRICTION TERMINATION DATE") EXCEPT (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A) THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR IN OFFSHORE TRANSACTIONS AND WITHOUT DIRECTED SELLING EFFORTS WITHIN THE MEANINGS OF SUCH TERMS AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF SUBPARAGRAPH (A)(1), (2) (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION REASONABLY SATISFACTORY TO IT THAT SUCH SALE, ASSIGNMENT OR OTHER TRANSFER IS BEING MADE IN COMPLIANCE WITH APPLICABLE SECURITIES LAWS OF ANY U.S. STATE OR ANY OTHER APPLICABLE JURISDICTION. THE HOLDER OF THIS SECURITY AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. A-2 IN WITNESS WHEREOF, the Company has caused this Note to be signed manually or by facsimile by its duly authorized officer. PACIFIC AEROSPACE & ELECTRONICS, INC. By: /s/ Donald A. Wright -------------------------------------- Name: Donald A. Wright Title: Chief Executive Officer and President Dated: March 25, 2002 A-3 (REVERSE OF SECURITY) 5.0% Senior Secured Notes Due 2007 1. Interest. PACIFIC AEROSPACE & ELECTRONICS, INC., a corporation organized under the laws of the State of Washington (the "Company"), promises to pay interest on the Principal Amount of this Note at the rate per annum shown above. Interest on the Notes will accrue from the most recent date on which interest has been paid or, if no interest has been paid, from March 25, 2002. Interest will accrue from the date of issuance of the Note at a rate of 5.0% per annum on the outstanding Principal Amount and will be payable in cash semi-annually in arrears on each Interest Payment Date, commencing May 1, 2002. Cash interest will be computed on the basis of a year of 360 days, for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest is payable. The Company shall pay interest on overdue principal and on overdue installments of interest (without regard to any applicable grace periods) from time to time on demand at the rate borne by the Notes plus 3.0% per annum, to the extent lawful. 2. Method of Payment. The Company shall pay interest on the Notes or on additional interest, if any, in respect of the Notes to the Persons who are the registered Holders thereof. Holders must surrender Notes to the Company to collect principal payments. The Company shall pay principal and interest in Dollars in the times and manner set forth in the Note Purchase Agreement. 3. Note Purchase Agreement. The Company issued the Notes pursuant to a Note Purchase Agreement, dated as of March 19, 2002 (the "Note Purchase Agreement"), among the Company, the Initial Purchaser and First Union National Bank, as Collateral Agent (the "Collateral Agent"). This Note is one of a duly authorized issue of Notes of the Company designated as its 5.0% Senior Secured Notes due 2007. The Notes are limited to $36,000,000 in aggregate principal amount, except as otherwise provided in the Note Purchase Agreement. The initial Accreted Principal Amount of the Notes will be $22,000,000; therefore, the "Original Issue Discount" is $14,000,000. "Accreted Principal Amount" of any Note, at any date, shall equal the (i) the Original Issue Price of such Note plus (ii) the accrued amortization of the Original Issue Discount attributable ratably on a daily basis, using a daily level yield, to the period from and including the Closing Date to (but excluding) the Maturity Date. The Notes will mature on May 1, 2007. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to such terms in the Note Purchase Agreement. The terms of the Notes include those stated in the Note Purchase Agreement. Notwithstanding anything to the contrary herein, the Notes are subject to all such terms, and Holders of Notes are referred to the Note Purchase Agreement for a statement of them. The Notes are senior secured obligations of the Company. A-4 4. Optional Prepayment. The Company may prepay, in whole or in part, at any time and from time to time, the outstanding Accreted Principal Amount of the Notes at the prices (expressed as percentages of the Accreted Principal Amount of the Notes on the date of such prepayment) corresponding to the relevant period set forth in the table below, plus accrued and unpaid interest thereon to the applicable prepayment date:

Premium to Accreted Period Principal Amount -------------------------------- ------------------- Closing Date - November 30, 2002 104.0% December 1, 2002 - November 30, 2003 103.0% December 1, 2003 - November 30, 2004 102.0% December 1, 2004 - Maturity Date 100.0%

5. Notice of Optional Prepayment. Notice of optional prepayment will be mailed at least 10 days but not more than 30 days before the Business Day fixed for such prepayment to each Holder of Notes to be redeemed at such Holder's registered address. 6. Mandatory Prepayment of the Notes. Section 7.1 of the Note Purchase Agreement provides that, after certain Asset Dispositions, after certain sales or issuances of Capital Stock or Stock Equivalents by the Company or any of its Subsidiaries and upon the receipt of the proceeds of any insurance required to be maintained pursuant to the Note Purchase Agreement, subject to further limitations contained therein, the Company will prepay certain amounts of the Notes in accordance with the procedures set forth in the Note Purchase Agreement. The Notes are not entitled to the benefit of any sinking fund. 7. Offers to Purchase. Section 7.3 of the Note Purchase Agreement provides, that upon the occurrence of a Change of Control and with 100% of the Excess Cash Flow in each year in which the Notes are outstanding, subject to further limitations contained therein, the Company will make an offer to purchase certain amounts of the Notes in accordance with the procedures set forth in the Note Purchase Agreement. A-5 8. Denominations; Transfer; Exchange. The Notes are in registered form. A Holder shall register the transfer of or exchange Notes in accordance with the Note Purchase Agreement. The Company may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay certain transfer taxes or similar governmental charges payable in connection therewith as permitted by the Note Purchase Agreement. 9. Persons Deemed Owners. The registered Holder of a Note shall be treated as the owner of it for all purposes. 10. Amendment; Supplement; Waiver. Subject to certain exceptions set forth in the Note Purchase Agreement, the Note Purchase Agreement or the Notes may be amended or supplemented with the written consent of the Company and the Required Holders, and any past Default or Event of Default or noncompliance with any provision may be waived with the written consent of the Required Holders. 11. Restrictive Covenants. The Note Purchase Agreement imposes certain limitations on the ability of the Company and its Subsidiaries to, among other things, incur additional Debt, make payments in respect of its Capital Stock or certain Debt, make certain Investments, incur Liens, enter into transactions with Affiliates, merge or consolidate with any other Person, and complete certain Asset Dispositions. Such limitations are subject to a number of important qualifications and exceptions. 12. Defaults and Remedies. If an Event of Default occurs and is continuing, the Required Holders may declare all the Notes to be due and payable in the manner, at the time and with the effect provided in the Note Purchase Agreement. Holders of Notes may not enforce the Note Purchase Agreement or the Notes except as provided in the Note Purchase Agreement. 13. Collateral Agent Dealings with Company. The Collateral Agent under the Note Purchase Agreement, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with the Company, its Subsidiaries or their respective Affiliates as if it were not the Collateral Agent. 14. Governing Law. This Note and the Note Purchase Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflict of laws (other than Section 5-1401 of the New York General Obligations Law). 15. CUSIP Numbers. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes as a convenience to the Holders of the Notes. No representation is made as to the accuracy of such numbers as printed on the Notes and reliance may be placed only on the other identification numbers printed hereon. A-6 16. Note Purchase Agreement. Each Holder, by accepting a Note, agrees to be bound by all of the terms and provisions of the Note Purchase Agreement, as the same may be amended, restated, supplemented or otherwise modified from time to time. The Company will furnish to any Holder of a Note upon written request and without charge a copy of the Note Purchase Agreement. Requests may be made to: Pacific Aerospace & Electronics, Inc., 430 Olds Station Road, Wenatchee, Washington 98801, Attention: President or Chief Financial Officer. A-7 ASSIGNMENT FORM If you the Holder want to assign this Note, fill in and sign the form below: I or we assign and transfer this Note to: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Print or type name, address and zip code and social security or tax ID number of assignee) and irrevocably appoint ___________________________ , agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. Dated: __________________ Signed:________________________________ NOTICE: The signature to any endorsement hereon must correspond with the name as written upon the face of the Note in every particular, without alteration or enlargement or any change whatever. If the endorsement be executed by an attorney, executor, administrator, trustee or guardian, the person executing the endorsement must give his full title in such capacity and proper evidence of authority to act in such capacity, if not on file with the Note, must be forwarded with this Note. (Sign exactly as your name appears on the other side of this Note) A-8 [OPTION OF HOLDER TO ELECT PURCHASE] If you want to elect to have this Note purchased by the Company pursuant to Section 7.3(a) or 7.3(b) of the Note Purchase Agreement, check the appropriate box: Section 7.3(a) [ ] Section 7.3(b) [ ] If you want to elect to have only part of this Note purchased by the Company pursuant to Section 7.3(a) or 7.3(b) of the Note Purchase Agreement, state the amount you elect to have purchased: $_____________________ Dated:________________ _____________________ NOTICE: The signature to any endorsement hereon must correspond with the name as written upon the face of the Note in every particular, without alteration or enlargement or any change whatever. If the endorsement be executed by an attorney, executor, administrator, trustee or guardian, the person executing the endorsement must give his full title in such capacity and proper evidence of authority to act in such capacity, if not on file with the Note, must be forwarded with this Note. A-9 EX-10.9 14 f80483ex10-9.txt EXHIBIT 10.9 Exhibit 10.9 - -------------------------------------------------------------------------------- SUBSIDIARY GUARANTY AGREEMENT Dated March 25, 2002 From AEROMET AMERICA, INC., BALO PRECISION PARTS, INC., CASHMERE MANUFACTURING CO., INC., CERAMIC DEVICES, INC., ELECTRONIC SPECIALTY CORPORATION, NORTHWEST TECHNICAL INDUSTRIES, INC., PACIFIC COAST TECHNOLOGIES, INC., PA&E INTERNATIONAL, INC., SEISMIC SAFETY PRODUCTS, INC., and SKAGIT ENGINEERING & MANUFACTURING, INC., each, as a Subsidiary Guarantor in favor of THE HOLDERS (AS DEFINED IN THE NOTE PURCHASE AGREEMENT REFERRED TO HEREIN) and FIRST UNION NATIONAL BANK, as Collateral Agent - -------------------------------------------------------------------------------- TABLE OF CONTENTS

Page No. ---- SECTION 1. Definitions................................................................2 SECTION 2. Guaranty...................................................................2 SECTION 3. Guaranty Absolute..........................................................2 SECTION 4. Waivers....................................................................4 SECTION 5. Subrogation................................................................4 SECTION 6. Payments Free and Clear of Taxes, Etc......................................5 SECTION 7. Representations and Warranties.............................................6 SECTION 8. Covenants..................................................................7 SECTION 9. Amendments, Etc............................................................8 SECTION 10. Notices, Etc..............................................................8 SECTION 11. Set-off...................................................................8 SECTION 12. No Waiver.................................................................8 SECTION 13. Continuing Guaranty; Assignments under the Note Purchase Agreement................................................................9 SECTION 14. Governing Law; Jurisdiction; Waiver of Jury Trial.........................9 SECTION 15. Counterparts.............................................................10 SECTION 16. Applicability of Note Purchase Agreement.................................10 ANNEX I -- ADDRESSES

i THIS SUBSIDIARY GUARANTY AGREEMENT (this "Agreement"), dated as of March 25, 2002, is made by Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., PA&E International, Inc., Seismic Safety Products, Inc. and Skagit Engineering & Manufacturing, Inc. (each, a "Subsidiary Guarantor" and, collectively, the "Subsidiary Guarantors"), in favor of the Holders (as hereinafter defined) party to the Note Purchase Agreement (as hereinafter defined) and First Union National Bank, as collateral agent for the Holders (in such capacity, the "Collateral Agent"). WHEREAS, Pacific Aerospace & Electronics, Inc., a Washington corporation (the "Company"), the Initial Purchaser (as hereinafter defined) and the Collateral Agent have entered into that certain Note Purchase Agreement (the "Note Purchase Agreement"), dated as of March 19, 2002, pursuant to which, among other things, the Company has agreed to issue and sell, and the Holders have agreed to purchase the Company's 5% Senior Secured Notes due May 1, 2007 (the "Notes"); WHEREAS, the Subsidiary Guarantors will derive substantial direct and indirect benefit from the transactions contemplated by the Note Purchase Agreement; and WHEREAS, it is a condition to closing the transactions contemplated by the Note Purchase Agreement that the Subsidiary Guarantors execute and deliver this Agreement; NOW, THEREFORE, in consideration of the premises and in order to induce the Holders to enter into the Note Purchase Agreement, the Subsidiary Guarantors hereby agree as follows: SECTION 1. Definitions. Capitalized terms used herein and not otherwise defined shall have the meaning ascribed to such terms in the Note Purchase Agreement. SECTION 2. Guaranty. Each Subsidiary Guarantor, jointly and severally, hereby unconditionally and irrevocably guarantees the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of all of the Obligations now or hereafter existing under the Operative Agreements, whether for principal, interest, fees, expenses or otherwise (such Obligations being the "Guaranteed Obligations"), and agrees to pay any and all expenses (including reasonable counsel fees and expenses) incurred by the Collateral Agent or the Holders in enforcing any rights under this Agreement. Without limiting the generality of the foregoing, the Subsidiary Guarantors' liability shall extend to all amounts that constitute part of the Guaranteed Obligations and would be owed by the Company to the Collateral Agent or the Holders under the Operative Agreements but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving the Company. This guaranty is an absolute guaranty of payment and performance and not a guaranty of collection. SECTION 3. Guaranty Absolute. The obligations of the Subsidiary Guarantors under this Agreement are independent of the Obligations, and a separate action or actions may be brought and prosecuted against the Subsidiary Guarantors to enforce this Agreement, irrespective of whether any action is brought against the Company or whether the Company is joined in any such action or actions. The liability of the Subsidiary Guarantors under this Agreement shall be absolute and unconditional irrespective of: (a) any lack of validity or enforceability of any Operative Agreement or any agreement or instrument relating thereto; (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Guaranteed Obligations, or any other amendment or waiver of or any consent to departure from any Operative Agreement, including without limitation any increase in the Guaranteed Obligations resulting from the extension of additional credit to the Company or otherwise; (c) any taking, release or amendment or waiver of or consent to departure from any other guaranty, for all or any of the Guaranteed Obligations; (d) any manner of sale or other disposition of any assets of the Company or any of its Subsidiaries for all or any of the Guaranteed Obligations; (e) any change, restructuring or termination of the corporate structure or existence of the Company or any of its Subsidiaries; (f) any exchange, release or non-perfection of any Lien on any collateral for, or any release or amendment or waiver of any term of any other guaranty of, or any consent to departure from any requirement of any other guaranty of, all or any of the Obligations; (g) the absence of any attempt to collect any of the Obligations from the Company or any other guarantor or any other action to enforce the same or the election of any remedy by the Holders or the Collateral Agent; (h) the election by the Holders or the Collateral Agent in any proceeding under chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") of the application of section 1111(b)(2) of the Bankruptcy Code; (i) any borrowing or grant of a security interest by the Company, as debtor-in-possession, under section 364 of the Bankruptcy Code; (j) the disallowance, under section 502 of the Bankruptcy Code, of all or any portion of the claims of any of the Holders or the Collateral Agent for payment of any of the Obligations; or (k) any other circumstance (including without limitation any statute of limitations) that might otherwise constitute a defense available to, or a discharge of, a borrower or a guarantor, other than the indefeasible payment in full of the Obligations. 3 This Agreement shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Guaranteed Obligations is rescinded or must otherwise be returned by the Collateral Agent or any Holder upon the insolvency, bankruptcy or reorganization of the Company or otherwise, all as though such payment had not been made. SECTION 4. Waivers. (a) Each Subsidiary Guarantor hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Guaranteed Obligations and this Agreement and any requirement that the Collateral Agent, any Holder or any other Person protect, secure, perfect or insure any Lien or any property subject thereto or exhaust any right or take any action against the Company or any other Person. (b) Each Subsidiary Guarantor hereby waives any right to revoke this Agreement and acknowledges that this Agreement is continuing in nature and applies to all Guaranteed Obligations, whether existing now or in the future. (c) Each Subsidiary Guarantor acknowledges that it will receive substantial direct and indirect benefits from the financing arrangements contemplated by the Operative Agreements and that the waivers set forth in this Section 4 are knowingly made in contemplation of such benefits. (d) Each Subsidiary Guarantor agrees that if, after the occurrence and during the continuance of an Event of Default, the Holders or the Collateral Agent are prevented by applicable law from exercising their respective rights to accelerate the maturity of the Obligations, to collect interest on the Obligations, or to enforce or exercise any other right or remedy with respect to the Obligations, the Subsidiary Guarantors agree to pay to the Collateral Agent for the account of the Holders, upon demand therefor, the amount that would otherwise have been due and payable had such rights and remedies been permitted to be exercised by the Holders or the Collateral Agent. SECTION 5. Subrogation. Until all amounts owed to the Holders with respect to the Guaranteed Obligations are paid in full, none of the Subsidiary Guarantors will exercise any rights that any of them may now or hereafter acquire against the Company that arise from the existence, payment, performance or enforcement of the Subsidiary Guarantors' obligations under this Agreement or any other Operative Agreement, including without limitation any right of subrogation, reimbursement, exoneration, contribution or indemnification and any right to participate in any claim or remedy of the Collateral Agent or any Holder against the Company, whether or not such claim, remedy or right arises at equity or under contract, statute or common law, including without limitation the right to take or receive from the Company, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim, remedy or right except as specifically otherwise provided in the Operative Agreements. If any amount shall be paid to any Subsidiary Guarantor in violation of the preceding sentence at any time prior to the payment in full in cash of the Guaranteed Obligations and all other amounts payable under this Agreement, such amount shall be held in trust for the benefit of the Collateral 4 Agent and the Holders and shall forthwith be paid to the Collateral Agent to be credited and applied to any unsatisfied Guaranteed Obligations and all other amounts payable under this Agreement, whether matured or unmatured, in accordance with the terms of the Operative Agreements, or to be held as collateral for any unsatisfied Guaranteed Obligations or other amounts payable under this Agreement thereafter arising. If (i) the Subsidiary Guarantors shall make payment to the Collateral Agent or any other Holder of all or any part of the Guaranteed Obligations and (ii) all of the Guaranteed Obligations and all other amounts payable under this Agreement shall be paid in full in cash, the Collateral Agent and the Holders will, at the Subsidiary Guarantors' request and expense, execute and deliver to the Subsidiary Guarantors appropriate documents, without recourse and without representation or warranty, necessary to evidence the transfer by subrogation to the Subsidiary Guarantors of an interest in the Guaranteed Obligations resulting from such payment by the Subsidiary Guarantors. SECTION 6. Payments Free and Clear of Taxes, Etc. (a) Any and all payments made by the Subsidiary Guarantors hereunder shall be made in accordance with Section 2.4 of the Note Purchase Agreement, free and clear of and without deduction for any and all present or future Taxes, excluding Taxes measured by a Holder's net income and franchise taxes imposed on it by the jurisdiction under the laws of which such Holder is organized or is required to be qualified to do business or any political subdivision of either of the foregoing. If any of the Subsidiary Guarantors shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Holder or the Collateral Agent, (i) the sum payable shall be increased as may be necessary so that after making all required deductions, such Holder or the Collateral Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) such Subsidiary Guarantor shall make such deductions and (iii) such Subsidiary Guarantor shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (b) Each Subsidiary Guarantor will indemnify each Holder and the Collateral Agent for the full amount of Taxes (including without limitation any Taxes imposed by any jurisdiction on amounts payable under Section 2.4 of the Note Purchase Agreement) paid by such Holder or the Collateral Agent (as the case may be) in connection with any amounts received by such Person hereunder and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. This indemnification shall be made within 30 days from the date such Holder or the Collateral Agent (as the case may be) makes written demand therefor. A certificate as to the amount of such payment or liability delivered to the Company by a Holder, or by the Collateral Agent on behalf of a Holder, shall be conclusive absent manifest error. (c) Within 45 days after the date of any payment of Taxes, the applicable Subsidiary Guarantor will furnish to the Collateral Agent, at its address referred to in the Note Purchase Agreement, appropriate evidence of payment thereof. If no Taxes are payable in respect of any payment hereunder by any Subsidiary Guarantor through an account or branch outside the United States or on behalf of any Subsidiary Guarantor by a payor that is not a United States person, such Subsidiary Guarantor will furnish, or will cause such payor to furnish, to the Collateral Agent a certificate from each appropriate taxing authority or authorities, or an opinion 5 of counsel reasonably acceptable to the Collateral Agent, in either case stating that such payment is exempt from or not subject to Taxes. (d) Without prejudice to the survival of any other agreement of the Subsidiary Guarantors hereunder, the agreements and obligations of the Subsidiary Guarantors contained in this Section 6 shall survive the payment in full of the Guaranteed Obligations and all other amounts payable under this Agreement. SECTION 7. Representations and Warranties. Each Subsidiary Guarantor hereby represents and warrants as follows: (a) Corporate Existence. It: (i) is a corporation duly formed, validly existing and in good standing under the laws of the state of its incorporation; (ii) has all requisite power, and has all material governmental licenses, authorizations, consents and approvals necessary, to own its assets and carry on its business as now being or as proposed to be conducted; (iii) is qualified to do or transact business in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify would reasonably be expected to have a Material Adverse Effect. (b) Authority; Execution; Contravention. The execution and delivery of this Agreement, the consummation of the transactions herein contemplated and compliance with the terms and provisions hereof (i) are within its powers, (ii) have been duly authorized by all necessary action, (iii) require no action by or in respect of, or filing with, and Governmental Authority, (iv) and do not contravene, or constitute a default under, any provision of any applicable law, statute, ordinance, regulation, rule, order or other governmental restriction or the charter or bylaws or equivalent documents of such Subsidiary Guarantor (collectively, the "Charter Documents"), and (v) do not contravene, or constitute a default under, any agreement, judgment, injunction, order, decree, indenture, contract, lease, instrument or other commitment to which it is a party or by which its assets are bound which could reasonably be expected to have a Material Adverse Effect other than the Old Notes Indenture and the Old Notes. (c) Approvals. No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority or regulatory body is required for the due execution, delivery and performance by such Subsidiary Guarantor of this Agreement. (d) Enforceability. This Agreement is the legal, valid and binding obligation of such Subsidiary Guarantor enforceable against such Subsidiary Guarantor in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium and similar laws of general application relating to or affecting the rights and remedies of creditors and by general equitable principles, regardless of whether such enforceability is considered in a proceeding in equity or law. (e) Litigation. There is no pending or, to the best of its knowledge, threatened action or proceeding affecting such Subsidiary Guarantor before any court, governmental agency or arbitrator which may materially adversely affect the financial condition or operations of such Subsidiary Guarantor or which purports to affect the legality, validity or enforceability of this 6 Agreement, except for the litigation matters described on Schedule 5.5 of the Note Purchase Agreement. (f) Reliance. Such Subsidiary Guarantor has, independently and without reliance upon the Collateral Agent or any Holder and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. SECTION 8. Covenants. Each Subsidiary Guarantor shall, so long as any Guaranteed Obligation is outstanding: (a) Provide to the Collateral Agent notice in writing of any event, act or condition which has, or, upon the passing of time, the giving of notice or both, could reasonably be expected to have, a Material Adverse Effect promptly upon, and in any event within 5 Business Days after, such Subsidiary Guarantor becoming aware of any such event, act or condition; (b) Keep proper books of record and account in which full, true and correct entries in conformity with GAAP and all requirements of applicable law shall be made of all dealings and transactions in relation to its business and activities. Such Subsidiary Guarantor shall permit officers and designated representatives of the Collateral Agent and each of the Holders to examine the books and records of such Subsidiary Guarantor, and discuss the affairs, finances and accounts of such Subsidiary Guarantor with, and be advised as to the same by, its and their officers, all upon reasonable notice and at such reasonable times as the Collateral Agent and the Holders may desire; (c) Do or cause to be done, all things necessary to preserve and keep in full force and effect its existence as a corporation in good standing in the state of its corporation and its qualification to do business as a foreign corporation in each other jurisdiction where such qualification is necessary except where the failure to be so qualified could not reasonably be expected to have a Material Adverse Effect; provided that each such Subsidiary Guarantor may dissolve or liquidate and complete Asset Dispositions in accordance with the terms and conditions of the Note Purchase Agreement. (d) Submit or cause to be submitted when due all returns and declarations required to be filed in respect of, and pay when required by any applicable Governmental Authority, all Taxes and all charges, betterments, or other assessments relating to its business, and all other lawful governmental and non-governmental claims, except to the extent any of the same are subject to a contest, or the failure to submit or pay the same could not reasonably be expected to have a Material Adverse Effect; (e) Execute, deliver, and perform its obligations under this Agreement in compliance with all applicable laws; and (f) Perform all of its obligations under the terms of each agreement or instrument by which it or any of its properties is bound or to which it is a party, where any 7 failure to perform such obligations could reasonably be expected to result in a Material Adverse Effect. SECTION 9. Amendments, Etc. No amendment or waiver of any provision of this Agreement and no consent to any departure by the Subsidiary Guarantors therefrom shall in any event be effective unless the same shall be in writing and signed by the Collateral Agent and the Required Holders and, with respect to any amendment of this Agreement, the Subsidiary Guarantors, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided that no amendment, waiver or consent shall, unless in writing and signed by all the Holders, (a) limit, assign or transfer the liability of the Subsidiary Guarantors hereunder, (b) postpone any date fixed for payment hereunder or (c) change the number of Holders required to take any action hereunder. SECTION 10. Notices, Etc. All notices and other communications hereunder shall be given (in the manner specified in the Note Purchase Agreement) to the parties hereto at their respective addresses specified in the Note Purchase Agreement (or, if any party hereto is not a party to the Note Purchase Agreement, at its address set forth on Annex I hereto. SECTION 11. Set-off. Upon the occurrence and during the continuance of any Event of Default, each of the Holders and the Collateral Agent is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Holder or Collateral Agent to or for the credit or the account of any of the Subsidiary Guarantors against any and all of the obligations of any such Subsidiary Guarantor now or hereafter existing under this Agreement, irrespective of whether or not such Holder or the Collateral Agent shall have made any demand under this Agreement and although such obligations may be contingent and unmatured. Each of the Holders and the Collateral Agent agrees promptly to notify the applicable Subsidiary Guarantor after any such set-off and application made by it; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Holder and the Collateral Agent under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which such Holder or Collateral Agent may have. SECTION 12. No Waiver. No failure on the part of the Collateral Agent or any Holder to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. 8 SECTION 13. Continuing Guaranty; Assignments under the Note Purchase Agreement. This Agreement is a continuing guaranty and shall (a) remain in full force and effect until the indefeasible cash payment in full of the Guaranteed Obligations and all other amounts payable under this Agreement, (b) be binding upon such Subsidiary Guarantor, its successors and assigns and (c) inure to the benefit of and be enforceable by the Holders, the Collateral Agent and their respective successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), any Holder may assign or otherwise transfer all or any portion of its rights and obligations under the Note Purchase Agreement and the other Operative Agreements in accordance with the terms thereof to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to such Holder herein or otherwise, in each case as provided in Section 13 of the Note Purchase Agreement and in compliance with applicable law. SECTION 14. Governing Law; Jurisdiction; Waiver of Jury Trial. (a) This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. (b) Each Subsidiary Guarantor hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or federal court of the United States of America sitting in New York City, and any appellate court from any such court, in any action or proceeding arising out of or relating to this Agreement or any of the other Operative Agreements to which it is or is to be a party, or for recognition or enforcement of any judgment, and each Subsidiary Guarantor hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the extent permitted by law, in such federal court. Each Subsidiary Guarantor agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement or any of the other Operative Agreements to which it is or is to be a party in the courts of any jurisdiction. (c) Each Subsidiary Guarantor irrevocably and unconditionally waives, to the fullest extent it may legally do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any of the other Operative Agreements to which it is or is to be a party in any New York State or federal court. Each Subsidiary Guarantor hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (d) Each Subsidiary Guarantor hereby irrevocably waives all right to trial by jury in any action, proceeding or counterclaim (whether based on contract, tort or otherwise) arising our of or relating to any of the Operative Agreements, the transactions contemplated thereby or the actions of the Collateral Agent or any Holder in the negotiation, administration, performance or enforcement thereof. 9 SECTION 15. Counterparts. This Agreement may be executed in counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. SECTION 16. Applicability of Note Purchase Agreement. In amplification of, and notwithstanding any other provisions of this Agreement, in connection with its obligations hereunder, the Collateral Agent has all of the rights, powers, privileges, exculpations, protections and indemnities as are provided for or referred to in the Note Purchase Agreement. [SIGNATURE PAGE FOLLOWS] 10 IN WITNESS WHEREOF, each Subsidiary Guarantor has caused this Agreement to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written. AEROMET AMERICA, INC. By: /s/ Donald A. Wright --------------------------------- Name: Donald A. Wright Title: Executive Vice President BALO PRECISION PARTS, INC. By: /s/ Donald A. Wright --------------------------------- Name: Donald A. Wright Title: Executive Vice President CASHMERE MANUFACTURING CO., INC. By: /s/ Donald A. Wright --------------------------------- Name: Donald A. Wright Title: Executive Vice President CERAMIC DEVICES, INC. By: /s/ Donald A. Wright --------------------------------- Name: Donald A. Wright Title: Executive Vice President ELECTRONIC SPECIALTY CORPORATION By: /s/ Donald A. Wright --------------------------------- Name: Donald A. Wright Title: Executive Vice President NORTHWEST TECHNICAL INDUSTRIES, INC. By: /s/ Donald A. Wright --------------------------------- Name: Donald A. Wright Title: Executive Vice President PACIFIC COAST TECHNOLOGIES, INC. By: /s/ Donald A. Wright --------------------------------- Name: Donald A. Wright Title: Executive Vice President SEISMIC SAFETY PRODUCTS, INC. By: /s/ Donald A. Wright --------------------------------- Name: Donald A. Wright Title: Executive Vice President PA&E INTERNATIONAL, INC. By: /s/ Donald A. Wright --------------------------------- Name: Donald A. Wright Title: President FIRST UNION NATIONAL BANK, in its capacity as Collateral Agent for the Holders By: /s/ Paul Thompson --------------------------------- Name: Paul Thompson Title: Vice President ANNEX I ADDRESSES OF THE SUBSIDIARY GUARANTORS Notices to each of the Subsidiary Guarantors may be sent c/o Pacific Aerospace & Electronics, Inc., 430 Olds Station Road, Wenatchee, Washington 98801, to the attention of the President or the Chief Financial Officer, Telephone No.: (509) 667-9600, Facsimile No.: (509) 667-9696. EX-10.10 15 f80483ex10-10.txt EXHIBIT 10.10 Exhibit 10.10 ================================================================================ SECURITY AGREEMENT among PACIFIC AEROSPACE & ELECTRONICS, INC., AEROMET AMERICA, INC., BALO PRECISION PARTS, INC., CASHMERE MANUFACTURING CO., INC., CERAMIC DEVICES, INC., ELECTRONIC SPECIALTY CORPORATION, NORTHWEST TECHNICAL INDUSTRIES, INC., PACIFIC COAST TECHNOLOGIES, INC., PA&E INTERNATIONAL, INC., SEISMIC SAFETY PRODUCTS, INC. and SKAGIT ENGINEERING & MANUFACTURING, INC., each a Debtor and FIRST UNION NATIONAL BANK, as Collateral Agent Dated as of March 25, 2002 ================================================================================ TABLE OF CONTENTS

Page ---- SECTION 1. DEFINITIONS........................................................... 1 SECTION 2. ASSIGNMENT; SECURITY INTERESTS; INSURANCE PROCEEDS.................... 2 2.01 Assignment; Grant of Security Interests............................... 2 2.02 Power of Attorney..................................................... 3 2.03 Costs of Enforcement.................................................. 4 SECTION 3. GENERAL REPRESENTATIONS AND WARRANTIES................................ 5 3.01 Location of Collateral................................................ 5 3.02 Debtor Organization................................................... 5 3.03 Enforceability........................................................ 5 3.04 Ownership............................................................. 5 3.05 Business.............................................................. 5 3.06 Control............................................................... 5 3.07 Liens................................................................. 6 3.08 Consents.............................................................. 6 SECTION 4. SPECIAL PROVISIONS CONCERNING ACCOUNTS; INSTRUMENTS; CHATTEL PAPER; COMMERCIAL TORT CLAIMS................................................ 6 4.01 Additional Representations and Warranties............................. 6 4.02 Maintenance of Records................................................ 6 4.03 Direction to Account Debtors; Contracting Parties; etc................ 6 4.04 Collection............................................................ 7 4.05 Instruments and Chattel Paper......................................... 7 4.06 Commercial Tort Claims................................................ 7 SECTION 5. SPECIAL PROVISIONS CONCERNING PATENTS, COPYRIGHTS AND TRADEMARKS...... 7 5.01 Additional Representations and Warranties............................. 7 5.02 Infringements......................................................... 7 5.03 Other Patents, Copyrights and Trademarks.............................. 8 SECTION 6. PROVISIONS CONCERNING ALL COLLATERAL; INSURANCE....................... 8 6.01 Protection of the Collateral Agent's Interests........................ 8 6.02 Further Actions....................................................... 8 6.03 Financing Statements.................................................. 8

i 6.04 Location.............................................................. 9 6.05 Adverse Claims........................................................ 9 6.06 Taxes................................................................. 9 6.07 Tangible Property..................................................... 10 6.08 No Other Liens........................................................ 10 6.09 Access................................................................ 10 SECTION 7. REMEDIES UPON OCCURRENCE OF EVENT OF DEFAULT.......................... 10 7.01 Remedies; Obtaining the Collateral Upon Default....................... 10 7.02 Remedies; Disposition of the Collateral............................... 12 7.03 Waiver of Claims...................................................... 12 7.04 Application of Proceeds............................................... 13 7.05 Remedies Cumulative................................................... 13 7.06 Discontinuance of Proceedings......................................... 14 SECTION 8. INDEMNITY............................................................. 14 SECTION 9. MISCELLANEOUS......................................................... 14 9.01 Notices............................................................... 14 9.02 Waiver; Amendment..................................................... 14 9.03 Obligations Absolute.................................................. 14 9.04 Successors and Assigns................................................ 15 9.05 Headings Descriptive, etc............................................. 15 9.06 GOVERNING LAW; SUBMISSION TO JURISDICTION AND VENUE; WAIVER OF JURY TRIAL............................................................ 15 9.07 The Debtors' Duties................................................... 16 9.08 Termination; Release.................................................. 16 9.09 Counterparts.......................................................... 16 9.10 Severability.......................................................... 16 9.11 Applicability of Note Purchase Agreement.............................. 17 PATENT STATUS CHART......................................................... 8 SCHEDULE I COMMERCIAL TORT CLAIMS SCHEDULE II DEBTOR AND COLLATERAL DETAILS SCHEDULE III PATENTS, COPYRIGHTS AND TRADEMARKS SCHEDULE IV ADDRESSES OF THE DEBTORS ii SECURITY AGREEMENT SECURITY AGREEMENT, dated as of March 25, 2002 (this "Agreement"), by and among Pacific Aerospace & Electronics, Inc., a Washington corporation (the "Company"), and Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., PA&E International, Inc., Seismic Safety Products, Inc. and Skagit Engineering & Manufacturing, Inc. (each a "Subsidiary Guarantor"; each Subsidiary Guarantor and the Company are referred to herein individually as a "Debtor" and collectively as the "Debtors"), and First Union National Bank, a national banking association, in its capacity as Collateral Agent for the Secured Parties (as hereinafter defined) (in such capacity, the "Collateral Agent"), W I T N E S S E T H : - - - - - - - - - - WHEREAS, each Subsidiary Guarantor is a wholly-owned Subsidiary (as hereinafter defined) of the Company; WHEREAS, the Company, the Initial Purchaser (as hereinafter defined) and the Collateral Agent have entered into that certain Note Purchase Agreement, dated as of March 19, 2002 (as such agreement may be amended, restated, modified or supplemented from time to time, the "Note Purchase Agreement"); WHEREAS, as a condition precedent to the obligations of the Initial Purchaser under the Note Purchase Agreement, each Debtor is required to execute and deliver this Agreement and to grant to the Collateral Agent for the benefit of the Secured Parties (as hereinafter defined) a continuing security interest in all of the Collateral (as hereinafter defined) in which it has an interest; NOW, THEREFORE, in consideration of the benefits to each Debtor, the receipt and sufficiency of which are hereby acknowledged, each Debtor hereby makes the following assignments, representations and warranties to the Collateral Agent and hereby covenants and agrees with the Collateral Agent as follows: SECTION 1. DEFINITIONS For all purposes of this Agreement, (i) capitalized terms not otherwise defined herein shall have the meanings set forth in the Note Purchase Agreement, (ii) the following terms, which are defined in the UCC (as hereinafter defined) are used herein as so defined: Accession, Account, Chattel Paper, Copyrights, Commercial Tort Claim, Deposit Account, Document, Equipment, Fixtures, General Intangible, Goods, Instrument, Inventory, Investment Property, Letter-of-Credit Right, Patent, Proceeds, Supporting Obligation, Tangible Chattel Paper, and Trademark, and (iii) the principles of construction set forth in the Note Purchase Agreement shall apply. In addition, the following terms shall have the meanings herein specified: "Collateral" has the meaning provided in Section 2.01(a). "Collateral Agent" has the meaning specified in the preamble hereto. "Collateral Proceeds" shall mean, with respect to a Debtor, "proceeds" as such term is defined in the UCC or under other relevant law and, in any event, shall include, but shall not be limited to, (i) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to the Collateral Agent or such Debtor from time to time, and claims for insurance, indemnity, warranty or guaranty effected or held for the benefit of such Debtor, with respect to any of the Collateral, (ii) any and all payments (in any form whatsoever) made or due and payable to such Debtor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any Governmental Authority (or any person acting under color of Governmental Authority) and (iii) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral. "Company" has the meaning specified in the preamble hereto. "Debtor" has the meaning provided in the preamble of this Agreement. "Note Purchase Agreement" has the meaning provided in the second whereas clause of this Agreement. "Secured Obligations" shall mean all obligations, fees, charges, liabilities and indebtedness of every nature of each Debtor from time to time owing to the Collateral Agent and/or the Secured Parties under the Note Purchase Agreement and/or any other Operative Agreement to which such Debtor is a party. "Secured Party" shall mean the Collateral Agent, the Initial Purchaser and each other Holder of the Notes. "Subsidiary Guarantor" has the meaning specified in the preamble hereto. "UCC" shall mean the Uniform Commercial Code as in effect in the State of New York on the date hereof; provided, however, in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of the security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of New York, the term "UCC" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such attachment, perfection or priority and for purposes of definitions related to such provisions. SECTION 2. ASSIGNMENT; SECURITY INTERESTS; INSURANCE PROCEEDS 2.01 Assignment; Grant of Security Interests. (a) Each Debtor, as security for the prompt and complete payment and performance when due of the Secured Obligations of such Debtor, does hereby assign, pledge, convey, set over and transfer unto the Collateral Agent for the benefit of the Secured Parties, and does hereby grant to the Collateral Agent for the benefit of the Secured Parties a continuing security interest of first priority in, all of the right, title and interest of such Debtor in, to and under all of the following, whether now existing or hereafter from time to time acquired (collectively, the "Collateral"): 2 (i) all Equipment, Inventory, Fixtures and Goods of such Debtor; (ii) all Accounts, Deposit Accounts, Investment Property and all other cash and currency of such Debtor; (iii) all General Intangibles of such Debtor; (iv) all Chattel Paper, Documents and Instruments owned by such Debtor; (v) all property and interests in property of such Debtor now or hereafter coming into the actual possession, custody or control of the Collateral Agent or any Secured Party in any way and for any purpose (whether for safe keeping, deposit, custody, pledge, transmission, collection or otherwise); (vi) all books and records of such Debtor relating to any Collateral; (vii) all other property and interests in property of such Debtor constituting personal property; (viii) all Commercial Tort Claims of such Debtor, as specified on Schedule I; (ix) all Letter-of-Credit Rights of such Debtor; (x) all Supporting Obligations of such Debtor; and (xi) all Accessions and all Collateral Proceeds and products of any and all of the foregoing. (b) The Collateral pledged and the security interest granted by each of the Debtors secures the prompt and complete payment and performance of all the Secured Obligations owed by such Debtor, and the security interest of the Collateral Agent held under this Agreement extends to all Collateral which any Debtor may acquire at any time during the continuation of this Agreement. 2.02 Power of Attorney. Each Debtor hereby irrevocably appoints the Collateral Agent as its attorney-in-fact with right of substitution, so that the Collateral Agent or any other Person empowered by the Collateral Agent shall be authorized, without need of further authorization from such Debtor, at any time upon the occurrence of and during the continuance of an Event of Default, in the Collateral Agent's discretion to take any and all actions authorized or permitted to be taken by the Collateral Agent under this Agreement or by law, including but not limited to the power: (i) to effect the sale of any of the Collateral in one or more transactions to the extent permitted by law and in such other manner as may be determined by the attorney-in-fact, including the direct sale without public auction of 3 any such Collateral at such price, and upon such terms as may be determined by the attorney-in-fact; (ii) to enter upon any premises where the Collateral or any part thereof may be located without the need for a court order or other form of authority otherwise than upon the authority granted herein; (iii) to take and retain actual possession and control of any such Collateral as receivers without bond or otherwise, and transport any of it to any location as determined by such attorney-in-fact; (iv) to make any repairs, additions and improvements on the Collateral as such attorney-in-fact shall deem proper or necessary; (v) to administer, manage and use any of the Collateral; (vi) to conclude any agreement and collect any monies thereunder or otherwise due to any Debtor in respect of, or generated through the usage of, any of the Collateral; (vii) to institute and maintain such suits and proceedings as such attorney-in-fact shall deem expedient to prevent any impairment of the Collateral or to preserve and protect such attorney-in-fact's interest therein; (viii) to execute and deliver such deeds of conveyance or sale as may be necessary or proper for the purpose of conveying full title and ownership, free from any claims and rights of any Debtor, to any of the Collateral, after foreclosure thereof; and (ix) in general, to sign such agreements and documents and perform such acts and things required, necessary or, in the opinion of such attorney-in-fact, advisable, to fully accomplish the purpose hereof. Each Debtor hereby confirms and ratifies any and all actions and things performed or done by the Collateral Agent as the Debtor's attorney-in-fact or any of its representatives in each case pursuant to the powers granted hereunder. This special power of attorney shall be deemed coupled with an interest, and cannot be revoked by any Debtor until all of the Secured Obligations have been paid in full. 2.03 Costs of Enforcement. All reasonable costs, expenses, charges and fees paid or incurred by the Collateral Agent in the exercise of any of the rights, remedies or powers granted under this Agreement shall be for the account of the Debtors, and each Debtor undertakes promptly on demand to pay the same or, as the case may be, to reimburse the Collateral Agent therefor. 4 SECTION 3. GENERAL REPRESENTATIONS AND WARRANTIES Each Debtor represents and warrants, which representations and warranties shall survive execution and delivery of this Agreement and the payment in full of the Secured Obligations, as follows: 3.01 Location of Collateral. All of the Inventory and Equipment is located at the places specified on Schedule II. The office where each Debtor keeps its records concerning Accounts and other Collateral is located at the address specified on Schedule II for such Debtor. None of the Accounts is evidenced by an Instrument or by Chattel Paper which have not been delivered to the Collateral Agent. 3.02 Debtor Organization. Each Debtor's exact legal name, state of incorporation or formation, principal place of business and chief executive office are (and for the four months prior to the date hereof has been) as set forth on Schedule II. Each Debtor is qualified to do business and in good standing in all states and other jurisdictions in which the failure to be so qualified and in good standing would have a Material Adverse Effect or a material adverse effect on the ability of such Debtor to enforce the collection of Accounts due from customers residing in such locations. 3.03 Enforceability. This Agreement has been duly executed and delivered by each Debtor and constitutes a legal, valid and binding obligation of such Debtor enforceable in accordance with its terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and by general principles of equity (whether enforcement is sought by proceedings in equity or at law). 3.04 Ownership. Each Debtor is the legal, record and beneficial owner of, and has good and marketable title to, the Collateral which it owns, free and clear of any Lien whatsoever, except (i) for the Lien created hereby and any other Liens permitted to be created pursuant to the Note Purchase Agreement, (ii) for the Lien on patent no. 4,925,607 in favor of James C. Kyle and (iii) that the assignments of patent nos. 4,925,607 and EP 0 522 687 B1 to Pacific Coast Technologies, Inc. have not been recorded with the appropriate Governmental Authorities. No financing statement or other security instrument is on file in any jurisdiction covering any of the Collateral, other than such as have been filed with respect to (i) the Lien created hereby or (ii) any other Liens permitted to be created pursuant to the Note Purchase Agreement. 3.05 Business. None of the Debtors conducts any business under any name or trade name other than its proper legal name, which is the name set forth on Schedule II. The taxpayer identification number of each Debtor is set forth on Schedule II. 3.06 Control. 5 Except for Inventory in transit in the ordinary course of each Debtor's business, such Debtor has exclusive possession and control of the Inventory and Equipment. 3.07 Liens. This Agreement creates a continuing Lien in the Collateral, securing the payment of the Secured Obligations. 3.08 Consents. No consent or authorization of, filing with, notice to, or other act by or in respect of, any Governmental Authority or any other Person is required with respect to each Debtor in connection with either (i) the grant by such Debtor of the Lien created hereby or the execution, delivery or performance of this Agreement by such Debtor or (ii) for the perfection of or the exercise by the Collateral Agent of its rights and remedies hereunder, other than the filing of financing statements and continuation statements with the Secretary of State of the State of Washington. SECTION 4. SPECIAL PROVISIONS CONCERNING ACCOUNTS; INSTRUMENTS; CHATTEL PAPER; COMMERCIAL TORT CLAIMS 4.01 Additional Representations and Warranties. As of the time when each Account arises, each Debtor shall be deemed to have represented and warranted, to the best of its knowledge and belief and unless otherwise disclosed by such Debtor in writing to the Collateral Agent, that such Account, and all records, papers and documents relating thereto (if any) are genuine and in all respects what they purport to be, will evidence true and valid obligations, enforceable in accordance with their respective terms and will be in compliance and will conform with all applicable law. 4.02 Maintenance of Records. Each Debtor will keep and maintain at its own cost and expense satisfactory and complete records of the Accounts, including, but not limited to, the originals of all documentation with respect thereto, records of all payments received, all credits granted thereon (subject to customary record retention policies) and all other dealings therewith, and such Debtor will make the same available to the Collateral Agent and the Secured Parties and their respective representatives for inspection, at such Debtor's own cost and expense, at all reasonable times upon reasonable prior written notice. Each Debtor shall, at its own cost and expense, deliver all tangible evidence of the Accounts (including, without limitation, all documents evidencing the Accounts) and such books and records to the Collateral Agent or to its representatives (copies of which evidence and books and records may be retained by such Debtor) upon its demand at any time after the occurrence of and during the continuance of an Event of Default. If the Collateral Agent so directs, each Debtor shall legend, in form and manner reasonably satisfactory to the Collateral Agent, the Accounts, as well as books, records and documents of such Debtor evidencing or pertaining to the same with an appropriate reference to the fact that the Accounts have been assigned to the Collateral Agent and that the Collateral Agent has a security interest therein. 4.03 Direction to Account Debtors; Contracting Parties; etc. 6 Each Debtor agrees that upon the occurrence of and during the continuance of an Event of Default, the Collateral Agent may, at its option, directly notify the obligors with respect to any Accounts to make payments with respect thereto as directed by the Collateral Agent and (ii) the Collateral Agent may apply, without notice to or assent by such Debtor, any or all such amounts in the manner provided in the Note Purchase Agreement. 4.04 Collection. Each Debtor shall endeavor to cause to be collected from the account debtor named in such Debtor's Accounts, as and when due (including, without limitation, amounts which are delinquent, such amounts to be collected in accordance with generally accepted lawful collection procedures) any and all amounts owing under or on account of such Account, and apply forthwith upon receipt thereof all such amounts as are so collected to the outstanding balance of such Account, except that, unless an Event of Default shall have occurred and be continuing (and shall not have been waived by an appropriate vote or other action by the Secured Parties), such Debtor may, subject to compliance with the Note Purchase Agreement and other Operative Agreements, allow in the ordinary course of business as adjustments to amounts owing under such Debtor's Accounts (i) an extension or renewal of the time or times of payment, or settlement for less than the total unpaid balance, which such Debtor finds appropriate in accordance with sound business judgment and (ii) a refund or credit due as a result of returned or damaged merchandise or improperly performed services. 4.05 Instruments and Chattel Paper. If any Collateral shall be evidenced by any Instrument or Chattel Paper, each Debtor shall within 10 days thereof either (i) deliver or pay over or otherwise credit to the account of the Collateral Agent such Instrument or Chattel Paper; or (ii) notify the Collateral Agent thereof, and shall upon request by the Collateral Agent promptly deliver such Instrument or Chattel Paper to the Collateral Agent appropriately endorsed to the order of the Collateral Agent as further security hereunder. 4.06 Commercial Tort Claims. If any Debtor becomes involved, or becomes aware of a reasonable likelihood of becoming involved, in a Commercial Tort Claim, such Debtor shall within 10 days thereof provide the Collateral Agent with reasonable details thereof such that Schedule I may be appropriately updated. SECTION 5. SPECIAL PROVISIONS CONCERNING PATENTS, COPYRIGHTS AND TRADEMARKS 5.01 Additional Representations and Warranties. Each Debtor represents and warrants that as of the Closing Date, such Debtor owns the Patents, Copyrights and Trademarks set forth on Schedule III. 5.02 Infringements. 7 Promptly upon learning thereof, each Debtor shall notify the Collateral Agent in writing of all pertinent details available thereto, with respect to any infringement or other violation of such Debtor's rights in any Patent, Copyright or Trademark that could reasonably be expected to have a Material Adverse Effect, whether or not such right is presently held by such Debtor. As to each such instance, to the extent deemed appropriate by such Debtor in its commercially reasonable judgement, and to the extent permitted by all requirements of law, such Debtor shall diligently pursue a remedy. Promptly upon learning thereof, such Debtor shall notify the Collateral Agent in writing of any claim that any activity of such Debtor infringes or otherwise violates the right of any third party with respect to any Patent, Copyright or Trademark. 5.03 Other Patents, Copyrights and Trademarks. If any Debtor hereafter acquires rights in any material Patent, Copyright or Trademark, such Debtor shall deliver to the Collateral Agent within 30 days, a copy of such Patent, Copyright or Trademark. SECTION 6. PROVISIONS CONCERNING ALL COLLATERAL; INSURANCE 6.01 Protection of the Collateral Agent's Interests. Each Debtor will do nothing to impair the rights of the Collateral Agent in the Collateral; provided, however, that nothing herein shall prevent such Debtor, prior to the exercise by the Collateral Agent of any such rights, from undertaking such Debtor's operations in the ordinary course of business. Each Debtor assumes all liability and responsibility in connection with the Collateral which it owns and the liability of such Debtor with respect to the Secured Obligations shall in no way be affected or diminished by reason of the fact that such Collateral may be lost, destroyed, stolen, damaged or for any reason whatsoever be unavailable to such Debtor. 6.02 Further Actions. Each Debtor will, at its own expense, make, execute, endorse, acknowledge, file and/or deliver to the Collateral Agent from time to time such lists, descriptions and designations of the Collateral, warehouse receipts, receipts in the nature of warehouse receipts, bills of lading, documents of title, vouchers, invoices, schedules, confirmatory assignments, conveyances, financing statements, transfer endorsements, powers of attorney, certificates, reports and other assurances or instruments and take such further steps relating to the Collateral and other property or rights covered by the interests hereby granted, which the Collateral Agent, upon written direction, deems reasonably appropriate or advisable to perfect, preserve or protect its security interests in the Collateral. 6.03 Financing Statements. Each Debtor agrees to file such financing statements as are necessary to establish and maintain the security interests contemplated hereunder as valid, enforceable, first priority security interests as provided herein, and to sign and deliver to the Collateral Agent such financing statements (or similar statement or instrument of registration under the law of any jurisdiction), in form reasonably acceptable to the Collateral Agent as it may from time to time reasonably request or as are necessary or desirable in its reasonable opinion to establish and maintain the security interests contemplated hereunder as valid, enforceable first priority security interests as provided herein and the other rights and security contemplated herein, all in accordance with the UCC or any other 8 applicable law. Each Debtor will pay any applicable filing fees and related reasonable expenses in connection with such financing statements (or similar statement or instrument of registration). Each Debtor authorizes the Collateral Agent to file any such financing statements without the signature of such Debtor to the extent permitted by law. In addition, each Debtor hereby irrevocably makes, constitutes and appoints Collateral Agent (and all Persons designated by the Collateral Agent for that purpose) such Debtor's true and lawful attorney-in-fact to sign the name of such Debtor on any financing statement or other writing necessary or requested by the Collateral Agent to perfect its Lien on or in any of the Collateral or to maintain the perfection thereof. The Collateral Agent agrees to provide the relevant Debtor with a copy of any financing statement filed by it without the signature of such Debtor promptly after the filing thereof. 6.04 Location. Each Debtor shall not (i) change the location of its chief executive office or principal place of business from the address specified on Schedule II or remove its books and records from the location specified on Schedule II, (ii) change its name (including the adoption of any new trade name), jurisdiction of incorporation, identity or corporate structure, or (iii) change the location of any other Collateral to a location not listed on Schedule II, unless, in any such case, it shall have provided at least thirty (30) days' prior written notice to the Collateral Agent of any such change; provided, however, this Section 6.04 shall not restrict the Debtors from disposing of or removing any Collateral for repairs or similar purposes in the ordinary course of its business and in accordance with the terms of the Note Purchase Agreement. Each Debtor shall from time to time notify the Collateral Agent of each location at which any material portion of the Collateral or such books and records are to be kept for temporary processing, storage, repair or similar purposes. No action requiring notice to the Collateral Agent under this paragraph shall be effected until such filings and other measures as may be required under applicable law to continue uninterrupted the perfected Lien of the Collateral Agent on and in the Collateral affected thereby shall have been taken, and until the Collateral Agent shall have received such opinions of counsel with respect thereto as it may have reasonably requested. 6.05 Adverse Claims. Each Debtor shall defend the Collateral against all claims and demands of all Persons (other than the Collateral Agent, the Secured Parties and holders of Liens permitted to be created pursuant to the Note Purchase Agreement) claiming an interest therein. Each Debtor shall pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Collateral, except to the extent that (i) such Debtor is, in good faith and by appropriate proceedings, contesting the validity thereof and (ii) the Collateral that is the subject thereof is not in imminent risk of seizure, levy, sale, execution or other process. 6.06 Taxes. Each Debtor confirms to the Collateral Agent that any and all taxes or fees relating to its business, including, but not limited to, the Accounts and all goods relating thereto, are its sole responsibility and shall be paid by such Debtor when due; provided, however, that unless such taxes or fees represent a Lien on the Collateral of such Debtor, no such tax need be paid if the same is being contested, in good faith, by appropriate proceedings promptly instituted and diligently conducted and if an adequate reserve or other appropriate provision shall have been made therefor as reflected on the audited financial statements for the relevant fiscal year in accordance with GAAP, 9 and, to the extent such reserves shall be taken thereafter, consistent with such Debtor's practices. Each Debtor shall maintain its status as a validly existing legal entity, and shall remain qualified to do business and in good standing in all states and other jurisdictions in which the failure to be so qualified and in good standing would have a Material Adverse Effect or a material adverse effect on the ability of such Debtor to enforce collection of the Accounts due from customers residing in such locations. 6.07 Tangible Property. Each Debtor agrees that all Collateral consisting of tangible property is now and shall remain personal property, notwithstanding the manner in which such Collateral or any part thereof shall now or hereafter be affixed or annexed to real estate. Each Debtor shall use commercially reasonable efforts to obtain and deliver to the Collateral Agent such instruments as may reasonably be requested by the Collateral Agent pursuant to which any Person with an interest in any real property upon which all or any part of the tangible Collateral is now or may hereafter be located consents to the Liens created hereby, disclaims any Lien on or other interest in the tangible Collateral, waives in favor of the Collateral Agent all right to distrain or levy upon such Collateral for rent or other payments due or to become due to such Person, and authorizes the Collateral Agent to enter upon the relevant premises at any time to remove such Collateral. 6.08 No Other Liens. No Debtor shall grant, create or permit to exist any Lien upon all or any portion of the Collateral, or any proceeds thereof, in favor of any other Person other than the Collateral Agent and shall not create, or permit to exist, any obligations, other than those secured by Liens permitted to be created pursuant to the Note Purchase Agreement, that are secured thereby. 6.09 Access. Each Debtor shall permit the Collateral Agent, or its representatives, to have access to the Inventory and the Equipment, and other tangible Collateral for purposes of inspection during normal business hours and upon reasonable notice to such Debtor; and shall promptly notify the Collateral Agent in writing of any material loss or damage to the Inventory, Equipment or other Collateral. SECTION 7. REMEDIES UPON OCCURRENCE OF EVENT OF DEFAULT 7.01 Remedies; Obtaining the Collateral Upon Default. Each Debtor agrees that, if any Event of Default shall have occurred and be continuing, subject to applicable cure periods, (and shall not have been waived by an appropriate vote or other action by the Secured Parties), then and in every such case, subject to the terms and provisions of the Note Purchase Agreement and any applicable law, the Collateral Agent, in addition to any rights now or hereafter existing under any applicable law, shall have all rights as a secured creditor under the UCC or other any applicable law in all relevant jurisdictions and may, acting pursuant to and in accordance with the terms of the Note Purchase Agreement and other Operative Agreements: 10 (a) personally, or by agents or attorneys, immediately retake possession of the Collateral or any part thereof, from such Debtor or any other Person who then has possession of any part thereof with or without notice or process of law, and for that purpose may enter upon such Debtor's premises where any of the Collateral is located and remove the same and use in connection with such removal any and all services, supplies, aids and other facilities of such Debtor; and (b) instruct the obligor or obligors on any agreement, instrument or other obligation, and the Accounts constituting the Collateral to make any payment required by the terms of such instrument or agreement directly to the Collateral Agent; and (c) sell, assign or otherwise liquidate, or direct such Debtor to sell, assign or otherwise liquidate, any or all of the Collateral or any part thereof, and take possession of the proceeds of any such sale or liquidation; and (d) take possession of the Collateral or any part thereof, by directing such Debtor in writing to deliver the same to the Collateral Agent at any place or places designated by the Collateral Agent, in which event such Debtor shall at its own expense: (i) forthwith cause the same, to the extent reasonably feasible, to be moved to the place or places so designated by Collateral Agent and there delivered to the Collateral Agent, (ii) store and keep any Collateral so delivered to the Collateral Agent (to the extent not physically delivered to the Collateral Agent) at such place or places pending further action by the Collateral Agent as provided in Section 7.02, and (iii) while such Collateral shall be so stored and kept, provide such guards and maintenance services as shall be necessary to protect the same and to preserve and maintain them in good condition; it being understood that such Debtor's obligation to so deliver the Collateral is of the essence of this Agreement and that, accordingly, upon application to a court having jurisdiction, the Collateral Agent shall be entitled to a decree requiring specific performance by such Debtor of such obligation; and (e) take and practice or use or sell any or all of such Patents, Copyrights or Trademarks, or take and use or sell each Debtor's rights in such Patents, Copyrights or Trademarks, along with the goodwill and all other elements of such Debtor's ongoing business symbolized by such assets and secured under this Agreement, and the right to carry on the business of the Debtors in connection with which such assets have been used; and (f) direct the Debtors to refrain, in which event the Debtors shall refrain, from practicing under such Patent and Copyright rights directly or indirectly, or from using the Trademarks in any manner, directly or indirectly, and if requested by the Collateral Agent, the Debtors shall change their respective names to eliminate therefrom any use of any Trademarks, and execute any other and further documents which the Collateral Agent may request further to confirm the foregoing and to permit the Collateral Agent to enforce its remedies relating to such Trademarks, Patents and/or Copyrights. 11 7.02 Remedies; Disposition of the Collateral. Any Collateral repossessed by the Collateral Agent under or pursuant to Section 7.01, and any other Collateral whether or not so repossessed by the Collateral Agent, may be sold, assigned, leased or otherwise disposed of under one or more contracts or as an entirety, and without the necessity of gathering at the place of sale the property to be sold, and in general in such manner, at such time or times, at such place or places and on such terms as the Collateral Agent may, upon written direction in compliance with all applicable law, determine to be commercially reasonable. Any of the Collateral may be sold, leased or otherwise disposed of, in the condition in which the same existed when taken by the Collateral Agent or after any overhaul or repair which the Collateral Agent shall determine to be commercially reasonable. Any such disposition which shall be a private sale or other private proceeding permitted by such requirements shall be made upon not less than ten days' written notice to the relevant Debtor specifying the time at which such disposition is to be made and the intended sale price or other consideration therefor, and shall be subject, for the ten days after the giving of such notice, to the right of such Debtor or any nominee of such Debtor to acquire the Collateral involved at a price or for such other consideration at least equal to the intended sale price or other consideration so specified. To the extent permitted by all requirements of law, the Collateral Agent may bid for and become the purchaser of the Collateral or any item thereof, offered for sale in accordance with this Section 7.02. If, under any applicable law, the Collateral Agent shall be required to make disposition of the Collateral within a period of time which does not permit the giving of notice to the relevant Debtor as hereinabove specified, the Collateral Agent shall give such Debtor only such notice of disposition as shall be reasonably practicable in view of such applicable law. 7.03 Waiver of Claims. Except as otherwise provided in this Agreement, EACH DEBTOR HEREBY WAIVES, TO THE EXTENT PERMITTED BY ALL REQUIREMENTS OF LAW, NOTICE AND JUDICIAL HEARING IN CONNECTION WITH THE COLLATERAL AGENT TAKING POSSESSION OR THE COLLATERAL AGENT'S DISPOSITION OF ANY OF THE COLLATERAL, IN EACH CASE IF AND AS PERMITTED BY ALL REQUIREMENTS OF LAW, INCLUDING, WITHOUT LIMITATION, ANY AND ALL PRIOR NOTICE AND HEARING FOR ANY PREJUDGMENT REMEDY OR REMEDIES AND ANY SUCH RIGHT WHICH SUCH DEBTOR WOULD OTHERWISE HAVE UNDER THE CONSTITUTION OR ANY STATUTE OF THE UNITED STATES OR ANY POLITICAL SUBDIVISION THEREOF, and each Debtor hereby further waives, to the extent permitted by all applicable law: (i) all damages occasioned by such taking of possession except any damages which are the direct result of the gross negligence or willful misconduct of the Collateral Agent or any Person acting on its behalf or instruction; (ii) all other requirements as to the time, place and terms of sale or other requirements with respect to the enforcement of the Collateral Agent's rights hereunder; and (iii) all rights of redemption, appraisement, valuation, stay, extension or moratorium now or hereafter in force under any applicable law in order to prevent or delay the enforcement of this Agreement (including, without limitation, any right to claim that such enforcement should be stayed pending the outcome of any other 12 action or proceeding (including any arbitration proceeding)) or the absolute sale of the Collateral or any portion thereof, and such Debtor, for itself and all who may claim under it, insofar as it or they now or hereafter lawfully may, hereby waives the benefit of all such applicable of law. Any sale of, or the grant of options to purchase, or any other realization upon, any Collateral shall operate to divest all right, title, interest, claim and demand, either at law or in equity, of the relevant Debtor therein and thereto, and shall be a perpetual bar both at law and in equity against such Debtor and against any and all Persons claiming or attempting to claim the Collateral so sold, optioned or realized upon, or any part thereof, from, through and under such Debtor. 7.04 Application of Proceeds. The proceeds of any Collateral obtained pursuant to Section 7.01 or disposed of pursuant to Section 7.02 shall be applied in the following order: FIRST, to the payment of all reasonable out-of-pocket fees and costs and expenses (including without limitation reasonable attorneys' fees) of the Collateral Agent under the Operative Agreements, including, but not limited to, those incurred in connection with enforcing the rights of Collateral Agent and the Holders under the Operative Agreements; SECOND, to the payment of all reasonable out-of-pocket costs and expenses (including without limitation, reasonable attorneys' fees) of each of the Holders in connection with enforcing its rights under the Operative Agreements or otherwise with respect to the Obligations owing to such Holder; THIRD, to the payment of all accrued interest and fees on or in respect of the Obligations; FOURTH, to the payment of the outstanding principal amount of the Obligations; FIFTH, to all other obligations which shall have become due and payable under the Operative Agreements or otherwise and not repaid pursuant to clauses "FIRST" through "FOURTH" above; and SIXTH, to the payment of the surplus, if any, to whoever may be lawfully entitled to receive such surplus. Each Debtor irrevocably waives the right to direct the application of such payments and proceeds and acknowledges and agrees that the Collateral Agent shall have the continuing and exclusive right to apply and reapply any and all such payments and proceeds in the Collateral Agent's sole discretion, notwithstanding any entry to the contrary upon any of its books and records. 7.05 Remedies Cumulative. No failure or delay on the part of the Collateral Agent in exercising any right, power or privilege hereunder or under any other Operative Agreement and no course of dealing between any Debtor and the Collateral Agent shall operate as a waiver thereof; nor shall any single or partial 13 exercise of any right, power or privilege hereunder or under any other Operative Agreement preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights, powers and remedies herein or in any other Operative Agreement expressly provided are cumulative and not exclusive of any rights, powers or remedies which the Collateral Agent or any Secured Party would otherwise have. No notice to or demand on a Debtor in any case shall entitle the Debtor to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Collateral Agent or any Secured Party to any other or further action in any circumstances without notice or demand. 7.06 Discontinuance of Proceedings. In case the Collateral Agent shall have instituted any proceeding to enforce any right, power or remedy under this Agreement by foreclosure, sale, entry or otherwise, and such proceeding shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Collateral Agent, then and in every such case, the Debtor, Collateral Agent and the Secured Parties shall be restored to their former positions and rights hereunder with respect to the Collateral subject to the security interest created under this Agreement, and all rights, remedies and powers of the Collateral Agent shall continue as if no such proceeding had been instituted. SECTION 8. INDEMNITY The provisions of Section 15(b) of the Note Purchase Agreement are incorporated herein by reference. SECTION 9. MISCELLANEOUS 9.01 Notices. All notices and other communications hereunder shall be given in the manner specified in Section 18 of the Note Purchase Agreement to the parties hereto at their respective addresses specified in the Note Purchase Agreement or, with respect to the Subsidiary Guarantors, at their respective addresses set forth on Schedule IV hereto. 9.02 Waiver; Amendment. This Agreement may be amended, restated, waived, discharged, or (except as provided in Section 9.08) terminated only by an instrument in writing executed by all of the parties hereto. Promptly after the execution of any and all amendments , supplements and waivers, of and to the Collateral, originals, if reasonably available and, if not, copies of such amendments, supplements and waivers shall be delivered to the Collateral Agent. 9.03 Obligations Absolute. The obligations of each Debtor under this Agreement shall be absolute and unconditional and shall remain in full force and effect without regard to, and shall not be released, suspended, discharged, terminated or otherwise affected by, any circumstance or occurrence whatsoever, including, without limitation: (i) any renewal, extension, amendment or modification of, or addition or supplement to or deletion from, the Note Purchase Agreement or any of the Operative Agreements or any other instrument or agreement referred to therein, or any assignment or transfer of 14 any thereof; (ii) any waiver, consent, extension, indulgence or other action or inaction under or in respect of any such instrument or agreement or this Agreement or any exercise or non-exercise of any right, remedy, power or privilege under or in respect of this Agreement or any other Operative Agreements; (iii) any furnishing of any additional security (including, without limitation, any assets, whether now owned or hereafter acquired, upon which a Lien is created or granted from time to time) to the Collateral Agent or any acceptance thereof or any sale, exchange, release, surrender or realization of or upon any security by the Collateral Agent; or (iv) any invalidity, irregularity or unenforceability of all or part of the Secured Obligations or of any security therefor. In the event of any inconsistency between this Agreement and the Note Purchase Agreement, the Note Purchase Agreement shall govern. 9.04 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto and shall inure to the benefit of the Secured Parties; provided, however, that each Debtor may not assign or transfer any of its rights or obligations hereunder without the prior written consent of the Collateral Agent and the Secured Parties. The Collateral Agent may transfer, assign or grant all or such relevant part of its rights hereunder in accordance with the provisions of the Note Purchase Agreement. All agreements, statements, representations and warranties made by each Debtor herein or in any certificate or other instrument delivered by such Debtor or on its behalf under this Agreement shall be considered to have been relied upon by the Collateral Agent and the Secured Parties and shall survive the execution and delivery of this Agreement, the Note Purchase Agreement and the other Operative Agreements regardless of any investigation made by the Collateral Agent and the Secured Parties or on their behalf. 9.05 Headings Descriptive, etc. The headings of the several sections and subsections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. 9.06 GOVERNING LAW; SUBMISSION TO JURISDICTION AND VENUE; WAIVER OF JURY TRIAL. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF (OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW), EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. (a) Each Debtor and the Collateral Agent, to the extent that they may lawfully do so, hereby consent to service of process, and to be sued, in the Borough of Manhattan, City and State of New York, and consent to the nonexclusive jurisdiction of the courts of the State of New York located in such Borough and the United States District Court for the Southern District of New York, as well as to the jurisdiction of all courts to which an appeal may be taken from such courts, for the 15 purpose of any suit, action, or other proceeding arising out of any of their obligations hereunder or with respect to the transactions contemplated hereby, and expressly waive any and all objections they may have as to venue in any such courts. (b) EACH PARTY HERETO HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER OPERATIVE AGREEMENT, OR ANY COURSE OR CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN), OR ACTIONS OF THE DEBTORS OR THE COLLATERAL AGENT. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PARTIES TO ENTER INTO THIS AGREEMENT. 9.07 The Debtors' Duties. It is expressly agreed, anything herein contained to the contrary notwithstanding, that each Debtor shall remain liable to perform all of the obligations, if any, assumed by it with respect to the Collateral and the Collateral Agent shall have no obligations or liabilities with respect to any Collateral by reason of or arising out of or in connection with this Agreement, nor shall the Collateral Agent or the Secured Parties be required or obligated in any manner to perform or fulfill any of the obligations of any Debtor under or with respect to any Collateral. 9.08 Termination; Release. This Agreement shall terminate when all Secured Obligations have been paid in full, and the Collateral Agent, at the written request and expense of the relevant Debtor, will promptly execute and deliver to such Debtor the proper instruments (which shall include UCC termination statements on form UCC-3 or such other similar form which may then be required by law to terminate such security interest) acknowledging the termination of this Agreement, and will promptly duly assign, transfer and deliver to such Debtor (without recourse and without any representation or warranty) free from any interest of the Collateral Agent or Lien granted hereunder such of the Collateral as may be in possession of the Collateral Agent and has not theretofore been sold or otherwise applied or released pursuant to this Agreement together with such notices to third parties as may be necessary to countermand any notices previously sent to them pursuant hereto. 9.09 Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. 9.10 Severability. In case any one or more of the provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected and/or impaired thereby. In addition, each Debtor and the Collateral Agent undertake to negotiate in good faith with a view to replacing such invalid, illegal or unenforceable provision with another provision not so invalid, illegal or unenforceable with the same or similar effect. 16 9.11 Applicability of Note Purchase Agreement. In amplification of, and notwithstanding any other provisions of this Agreement, in connection with its obligations hereunder, the Collateral Agent has all of the rights, powers, privileges, exculpations, protections and indemnities as are provided for or referred to in the Note Purchase Agreement. [SIGNATURE PAGE FOLLOWS] 17 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their respective duly authorized officers as of the date first above written. PACIFICE AEROSPACE & ELECTRONICS, INC. By: /s/ Donald A. Wright ------------------------------------- Name: Donald A. Wright Title: Chief Executive Officer and President AEROMET AMERICA, INC. By: /s/ Donald A. Wright ------------------------------------- Name: Donald A. Wright Title: Executive Vice President BALO PRECISION PARTS, INC. By: /s/ Donald A. Wright ------------------------------------- Name: Donald A. Wright Title: Executive Vice President CASHMERE MANUFACTURING CO., INC. By: /s/ Donald A. Wright ------------------------------------- Name: Donald A. Wright Title: Executive Vice President CERAMIC DEVICES, INC. By: /s/ Donald A. Wright ------------------------------------- Name: Donald A. Wright Title: Executive Vice President ELECTRONIC SPECIALTY CORPORATION By: /s/ Donald A. Wright ------------------------------------- Name: Donald A. Wright Title: Executive Vice President NORTHWEST TECHNICAL INDUSTRIES, INC. By: /s/ Donald A. Wright ------------------------------------- Name: Donald A. Wright Title: Executive Vice President PACIFIC COAST TECHNOLOGIES, INC. By: /s/ Donald A. Wright ------------------------------------- Name: Donald A. Wright Title: Executive Vice President PA&E INTERNATIONAL, INC. By: /s/ Donald A. Wright ------------------------------------- Name: Donald A. Wright Title: President SEISMIC SAFETY PRODUCTS, INC. By: /s/ Donald A. Wright ------------------------------------- Name: Donald A. Wright Title: Executive Vice President SKAGIT ENGINEERING & MANUFACTURING, INC. By: /s/ Donald A. Wright ------------------------------------- Name: Donald A. Wright Title: Executive Vice President FIRST UNION NATIONAL BANK, not in its individual capacity, but solely as Collateral Agent By: /s/ Paul Thompson ------------------------------------- Name: Paul Thompson Title: Vice President SCHEDULE I COMMERCIAL TORT CLAIMS None. SCHEDULE II DEBTOR AND COLLATERAL DETAIL

COMPANY LOCATION USE ------- -------- --- 1. PA&E 430 Olds Station Road PA&E headquarters Wenatchee, WA 98801 2. Northwest Technical 2249 Diamond Point Road Bonded Metals Div. operations Industries, Inc. Sequim, WA 98382 3. Cashmere Port of Chelan Mach. Div. Operations Manufacturing Co., 432 Olds Station Rd. Inc. Wenatchee, WA 98801 4. Pacific Coast Port of Chelan Electr. Group Operations Technologies, Inc. 434 Olds Station Rd. Wenatchee, WA 98801 5. PA&E Port of Chelan Mach. Div. Operations 200 Olds Station Rd. Wenatchee, WA 98801 6. PA&E Port of Chelan Mach. Div. Operations 2605 Chester Kimm Road Wenatchee, WA 98801 7. Electronic Specialty Erickson Realty, Ltd. Display Div. Operations Corporation 14511 NE 13th Ave. (not in use) Vancouver, WA 98685 8. Skagit Engineering & Sea-Land Development Eng. & Fab. Div. Operations Manufacturing, Inc. 500 Metcalf Street (not in use. Sedro-Woolley, WA 98284 Partially terminated)

9. Skagit Engineering & 220th Street LLC Eng. & Fab. Office Manufacturing, Inc. 6808 220th St. SW (subleased) Suite 200 Mountlake Terrace, WA 98043 10. Northwest Technical Rayonier, Inc. Remote blasting site Industries, Inc. (site has no address) SCHEDULE III PATENTS, COPYRIGHTS AND TRADEMARKS PACIFIC COAST TECHNOLOGIES, INC. PATENT STATUS CHART

APPLICANT/ PATENTEE/ ASSIGNEE COUNTRY ATTORNEY DOCKET NO. INVENTORS SERIAL NO. FILING DATE PATENT NO. ISSUE DATE - ---------------------- ------------------- ------------- ---------- ----------- ---------- ---------- PCT, Inc. 42474/5 James C. Kyle 07.16.81 4,507,522 03.26.85 USA Kyle 12 - ---------------------- ------------------- ------------- ---------- ----------- ---------- ---------- PCT, Inc. 42474/5 James C. Kyle 05.02.84 4,512,791 04.23.85 USA Kyle 13 - ---------------------- ------------------- ------------- ---------- ----------- ---------- ---------- PCT, Inc. 42474/5 James C. Kyle 05.02.84 4,514,207 04.30.85 USA Kyle 14 - ---------------------- ------------------- ------------- ---------- ----------- ---------- ---------- PCT, Inc. 42474/5 James C. Kyle 10.08.82 4,514,590 04.30.85 USA Kyle 15 - ---------------------- ------------------- ------------- ---------- ----------- ---------- ---------- PCT, Inc. 42474/5 James C. Kyle 11.04.82 4,518,820 05.21.85 USA Kyle 16 - ---------------------- ------------------- ------------- ---------- ----------- ---------- ---------- PCT, Inc. 42474/5 James C. Kyle 05.02.84 4,593,758 06.10.86 USA Kyle 17 - ---------------------- ------------------- ------------- ---------- ----------- ---------- ----------

APPLICANT/ PATENTEE/ ASSIGNEE COUNTRY EXPIRATION DATE TITLE STATUS MAINTENANCE FEE DUE DATES - ---------------------- --------------- ------------------------- ----------------- ---------------------------------- PCT, Inc. 03.26.02 TERMINAL ASSEMBLY IN FORCE No further fees due USA - ---------------------- --------------- ------------------------- ----------------------------------------------------- PCT, Inc. 04.23.02 HERMETICALLY SEALED IN FORCE No further fees due INSULATING ASSEMBLY USA - ---------------------- --------------- ------------------------- ----------------------------------------------------- PCT, Inc. 04.30.02 METHOD FOR MAKING IN FORCE No further fees due TERMINAL ASSEMBLY FOR HEART PACEMAKER USA - ---------------------- --------------- ------------------------- ----------------------------------------------------- PCT, Inc. 10.08.02 ELECTRICAL TERMINAL IN FORCE No further fees due ASSEMBLY USA - ---------------------- --------------- ------------------------- ----------------------------------------------------- PCT, Inc. 11.04.02 TERMINAL ASSEMBLY FOR IN FORCE No further fees due HEART PACEMAKER USA - ---------------------- --------------- ------------------------- ----------------------------------------------------- PCT, Inc. 06.10.03 HERMETICALLY SEALED IN FORCE No further fees due INSULATING ASSEMBLY USA - ---------------------- --------------- ------------------------- -----------------------------------------------------

APPLICANT/ PATENTEE/ ASSIGNEE COUNTRY ATTORNEY DOCKET NO. INVENTORS SERIAL NO. FILING DATE PATENT NO. ISSUE DATE - ---------------------- ------------------- ------------- ---------- ----------- ---------- ---------- PCT, Inc. 42474/5 James C. Kyle 12.04.84 4,654,752 03.31.87 USA Kyle 18 - ---------------------- ------------------- ------------- ---------- ----------- ---------- ---------- PCT, Inc. 42474/5 James C. Kyle 06.29.84 4,657,337 04.14.87 USA Kyle 19 - ---------------------- ------------------- ------------- ---------- ----------- ---------- ---------- PCT, Inc.(1) 42474/5 James C. Kyle 10.20.83 4,925,607 5.15.90 USA Kyle 20 - ---------------------- ------------------- ------------- ---------- ----------- ---------- ---------- PCT, Inc. 42474/5 James C. Kyle 09.20.82 4,935,583 06.19.90 USA Kyle 21 - ---------------------- ------------------- ------------- ---------- ----------- ---------- ---------- PCT, Inc. 42474/6 Edward A. 01.07.92 5,298,683 03.29.94 Taylor USA Taylor 1 - ---------------------- ------------------- ------------- ---------- ----------- ---------- ----------

APPLICANT/ PATENTEE/ ASSIGNEE COUNTRY EXPIRATION DATE TITLE STATUS MAINTENANCE FEE DUE DATES - ---------------------- --------------- ------------------------- ---------------- ----------------------------- PCT, Inc. 12.04.04 TERMINAL ASSEMBLY IN FORCE No further fees due AND METHOD OF MAKING USA TERMINAL ASSEMBLY - ---------------------- --------------- ------------------------- ---------------- ----------------------------- PCT, Inc. 06.29.04 ELECTRICAL CONNECTOR & IN FORCE No further fees due METHOD OF PRODUCING USA ELECTRICAL CONNECTOR - ---------------------- --------------- ------------------------- ---------------- ----------------------------- PCT, Inc.(1) 05.15.07 ELECTRICAL INSULATING IN FORCE Release of Sec'y Int. sent to MATERIAL FORMED FROM AT Kyle for signature 01.02. USA LEAST ONE FLUX AND A Sec'y Int. not yet released; CRYSTALLINE STUFFING need to correct fee payment. MATERIAL - ---------------------- --------------- ------------------------- ---------------- ----------------------------- PCT, Inc. 06.19.07 INSULATED CONDUCTOR WITH IN FORCE No further fees due CERAMIC-CONNECTED USA ELEMENTS - ---------------------- --------------- ------------------------- ---------------- ----------------------------- PCT, Inc. 01.07.12 DISSIMILAR METAL IN FORCE 09.29.05 CONNECTORS USA - ---------------------- --------------- ------------------------- ---------------- -----------------------------

- ---------------------- 1 Assignment to PCT, Inc. included security interest to Kyle. Obligation to Kyle has been satisfied. Requested and have not yet received the executed release of the security interest.

APPLICANT/ PATENTEE/ ASSIGNEE COUNTRY ATTORNEY DOCKET NO. INVENTORS SERIAL NO. FILING DATE PATENT NO. ISSUE DATE - ---------------------- ------------------- ------------- ---------- ----------- ---------- ---------- PCT, Inc. 42474/7 Edward A. 06.02.94 5,433,260 07.18.95 Taylor USA Taylor 2 - ---------------------- ------------------- ------------- ---------- ----------- ---------- ---------- PCT, Inc. 42474/7 Edward A. 06.19.95 5,675.122 10.07.97 Taylor USA Taylor 3 - ---------------------- ------------------- ------------- ---------- ----------- ---------- ---------- PCT, Inc. 42474/19c1 Edward 09/006,696 01.14.98 5,986,208 11.16.99 A.Taylor; USA Taylor 5 Marshall Neal Hulbert - ---------------------- ------------------- ------------- ---------- ----------- ---------- ---------- PCT, Inc. 42474/801 Brian Lasater 09/076,230 05.12.98 6,221,513 04.24.01 USA Lasater 1 - ---------------------- ------------------- ------------- ---------- ----------- ---------- ---------- PCT, Inc. 42474/801 PCT Brian Lasater 99 921 Priority 874.6 Date EUROPE Lasater 1 PCT Int'l 05.11.99 PCT/US99/ 10313 Published 11.18.09 as WO 99/58322.

APPLICANT/ PATENTEE/ ASSIGNEE COUNTRY EXPIRATION DATE TITLE STATUS MAINTENANCE FEE DUE DATES - ---------------------- --------------- ------------------------- ---------------- ----------------------------- PCT, Inc. 07.27.12 SEALABLE ELECTRONIC IN FORCE 01.18.03, 01.18.07 PACKAGES & METHODS OF USA PRODUCING & SEALING SUCH PACKAGES - ---------------------- --------------- ------------------------- ---------------- ----------------------------- PCT, Inc. 07.27.12 SEALABLE ELECTRONIC IN FORCE 04.07.05 PACKAGES USA 04.07.09 - ---------------------- --------------- ------------------------- ---------------- ----------------------------- PCT, Inc. 03.19.16 WAVEGUIDE WINDOW IN FORCE 05.16.03, 05.16.07, 05.16.11 ASSEMBLY AND MICROWAVE USA ELECTRONICS PACKAGE - ---------------------- --------------- ------------------------- ---------------- ----------------------------- PCT, Inc. 05.12.18 METHODS FOR HERMETICALLY IN FORCE BROADENING REISSUE DEADLINE SEALING CERAMIC TO 04.24.03; MAINT. FEES DUE: USA METALLIC SURFACES AND 10.24.04, 10.24.08, 10.24.12 ASSEMBLIES INCORPORATING SUCH SEALS - ---------------------- --------------- ------------------------- ---------------- ----------------------------- PCT, Inc. METHODS AND MATERIALS Pending; Maintenance fee due annually. FOR SEALING CERAMIC TO Designated EUROPE METALLIC SURFACES countries are: Switzerland- Liechtenstein, Germany; Denmark, France, Great Britain, Italy, Netherlands and Sweden;

APPLICANT/ PATENTEE/ ASSIGNEE COUNTRY ATTORNEY DOCKET NO. INVENTORS SERIAL NO. FILING DATE PATENT NO. ISSUE DATE - ---------------------- ------------------- ------------- ---------- ----------- ---------- ---------- - ---------------------- ------------------- ------------- ---------- ----------- ---------- ---------- PCT, Inc. 42474/802aLasater 4 Brian Lasater 09/235,223 01.22.99 6,232,004 05.15.01 USA - ---------------------- ------------------- ------------- ---------- -------------- ---------- ---------- PPCT, Inc. 42474/802PCT Brian Lasater 99 920 345.8 Priority Date 05.05.99 EUROPE Lasater 3 PCT/US99/09819 Published 11.18.99 as WO 99/58690. - ---------------------- ------------------- ------------- ---------- -------------- ---------- ---------- PCT, Inc. 42474/17-5 Edward J. 07.09.91 5,110,307 05.05.92 USA Rapoza Rapoza

APPLICANT/ PATENTEE/ ASSIGNEE COUNTRY EXPIRATION DATE TITLE STATUS MAINTENANCE FEE DUE DATES - ---------------------- --------------- ------------------------- -------------------------------------------------------- - ---------------------- -------------- ------------------------- --------------------------------------------------------- PCT, Inc. 05.06.18 METHODS FOR TREATING IN FORCE BROADENING REISSUE DEADLINE 05.15.03; CERAMIC MATERIALS AND MAINT. FEES DUE: 11.15.04; USA CERAMIC MATERIALS 11.15.08; 11.15.12 PRODUCED THEREBY (Zirconia treatment with metals) - ---------------------- -------------- ------------------------- --------------------------------------------------------- PPCT, Inc. METHODS FOR TREATING Pending; Maintenance fee due annually CERAMIC MATERIALS AND Switzerland- EUROPE IMPROVED TREATED CERAMIC Liechtenstein, MATERIALS PRODUCED Germany; Denmark THEREBY (Zirconia France, Great staining with titanium) Britain, Italy, Netherlands and Sweden - ---------------------- -------------- ------------------------- --------------------------------------------------------- PCT, Inc. 07.09.11 LASER IN FORCE 11.05.03 WELDABLE USA HERMETIC CONNECTOR

APPLICANT/ PATENTEE/ ASSIGNEE COUNTRY ATTORNEY DOCKET NO. INVENTORS SERIAL NO. FILING DATE PATENT NO. ISSUE DATE - ---------------------- ------------------- ------------- ---------- ----------- ---------- ---------- PCT, Inc. 42474/17 Edward J. 05.04.92 5,405,272 04.11.95 Rapoza USA Rapoza 2 - ---------------------- ------------------- ------------- ---------- ------------ ---------- ---------- 42474/17 Edward J. 92303983.8 05.01.92 EP 0 522 03.05.97 Rapoza 687 B1 UK(2) Rapoza 3 - ---------------------- ------------------- ------------- ---------- ----------- ---------- ---------- PCT, Inc. 42474/17 Edward J. Can. 04.30.92 2,067,667 12.25.01 CANADA Rapoza 20676671 Rapoza 4 - ---------------------- ------------------- ------------- ---------- ----------- ---------- ---------- PCT, Inc. 42474/17 William F. 11.01.90 5,041,019 08.20.91 Sharp, et al. USA Sharp 1 - ---------------------- ------------------- ------------- ---------- ----------- ---------- ---------- PCT, Inc. 42474/17 William F. 03.18.91 5,109,594 05.05.92 Sharp, et al. USA Sharp 2 - ---------------------- ------------------- ------------- ---------- ----------- ---------- ---------- PCT, Inc. 42474/17 Wayne R. Snow, 09.26.85 4,690,480 09.01.87 et. al. USA Snow 1 - ---------------------- ------------------- ------------- ---------- ----------- ---------- ----------

APPLICANT/ PATENTEE/ ASSIGNEE COUNTRY EXPIRATION DATE TITLE STATUS MAINTENANCE FEE DUE DATES - ---------------------- ------------------ ------------------------ ---------------- ----------------------------- PCT, Inc. 04.11.12 LASER WELDABLE HERMETIC IN FORCE 10.11.02, 10.11.06 CONNECTOR USA - ---------------------- ------------------ ------------------------ ---------------- ----------------------------- 05.01.12 LASER WELDABLE HERMETIC EU patent ANNUALLY ON MAY 3RD UK(2) CONNECTOR enforceable in UK - ---------------------- ------------------ ------------------------ ---------------- ----------------------------- PCT, Inc. 04.30.12 LASER WELDABLE HERMETIC IN FORCE ANNUALLY ON APRIL 30TH CANADA CONNECTOR - ---------------------- ----------------- ------------------------- --------------- ----------------------------- PCT, Inc. 11.01.10 TRANSITION JOINT FOR IN FORCE 02.20.03 MICROWAVE PACKAGE USA - ---------------------- ------------------ ------------------------ ---------------- ----------------------------- PCT, Inc. 11.01.10 METHOD OF MAKING SEALED IN FORCE 11.05.03 TRANSITION JOINT USA - ---------------------- ------------------ ------------------------ ---------------- ----------------------------- PCT, Inc. 09.26.05 TUBULAR IN FORCE No further fees due BI-METAL CONNECTOR USA - ---------------------- ------------------ ------------------------ ---------------- -----------------------------

__________________ (2) Assignment to PCT, Inc. not yet recorded in UK; we are the following up to record. PACIFIC AEROSPACE & ELECTRONICS, INC. PATENT STATUS CHART

APPLICANT/ ATTORNEY DOCKET ASSIGNEE COUNTRY NO. INVENTORS SERIAL NO. FILE DATE PATENT NO. ------------------ --------------- ------------------- --------- --------- ---------- Pacific Aerospace & 42474/900 David N. Crane 09/200,204 11.25.98 6,150,772 Electronics, Inc. USA ------------------ --------------- ------------------- --------- --------- ---------- Pacific Aerospace & 42474/901 Herman L. ("Jack") 09/302,590 04.30.99 Electronics, Inc.(3) Jones; Edward A. Taylor USA ------------------ --------------- ------------------- --------- --------- ---------- Pacific Aerospace & 42474/902 Herman L. ("Jack") 09/303,196 04.30.99 6,284,389 Electronics, Inc. Jones; Edward A. Taylor USA ------------------ --------------- ------------------- --------- --------- ----------

APPLICANT/ ASSIGNEE COUNTRY ISSUE DATE EXPIRATION DATE TITLE STATUS ------------------ ---------- --------------- ---------------------------- ---------------- Pacific Aerospace & 11.21.00 11.25.18 GAS DISCHARGE LAMP CONTROLLER IN FORCE Electronics, Inc. USA ------------------ ---------- --------------- ---------------------------- ---------------- Pacific Aerospace & ELECTRONICS PACKAGES HAVING A PENDING; Claims Electronics, Inc.(3) COMPOSITE STRUCTURE AND METHODS FOR allowed; Issue Fee MANUFACTURING SUCH ELECTRONICS paid and formal USA PACKAGES drawings submitted. ------------------ ---------- --------------- ---------------------------- ---------------- Pacific Aerospace & 09.04.01 04.30.19 COMPOSITE MATERIALS AND METHODS FOR IN FORCE Electronics, Inc. MANUFACTURING COMPOSITE MATERIALS USA ------------------ ---------- --------------- ---------------------------- ----------------

APPLICANT/ MAINTENANCE ASSIGNEE COUNTRY FEE DUE DATES ------------------ ---------------------- Pacific Aerospace & BROADENING REISSUE Electronics, Inc. DEADLINE 11.21.02; MAINT. FEES DUE: 05.21.04, USA 05.21.08, 05.21.12 ------------------ ---------------------- Pacific Aerospace & Electronics, Inc.(3) USA ------------------ ---------------------- Pacific Aerospace & BROADENING REISSUE Electronics, Inc. DEADLINE 09.04.03; MAINT. FEES DUE: USA 03.04.05 03.04.09 03.04.13 ------------------ ----------------------

(3) Mr. Jones holds a Security Interest in these applications but has consented to the granting by the Company of a second priority perfected security interest in these applications in favor of the Collateral Agent.

APPLICANT/ ATTORNEY DOCKET ASSIGNEE COUNTRY NO. INVENTORS SERIAL NO. FILE DATE PATENT NO. ------------------ --------------- ------------------- --------- --------- ---------- Pacific Aerospace & 42474/ Herman L. ("Jack") EP 00 11.15.01 Electronics, Inc. Jones; Edward A. `928'580.0 901-2.EP Taylor Nat'l phase of PCT/US00/11579 EUROPE - ------------------------ ------------------ ----------------------- ----------------- -------------- -----------------

APPLICANT/ MAINTENANCE ASSIGNEE COUNTRY ISSUE DATE EXPIRATION DATE TITLE STATUS FEE DUE DATES ------------------ ---------- --------------- ---------------------------- ----------- ------------- Pacific Aerospace & COMPOSITE ELECTRONICS PENDING. Electronics, Inc. PACKAGES AND METHODS FOR MANUFACTURE EUROPE ------------------ ---------- --------------- ---------------------------- ----------- -------------

SEISMIC SAFETY PRODUCTS, INC. PATENT STATUS CHART

APPLICANT/ PATENTEE/ ATTORNEY DOCKET ASSIGNEE COUNTRY NO. INVENTORS SERIAL NO. FILE DATE PATENT NO. ISSUE DATE - ------------------ --------------- -------------- ---------- --------- --------- ---------- Seismic Safety 42474/28 James C. McGill 03.07.88 4,903,720 02.27.90 Prods., Inc. USA McGill 1 - ------------------ --------------- -------------- ---------- --------- --------- ---------- Seismic Safety 42474/28 James C. McGill 02.26.91 5,119,841 06.09.92 Prods., Inc. McGill 2 USA - ------------------ --------------- -------------- ---------- --------- --------- ---------- Seismic Safety 42474/28 James C. McGill, 11.09.93 5,409,031 04.25.95 Prods., Inc. Antonio F. Fernandez McGill 3 USA - ------------------ --------------- -------------- ---------- --------- --------- ---------- Seismic Safety 42474/28 James C. McGill, 03.13.95 5,704,385 01.06.98 Prods., Inc. Antonio F. Fernandez McGill 4 USA - ------------------ --------------- -------------- ---------- --------- --------- ----------

APPLICANT/ PATENTEE/ MAINTENANCE FEE ASSIGNEE COUNTRY EXPIRATION DATE TITLE STATUS DUE DATES - ------------------ --------------- --------------------------- --------- --------------- Seismic Safety 03.07.08 SAFETY SHUTOFF DEVICE IN FORCE All fees paid Prods., Inc. USA - ------------------ --------------- --------------------------- -------- --------------- Seismic Safety 02.26.11 SAFETY SHUT OFF APPARATUS IN FORCE 12.09.03 Prods., Inc. USA - ------------------ --------------- --------------------------- -------- --------------- Seismic Safety 04.25.12 SAFETY SHUT OFF VALVE IN FORCE 10.25.02, Prods., Inc. 10.25.06 USA - ------------------ --------------- --------------------------- -------- --------------- Seismic Safety 01.06.15 AUTOMATIC AND MANUALLY IN FORCE 07.06.05, Prods., Inc. OPERABLE SAFETY SHUTOFF VALVE 07.06.09 USA - ------------------ --------------- --------------------------- -------- ---------------

AEROMET INTERNATIONAL PLC PATENT STATUS CHART

APPLICANT/ PATENTEE/ ASSIGNEE ATTORNEY DOCKET COUNTRY NO. INVENTORS SERIAL NO. FILING DATE PATENT NO. ISSUE DATE - ------------------ --------------- --------- ---------- ----------- ---------- ---------- Aeromet Int'l PLC 9804599.0 03.05.98 (initial) UK 9904741.7 (final) - ------------------ --------------- --------- ---------- ----------- ---------- ---------- Aeromet Int'l PLC 99104277.1 EUROPE - ------------------ --------------- --------- ---------- ----------- ---------- ---------- Aeromet Int'l PLC 2264214 CANADA - ------------------ --------------- --------- ---------- ----------- ---------- ---------- Aeromet Int'l A00009359 Butler 09/262,446 03.04.99 6,126,898 10.03.00 US USA priority to 03.05.98 - ------------------ --------------- --------- ---------- ----------- ---------- ---------- Aeromet Int'l 11-57989 JAPAN - ------------------ --------------- --------- ---------- ----------- ---------- ----------

APPLICANT/ PATENTEE/ ASSIGNEE MAINTENANCE FEE DUE COUNTRY EXPIRATION DATE TITLE STATUS DATES - ------------------ --------------- -------------------------- ------------------- -------------------- Aeromet Int'l PLC CAST ALUMINUM-COPPER ALLOY PENDING; no further information. UK - ------------------ --------------- -------------------------- ------------------- -------------------- Aeromet Int'l PLC CAST ALUMINUM-COPPER ALLOY PENDING; no further information. EUROPE - ------------------ --------------- -------------------------- ------------------- -------------------- Aeromet Int'l PLC CAST ALUMINUM-COPPER ALLOY PENDING; no further information. CANADA - ------------------ --------------- -------------------------- ------------------- -------------------- Aeromet Int'l 03.04.19 CAST ALUMINUM-COPPER ALLOY IN FORCE BROADENING REISSUE DEADLINE 10.03.02; MAINT. FEES DUE: USA 04.03.04, 04.03.08, 04.03.12 - ------------------ --------------- -------------------------- ------------------- -------------------- Aeromet Int'l CAST ALUMINUM-COPPER ALLOY PENDING; no further information. JAPAN - ------------------ --------------- -------------------------- ------------------- --------------------

TRADEMARK STATUS REPORT FOR PACIFIC AEROSPACE & ELECTRONICS, INC.

CLIENT/ ASSIGNMENT MATTER NO. MARK COUNTRY SERIAL NO. FILING DATE - -------------------- ------------ ---------------------- ----------- --------------- --------------- PCT, Inc. 42174/10 KRYOFLEX USA 73/117,580 03.01.77 - -------------------- ------------ ---------------------- ----------- --------------- --------------- PCT, Inc. 42174/11 HERMETIC ADVANTAGE USA 74/521,789 05.03.94 - -------------------- ------------ ---------------------- ----------- --------------- --------------- PCT, Inc. 42174/12 PARTNERS WITH USA 74/522,844 05.03.94 TOMORROW - -------------------- ------------ ---------------------- ----------- --------------- --------------- Seismic Safety 42174/16 NORTHRIDGE VALVE USA 75/169,974 09.23.96 Products, Inc. - -------------------- ------------ ---------------------- ----------- --------------- ---------------

REGISTRATION INT'L ASSIGNMENT NO./DATE GOODS /SERVICES CLASS STATUS - -------------------- -------------- --------------------------- ----------- ------------------------------------- PCT, Inc. 1,114,452 CERAMIC MATERIALS SOLD 10; 21 REGISTERED; AS A COMPONENT OF HEART Mar. 6, 1979 PACEMAKERS Next renewal due 03.06.09 - -------------------- -------------- --------------------------- ----------- ------------------------------------ PCT, Inc. 1,998,984 ELECTRONIC COMPONENTS, 9 REGISTERED; NAMELY ELECTRONIC CONNECTORS AND SEC. 8/15 DECL due 9.10.01 - 9.10.02; Sept. 10, 1996 HER-METIC SEALING Renewal due 3.10.06 - 9.10.06 DEVICES - -------------------- -------------- --------------------------- ----------- ------------------------------------ PCT, Inc. 1,998,986 ELECTRONIC COMPONENTS, 9 REGISTERED; NAMELY ELECTRONIC CON-NECTORS AND Sept. 10, 1996 HERMETIC SEALING Sec 8/15 Decl due 9.10.01 - 9.10.02; DEVICES FOR ELEC-TRONIC PACKAGES AND CONNECTORS Renewal due 3.10.06 - 9.10.06 - -------------------- -------------- --------------------------- ----------- ------------------------------------ Seismic Safety 2,119,389 VALVES FOR NATURAL GAS 7 REGISTERED; Products, Inc. DISTRIBUTION SYSTEMS Dec. 9, 1997 Sec 8/15 Decl due 12.9.02 - 12.9.03; RENEWAL due 6.9.07 - 12.9.07 - -------------------- -------------- --------------------------- ----------- ------------------------------------

SCHEDULE IV ADDRESSES OF THE DEBTORS

NAME OF DEBTOR STATE OF INCORPORATION PRINCIPAL PLACE OF BUSINESS -------------- ---------------------- ---------------------------------- Pacific Aerospace & Electronics, Inc. Washington 430 Olds Station Road, Third Floor Wenatchee, Washington 98801 Aeromet America, Inc. Washington 430 Olds Station Road Wenatchee, Washington 98801 Balo Precision Parts, Inc. Washington 430 Olds Station Road Wenatchee, Washington 98801 Cashmere Manufacturing Co., Inc. Washington 432 Olds Station Road Wenatchee, Washington 98801 Ceramic Devices, Inc. Washington 434 Olds Station Road Wenatchee, Washington 98801 Electronic Specialty Corporation Washington 14511 NE 13th Avenue Vancouver, WA 98685 Northwest Technical Industries, Inc. Washington 2249 Diamond Point Road Sequim, WA 98382 Pacific Coast Technologies, Inc. Washington 434 Olds Station Road Wenatchee, Washington 98801 PA&E International Inc. Washington 430 Olds Station Road Wenatchee, Washington 98801 Seismic Safety Products, Inc. Washington 430 Olds Station Road Wenatchee, Washington 98801 Skagit Engineering & Manufacturing, Inc. Washington 500 Metcalf Street Sedro-Woolley, WA 98284

EX-10.11 16 f80483ex10-11.txt EXHIBIT 10.11 Exhibit 10.11 - -------------------------------------------------------------------------------- STOCK PLEDGE AGREEMENT among PACIFIC AEROSPACE & ELECTRONICS, INC. and PA&E INTERNATIONAL, INC., each a Pledgor, and FIRST UNION NATIONAL BANK, as Collateral Agent ------------------------- Dated as of March 25, 2002 ------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS

Page ---- SECTION 1. DEFINITIONS.........................................................1 SECTION 2. THE PLEDGE..........................................................2 SECTION 3. SECURITY FOR OBLIGATIONS............................................3 SECTION 4. REPRESENTATIONS AND WARRANTIES......................................3 SECTION 5. COVENANTS...........................................................4 SECTION 6. ADVANCES BY LENDERS.................................................5 SECTION 7. VOTING RIGHTS; DIVIDENDS............................................5 SECTION 8. CONTINUED PERFECTION OF SECURITY INTEREST...........................6 SECTION 9. OBLIGATIONS OF THE PLEDGORS AND RIGHTS OF THE COLLATERAL AGENT......6 SECTION 10. REMEDIES OF THE COLLATERAL AGENT....................................6 SECTION 11. COLLATERAL AGENT APPOINTED ATTORNEY-IN-FACT.........................8 SECTION 12. SECURITY INTEREST ABSOLUTE..........................................9 SECTION 13. AMENDMENTS; ETC.....................................................9 SECTION 14. NOTICES.............................................................9 SECTION 15. CONTINUING ASSIGNMENT; PLEDGE AND SECURITY INTEREST; RELEASE.......10 SECTION 16. APPLICATION OF PROCEEDS............................................10 SECTION 17. SEVERABILITY.......................................................11 SECTION 18. HEADINGS...........................................................11 SECTION 19. GOVERNING LAW......................................................11 SECTION 20. CONSENT TO JURISDICTION............................................11 SECTION 21. WAIVER OF JURY TRIAL...............................................12 SECTION 22. EXECUTION IN COUNTERPARTS..........................................12 SECTION 23. APPLICABILITY OF NOTE PURCHASE AGREEMENT...........................12

i Annex 1-A - Certificates of Stock of the Domestic Subsidiaries Annex 1-B - Certificates of Stock of the Foreign Subsidiaries STOCK PLEDGE AGREEMENT STOCK PLEDGE AGREEMENT, dated as of March 25, 2002 (this "Agreement"), among PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington corporation (the "Company"), and PA&E INTERNATIONAL, INC. and each other Subsidiary (as hereinafter defined) of the Company that may become a "pledgor" hereunder (collectively, the "Pledgor Subsidiaries"; the Company and the Pledgor Subsidiaries are referred to herein individually as a "Pledgor" and collectively, as the "Pledgors"), and FIRST UNION NATIONAL BANK, acting in its capacity as collateral agent (the "Collateral Agent") for the Holders (as hereinafter defined), W I T N E S S E T H: WHEREAS, the Company, the Initial Purchaser (as hereinafter defined) and the Collateral Agent have entered into that certain Note Purchase Agreement, dated as of March 19, 2002 (as such agreement may be amended, restated, modified or supplemented from time to time, the "Note Purchase Agreement"); and WHEREAS, it is a condition precedent to the obligations of the Initial Purchaser under the Note Purchase Agreement, that the Pledgors execute and deliver this Agreement pursuant to which, among other things, the Pledgors shall grant to the Collateral Agent, for the benefit of the Holders, a continuing security interest in all of the Collateral (as hereinafter defined) to secure all of the Obligations (as hereinafter defined); NOW, THEREFORE, in consideration of the agreements and covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each Pledgor hereby makes the following assignments, representations and warranties to the Collateral Agent and hereby covenants and agrees with the Collateral Agent as follows: SECTION 1. Definitions Except as otherwise indicated herein, as used in this Agreement, the following terms have the following meanings: "Domestic Subsidiaries" means each Subsidiary that is a corporation incorporated under the laws of the United States of America or any State or territory thereof. "Foreign Subsidiaries" means each Subsidiary that is a corporation incorporated under the laws of any jurisdiction other than the United State of America or any State or territory thereof. "UCC" means the Uniform Commercial Code, as in effect in any applicable jurisdiction. (a) Capitalized terms used and not otherwise defined herein shall have the meanings set forth in the Note Purchase Agreement, and the principles of construction set forth in the Note Purchase Agreement shall apply. (b) Except for the terms defined in this Agreement or in the Note Purchase Agreement, all terms defined in Article 8 or 9 of the UCC of the State of New York which are used in this Agreement shall have the meanings specified in such Articles. SECTION 2. The Pledge. Each Pledgor hereby pledges and hypothecates to the Collateral Agent for the benefit of the Holders, and hereby grants to the Collateral Agent for the benefit of the Holders a continuing security interest in and to, all of its presently owned or hereafter acquired right, title and interest in and to the following (the "Collateral"): (a) (i) the shares of common stock of each of the Domestic Subsidiaries, identified in Annex 1-A hereto, representing 100% of the issued and outstanding common stock of each of the Domestic Subsidiaries, and all other shares of Capital Stock of whatever class of each of the Domestic Subsidiaries now or hereafter owned by such Pledgor, in each case together with the certificates evidencing the same, and (ii) the shares of common stock of each of the Foreign Subsidiaries, identified in Annex 1-B hereto, representing 65% (or, if as a result of a change in applicable law, such Pledgor can pledge a greater percentage without causing adverse tax consequences to the Pledgor, such greater percentage) of the issued and outstanding voting stock (within the meaning of Treas. Reg. Section 1.956-2(c)(2)) and 100% of any nonvoting classes of stock (within the meaning of Treas. Reg. Section 1.956-2(c)(2)) of each of the Foreign Subsidiaries, and all other shares of Capital Stock of whatever class, now or hereafter owned by such Pledgor, necessary to maintain the security interest created hereby in 65% (or, if as a result of a change in applicable law, such Pledgor can pledge a greater percentage without causing adverse tax consequences to such Pledgor, such greater percentage) of the voting stock and 100% of the nonvoting stock of each of the Foreign Subsidiaries, in each case together with the certificates representing the same (the shares of stock referred to in clauses (i) and (ii), collectively, the "Pledged Shares"); (b) all shares, securities, moneys or property representing a dividend on any of the Pledged Shares, or representing a distribution or return of capital upon or in respect of the Pledged Shares, or resulting from a split-up, revision, reclassification or other like change of the Pledged Shares or otherwise received in exchange therefor, and any Stock Equivalents issued to the holders of, or otherwise in respect of, the Pledged Shares; (c) all securities in substitution for or in addition to any of the foregoing, any certificates representing or evidencing such securities, and all cash, securities, distributions and other property at any time and from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the foregoing; and 2 (d) all Proceeds of and to any of the property of such Pledgor described in the preceding clauses of this Section 2. SECTION 3. Security for Obligations. The Collateral secures the prompt and complete payment and performance of all the Obligations. SECTION 4. Representations and Warranties. Each Pledgor represents and warrants as follows: (a) No consent of any other Person and no authorization, approval, or other action by, or notice to or filing with, any Person is required (i) for the pledge and assignment by such Pledgor of the Collateral pursuant to this Agreement, (ii) for the validity, perfection or maintenance of the first priority security interest created hereby or (iii) for the exercise by the Collateral Agent of the voting or other rights provided for in this Agreement or the remedies in respect of such Collateral pursuant to this Agreement or as provided by law, except in each case for those which have been duly obtained or made, which are in full force and effect and as may be required in connection with any disposition of any portion of the Collateral by laws affecting the offering and sale of securities generally. (b) Each Pledgor is the legal and beneficial owner of, and has good title to, the Collateral of such Pledgor free and clear of all Liens, except for the security interest created by this Agreement and Liens for taxes, assessments, governmental charges or levies not yet due or which are being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained on the books of the Company and each of its Subsidiaries, as the case may be, in accordance with GAAP (such Liens, "Governmental Liens"). (c) Each Pledgor owns all of the issued and outstanding Capital Stock of the Domestic Subsidiaries and the Foreign Subsidiaries of such Pledgor. (d) This Agreement creates a valid security interest in and to all of the Collateral securing the payment of all the Obligations. The Pledged Shares pledged by each Pledgor hereunder are, and any securities pledged in substitution therefor or in addition thereto will be duly and validly pledged hereunder in accordance with all applicable Requirements of Law. (e) Each Pledgor has the right to pledge the Pledged Shares owned by it as herein provided. (f) Any certificate evidencing the Pledged Shares pledged by a Pledgor hereunder is, and any certificate pledged hereunder in substitution therefor or in addition thereto will be, issued in the name of such Pledgor and the form of transfer applicable to each such certificate has been, or when issued will then have been duly executed in blank or is, or when issued will then be, the subject of a duly executed 3 transfer duly signed in blank by or under the authority of the appropriate officer of such Pledgor. Each such transfer will give the Collateral Agent the rights and authority it purports to give. (g) Prior to or concurrently with the execution and delivery of this Agreement, each Pledgor shall have delivered to the Collateral Agent or its agent all certificates evidencing the Pledged Shares owned by it and any related instrument of transfer, duly endorsed by such Pledgor, evidencing any pledge of Pledged Shares made by such Pledgor to the Collateral Agent. (h) None of the Collateral pledged by the Pledgors hereunder constitutes margin stock, as defined in Regulation U of the Board of Governors of the Federal Reserve System. (i) No Pledgor owns any Capital Stock in any Subsidiary other than as set forth on Annex 1-A and Annex 1-B attached hereto. (j) No Pledgor is a party to any outstanding agreement, option or contract to sell or otherwise transfer all or any portion of the Collateral. No part of the Collateral is subject to the terms of any agreement restricting the sale or transfer of such Collateral. No Person has any right to purchase or terminate any or all of the interests of any Pledgor in the Pledged Shares of the Subsidiaries. SECTION 5. Covenants. Each Pledgor agrees that so long as any of the Secured Obligations remains outstanding: (a) Books and Records. It will mark its books and records (and cause the issuer of the Pledged Shares of such Pledgor to mark its books and records) to reflect the security interest granted to the Collateral Agent pursuant to this Agreement. (b) Defense of Collateral. It will defend the Collateral against all claims and demands of all Persons (other than the Collateral Agent, the Holders claiming an interest in any of the Collateral and the holders of Governmental Liens). It will discharge or cause to be discharged all Liens on any or all of the Collateral, except for the security interest created by this Agreement and Governmental Liens. (c) Location of Office. It shall keep its principal place of business and chief executive office and the office where it keeps its records concerning the Collateral at the address specified in the Note Purchase Agreement; or, upon thirty (30) days' prior written notice to the Collateral Agent, at such other location in a jurisdiction where all action required by Section 8 shall have been taken with respect to the Collateral. (d) Disposition of Collateral. It shall not transfer, sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral owned by it or create or suffer to exist any Lien upon or with respect to any of the Collateral owned 4 by it, except for (i) the pledge, hypothecation and security interest created by this Agreement and (ii) as otherwise expressly permitted by the Note Purchase Agreement. SECTION 6. Advances by Lenders. On failure of any Pledgor to perform any of the covenants and agreements contained herein, the Collateral Agent may, at its sole option and in its sole discretion, perform the same and in so doing may expend such sums as the Collateral Agent may reasonably deem advisable in the performance thereof, including, without limitation, the payment of any insurance premiums, the payment of any Taxes, a payment to obtain a release of a Lien or potential Lien, expenditures made in defending against any adverse claim and all other expenditures which the Collateral Agent or the Holders may make for the protection of the security hereof or which may be compelled to make by operation of law. All such sums and amounts so expended shall be repayable by the Pledgors on a joint and several basis promptly upon timely notice thereof and demand therefor, shall constitute additional Secured Obligations and shall bear interest from the date said amounts are expended at the default rate of 8.0%. No such performance of any covenant or agreement by the Collateral Agent or the Holders on behalf of any Pledgor, and no such advance or expenditure therefor, shall relieve the Pledgors of any default under the terms of this Agreement, the other Operative Agreements or any other documents relating to the Secured Obligations. The Collateral Agent and the Holders may make any payment hereby authorized in accordance with any bill, statement or estimate procured from the appropriate public office or holder of the claim to be discharged without inquiry into the accuracy of such bill, statement or estimate or into the validity of any tax assessment, sale, forfeiture, tax lien, title or claim except to the extent such payment is being contested in good faith by a Pledgor in appropriate proceedings and against which adequate reserves are being maintained in accordance with GAAP. SECTION 7. Voting Rights; Dividends. So long as no Default or Event of Default shall have occurred and be continuing, subject to applicable cure periods (or, in the case of clause (a) of this Section, as long as no notice thereof shall have been given by the Collateral Agent to the relevant Pledgor): (a) Each Pledgor shall be entitled to exercise any and all management, voting and other consensual rights pertaining to the Collateral in a manner consistent with the terms of this Agreement and the other Operative Agreements; provided, however, that such Pledgor shall not exercise, or refrain from exercising, any such right if such action or inaction would have a Material Adverse Effect; (b) Each Pledgor shall be entitled to receive and retain any and all dividends paid in respect of the Collateral owned by it (other than any and all dividends paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Collateral, all of which shall be forthwith delivered to the Collateral Agent to hold as Collateral and shall, if received by such Pledgor, be received in trust for the benefit of the 5 Collateral Agent, be segregated from the other property or funds of such Pledgor, and be forthwith delivered to the Collateral Agent as Collateral in the same form as so received (with any necessary indorsement)); provided that if any of the Pledgors' Subsidiaries are dissolved or liquidated in accordance with the terms and conditions of the Note Purchase Agreement, each such Pledgor shall be entitled to receive and retain any and all dividends paid in respect of such liquidation or dissolution. (c) The Collateral Agent shall execute and deliver (or cause to be executed and delivered) to the Pledgors all such proxies and other instruments as any Pledgor may reasonably request for the purpose of enabling such Pledgor to exercise the voting and other rights which it is entitled to exercise pursuant to paragraph (a) above and to receive the dividends which it is authorized to receive and retain pursuant to paragraph (b) above. SECTION 8. Continued Perfection of Security Interest. Each Pledgor agrees that it will not take any actions or fail to perform any of its duties or obligations under this Agreement so that after giving effect to such action or inaction the Collateral Agent will not then, or with the passage of time cease to have, a first priority perfected security interest in and to any of the Collateral owned by it. Each Pledgor agrees that from time to time, at the expense of such Pledgor, it will promptly execute and deliver all further instruments and documents, and take all further action that may be necessary or that the Collateral Agent may reasonably request, in order to perfect and protect the pledge, hypothecation and security interest granted or purported to be granted hereby or to enable the Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral owned by such Pledgor. In connection with the foregoing, each Pledgor agrees to file, and further hereby authorizes the Collateral Agent to file, at any time and from time to time Financing Statements in any jurisdiction that may be necessary, or that the Collateral Agent deems necessary to create, perfect and protect the pledge, hypothecation and security interest granted or purported to be granted hereby. SECTION 9. Obligations of the Pledgors and Rights of the Collateral Agent. The powers conferred on the Collateral Agent hereunder are solely to protect the interest in the Collateral for the benefit of the Holders and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Collateral Agent shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral and no such duties shall be implied as arising hereunder. The Collateral Agent shall not be required to take steps necessary to preserve any rights against prior parties to any of the Collateral. SECTION 10. Remedies of the Collateral Agent. 6 At any time after an Event of Default has occurred and so long as it is continuing, subject to applicable cure periods, the Collateral Agent has the right to do any or all of the following: (a) The Collateral Agent may exercise any and all rights and remedies of the Pledgors under or in connection with the Pledged Shares or otherwise in respect of the Collateral. (b) Subject to compliance with applicable law, the Collateral Agent shall have the right in its discretion and without prior notice to the relevant Pledgor, to transfer to or to register in the name of the Collateral Agent or any of its nominees any or all of the Collateral owned by such Pledgor. (c) Upon receipt of written notice of such Event of Default, subject to applicable cure periods, from the Collateral Agent or any Holder, all rights of the Pledgors to receive the dividends and distributions which they would otherwise be authorized to receive and retain, shall cease for so long as such Event of Default is continuing, and all such rights shall thereupon become vested in the Collateral Agent who shall thereupon have the sole right to receive and hold as Collateral such dividends and distributions. All dividends and distributions which are received by any Pledgor contrary to the provisions of this paragraph shall be received in trust for the benefit of the Collateral Agent as security for the Obligations, shall be segregated from other funds of the relevant Pledgor and shall be forthwith paid over to the Collateral Agent or its agent as Collateral in the same form as so received (with any necessary indorsement). (d) The Collateral Agent may file any claims, commence, maintain, settle or discontinue any actions, suits or other proceedings deemed by the Collateral Agent in its sole discretion necessary or advisable for the purpose of collecting upon the Collateral and execute any instrument and do all other things deemed necessary and proper by the Collateral Agent in its sole discretion to protect and preserve and permit the Collateral Agent to realize upon the Collateral and the other rights contemplated thereby. (e) The Collateral Agent may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party upon default under the UCC, and may also, without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of the Collateral Agent's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Collateral Agent may deem commercially reasonable. Each Pledgor agrees that, to the extent notice of sale shall be required by law, at thirty (30) Business Days' notice to such Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall (subject to applicable law) constitute reasonable notification. The Collateral Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Collateral Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. 7 (f) In view of the position of each Pledgor in relation to the Collateral owned by it, or because of other current or future circumstances, a question may arise under the Securities Act of 1933, as amended, as now or hereafter in effect, any rules or regulations promulgated thereunder, or any similar statute hereafter enacted analogous in purpose or effect (such Act, such rules and regulations and any such similar statute as from time to time in effect being called the "Federal Securities Laws") with respect to any disposition of the Collateral permitted hereunder. Each Pledgor understands that compliance with the Federal Securities Laws may strictly limit the course of conduct of the Collateral Agent if the Collateral Agent were to attempt to dispose of all or any part of the Collateral owned by such Pledgor, and may also limit the extent to which or the manner in which any subsequent transferee of any Collateral could dispose of the same. Similarly, there may be other legal restrictions or limitations affecting the Collateral Agent in any attempt to dispose of all or part of the Collateral under applicable "Blue Sky" or other state securities laws or the securities laws of countries other than the United States or similar laws analogous in purpose or effect. Each Pledgor recognizes that, in light of the foregoing restrictions and limitations, the Collateral Agent may, with respect to any sale of Collateral owned by such Pledgor, to the extent commercially reasonable, limit the purchasers to those who will agree, among other things, to acquire Collateral for their own account, for investment, and not with a view to the distribution or resale thereof. Each Pledgor acknowledges and agrees that, in light of the foregoing restrictions and limitations, the Collateral Agent, in a commercially reasonable manner, (i) may proceed to make such a sale whether or not a registration statement for the purpose of registering the Collateral or part thereof shall have been filed under the Federal Securities Laws and (ii) may approach and negotiate with any one or more possible purchasers to effect such sale. Each Pledgor acknowledges and agrees that any such sale may result in prices and other terms less favorable to the seller than if such sale were a public sale without such restrictions. In the event of any such sale, the Collateral Agent shall incur no responsibility or liability for selling all or any part of the Collateral at a price that the Collateral Agent, in a commercially reasonable manner, may in good faith deem reasonable under the circumstances, notwithstanding the possibility that a substantially higher price might have been realized if the sale were deferred until after registration as aforesaid or if more purchasers were approached. The provisions of this paragraph will apply notwithstanding the existence of a public or private market upon which the quotations or sales prices may exceed substantially the price at which the Collateral Agent sells the Pledged Shares. Each Pledgor agrees that sales made in accordance with this paragraph in all respects will be made in a commercially reasonable manner. (g) All payments made under or in connection with the Pledged Shares or otherwise in respect of the Collateral and received by the Collateral Agent as Collateral in accordance with the provisions hereof may, in the discretion of the Collateral Agent, be held by the Collateral Agent as collateral for, and then or as soon thereafter as is reasonably practicable applied in whole or in part by the Collateral Agent for the benefit of the Holders against all or any part of the Obligations in accordance with the terms of the Note Purchase Agreement. SECTION 11. Collateral Agent Appointed Attorney-in-Fact. 8 Each Pledgor hereby appoints the Collateral Agent such Pledgor's attorney-in-fact, with full authority in the place and stead of such Pledgor and in the name of such Pledgor or otherwise, upon the occurrence of and during the continuance of an Event of Default in the Collateral Agent's discretion, to take any and all actions authorized or permitted to be taken by the Collateral Agent under this Agreement or by law, including but not limited to the power to take any action and to execute any instrument which the Collateral Agent may deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation, to ask for, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in connection with the Collateral, to receive, indorse, and collect any drafts or other instruments, documents and chattel paper in connection therewith, and to file any claims or take any action or institute any proceedings which the Collateral Agent may deem to be necessary or desirable for the collection thereof. Such appointment of the Collateral Agent as the Pledgors' attorney-in-fact is coupled with an interest and is irrevocable. SECTION 12. Security Interest Absolute. The obligations of each Pledgor under this Agreement shall be absolute and unconditional, and shall remain in full force and effect without regard to, and shall not be released, suspended, discharged, terminated or otherwise affected by, any circumstance or occurrence whatsoever, including, without limitation: (a) any renewal, extension, amendment or modification of, or addition or supplement to or deletion from, the Note Purchase Agreement or any other Operative Agreement or any other instrument or agreement referred to therein, or any assignment or transfer of any thereof; (b) any waiver, consent, extension, indulgence or other action or inaction under or in respect of any such instrument or agreement or this Agreement or any exercise or non-exercise of any right, remedy, power or privilege under or in respect of this Agreement or any other Operative Agreement; (c) any furnishing of any additional security (including, without limitation, any assets, whether now owned or hereafter acquired, upon which a Lien is created or granted from time to time pursuant to the other Collateral Documents) to the Collateral Agent or any acceptance thereof or any sale, exchange, release, surrender or realization of or upon any security by the Collateral Agent; or (d) any invalidity, irregularity or unenforceability of all or part of the Obligations or of any security therefor. In the event of any inconsistency between this Agreement and the Note Purchase Agreement, the Note Purchase Agreement shall govern. SECTION 13. Amendments; Etc. This Agreement may be amended, restated, changed, waived, discharged or terminated only (i) by an instrument in writing executed by the parties hereto and (ii) in accordance with Section 17 of the Note Purchase Agreement. SECTION 14. Notices. All notices and other communications hereunder shall be given (in the manner specified in the Note Purchase Agreement) to the parties hereto at their respective 9 addresses specified in the Note Purchase Agreement (or, if any party hereto is not a party to the Note Purchase Agreement, at its address set forth under its name on the signature page hereto). SECTION 15. Continuing Assignment; Pledge and Security Interest; Release. This Agreement shall create a continuing pledge, assignment of, hypothecation of and security interest in the Collateral and shall (a) remain in full force and effect until the indefeasible payment in full of the Obligations (other than contingent surviving obligations) and (b) inure to the benefit of, and be enforceable by, the Collateral Agent, the Holders and their respective successors, transferees and assigns. Without limiting the generality of the foregoing clause (b), any Holder may assign or otherwise transfer all or any portion of its rights in the Obligations to the extent and in the manner provided in the Note Purchase Agreement, and such assignee shall thereupon become vested with all the benefits in respect thereof granted to such Holder herein or otherwise. Upon the indefeasible payment in full of the Obligations (other than contingent surviving obligations), the security interest granted hereby shall terminate and all rights to the Collateral shall revert to the Pledgor. Upon any such termination, the Collateral Agent will, at the Pledgors' expense, execute and deliver to the Pledgors such documents as the Pledgors shall reasonably request to evidence such termination. SECTION 16. Application of Proceeds. Upon the occurrence and during the continuation of an Event of Default, any payments in respect of the Obligations and any proceeds of the Collateral, when received by the Collateral Agent or any of the Holders in cash or its equivalent, will be applied in reduction of the Obligations in the following order: FIRST, to the payment of all reasonable out-of-pocket fees and costs and expenses (including without limitation reasonable attorneys' fees) of the Collateral Agent under the Operative Agreements, including, but not limited to, those incurred in connection with enforcing the rights of Collateral Agent and the Holders under the Operative Agreements; SECOND, to the payment of all reasonable out-of-pocket costs and expenses (including without limitation, reasonable attorneys' fees) of each of the Holders in connection with enforcing its rights under the Operative Agreements or otherwise with respect to the Obligations owing to such Holder; THIRD, to the payment of all accrued interest and fees on or in respect of the Obligations; FOURTH, to the payment of the outstanding principal amount of the Obligations; 10 FIFTH, to all other obligations which shall have become due and payable under the Operative Agreements or otherwise and not repaid pursuant to clauses "FIRST" through "FOURTH" above; and SIXTH, to the payment of the surplus, if any, to whoever may be lawfully entitled to receive such surplus. Each Debtor irrevocably waives the right to direct the application of such payments and proceeds and acknowledges and agrees that the Collateral Agent shall have the continuing and exclusive right to apply and reapply any and all such payments and proceeds in the Collateral Agent's sole discretion, notwithstanding any entry to the contrary upon any of its books and records. SECTION 17. Severability. If any provision of this Agreement shall be held, or deemed to be or shall, in fact, be illegal, inoperative or unenforceable, the same shall not affect any other provision or provisions herein contained or render the same invalid, inoperative or unenforceable to any extent whatever. SECTION 18. Headings. The headings of the various sections and paragraphs of this Agreement are for convenience of reference only, do not constitute a part hereof and shall not affect the meaning or construction of any provision hereof. SECTION 19. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF (EXCEPT SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW), EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. SECTION 20. CONSENT TO JURISDICTION. EACH PLEDGOR (I) IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY NEW YORK STATE COURT OR FEDERAL COURT SITTING IN THE SOUTHERN DISTRICT OF NEW YORK IN ANY ACTION ARISING OUT OF THIS AGREEMENT, (II) AGREES THAT ALL CLAIMS IN SUCH ACTION MAY BE DECIDED IN SUCH COURT, (III) WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM AND (IV) CONSENTS TO THE SERVICE OF PROCESS BY MAIL. A FINAL JUDGMENT IN ANY SUCH ACTION SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS. 11 NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE COLLATERAL AGENT TO SERVE LEGAL PROCESS IN ANY MANNER PERMITTED BY LAW OR AFFECT ITS RIGHT TO BRING ANY ACTION IN ANY OTHER COURT. SECTION 21. WAIVER OF JURY TRIAL. EACH PLEDGOR HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT. SECTION 22. Execution in Counterparts. This Agreement may be executed in counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. SECTION 23. Applicability of Note Purchase Agreement. In amplification of, and notwithstanding any other provisions of this Agreement, in connection with its obligations hereunder, the Collateral Agent has all of the rights, powers, privileges, exculpations, protections and indemnities as are provided for or referred to in the Note Purchase Agreement. [SIGNATURE PAGE FOLLOWS] 12 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their duly authorized officers as of the date first above written. PACIFIC AEROSPACE & ELECTRONICS, INC., as Pledgor By: /s/ Donald A. Wright ----------------------------- Name: Donald A. Wright Title: Chief Executive Officer and President PA&E INTERNATIONAL, INC., as Pledgor By: /s/ Donald A. Wright ----------------------------- Name: Donald A. Wright Title: President Address: c/o Pacific Aerospace & Electronics, Inc. 430 Olds Station Road Wenatchee, Washington 98801 FIRST UNION NATIONAL BANK, not in its individual capacity, but solely as Collateral Agent By: /s/ Paul Thompson ----------------------------- Name: Paul Thompson Title: Vice President ANNEX 1-A CERTIFICATES OF DOMESTIC SUBSIDIARIES

Number of Percentage Certificate Outstanding Pledgor Issuing Corporation Ownership Number Shares - ------- ------------------- --------- ----------- ----------- Pacific Aerospace & Aeromet America, Inc. 100.0% 3 100,000 Electronics, Inc. Pacific Aerospace & Balo Precision Parts, Inc. 100.0% 3 100,000 Electronics, Inc. Pacific Aerospace & Cashmere Manufacturing Co., Inc. 100.0% 38 1,000 Electronics, Inc. Pacific Aerospace & Ceramic Devices, Inc. 100.0% 2 1,000 Electronics, Inc. Pacific Aerospace & Electronic Specialty Corporation 100.0% 2 100,000 Electronics, Inc. Pacific Aerospace & Northwest Technical Industries, 100.0% 2 100,000 Electronics, Inc. Inc. Pacific Aerospace & Pacific Coast Technologies, Inc., 100.0% 67 10,714,726 Electronics, Inc. Pacific Aerospace & PA&E International, Inc., 100.0% 1 100,000 Electronics, Inc. Pacific Aerospace & Seismic Safety Products, Inc. 100.0% 3 100,000 Electronics, Inc. Pacific Aerospace & Skagit Engineering & 100.0% 002 100 Electronics, Inc. Manufacturing, Inc. Pacific Aerospace & PA&E Engineering, Inc. 100.0% 1 100,000 Electronics, Inc.

ANNEX 1-B CERTIFICATES OF FOREIGN SUBSIDIARIES

Number of Percentage Certificate Outstanding Pledgor Issuing Corporation Ownership Number Shares - ------- ------------------- --------- ----------- ----------- PA&E International, Inc. Pacific A & E Limited 100.0% 1 1

EX-10.12 17 f80483ex10-12.txt EXHIBIT 10.12 EXHIBIT 10.12 EXCHANGE AGREEMENT BY AND AMONG PACIFIC AEROSPACE & ELECTRONICS, INC., AEROMET AMERICA, INC., BALO PRECISION PARTS, INC., CASHMERE MANUFACTURING CO., INC., CERAMIC DEVICES, INC., ELECTRONIC SPECIALTY CORPORATION, NORTHWEST TECHNICAL INDUSTRIES, INC., PACIFIC COAST TECHNOLOGIES, INC., PA&E INTERNATIONAL, INC., SEISMIC SAFETY PRODUCTS, INC., SKAGIT ENGINEERING & MANUFACTURING, INC. AND THE HOLDERS OF THE OUTSTANDING 11 1/4% SENIOR SUBORDINATED NOTES DUE 2005 OF PACIFIC AEROSPACE & ELECTRONICS, INC. NAMED IN EXHIBIT A HERETO Dated as of March 19, 2002 TABLE OF CONTENTS

Page ---- ARTICLE 1 DEFINITIONS 1.1. Definitions...................................................................2 ARTICLE 2 THE EXCHANGE 2.1. Exchange......................................................................3 2.1.1. Common Stock...........................................................4 2.1.2. Preferred Stock........................................................4 2.1.3. New Notes..............................................................4 2.2. U.S. Federal Income Tax Treatment.............................................4 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SUBSIDIARY GUARANTORS 3.1. Representations and Warranties of the Company and the Subsidiary Guarantors....................................................................4 3.1.1. Organization and Standing..............................................4 3.1.2. Authority and Enforceability...........................................5 3.1.3. Consents and Approvals.................................................5 3.1.4. No Violations..........................................................6 3.1.5. Validity of Stock and Notes............................................7 3.1.6. Litigation and Claims Against the Company..............................7 3.1.7. Capitalization.........................................................8 3.1.8. SEC Reports and Financial Statements...................................8 3.1.9. Undisclosed Liabilities................................................9 3.1.10. Material Contracts...................................................10 3.1.11. Compliance...........................................................10 3.1.12. Title to Property and Assets.........................................10 3.1.13. Related Party Transactions...........................................10 3.1.14. No Fees..............................................................11 3.1.15. Proprietary Rights...................................................11 3.1.16. Employee Benefit Plans...............................................11 3.1.17. Labor Relations; Employees...........................................13 3.1.18. Environmental Matters................................................13 3.1.19. Section 3(a)(9) Exemption; Blue Sky Exemption........................14 3.1.20. Board Representation; Compliance with Rule 14f-1.....................14 3.1.21. Tax Returns..........................................................15

i ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE HOLDERS 4.1. Representations and Warranties of the Holders................................17 4.1.1. Ownership of Notes....................................................17 4.1.2. Authority.............................................................17 4.1.3. Consents and Approvals................................................17 4.1.4. No Violations.........................................................18 4.1.5. No Fees...............................................................18 ARTICLE 5 REGISTRATION RIGHTS 5.1. Demand Registrations.........................................................18 5.1.1. Demand Registrations..................................................18 5.1.2. Participation.........................................................19 5.1.3. Underwriting Requirements.............................................19 5.1.4. Preemption of Requested Registration..................................20 5.1.5. Exceptions............................................................20 5.1.6. Registration Statement Form...........................................21 5.2. Piggyback Registrations......................................................21 5.2.1. Piggyback Rights......................................................21 5.2.2. Right to Terminate Registration.......................................21 5.2.3. Underwriting Requirements.............................................22 5.3. Shelf Registration...........................................................22 5.4. Obligations of the Company...................................................23 5.5. Information from Holder......................................................26 5.6. Expenses of Registration.....................................................26 5.7. Delay of Registration........................................................27 5.8. Indemnification..............................................................27 5.9. "Market Stand-Off" Agreement.................................................30 ARTICLE 6 COVENANTS 6.1. Further Actions..............................................................31 6.2. Proxy Statement..............................................................31 6.3. Meetings.....................................................................31 6.4. Transferability..............................................................31 6.5. Voting Agreement.............................................................32 6.6. Board of Directors...........................................................32 6.6.1. Election of Directors.................................................32 6.6.2. Vacancies.............................................................33 6.6.3. Removal of Holder Nominees............................................34 ii 6.7. Exercise of Specified Rights.................................................34 6.8. No Voting Obligations - HBK Master Fund L.P..................................34 6.9. Grant of Stock Options.......................................................34 ARTICLE 7 CLOSING 7.1. Closing......................................................................35 7.2. Deliveries by the Company....................................................35 7.3. Deliveries by the Holders....................................................36 ARTICLE 8 SURVIVAL 8.1. Survival.....................................................................37 ARTICLE 9 MISCELLANEOUS 9.1. Entirety.....................................................................37 9.2. Counterparts.................................................................37 9.3. Fees and Expenses............................................................37 9.4. Notices and Waivers..........................................................37 9.5. Table of Contents and Captions...............................................38 9.6. No Assignment................................................................38 9.7. Successors and Assigns.......................................................39 9.8. Severability.................................................................39 9.9. Applicable Law...............................................................39 9.10. Amendment....................................................................39 9.11. Third Party Beneficiaries....................................................39 9.12. Publicity....................................................................39 iii TABLE OF SCHEDULES AND EXHIBITS Schedule 3.1.3 - Company Consents and Approvals Schedule 3.1.4 - No Violations Schedule 3.1.6 - Litigation and Claims against the Company Schedule 3.1.7 - Outstanding Options Schedule 3.1.8 - SEC Reports and Financial Statements Schedule 3.1.9 - Material Adverse Effect Schedule 3.1.10 - Material Contracts Schedule 3.1.12 - Title to Property and Assets Schedule 3.1.13 - Related Party Transactions Schedule 3.1.15 - Proprietary Rights Schedule 3.1.16(a) - Employee Benefit Plans Schedule 3.1.16(f) - Payments, Vestings or Liabilities Schedule 3.1.16(g) - Claims With Respect to Plans Schedule 3.1.16(h) - Post-Employment Life or Health Insurance Coverage Schedule 3.1.18 - Environmental Matters Schedule 3.1.21 - Tax Returns Exhibit A - Holders/Allocation of New Securities Exhibit B - Certificate of Designation Exhibit C - New Notes Indenture Exhibit D - Opinion of Company Counsel as to matters of Washington Law Exhibit E - Opinion of Company Counsel as to matters other than Washington Law Exhibit F - Amendment to Employment Agreement - Donald A. Wright Exhibit G - Supplemental Indenture Exhibit H - Form of Guarantee Exhibit I - Note Purchase Agreement iv EXCHANGE AGREEMENT THIS EXCHANGE AGREEMENT (this "Agreement") is made and entered into as of March 19, 2002 by and among Pacific Aerospace & Electronics, Inc., a corporation organized under the laws of the State of Washington (the "Company"), Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., PA&E International, Inc., Seismic Safety Products, Inc. and Skagit Engineering & Manufacturing, Inc. (collectively, the "Subsidiary Guarantors") and the noteholders named in Exhibit A (the "Holders") of the Company's 11 1/4% Senior Subordinated Notes due 2005 (the "Old Notes") issued pursuant to that certain indenture (the "Old Indenture") dated as of July 30, 1998 by and among the Company, the Guarantors (as defined therein) and the Bank of New York (as successor to IBJ Schroeder Bank & Trust Company), as Trustee. WHEREAS, the Company has failed to pay the interest payment on the Old Notes which was due on August 1, 2001, and did not make that payment by the expiration of the 30-day grace period, giving rise to certain rights of the Holders under the Old Indenture to accelerate payment of the Old Notes; WHEREAS, the Company and the Holders have entered into a Second Amended and Restated Agreement (as amended through the date hereof, the "Lock-Up Agreement"), dated as of January 11, 2002, pursuant to which the Holders have agreed to exchange their Old Notes for certain other securities of the Company, including common stock, convertible preferred stock and pay-in-kind senior subordinated notes, as more particularly described therein; WHEREAS, this Agreement provides for the exchange of such securities of the Company for the Old Notes; WHEREAS, following the execution of this Agreement, upon receipt of requisite shareholder approval to amend the Articles of Incorporation of the Company to increase the number of authorized shares of common stock of the Company as necessary to effect the full conversion of the convertible preferred stock into shares of common stock, the convertible preferred stock shall automatically convert into the number of shares of common stock of the Company (the "Conversion Shares") which will give the Holders, in the aggregate, 97.5% of the Company's common stock on a fully diluted basis (the "Automatic Conversion"); and WHEREAS, it is intended for U.S. federal income tax purposes that the Exchange (as defined below) shall qualify as a reorganization within the meaning of Section 368(a)(1)(E) of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, in consideration of the foregoing and of the respective representations, warranties and agreements set forth herein, and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS 1.1. Definitions. The following terms are defined in the sections indicated:

Defined Term Section ------------ ------- 2001 Financial Statement Report................... Section 5.3 Action............................................ Section 3.1.6 Agreement......................................... Preamble Amendment......................................... Section 6.2 Automatic Conversion............................. Recitals CEO............................................... Section 6.5 Certificate of Designation........................ Section 2.1.2 Closing........................................... Section 7.1 Code.............................................. Recitals Common Stock...................................... Section 2.1 Company........................................... Preamble Company Rights.................................... Section 3.1.15 Company SEC Filing................................ Section 3.1.8 Contract.......................................... Section 3.1.4(b) Conversion Shares................................. Recitals COO............................................... Section 6.5 Demand Request ................................... Section 5.1.1 Designated Registration........................... Section 5.2.1 DTC............................................... Section 7.2(i) Enforceability Exceptions......................... Section 3.1.2 Environmental Laws................................ Section 3.1.18 ERISA............................................. Section 3.1.16 ERISA Plan........................................ Section 3.1.16 Exchange.......................................... Section 2.1 Exchange Act...................................... Section 3.1.8 Expiring Nominee.................................. Section 6.6.1(e) GAAP.............................................. Section 3.1.8(a) Governmental Entity............................... Section 3.1.3 Guarantees........................................ Section 3.1.2 Holders........................................... Preamble Holder Nominee.................................... Section 6.6 Initiating Holder(s).............................. Section 5.1.1 Inspectors........................................ Section 5.4(o) Law............................................... Section 3.1.4(e) Liens............................................. Section 3.1.4(c) Lock-Up Agreement................................. Recitals Material Adverse Effect........................... Section 3.1.1 Material Contract................................. Section 3.1.10

2

Defined Term Section ------------ ------- Materials of Environmental Concern................ Section 3.1.18 New Notes ........................................ Section 2.1 New Notes Indenture............................... Section 2.1.3 New Options....................................... Section 6.9 Old Indenture..................................... Preamble Old Notes......................................... Preamble Option Rights..................................... Section 3.1.7 Order............................................. Section 3.1.4(e) Permit............................................ Section 3.1.4(e) PIK Notes......................................... Section 3.1.2 Plan(s)........................................... Section 3.1.16(a) Preferred Stock................................... Section 2.1 Proprietary Rights................................ Section 3.1.15 Proxy Statement................................... Section 6.2 Records........................................... Section 5.4(o) Registrable Securities ........................... Section 5.1.1 Registration Expenses............................. Section 5.6 Resale Registration Statement..................... Section 5.3 Rule 14f-1 Filing................................. Section 3.1.20(a) SEC............................................... Section 3.1.8(a) Securities Act.................................... Section 3.1.7 Specified Rights.................................. Section 3.1.7 Subsidiary Guarantors............................. Preamble Supplemental Indenture............................ Section 7.2(ix) Tax Return........................................ Section 3.1.21(e) Taxable Period.................................... Section 3.1.21(e) Taxes............................................. Section 3.1.21(e) Transaction Documents............................. Section 3.1.2 Voting Officer.................................... Section 6.5 Violation......................................... Section 5.8(a)

ARTICLE 2 THE EXCHANGE 2.1. Exchange. Upon the terms and subject to the conditions set forth in this Agreement, the Company is hereby issuing and delivering to each Holder which exchanges its Old Notes pursuant hereto, with respect to each $1,000 aggregate principal amount of Old Notes (and accrued but unpaid interest thereon through the date of the Exchange) so tendered, (i) 807.207 shares of common stock, par value $0.001 per share, of the Company (the "Common Stock"), (ii) 0.0158 shares of Series C Convertible Preferred Stock, par value $0.001 per share, of the Company (the "Preferred Stock") and (iii) $235.4788 aggregate amount of 10% pay-in-kind senior subordinated notes due November, 2007 of the Company, (the "New Notes") as set forth for each participating 3 Holder on Exhibit A hereto, all in exchange for cancellation of the Old Notes (together with accrued interest thereon through the date of the Exchange) so exchanged by such Holder (whether held beneficially or of record by such Holder) (such exchanges collectively, the "Exchange"). 2.1.1. Common Stock. Immediately following the exchange, the Holders will hold in the aggregate over 50% of the outstanding shares of Common Stock. 2.1.2. Preferred Stock. The Preferred Stock issued hereunder to the Holders is issued pursuant to, and shall have the terms and conditions set forth in, the Certificate of Designation attached hereto as Exhibit B (the "Certificate of Designation"). 2.1.3. New Notes. The New Notes issued hereunder to the Holders are issued pursuant to, and shall have the terms and conditions set forth in, the indenture by and between the Company, the Subsidiary Guarantors and U.S. Bank National Association, as trustee, dated as of the date hereof and in the form attached hereto as Exhibit C (the "New Notes Indenture"). 2.2. U.S. Federal Income Tax Treatment. The parties hereto (i) agree that it is their intention that the Exchange contemplated hereby qualify as a reorganization within the meaning of Section 368(a)(1)(E) of the Code pursuant to which no gain or loss is recognized and (ii) hereby adopt this Agreement as a plan of reorganization within the meaning of Treasury Regulation Section 1.368-2(g). ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SUBSIDIARY GUARANTORS 3.1. Representations and Warranties of the Company and the Subsidiary Guarantors. The Company and each of the Subsidiary Guarantors hereby, jointly and severally, represent and warrant to the Holders that the statements contained in this Section 3.1 are true, correct and complete as to itself and its subsidiaries as of the date of this Agreement, other than those representations and warranties that speak only as of a specified date: 3.1.1. Organization and Standing. The Company is a corporation duly organized and validly existing under the laws of the State of Washington. Each of the subsidiaries of the Company is a corporation duly organized and validly existing under the laws of the jurisdiction of its incorporation. Each of the Company and its subsidiaries has full corporate or other power and authority to carry on its business as it is currently conducted and to own and operate the properties currently owned and operated by it. Each of the Company and its subsidiaries is duly qualified or licensed to do business and is in good standing as a foreign corporation authorized to do business in all jurisdictions in which the 4 character of the properties owned or the nature of the business conducted by it would make such qualification or licensing necessary, except where the failure to be so qualified or licensed is not reasonably likely to have a material adverse effect on the financial condition, results of operations, properties, business or prospects of the Company and its subsidiaries, taken as a whole (a "Material Adverse Effect"). 3.1.2. Authority and Enforceability. Each of the Company and the Subsidiary Guarantors has full corporate power and authority to execute and deliver this Agreement, the New Notes, the New Notes Indenture, additional notes issued in kind in lieu of cash payment of interest on the New Notes (hereinafter, the "PIK Notes"), the Supplemental Indenture (as defined in Section 7.2(x) hereof) and the guarantees (the "Guarantees") contemplated in Article 11 of the New Notes Indenture (collectively, the "Transaction Documents"), to which it is a party, and to perform its obligations hereunder and thereunder. The Transaction Documents and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by the Company and each of the Subsidiary Guarantors, as applicable. The Transaction Documents have been duly executed and delivered by the Company and each of the Subsidiary Guarantors, as applicable, and the Transaction Documents constitute, and in the case of the PIK Notes (when issued in accordance with the New Notes Indenture), will constitute, valid, legal and binding obligations of the Company and the Subsidiary Guarantors, as applicable, enforceable against the Company and the Subsidiary Guarantors in accordance with their respective terms, except as enforceability may be limited by (A) applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws relating to or affecting creditors' rights generally and (B) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law) (clauses (A) and (B) being hereinafter referred to as the "Enforceability Exceptions"). 3.1.3. Consents and Approvals. Except as set forth on Schedule 3.1.3, no notices, reports, registrations or other filings are required to be made by or on behalf of the Company or any of its subsidiaries with, nor are any consents, approvals or authorizations required to be obtained by or on behalf of the Company or any of its subsidiaries from, any court or other governmental, administrative or regulatory authority in the United States or elsewhere (each, a "Governmental Entity") in connection with the execution, delivery or performance of this Agreement or the other Transaction Documents, or the consummation of the transactions contemplated hereby and thereby, in each case except for those the failure to make or obtain which, individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect or materially adversely affect the Company's or any of the Subsidiary Guarantors' ability to perform its obligations hereunder and under any of the other Transaction Documents or pursuant to the Certificate of Designation. 5 3.1.4. No Violations. Except as set forth on Schedule 3.1.4, the execution, delivery and performance of each of the Transaction Documents will not: (a) violate or contravene any provision of the articles of incorporation or bylaws or similar organizational documents of the Company or any of its subsidiaries; (b) violate, conflict with, or constitute or result in a default, acceleration or termination of, or entitle any party to terminate, accelerate, alter the terms of or cause a default under (in each case, with or without notice or lapse of time or both), any provision of any agreement, license, lease, contract, loan, note, mortgage, indenture, bond or other written or oral obligation to which the Company or any of its subsidiaries is a party or by which any of their assets are bound (each, a "Contract"), except, in each case, for such violations, conflicts, breaches or defaults which individually or in the aggregate are not reasonably likely to have a Material Adverse Effect or materially adversely affect the Company's or any of the Subsidiary Guarantors' ability to perform its obligations hereunder and under any of the other Transaction Documents or pursuant to the Certificate of Designation; (c) except pursuant to the terms of this Agreement or any of the other Transaction Documents, result in the creation or imposition of any liens, mortgages, security interests, charges, restrictions, pledges, equitable interests, rights of first refusal, preemptive rights, adverse claims or other encumbrances of any nature whatsoever (collectively, "Liens") with respect to any of the assets or properties of the Company or any of its subsidiaries; (d) require the Company or any of its subsidiaries to obtain the consent, waiver, authorization or approval of any person except where the failure to obtain such consent, waiver, authorization or approval is not reasonably likely to have a Material Adverse Effect or materially adversely affect the Company's or any of the Subsidiary Guarantors' ability to perform its obligations hereunder and under any of the other Transaction Documents or pursuant to the Certificate of Designation; or (e) violate, contravene or conflict with any award, judgment, decree, directive, requirement or other order of any Governmental Entity (each, an "Order"), any federal, state, local, municipal or foreign statute, law, rule, code, ordinance or regulation or common law (each, a "Law") or any federal, state, local, municipal or foreign permit (each, a "Permit") applicable to the Company or any of its subsidiaries except where such violation, contravention or conflict is not reasonably likely to have a Material Adverse Effect or materially adversely affect the Company's or any of the Subsidiary Guarantors' ability to perform its obligations hereunder and under any of the other Transaction Documents or pursuant to the Certificate of Designation. 6 3.1.5. Validity of Stock and Notes(a) . (a) The shares of the Common Stock being issued in the Exchange are duly authorized, validly issued, fully paid and nonassessable and free and clear of any Liens, and have not been issued in violation of any preemptive right or similar rights of any shareholder of the Company or any of its subsidiaries. (b) The Conversion Shares to be issued pursuant to the Automatic Conversion of the Preferred Stock following the receipt of requisite shareholder approval of the Amendment (as defined in Section 6.2) and the filing of such Amendment with the Secretary of State of the State of Washington will be duly authorized, validly issued, fully paid and nonassessable and free and clear of any Liens and, when issued upon such Automatic Conversion, will not have been issued in violation of any preemptive right or similar right of any shareholder of the Company or any of its subsidiaries. (c) The shares of the Preferred Stock being issued in the Exchange are duly authorized and validly issued, fully paid and nonassessable and free and clear of any Liens, have not been issued in violation of any preemptive right or similar rights of any shareholder of the Company or any of its subsidiaries, and holders thereof are entitled to the rights and privileges set forth in the Certificate of Designation. (d) The New Notes being issued in the Exchange are, and the PIK Notes at the time of their issuance pursuant to the terms of the New Notes Indenture will be, duly and validly authorized, executed, issued and delivered by the Company and constitute valid and legally binding obligations of the Company, entitled to the benefits provided by the New Notes Indenture, and enforceable in accordance with their terms subject to the Enforceability Exceptions, and the New Notes Indenture is duly authorized, executed and delivered by the Company and each of the Subsidiary Guarantors and duly qualified under the Trust Indenture Act of 1939, as amended and constitutes a valid and legally binding obligation of the Company and each of the Subsidiary Guarantors, enforceable in accordance with its terms, subject to the Enforceability Exceptions. 3.1.6. Litigation and Claims Against the Company. Except as set forth on Schedule 3.1.6, there are no actions, suits, claims, investigations or other legal or administrative proceedings by or before any Governmental Entity or arbitration panel (each, an "Action") or Orders pending or, to the knowledge of the Company, threatened against the Company or any of its subsidiaries or any of their respective assets, at law or in equity, individually or in the aggregate, that (i) is reasonably likely to have a Material Adverse Effect or materially adversely affect the Company's or any of the Subsidiary Guarantors' ability to perform its obligations hereunder and under any of the other Transaction Documents or pursuant to the Certificate of Designation or (ii) challenges or seeks to prevent the Exchange or the transactions contemplated by this Agreement and the other Transaction Documents. 7 3.1.7. Capitalization. Immediately prior to the Exchange, the authorized capital stock of the Company consists of 100,000,000 shares of Common Stock, of which 39,315,309 are issued and outstanding as of the date hereof and 11,473,150* of which are reserved for issuance as set forth on Schedule 3.1.7, and 5,000,000 shares of preferred stock, par value $0.001 per share, none of which are issued and outstanding. There are no shares of Common Stock which are treasury shares. All of the issued shares of capital stock of the Company (i) have been duly authorized, validly issued, fully paid and are nonassessable, and are free and clear of all Liens, (ii) have been issued in accordance with the Securities Act of 1933, as amended (the "Securities Act") and applicable state securities Laws and (iii) have not been issued in violation of any preemptive right or similar rights of any shareholder of the Company or any of its subsidiaries. Except as set forth on Schedule 3.1.7, all of the issued shares of capital stock of or other equity interests in each subsidiary of the Company (i) have been duly authorized, validly issued, fully paid and are nonassessable, and are owned directly or indirectly by the Company, free and clear of all Liens, (ii) have been issued in accordance with the Securities Act and applicable state securities Laws and (iii) have not been issued in violation of any preemptive right or similar rights of any shareholder of the Company or any of its subsidiaries. As of the date hereof, except pursuant to this Agreement and the other Transaction Documents and except as set forth on Schedule 3.1.7, there are no outstanding or authorized shares of phantom stock, options, warrants, purchase rights, subscription rights, conversion rights, exchange rights, stock appreciation rights, profit sharing rights or similar rights or other contracts or commitments or preemptive rights that could require the Company or any of its subsidiaries to issue, sell or otherwise cause to become outstanding any of its capital stock or any other debt or equity security (collectively, the "Option Rights"), and there are no outstanding securities convertible or exchangeable into shares of such capital stock or any other debt or equity security (together with the Option Rights, the "Specified Rights"). As of the date hereof, except for the Transaction Documents there are no agreements to which the Company or any of its subsidiaries is a party or, to the knowledge of the Company, to which any stockholder is a party, providing for voting rights, rights of first refusal, calls, commitments, stock restriction or other similar rights relating to any securities of the Company or any of its subsidiaries. 3.1.8. SEC Reports and Financial Statements(a) . (a) Except as described on Schedule 3.1.8, the Company has filed all required forms, reports and documents with the Securities and Exchange Commission (the "SEC") since January 1, 1996 (the "Company SEC Filings"), each of which complied in all - -------- * This amount includes 2,207,560 shares of Common Stock reserved for issuance in connection with stock options granted to Donald A. Wright, which Mr. Wright has agreed to cancel in exchange for new options following the Exchange. 8 material respects with all applicable requirements of the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), each as in effect on the dates such forms, reports and documents were filed. None of the Company SEC Filings (as amended through the date hereof), including, without limitation, any financial statements or schedules included or incorporated by reference therein, contained or incorporated by reference, when filed (or, in the case of filings amended by the Company, at such time as amended), any untrue statement of a material fact or omitted to state a material fact required to be stated or incorporated by reference therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Except as described on Schedule 3.1.8, the consolidated financial statements of the Company included or incorporated by reference in the Company SEC Filings complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto (including footnote disclosure) and fairly present in all material respects, in conformity with generally accepted accounting principles applied on a consistent basis ("GAAP") (except as may be indicated in the notes thereto), the consolidated financial position of the Company and its consolidated subsidiaries as of the dates thereof and their consolidated results of operations and changes in financial position for the periods then ended (subject, in the case of the unaudited interim financial statements, to normal year-end adjustments and to the fact that quarterly financial statements exclude certain footnotes required by GAAP). (b) The Proxy Statement (as defined in Section 6.2), when prepared and filed with the SEC as contemplated in Section 6.2, will comply in all material respects with all applicable requirements of the Exchange Act, as in effect on the date such Proxy Statement is filed and the date it is mailed to the stockholders of the Company. The Proxy Statement and any documents incorporated by reference therein (other than with respect to information provided by the Holders to the Company expressly for inclusion in such document) will not contain, when filed and when mailed to the stockholders of the Company, any untrue statement of a material fact or omit to state a material fact required to be stated or incorporated by reference therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The only information provided by the Holders to the Company for inclusion in the Proxy Statement is (i) the biographical information for each of the Holder Nominees (as defined below) expressly required for such inclusion pursuant to the Exchange Act and (ii) the aggregate principal amount of Old Notes either beneficially owned by such Holder or over which such Holder, alone or with its Affiliates (as defined in the Exchange Act, and over whom the Holder exercises sufficient control to insure enforcement of the provisions of this Agreement and the other Transaction Documents), has investment authority or discretion. 3.1.9. Undisclosed Liabilities. Except (a) as and to the extent reflected or adequately reserved against in the audited consolidated balance sheet 9 of the Company as of May 31, 2001 or in the notes thereto and (b) for liabilities which have been incurred since May 31, 2001 in the ordinary course of business consistent with past practice, there are no liabilities or obligations, secured or unsecured (whether absolute, accrued, contingent or otherwise), matured or unmatured, of the Company or any of its subsidiaries which would be required, in accordance with United States generally accepted accounting principles applied on a consistent basis, to be reflected or reserved against in the audited consolidated balance sheet of the Company as of May 31, 2001 or in the notes thereto or that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect. Except as set forth in Schedule 3.1.9, since May 31, 2001, there has not been any Material Adverse Effect. 3.1.10. Material Contracts. True and complete copies of the contracts, agreements, licenses and commitments (whether oral or written), material to the Company and its subsidiaries, taken as a whole (each, a "Material Contract") have been made available to the Holders prior to the date of this Agreement. All Material Contracts are valid and binding obligations of the Company and/or the applicable subsidiary, as the case may be, and to the knowledge of the Company, the other party or parties thereto, enforceable in accordance with their terms, subject to the Enforceability Exceptions. Except as set forth in Schedule 3.1.10, none of the Company nor any of its subsidiaries is in default under any of the Material Contracts, and no event has occurred, which, with notice or lapse of time or both, could constitute a default, except for such defaults that, individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect, and to the knowledge of the Company, except as set forth on Schedule 3.1.10, no other party thereto is in material default thereunder. 3.1.11. Compliance. Each of the Company and its subsidiaries has complied with all Laws and Orders applicable to its business and has obtained all Permits necessary for the conduct of its business, and such Permits are in full force and effect, except where failure to comply or to obtain such permits is not reasonably likely to have a Material Adverse Effect. 3.1.12. Title to Property and Assets. Except as set forth in Schedule 3.1.12 hereto, as of January 31, 2002, each of the Company and its subsidiaries has good and marketable title to all of its material real properties and assets and has good and valid title to, or a valid leasehold interest in, its other material property, in each case free and clear of all Liens. The material properties and assets of the Company and its subsidiaries are in good operating condition and repair, normal wear and tear excepted. 3.1.13. Related Party Transactions. Except for this Agreement and the other Transaction Documents, and except as set forth in Schedule 3.1.13, there are no agreements, understandings or proposed transactions among the Company or any of its subsidiaries on the one hand, and any of its respective officers, directors, shareholders, Affiliates (as such term is defined for purposes of the Securities Act), or any Affiliate thereof, on the other hand. 10 3.1.14. No Fees. Except for Jefferies & Company, Inc. and Houlihan Lokey Howard & Zukin Financial Advisors, Inc., whose fees shall be paid in accordance with Section 9.3 of this Agreement, no investment banker, financial advisor, consultant or other intermediary is entitled to any fee or commission from the Company or any of its subsidiaries for services rendered on behalf of the Company or any of its subsidiaries in connection with the transactions contemplated by this Agreement and the other Transaction Documents. 3.1.15. Proprietary Rights. Except as set forth on Schedule 3.1.15: (i) each of the Company and its subsidiaries is the sole owner, free and clear of any Lien, of, or has a valid license or other right, without the payment of any royalty except with respect to off-the-shelf software and otherwise on commercially reasonable terms, to all U.S. and foreign trademarks, service marks, logos, corporate and trade names, internet domain names, patents, registered designs, copyrights, computer software and databases, whether or not registered, web sites (and all intellectual property and proprietary rights incorporated therein) and all other trade secrets, research and development, know-how, proprietary and intellectual property rights and information, including all grants, registrations and applications relating thereto (collectively, the "Proprietary Rights"), used in the conduct of its business as now conducted, except for such Proprietary Rights the absence of which is not reasonably likely to have a Material Adverse Effect (such Proprietary Rights owned by or licensed to the Company or any of its subsidiaries, subject to such exception, collectively, the "Company Rights"); (ii) each of the Company and its subsidiaries has taken commercially reasonable actions to protect the Company Rights, and to acquire Proprietary Rights, consistent with prudent commercial practices in their respective industry; (iii) each of the rights of the Company and its subsidiaries in the Company Rights is valid and enforceable; (iv) none of the Company or its subsidiaries has received any demand, claim, notice or inquiry from any person or entity in respect of any Company Rights which challenges, threatens to challenge, or inquires as to whether there is any basis to challenge, the validity of, or the rights of the Company and its subsidiaries in, any such Company Rights, and the Company does not know of any basis for any such challenge; (v) none of the Company or its subsidiaries is in violation or infringement of, and none has violated or infringed, any Proprietary Rights of any other person or entity, except as is not reasonably likely to have a Material Adverse Effect; (vi) to the knowledge of the Company, no person or entity is infringing any Company Rights; and (vii) except on an arm's-length basis for value and other commercially reasonable terms, none of the Company or its subsidiaries has granted any license with respect to any Company Rights to any person or entity. 3.1.16. Employee Benefit Plans(a) . (a) For purposes hereof, each employee benefit or compensation plan, fund, program, arrangement, agreement or policy maintained or contributed to by the Company or any of its subsidiaries or as to which the Company or any of its subsidiaries has any liability shall be referred to herein as the "Plans" and individually as a "Plan". For purposes 11 hereof, "Plans" shall include any Plan that is an "employee benefit plan" within the meaning of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (each, an "ERISA Plan"). (b) Schedule 3.1.16(a) lists all Plans as of the date hereof, and the Company has provided the Holders with all documents relating to any of the Plans. (c) Each ERISA Plan is in compliance in all material respects with the applicable provisions of ERISA and the Code, including, in the case of any ERISA Plan intended to be qualified under Code Section 401(a), the provisions of Code Section 401(a). A determination letter has been received from the IRS as to each ERISA Plan that is intended to be qualified under Code Section 401(a) and to the knowledge of the Company nothing has occurred that would be reasonably likely to result in the revocation of any such determination letter. (d) With respect to any ERISA Plan maintained, sponsored or required to be contributed to within the last six years by the Company, any subsidiary or any trade or business which together with the Company or any subsidiary would be treated as a single employer under Section 414 of the Code that is subject to Title IV of ERISA, (i) no "accumulated funding deficiency", as defined in Section 412 of the Code, has been incurred, whether or not waived, that has not been satisfied in full and (ii) the actuarially determined present value of all "benefit liabilities" within the meaning of Section 4001(a)(16) of ERISA (as determined on the basis of the actuarial assumptions contained in the plans' most recent actuarial valuation) did not exceed the then current value of the assets of such plans, and (iii) there has not been an adverse change in the financial condition of such ERISA Plan which would have caused a material change in the funded status of such plan. No ERISA Plan to which the Company contributes or otherwise has any liability is a multiemployer pension plan within the meaning of Section 3(37) of ERISA. (e) None of the Company or any of its subsidiaries has engaged in any "prohibited transactions" (as described in Section 4975 of the Code or in Part 4 of Subtitle B of Title I of ERISA) with respect to any Plan. (f) Except as disclosed on Schedule 3.1.16(f), the consummation of the transactions contemplated by this Agreement will not (i) entitle any person to payments under any Plan to which he would not be entitled if the transactions contemplated by this Agreement were not consummated, (ii) accelerate the time of payment or vesting, or increase the amount of compensation or benefits due to any person under any Plan, or (iii) result in any liability under Title IV of ERISA. (g) Except as disclosed on Schedule 3.1.16(g), no Plan is subject to any pending, or to the knowledge of the Company, threatened with any, dispute, lawsuit, claim (other than routine claims for benefits), investigation or complaint 12 to, or by, any person or Governmental Entity. Except as disclosed on Schedule 3.1.16(g), no Plan is the subject of an audit or, to the knowledge of the Company, under investigation by any Governmental Entity, nor, to the knowledge of the Company, is any such audit or investigation threatened. (h) Except as set forth on Schedule 3.1.16(h), neither the Company nor any of its subsidiaries has any obligation to provide any post-employment health or life insurance coverage under any Plan or arrangement, other than such benefits required by law, and each Plan may be amended or terminated without incurring liability thereunder. 3.1.17. Labor Relations; Employees. No labor dispute with the employees of the Company or any of its subsidiaries exists or, to the knowledge of the Company, is imminent that is reasonably likely to have a Material Adverse Effect. No collective bargaining agreement covering any of the employees of the Company or any of its subsidiaries exists and, to the knowledge of the Company, no such agreement is imminent. 3.1.18. Environmental Matters(a) . (a) Except as disclosed in Schedule 3.1.18 or as is not reasonably likely to have a Material Adverse Effect, (i) each of the Company and its subsidiaries is in compliance with all applicable federal, state, local, municipal, and foreign Laws and Orders relating to pollution, preservation or protection of human health or safety or the environment, including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata, and natural resources, and mitigation of adverse effects thereon (together "Environmental Laws") and including, without limitation, Laws and Orders relating to the presence, manufacture, generation, processing, distribution, use, treatment, storage, disposal, transport, handling, emission, discharge, release or threatened release of chemicals, pollutants, contaminants, wastes, radioactive, toxic or hazardous substances or wastes, petroleum or petroleum-derived substances, products or wastes, asbestos or asbestos-containing materials, polychlorinated biphenyls, lead or lead-based paints or materials, or any constituent, breakdown product or by-product of any of the foregoing ("Materials of Environmental Concern"), and recordkeeping, notification, disclosure and reporting requirements with respect thereto, (ii) each of the Company and its subsidiaries possesses all Permits and other governmental authorizations required under applicable Environmental Laws, and is in compliance with the terms and conditions thereof and (iii) each of the Company and its subsidiaries is in compliance with the terms and conditions of any instrument or agreement pursuant to which any of them has settled or discharged any liability under Environmental Laws. (b) Except as disclosed in the Company SEC Filings or in Schedule 3.1.18 or except as is not reasonably likely to have a Material Adverse Effect, (i) neither the Company nor any of its subsidiaries has received any communication (written or oral), whether from a Governmental Entity, citizens group, employee or otherwise, which alleges that the Company or any of its 13 subsidiaries (or any person or entity whose liability the Company or any of its subsidiaries has acquired, retained or assumed either contractually or by operation of law) is, has been or may be in violation of or not in compliance with any Environmental Law or has or may have any liability (including, without limitation, liability for investigatory costs, cleanup costs, response costs, corrective action, natural resource damages, property damage, personal injury, or fines or penalties) under any Environmental Law and (ii) there are no past or present actions, activities, circumstances, conditions, events or incidents, including, without limitation, the release, emission, discharge, presence or disposal of any Materials of Environmental Concern at any location and at any time, that would form the basis for any future liability arising under or relating to Environmental Laws of or to the Company or any of its subsidiaries or of or to any person or entity whose liability the Company or any of its subsidiaries has acquired, retained or assumed either contractually or by operation of law. (c) Each of the Company and its subsidiaries has made available to the Holders any assessments, reports, data, results of investigations or audits, notices of violation, complaints, agreements and notices relating to contribution or indemnification rights or obligations, that are in the possession of the Company or any of its subsidiaries regarding actual or potential liabilities arising under or relating to Environmental Laws of or to the Company or its subsidiaries or of or to any person or entity whose liability the Company or any of its subsidiaries has acquired, retained or assumed either contractually or by operation of law, except as relates to such liabilities which are not reasonably likely to have a Material Adverse Effect. 3.1.19. Section 3(a)(9) Exemption; Blue Sky Exemption. Assuming no person, other than the Company, has paid or given, directly or indirectly, any commission or other remuneration for soliciting the Exchange and the other transactions contemplated in this Agreement or the other Transaction Documents, the issuance and delivery of the Common Stock, the Preferred Stock and the New Notes by the Company in exchange for each of the Holders' Old Notes pursuant to the terms of this Agreement and the other Transaction Documents is exempt pursuant to Section 3(a)(9) of the Securities Act from the registration requirements of the Securities Act. No consent, approval, filing, notice or similar action is required in connection with the Exchange pursuant to any state securities or "Blue Sky" Laws. 3.1.20. Board Representation; Compliance with Rule 14f-1(a) . (a) The Company has complied with the requirements of Rule 14f-1 pursuant to the Exchange Act and filed with the SEC, and transmitted to all holders (as of the applicable record date) of securities of the Company who would be entitled to vote at a meeting for the election of directors of the Company, the information contemplated by Rule 14f-1 under the Exchange Act (the "Rule 14f-1 Filing"), and taken all other actions required under Section 14 of the Exchange Act and Rule 14f-1 promulgated thereunder necessary to consummate the transactions contemplated in this Agreement and the other Transaction 14 Documents, including, without limitation, the appointment of directors contemplated by Section 3.1.20(b) hereof. The Rule 14f-1 Filing complied in all material respects with all applicable requirements of the Securities Act and the Exchange Act, as in effect on the date of such filing and such transmission to securityholders of the Company of the Rule 14f-1 Filing. The Rule 14f-1 Filing (other than with respect to the information provided in writing by the Holders to the Company expressly for inclusion in such filing) did not contain or incorporate by reference, when filed and when transmitted to securityholders of the Company, any untrue statement of a material fact or omit to state a material fact required to be stated or incorporated by reference therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. (b) As of the date hereof, Messrs. Werner Hafelfinger, Dale L. Rasmussen, Gene C. Sharratt, Robert M. Stemmler and William A. Wheeler have tendered their resignations as directors of the Company and, Messrs. Robert A. Hamwee, Matthew Kaufman, Richard Detweiler and Carl Goldsmith have been duly appointed by the holders of the Preferred Stock in accordance with Washington law, the Articles of Incorporation of the Company and the Bylaws of the Company, as directors of the Company. 3.1.21. Tax Returns(a) . (a) Except as set forth on Schedule 3.1.21, all Tax Returns required to be filed by or with respect to the Company or any of its subsidiaries for all Taxable Periods have been timely filed. All such Tax Returns (i) were prepared in the manner required by applicable Law, (ii) are true, correct, and complete in all material respects, and (iii) accurately reflect the liability for Taxes of the Company and its subsidiaries. All Taxes shown to be payable on such Tax Returns, and all assessments of Tax made against the Company or any of its subsidiaries with respect to such Tax Returns, have been paid when due. No adjustment relating to any such Tax Return has been proposed or, to the Company's knowledge threatened formally or informally by any Taxing authority and no basis exists for any such adjustment. Since the date of the most recent Company SEC Filing, neither the Company nor any subsidiary has incurred any liability for Taxes that would result in a material decrease in the net worth of the Company or any such subsidiary. (b) Except as set forth on Schedule 3.1.21, the Company and each of its subsidiaries have paid, or caused to be paid, all Taxes due, whether or not shown (or required to be shown) on a Tax Return, and have provided a sufficient reserve for the payment of all Taxes not yet due and payable in the Company SEC Filing; and such Taxes paid or provided for include those for which the Company or any of its subsidiaries may be liable in its own right, or as the transferee of the assets of, or as successor to, any other corporation, association, partnership, joint venture, or other entity. (c) The Company and each of its subsidiaries have complied in all material respects with the requirements relating to the withholding and payment 15 of Taxes, and have, within the time and in the manner prescribed by law, withheld from employee wages and paid over to the proper governmental authorities all amounts required. (d) Neither the Company nor any of its subsidiaries has incurred, or will incur, any material Tax liability in connection with (i) the Exchange or (ii) the other transactions contemplated by this Agreement. (e) As used herein the following terms have the following respective meanings: (i) "Tax" or "Taxes" shall mean any and all federal, state, local and foreign taxes, assessments and other governmental charges, duties, impositions, levies and liabilities, including, without limitation, taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, and value added, ad valorem, transfer, gains, franchise, withholding, payroll, recapture, employment, excise, unemployment, insurance, social security, business license, occupation, business organization, stamp, environmental and property taxes, together with all interest, penalties and additions imposed with respect to such amounts. For purposes of this Agreement, "Taxes" also includes any obligations under any agreements or arrangements with any Person with respect to the liability for, or sharing of, Taxes (including pursuant to Treas. Reg. Section 1.1502-6 or comparable provisions of state, local or foreign Tax law) and including any liability for Taxes as a transferee or successor, by contract or otherwise. (ii) "Taxable Period" means any taxable year or any other period that is treated as a taxable year (or other period, or portion thereof, in the case of a Tax imposed with respect to such other period; e.g., a quarter) with respect to which any Tax may be imposed under any applicable statute, rule, or regulation. (iii) "Tax Return" means any report, return, election, notice, estimate, declaration, information statement and other forms and documents (including, without limitation, all schedules, exhibits and other attachments thereto) relating to and filed or required to be filed with a taxing authority in connection with any Taxes (including, without limitation, estimated Taxes). 16 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE HOLDERS 4.1. Representations and Warranties of the Holders. (i) Each Holder hereby represents and warrants to the Company, severally, only as to itself, and not jointly, that the statements contained in this Section 4.1 with respect to such Holder are correct and complete as of the date of this Agreement, other than those representations and warranties that speak only as of a specified date: 4.1.1. Ownership of Notes. (i) The Holder either (A) beneficially owns the principal amount of Old Notes set forth opposite its name in Exhibit A attached hereto or (B) alone or with its Affiliates (as defined in the Exchange Act, and over whom the Holder exercises sufficient control to insure enforcement of the provisions of this Agreement and the other Transaction Documents) has investment authority or discretion over the principal amount of Old Notes set forth opposite its name in Exhibit A attached hereto, free and clear of any and all Liens, and the Holder has not granted, sold, conveyed, transferred or otherwise disposed of any right, title or interest (legal, record or beneficial) in and to such Old Notes to any person; and (ii) the Holder has the full right and authority to cancel the indebtedness represented by such Old Notes as contemplated by this Agreement. The debt evidenced by the Old Notes is no longer outstanding, the Holder does not have any rights thereunder and none of the Company, any of its subsidiaries or the Holder will have any obligations thereunder, except for those rights and obligations which the Company will have with respect to holders of such notes who are not parties to this Agreement or the other Transaction Documents. 4.1.2. Authority. The Holder has the power, authority and capacity necessary to execute, deliver and perform its obligations under this Agreement and any of the other Transaction Documents to which the Holder is a party and to consummate the transactions contemplated hereby and thereby and to execute the consent contemplated in Section 7.3(ii). The execution, delivery and performance of this Agreement and any other Transaction Document to which the Holder is a party and the consent contemplated in Section 7.3(ii) and the consummation of the transactions contemplated herein and therein have been duly and validly authorized by all necessary action in respect thereof on the part of the Holder. This Agreement and any other Transaction Document to which the Holder is a party have been duly executed and delivered and represent legally valid and binding obligations of the Holder, enforceable against the Holder in accordance with their terms, subject to the Enforceability Exceptions. 4.1.3. Consents and Approvals. Except for the filing of Schedule 13D and Form 3 with the SEC, no notices, reports, registrations or other filings are required to be made by the Holder or on its behalf with, nor are any consents, approvals or authorizations required to be obtained by the Holder or on its behalf 17 from, any Governmental Entity in connection with the execution, delivery or performance of this Agreement or any other Transaction Document to which the Holder is a party, in each case except for those the failure to make or obtain which, individually or in the aggregate, is not material. 4.1.4. No Violations. The execution, delivery and performance of this Agreement will not: (a) violate or contravene any provision of the articles of incorporation or bylaws or similar organizational documents of the Holder; (b) violate, conflict with, or constitute or result in a default, acceleration or termination of, or entitle any party to terminate, accelerate, alter the terms of or cause a default under (in each case, with or without notice or lapse of time or both), any provision of any agreement, license, lease, contract, loan, note, mortgage, indenture, bond or other written or oral obligation to which the Holder is a party or by which any of the Holder's assets are bound, except, in each case, for such violations, conflicts, breaches or defaults which individually or in the aggregate are not reasonably likely to materially adversely affect the Holder's ability to perform its obligations hereunder; (c) require the Holder to obtain the consent, waiver, authorization or approval of any person except where the failure to obtain such consent, waiver, authorization or approval is not reasonably likely to materially adversely affect the Holder's ability to perform its obligations hereunder; or (d) violate, contravene or conflict with any Order, Law or Permit, applicable to the Holder except where such violation, contravention or conflict is not reasonably likely to materially adversely affect the Holder's ability to perform its obligations hereunder. 4.1.5. No Fees. No investment banker, financial advisor, consultant or other intermediary is entitled to any fee or commission from the Holder for services rendered on behalf of the Holder in connection with the transactions contemplated by this Agreement and the other Transaction Documents. ARTICLE 5 REGISTRATION RIGHTS 5.1. Demand Registrations. 5.1.1. Demand Registrations. Subject to the conditions of this Section 5.1, at any time on and after the date hereof, any of the Holders individually or together with other Holders (the "Initiating Holder" or "Initiating Holders") holding in the aggregate at least 50% of the total outstanding number of shares or aggregate principal amount, as applicable, of Registrable Securities for 18 which a Demand Request (as hereinafter defined) is made may make a written request (a "Demand Request") that the Company file a registration statement under the Securities Act on the appropriate form covering the registration of Registrable Securities. Such Demand Request shall specify the aggregate number of shares or aggregate principal amount of Registrable Securities proposed to be sold and will also specify the intended method or methods of disposition thereof. The Company shall only be required to effect three registrations pursuant hereto and no more than two in any 12-month period. "Registrable Securities" shall mean (i) the shares of the Common Stock acquired by the Holders pursuant to the terms of this Agreement, including the Conversion Shares acquired by the Holders upon the Automatic Conversion of the Preferred Stock and (ii) the New Notes and the PIK Notes; provided, that any Registrable Securities transferred (A) pursuant to a registration statement under the Securities Act covering such Registrable Securities that has been declared effective by the SEC or (B) pursuant to Rule 144 promulgated pursuant to the Securities Act to a non-affiliate of the Company, shall be excluded from the definition of "Registrable Securities". 5.1.2. Participation. Within twenty (20) days of the receipt of any Demand Request, the Company shall give written notice of such Demand Request to all Holders. Subject to the provisions of this Section 5.1, the Company shall include in such demand registration all Registrable Securities that the Holders request to be registered in a written request from such Holders received by the Company within twenty (20) days of the mailing of the Company's notice pursuant to this Section 5.1.2. 5.1.3. Underwriting Requirements. The Company shall have the right to select an investment banking firm to act as managing underwriter from a list of five (5) investment banking firms chosen by the Initiating Holder out of the top ten managers of underwritten equity offerings in the country based on the volume of underwritten equity offerings for the past two years. Notwithstanding any other provision of this Section 5.1, if the managing underwriter with respect to a proposed offering made pursuant to a Demand Request advises the Company and the Holders in writing that, in its good faith opinion, the number of securities requested to be included in such offering exceeds the number of securities which can be sold in such offering without being likely to have an adverse effect on the offering of securities as then contemplated (including the price at which it is proposed to sell the securities), then the Company shall so advise all Holders of Registrable Securities that would otherwise be underwritten pursuant hereto, and the number of shares that may be included in the registration shall be allocated: (i) first, to securities being sold for the account of the Holders of Registrable Securities on a pro rata basis based on the number of Registrable Securities requested to be included in such registration by all such Holders; provided that if the Initiating Holder is unable to register at least 50% of its Registrable Securities proposed to be registered in its or their Demand Request, such Demand Request shall be deemed to have been withdrawn, but the Company shall be obligated to continue to pursue the registration of Registrable Securities initiated by the making of such Demand Request, and the Initiating Holder shall retain its rights 19 to registration under this Section 5.1 as though no request for such registration had been made by such Holder; (ii) second, to securities being sold for the account of the Company; and (iii) last, to any other shareholders the Company may determine to allow to participate in the registration. 5.1.4. Preemption of Requested Registration. Notwithstanding anything to the contrary contained herein, at any time within twenty (20) business days after receiving a Demand Request, the Company may elect to effect an underwritten primary registration in lieu of the registration requested in the Demand Request if the Company's Board of Directors believes that such primary registration would be in the best interests of the Company or if the managing underwriter with respect to the proposed offering requested in the Demand Request advises the Company and the Holders in writing that in its good faith opinion, in order to sell the Registrable Securities to be sold, the Company should include its own securities. If the Company so elects to effect a primary registration, the Company shall give prompt written notice to all Holders of Registrable Securities of its intention to effect such a registration and shall afford the Holders of the Registrable Securities piggyback rights contained in Section 5.2 with respect to such primary registration. In the event that the Company so elects to effect a primary registration after receiving a Demand Request, such Demand Request shall be deemed to have been withdrawn and the Initiating Holder shall retain its rights to registration under this Section 5.1 as though no request for such registration had been made by them. 5.1.5. Exceptions. Notwithstanding the foregoing provisions, the Company shall not be required to effect a registration pursuant to this Section 5.1: (i) in any particular jurisdiction in which the Company would be required to qualify to do business, where not otherwise required, or to execute a general consent to service of process in effecting such registration, qualification or compliance; or (ii) after the Company has effected the number of registrations required pursuant to Sections 5.1.1, and such registrations have been declared or ordered effective, shall remain effective for at least the period of time provided in Section 5.4(a) hereof, and no stop order shall have been issued with respect thereto; or (iii) during the period starting with the date thirty (30) days prior to the Company's good faith estimate of the date of the filing of, and ending on a date one hundred eighty (180) days following the effective date of, a registration subject to the Holders' rights under Section 5.2; provided that the Company is actively employing in good faith reasonable efforts to cause such registration statement to become effective. If a demand registration is delayed, deferred or otherwise not effected due to 20 this Section 5.1.5(iii), the Initiating Holder's request shall be deemed withdrawn and the Initiating Holder shall retain its rights to registration under this Section 5.1 as though no request for such registration had been made by such Holder; or (iv) if the Board of Directors of the Company, in its good faith judgment, determines that a registration of Registrable Securities should not be made because it would be seriously detrimental to the Company to register such Registrable Securities, then in such event the Company shall have the right to defer the filing or registration statement pursuant to a Demand Request for a period of not more than one hundred eighty (180) days after receipt of such Demand Request (provided, however, that the Company shall not defer its obligation in this manner more than once in any twelve-month period). 5.1.6. Registration Statement Form. The Company may, if permitted by law, effect any registration of Registrable Securities pursuant to Section 5.1 by the filing of a registration statement on Form S-3 unless, in the event such registration involves an underwritten public offering, the managing underwriter shall notify the Company in writing that, in the judgment of such managing underwriter, the use of a more detailed form or inclusion of additional information, which in each case shall be specified in such notice, is reasonably necessary to effectively market the offering of such Registrable Securities, in which case such registration shall be effected on the form so specified or shall include the information so specified, as applicable. 5.2. Piggyback Registrations. 5.2.1. Piggyback Rights. If (but without any obligation to do so) the Company proposes to register any of its shares of Common Stock or other securities under the Securities Act in connection with the public offering of such securities (other than a registration relating solely to the sale of securities to participants in a Company employee benefit plan or a registration relating to a corporate reorganization or other transaction under Rule 145 of the Securities Act (each, a "Designated Registration")), whether or not for its own account, the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given in writing to the Company within fifteen (15) days after receipt of such notice by the Company, the Company shall, subject to the provisions of Section 5.2.3, use its reasonable best efforts to prepare, file and cause to become effective a registration statement which includes all of the Registrable Securities that each such Holder has requested to be registered. 5.2.2. Right to Terminate Registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 5.2 prior to the effectiveness of such registration, whether or not any 21 Holder has elected to include securities in such registration. The expenses of such withdrawn registration shall be borne by the Company in accordance with Section 5.6 hereof. Any such withdrawal shall be without prejudice to the rights of any Holder to request that a registration be effected under Section 5.1 or to be included in subsequent registrations under Section 5.2.1. 5.2.3. Underwriting Requirements. In connection with any offering involving an underwriting of shares issued by the Company, the Company shall not be required under this Section 5.2 to include any of a Holder's Registrable Securities in such underwriting unless such Holder accepts the terms of the underwriting as agreed upon between the Company and the underwriters selected by the Company and enters into an underwriting agreement in customary form with an underwriter or underwriters selected by the Company. If the total amount of securities, including Registrable Securities, requested by shareholders to be included in such offering exceeds the amount of securities to be sold, other than by the Company, that the underwriters determine in their reasonable discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, that the underwriters determine in their good faith opinion will not jeopardize the success of the offering. If such registration as initially proposed by the Company was in whole or in part requested by holders of securities of the Company, other than the Holders of Registrable Securities in their capacities as such, pursuant to demand registration rights, then the number of shares that may be included in the underwriting shall be allocated as follows: (x) first, such securities held by the holders initiating such registration and, if applicable, any securities proposed by the Company to be sold for its own account, allocated in accordance with the priorities then existing among the Company and such holders, (y) second, any Registrable Securities requested to be included in such registration by Holders of Registrable Securities, pro rata on the basis of the number of Registrable Securities requested to be included in such registration and (z) last, any other securities of the Company proposed to be included in such registration, allocated among the holders thereof in accordance with the priorities then existing among the Company and such holders. Any Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn from the registration. 5.3. Shelf Registration. The Company shall use its best efforts to obtain, and to cause its independent auditors to deliver, as promptly as practicable following the date hereof, an unqualified audit opinion on the consolidated financial statements of the Company as of December 31, 2000 and December 31, 2001 and for each of the years ending May 31, 1999, 2000 and 2001 (the "2001 Financial Statement Report"). The Company shall, within 5 business days following its receipt of the 2001 Financial Statement Report, (i) prepare and file with the SEC a registration statement pursuant to which the Holders may resell from time to time any Registrable Securities received in the Exchange or upon the Automatic Conversion (the "Resale Registration Statement") and (ii) use its best efforts to have the Resale Registration Statement declared effective by the SEC as promptly as practicable following the filing thereof. The 22 Company shall prepare and file such amendments and supplements to the Resale Registration Statement and the prospectus used in connection therewith and take any other actions as may be necessary to keep the Resale Registration Statement effective for a period of two years from the date upon which the SEC declares the Resale Registration Statement effective. 5.4. Obligations of the Company. Whenever required under this Article 5 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) prepare and file with the SEC, no later than forty-five (45) days after the Company's receipt of a Demand Request made pursuant to Section 5.1.1, a registration statement with respect to such Registrable Securities and use its reasonable best efforts to cause such registration statement to become effective and, keep such registration statement effective for a period of one year or, if earlier, until the distribution contemplated in the registration statement has been completed; provided, however, that such one year period shall be extended by the number of calendar days in any period beginning with the delivery of the notification contemplated by the first clause of subsection 5.4(g), and ending with the delivery of the supplements or amendments contemplated by subsection 5.4(g); (b) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration as may be necessary to comply with the provisions of the Securities Act with respect to disposition of all securities covered by such registration statement for the period set forth in paragraph 5.4(a) above or Section 5.3, as applicable; (c) furnish to each selling Holder and counsel selected by the selling Holders copies of all documents proposed to be filed with the SEC in connection with such registration, which documents will be subject to the review of such counsel and each selling Holder; (d) furnish to the selling Holders, without charge, such number of (i) conformed copies of the registration statement and of each amendment or supplement thereto (in each case including all exhibits and documents filed therewith), and (ii) copies of the prospectus included in such registration statement, including each preliminary prospectus and any summary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them in accordance with the intended method or methods of such disposition; (e) in the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering and enter into 23 such other agreements and take such other actions in order to expedite or facilitate the disposition of such Registrable Securities, including, without limitation, preparing for, and participating in, "road shows" and all other customary selling efforts, all as the underwriters reasonably request; (f) promptly notify each selling Holder covered by such registration statement (i) of the issuance of any stop order by the SEC in respect of such registration statement (and use every reasonable effort to obtain the lifting of any such stop order at the earliest possible moment), (ii) of any period when the registration statement ceases to be effective, (iii) when such registration statement or any prospectus used in connection therewith, or any amendment or supplement thereto, has been filed and, with respect to such registration statement or any post-effective amendment thereto, when the same has become effective or (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification of any Registrable Securities for sale under the applicable securities or blue sky laws of any jurisdiction; (g) notify each selling Holder covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes or incorporates by reference an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and, as promptly as is practicable, prepare, file with the SEC and furnish to such selling Holder a reasonable number of copies of any supplement to or amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include or incorporate by reference an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; (h) cause all such Registrable Securities registered hereunder to be listed on each national securities exchange on which similar securities issued by the Company are then listed; (i) provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration; (j) use its reasonable best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky Laws of such jurisdictions as shall be reasonably requested by the selling Holders (or obtain an exemption from registration or qualification under such Laws) and do any and all other acts and things which may be necessary or advisable to enable such selling Holders to consummate the disposition of the 24 Registrable Securities in such jurisdictions in accordance with the intended method or methods of distribution thereof; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business, where not otherwise required, or to file a general consent to service of process in any such states or jurisdictions; (k) furnish to each selling Holder a signed counterpart, addressed to such selling Holder, of an opinion of counsel for the Company experienced in securities Law matters, dated the effective date of the registration statement (and, if any registration includes an underwritten public offering, the date of the closing under the underwriting agreement) covering such matters as are customarily covered in opinions of issuer's counsel delivered to the underwriters in underwritten public offerings of securities and such other matters as may be reasonably requested by the Initiating Holders, if any; (l) to the extent the Company is able, after using its best efforts, to cause the independent accountants who have issued an audit report on the Company's financial statements included (or incorporated by reference) in the registration statement to issue a "comfort" letter to each selling Holder after using the Company's best efforts to obtain such a letter, furnish to each selling Holder a signed counterpart of such "comfort" letter, dated the effective date of the registration statement (and, if any registration includes an underwritten public offering, the date of the closing under the underwriting agreement), signed by the independent public accountants covering such matters as are customarily covered in accountant's letters delivered to the underwriters in underwritten public offerings of securities and such other matters as may be reasonably requested by the Initiating Holders, if any; (m) use its reasonable best efforts to cause all Registrable Securities covered by such registration statement to be registered with or approved by such other Governmental Entities as may be necessary by virtue of the business and operations of the Company to enable each selling Holder thereof to consummate the disposition of such Registrable Securities in accordance with the intended method or methods of disposition thereof; (n) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable, an earnings statement of the Company (in form complying with the provisions of Rule 158 under the Securities Act) covering the period of at least twelve (12) months, but not more than eighteen (18) months, beginning with the first month after the effective date of the registration statement; (o) make available for inspection by any selling Holder, any underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other agent retained by any such Holder or underwriter (collectively, the "Inspectors"), all financial and other records, 25 pertinent corporate documents and properties of the Company (collectively, the "Records") as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such Inspector in connection with such registration statement, and permit the Inspectors to participate in the preparation of such registration statement and any prospectus contained therein and any amendment or supplement thereto. Records which the Company determines, in good faith, to be confidential and which it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in the registration statement, (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction or (iii) the information in such Records has been made generally available to the public. The selling Holder of Registrable Securities agrees by acquisition of such Registrable Securities that it will, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give notice to the Company and allow the Company, at the Company's expense, to undertake appropriate action to prevent disclosure of the Records deemed confidential; and (p) use its reasonable best efforts to take all other steps necessary to effect the registration and disposition of such Registrable Securities as contemplated hereby. 5.5. Information from Holder. Except with respect to the Company's obligations contained in Section 5.3, it shall be a condition precedent to the obligations of the Company to take any action pursuant to this Article 5 with respect to the Registrable Securities of any selling Holder that such Holder shall, within ten (10) business days of a written request by the Company, furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be reasonably required by the Company to effect the registration of such Holder's Registrable Securities. In any registration statement with respect to any Registrable Securities or any amendment or supplement thereto, the Company agrees not to refer to any selling Holder of any Registrable Securities covered thereby by name, or otherwise identify such seller as the holder of any Registrable Securities, without the prior written consent of such selling Holder, such consent not to be unreasonably withheld. 5.6. Expenses of Registration. The Company shall pay all Registration Expenses in connection with registrations, filings or qualifications which the Company is required to effect pursuant to Sections 5.1 and 5.3 and which it effects pursuant to Section 5.2. For purposes of this Section, "Registration Expenses" shall mean all expenses other than underwriting discounts and commissions incident to the Company's performance of its obligations under or compliance with Sections 5.1, 5.2, 5.3 and 5.4, including (without limitation) all registration, filing and qualification fees (including Blue Sky fees), NASD fees and other fees and expenses associated with listing securities on the Nasdaq National Market or any national securities exchange, printers' and accounting fees, transfer agent fees and expenses, trustee fees and expenses, rating agency fees and 26 expenses, word processing and duplicating fees, messenger and delivery expenses, fees and disbursements of underwriters customarily paid by issuers or sellers of securities, fees and disbursements of counsel for the Company and the reasonable fees and disbursements of one counsel for the selling Holders (which counsel shall be selected by the Initiating Holders, if any, and otherwise by a majority in interest of the Holders participating in such registration). 5.7. Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Article 5. 5.8. Indemnification. In the event any Registrable Securities are included in a registration statement under this Article 5: (a) To the extent permitted by law, the Company will indemnify and hold harmless each selling Holder, the partners, officers, directors, members and shareholders of each selling Holder, legal counsel and accountants for each selling Holder, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter, within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages, expenses or liabilities (joint or several) (or actions, proceedings or settlements in respect thereof), to which they may become subject under the Securities Act, the Exchange Act or other federal, state, local or foreign securities Laws, insofar as such losses, claims, damages, expenses or liabilities (or actions, proceedings or settlements in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively, a "Violation") by the Company: (i) any untrue statement or alleged untrue statement of a material fact contained or incorporated by reference in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, or any other document required in connection therewith or any qualification or compliance associated therewith; (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein (in the case of a prospectus, in the light of the circumstances under which they were made) not misleading; or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any securities Laws or any rule or regulation promulgated under the Securities Act, the Exchange Act or any securities Laws; and the Company will reimburse each such selling Holder, partner, officer, director, member, shareholder, counsel, accountant, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending or settling any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the indemnity agreement contained in this Section 5.8(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld, delayed or conditioned), nor shall the 27 Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation that occurs in reliance upon and in conformity with written information furnished expressly for use in connection with the applicable registration statement by any such Holder, underwriter or controlling person; provided, further, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Holder or underwriter, or any person controlling such Holder or underwriter, from whom the person asserting any such losses, claims, damages or liabilities purchased securities in the offering, if a copy of the prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Holder or underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the securities to such person, and if the prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage or liability. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of any Holder or any other person entitled to indemnification pursuant to this Section 5.8(a) and shall survive the transfer of such securities by any Holder. (b) To the extent permitted by law, each selling Holder, on a several and not joint basis, will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Securities Act, legal counsel and accountants for the Company, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages, expenses or liabilities (joint or several) (or actions, proceedings or settlements in respect thereof) to which any of the foregoing persons may become subject, under the Securities Act, the Exchange Act or any state or foreign securities Laws, insofar as such losses, claims, damages or liabilities (or actions, proceedings or settlements in respect thereto) arise out of or are based upon any Violation (but excluding clause (iii) of the definition thereof), in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with the applicable registration statement; and each such Holder will reimburse any person intended to be indemnified pursuant to this Section 5.8(b) for any legal or other expenses reasonably incurred by such person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 5.8(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of such Holder (which consent shall not be unreasonably withheld, delayed or conditioned); provided, further, that in no event shall any indemnity under this Section 5.8(b) exceed the net proceeds from the offering received by such Holder. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling person and shall survive the transfer of such securities by any Holder. 28 (c) Promptly after receipt by an indemnified party under this Section 5.8 of written notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 5.8, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties that may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the reasonable fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if materially prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 5.8 to the extent of such prejudice, but the omission to so deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 5.8. No indemnifying party, in the defense of any such claim or action, shall, except with the consent of each indemnified party, consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by claimant or plaintiff to such indemnified party of a full and unconditional release from all liability in respect of such claim or action, or which contains any admission of liability or responsibility with respect to such indemnified party. (d) If the indemnification provided for in this Section 5.8 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of and, except as to the Company where the Company does not participate in the offering, the relative benefits received by the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage or expense, as well as any other relevant equitable considerations; provided that no person guilty of fraud shall be entitled to contribution. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such 29 statement or omission. The relative benefits received by the indemnifying party and the indemnified party shall be determined by reference to the net proceeds and underwriting discounts and commissions from the offering received by each such party. In no event shall any contribution under this Section 5.8(d) exceed the net proceeds from the offering received by such Holder, less any amounts paid under Section 5.8(b). (e) The obligations of the Company and Holders under this Section 5.8 shall survive the completion of any offering of Registrable Securities under this Article 5. (f) Indemnification similar to that specified in this Section 5.8 (with appropriate modifications) shall be given by the Company and each seller of Registrable Securities with respect to any required registration (other than under the Securities Act) or other qualification of such Registrable Securities under any Law or regulation of any Governmental Entity other than the Securities Act. (g) Any indemnification required to be made by an indemnifying party pursuant to this Section 5.8 shall be made by periodic payments to the indemnified party during the course of the action or proceeding, as and when bills are received by such indemnifying party with respect to an indemnifiable loss claim, damage, expense or liability incurred by such indemnified party. (h) The obligations of the parties under this Section 5.8 shall be in addition to any liability which any party may otherwise have to any other party. 5.9. "Market Stand-Off" Agreement. If requested by the Company or the representative of the underwriters of Common Stock (or other securities) of the Company, each Holder shall not sell or otherwise transfer or dispose of any Common Stock (or any other securities convertible into Common Stock) of the Company held by such Holder (other than those included in the registration) for a period specified by the representative of the underwriters not to exceed ninety (90) days following the effective date of a registration statement of the Company filed under the Securities Act; provided that all officers and directors of the Company enter into similar agreements. Each Holder agrees to execute and deliver such other agreements as may be reasonably requested by the Company or the underwriter which are consistent with the foregoing or which are necessary to give further effect thereto. The obligations described in this Section 5.9 shall not apply to a Designated Registration. The Company may impose stop-transfer instructions with respect to the shares of Common Stock subject to the foregoing restriction until the end of such period, not to exceed a ninety (90) day period. 30 ARTICLE 6 COVENANTS 6.1. Further Actions. Following the execution of this Agreement, each of the parties hereto shall execute and deliver such instruments and take such other actions as may reasonably be required to (i) carry out the intent of this Agreement and the other Transaction Documents and (ii) consummate the Exchange; provided that no Holder shall be required to incur any expense, liability or other monetary obligation with respect thereto. 6.2. Proxy Statement. The Company has prepared and filed with the SEC a proxy statement (the "Proxy Statement") for purposes of obtaining the approval of the shareholders of the Company to amend the Articles of Incorporation of the Company to increase the authorized number of shares of Common Stock to effect the Automatic Conversion (the "Amendment"). The Company shall provide the Holders with a copy of such filing and any related filings with the SEC. The Company will use commercially reasonable efforts to cause the Proxy Statement to be cleared by the SEC and mailed to its stockholders at the earliest practicable date. 6.3. Meetings. The Company shall take all lawful action to (i) cause a special meeting of its stockholders to be duly called and held as soon as practicable after the date of this Agreement for the purpose of voting on and obtaining the approval of the shareholders of the Amendment and (ii) solicit proxies from its stockholders to obtain the vote required under Washington Law and in accordance with the Articles of Incorporation of the Company for the approval and adoption of the Amendment. The Board of Directors of the Company shall recommend approval and adoption of the Amendment and shall not withdraw, amend or modify in any manner such recommendation (or announce publicly its intention to do so). 6.4. Transferability. The Holders shall not sell, assign or otherwise transfer the Preferred Stock issued hereunder without the prior written consent of the Company, which consent shall not be unreasonably withheld, delayed or conditioned; provided, however, that the Holders may sell, assign or otherwise transfer the Preferred Stock without the Company's prior written consent to any purchaser or transferee if such transfer is in compliance with applicable securities Laws and any other Laws applicable to such transfer, the purchaser or transferee agrees in writing to be bound by the terms of this Agreement and the other Transaction Documents, and the transferring Holder provides notice to the other Holders and the Company as contemplated in Section 9.4. The Common Stock, the New Notes and the PIK Notes shall be transferable without the Company's consent upon compliance with all applicable securities Laws and any other Laws applicable to such transfer; provided, however, that no shares of Common Stock may be transferred unless the transferee agrees in writing to be bound by the terms of this Agreement and the other Transaction Documents, and the transferring Holder provides notice to the other Holders and the Company as contemplated in Section 9.4. 31 6.5. Voting Agreement. Each of the Holders, the Chief Executive Officer of the Company, Donald A. Wright (the "CEO"), and the Chief Operating Officer of the Company, Werner Hafelfinger (the "COO", who together with the CEO shall be parties to this Agreement solely for purposes of Sections 6.5, 6.6 and 6.7 and are referred to each as a "Voting Officer"), hereby agrees to vote, or cause to be voted, or if applicable, execute written consents with respect to, all shares of capital stock of the Company held by such Holder or Voting Officer, respectively, and entitled to vote, or that such Holder or Voting Officer, respectively, has the power to vote or in respect of which such Holder or Voting Officer, respectively, has the power to direct the vote, in favor of approving the Amendment, in any and all votes or solicitations of written consents with respect to the approval of the Amendment, or any other circumstances upon which a vote, consent or other approval is sought with respect to the approval of the Amendment. 6.6. Board of Directors. For so long as the Holders own securities having, in the aggregate, at least 33.3% of the outstanding voting power of the Company and subject to Section 6.6.3, the Board of Directors will consist of (i) three persons nominated by GSCP Recovery, Inc. and GSC Recovery II, L.P. or their affiliates, (ii) one person nominated by MW Post Advisory Group L.L.C. or its affiliates and (iii) the Chief Executive Officer of the Company. Each person nominated for election as a director of the Company pursuant to this Section 6.6, and each person nominated for election as a director of the Company in lieu of any such person pursuant to Section 6.6.1(c), or to fill a vacancy on the Board of Directors created by such person pursuant to Section 6.6.2, is referred to herein as a "Holder Nominee." 6.6.1. Election of Directors. (a) For so long as the Holders own securities having, the aggregate at least 33.3% of the outstanding voting power of the Company, each Holder agrees to take all actions necessary to cause the Holder Nominees to be elected as directors of the Company in any and all elections of directors. (b) Each Voting Officer agrees to take all actions necessary to cause the Holder Nominees to be elected as directors of the Company at the next election of directors or upon the next solicitation of written consents, or upon the next occasion upon which a vote, consent or other approval is sought, with respect to the election of directors, following the date of this Agreement. (c) For so long as the Holders own securities having, in the aggregate, at least 33.3% of the outstanding voting power of the Company and without limiting the generality or effect of Section 6.6.1(a), each Holder will vote or cause to be voted, or if applicable execute written consents with respect to, all shares of capital stock of the Company held by such Holder and entitled to vote, or that such Holder has the power to vote or in respect of which such Holder has the power to direct the vote, in favor of the election of the Holder Nominees to the Board of Directors of the Company in any and all elections of, or solicitations of written consents, or in any other circumstances upon which a 32 vote, consent or other approval is sought, with respect to the election of directors. (d) Each Voting Officer will vote or cause to be voted, or if applicable execute written consents with respect to, all shares of capital stock of the Company held by such Voting Officer and entitled to vote, or that such Voting Officer has the power to vote or in respect of which such Voting Officer has the power to direct the vote, in favor of the election of the Holder Nominees to the Board of Directors of the Company at the next election of directors or upon the next solicitation of written consents, or upon the next occasion upon which a vote, consent or other approval is sought, with respect to the election of directors, following the date of this Agreement. (e) Without limiting the generality or effect of this Section 6.6.1, for so long as the Holders have the rights contemplated by Section 6.6, at each meeting of the shareholders of the Company at which the term of office of any Holder Nominee (an "Expiring Nominee") expires, each such Expiring Nominee will be nominated for election to another term as a director of the Company and will be included in the slate of nominees recommended to shareholders of the Company for election as directors of the Company in any proxy statement prepared by or on behalf of the Company with respect to such meeting; provided that, if any Holder or Holders that nominated any Holder Nominee that is an Expiring Nominee so specify or if any Expiring Nominee declines or is unable to accept the nomination, another individual designated by the Holder or Holders that nominated such Expiring Nominee, in lieu of such Expiring Nominee, will be nominated for election as a director of the Company and will be included in the slate of nominees recommended to shareholders of the Company for election as directors of the Company in any such proxy statement. (f) Without limiting any other provision of this Agreement imposing obligations on transferees generally, it is expressly agreed that the voting and related obligations contained in this Section 6.6 shall bind any transferee of any Holder or of any Voting Officer and no transfer by such Holder or Voting Officer shall be valid until such Holder or Voting Officer has delivered written evidence reasonably satisfactory to the remaining Holders executed by the transferee obligating such transferee to be bound by the terms contained in this Section 6.6. 6.6.2. Vacancies. Except as contemplated in Section 6.6, each director will hold his or her office as a director of the Company for such term as is provided in the Company's Articles of Incorporation and Bylaws or until his or her death, restriction or removal from the Board of Directors or until his or her successor has been duly elected and qualified in accordance with the provisions of this Agreement, the Company's Articles of Incorporation and Bylaws and applicable law. If any Holder Nominee ceases to serve as a director of the Company for any reason during his or her term, a nominee for the vacancy resulting therefrom will be designated by the Holder or Holders that nominated such director. 33 6.6.3. Removal of Holder Nominees. For so long as the Holders own securities having, in the aggregate, at least 33.3% of the outstanding voting power of the Company, if any Holder or Holders that nominated any Holder Nominee shall notify the Company in writing of its desire to have removed from the Board of Directors, with or without cause, a Holder Nominee, each Holder will, if necessary, subject to all applicable requirements of law, use its respective best efforts to take or cause to be taken all such action as may be required to remove such Holder Nominee from the Board of Directors. Subject to the immediately preceding sentence, none of the Holders will vote or cause to be voted, or execute written consents with respect to, any shares of the Company's capital stock that it has the power to vote or in respect of which it has the power to direct the vote for the removal of any Holder Nominee nominated by any other Holder without the prior written consent of the Holder or Holders that nominated such Holder Nominee. 6.7. Exercise of Specified Rights. Each of the Voting Officers hereby agrees that he or she will not exercise or cause to be exercised, in whole or in part, or take any other similar action having the effect of such exercise, any Specified Rights which such Voting Officer has, or may be entitled to, except for options granted to Donald A. Wright pursuant to the 2002 Stock Option Plan, and each of the Voting Officers hereby agrees to enter into and execute any agreement or other documentation reasonably requested by the Holders to effect the covenants contained in this Section 6.7. 6.8. No Voting Obligations - HBK Master Fund L.P. Solely for purposes of Sections 6.5, 6.6 and 6.7 above, the term "Holders" shall not include HBK Master Fund L.P. and, accordingly, HBK Master Fund L.P. shall not be entitled to any of the rights or remedies, nor subject to any of the obligations or restrictions, contemplated in Sections 6.5, 6.6 and 6.7. 6.9. Grant of Stock Options. The Company hereby agrees to grant to Donald A. Wright one or more options to purchase the Company's Common Stock (the "New Options"), in consideration for cancellation by Mr. Wright of his existing unexercised stock options of the Company (such cancellation to be effective as of the date of grant of the New Options). The New Options shall be exercisable for five percent (5%) of the Company's Common Stock on a fully-diluted basis immediately following the Exchange. The New Options shall vest over three (3) years and may be exercised over a ten-year term. The New Options shall contain exercise prices designed to incentivize Mr. Wright's performance as President and Chief Executive Officer of the Company, and shall be based upon reasonable targets established by the Compensation Committee of the Board of Directors after discussion with Mr. Wright, in accordance with the targets previously discussed between Mr. Wright and the Holders. 34 ARTICLE 7 CLOSING 7.1. Closing. The closing (the "Closing") of the transactions contemplated by this Agreement and the other Transaction Documents and the deliveries contemplated in Sections 7.2 and 7.3 hereof are taking place as of the date hereof at the offices of Milbank Tweed Hadley & McCloy, One Chase Manhattan Plaza, New York, NY 10005. All of the securities to be delivered at Closing as contemplated in Sections 7.2 and 7.3 below shall be dated as of the date hereof. 7.2. Deliveries by the Company. The Company is delivering to the Holders at the Closing, the following: (i) evidence reasonably satisfactory to the Holders that The Depository Trust Company ("DTC") has recorded in its book-entry system as holders, in the aggregate, of the number of shares of Common Stock set forth on Exhibit A for each Holder, the DTC Participants identified to the Company by such Holder; (ii) evidence reasonably satisfactory to the Holders that DTC has recorded in its book-entry system as holders, in the aggregate, of the number of shares of Preferred Stock set forth on Exhibit A for each Holder, the DTC Participants identified to the Company by such Holder; (iii) evidence reasonably satisfactory to the Holders that the Company has delivered and DTC has received one or more global certificates representing $15,000,000 aggregate principal amount of New Notes and has recorded in its book-entry system as holders, in the aggregate, of the aggregate principal amount of the New Notes set forth on Exhibit A for each Holder, the DTC Participants identified by such Holder; (iv) the New Notes Indenture, duly executed by the Company, each Subsidiary Guarantor, and the trustee with respect thereto, attached hereto as Exhibit C; (v) evidence, reasonably satisfactory to the Holders, that all consents, approvals and waivers listed in Schedules 3.1.3 and 3.1.4 required in connection with the Exchange and the transactions contemplated by this Agreement and the other Transaction Documents, have been obtained without the imposition of any non-customary limitation, requirement or condition, and all waiting periods the expiration of which are required under applicable Law for such consummation have expired or been terminated; 35 (vi) written opinions of counsel for the Company in the form attached hereto as Exhibit D and Exhibit E; (vii) a written opinion reasonably acceptable to the Holders from Houlihan Lokey Howard & Zukin Financial Advisors, Inc. as to the fairness of the transactions contemplated by this Agreement and the other Transaction Documents to the Company's existing shareholders not participating in the Exchange; (viii) an amendment to his existing employment agreement executed by Donald A. Wright and the Company in the form attached hereto as Exhibit F; (ix) a copy of the supplemental indenture attached hereto as Exhibit G (the "Supplemental Indenture") executed by the Company and the trustee pursuant thereto; (x) the Guarantees duly executed by each of the Subsidiary Guarantors, substantially in the form of Exhibit H hereto; and (xi) a fully executed Note Purchase Agreement executed by the Company, Jefferies & Company, Inc. and First Union National Bank, as collateral agent in the form attached hereto as Exhibit I. 7.3. Deliveries by the Holders. The Holders are delivering to the Company at the Closing, the following: (i) the Old Notes held by each of the Holders (via DTC's book-entry system); (ii) evidence reasonably satisfactory to the Company that each of the Holders has delivered instructions to its respective DTC Participants with respect to the tendering of the Old Notes held by such DTC Participant for the benefit of such Holder and such Holder's consent to the Supplemental Indenture; (iii) their written consent to the Company entering into the Supplemental Indenture; and (iv) evidence, reasonably satisfactory to the Company, that all consents, approvals and waivers listed in Section 4.1.3, required in connection with the Exchange and the transactions contemplated by this Agreement and the other Transaction Documents, have been obtained without the imposition of any non-customary limitation, requirement or condition, and all waiting 36 periods the expiration of which are required under applicable Law for such consummation have expired or been terminated. ARTICLE 8 SURVIVAL 8.1. Survival. The representations and warranties contained in this Agreement shall survive the execution and delivery of this Agreement and the Closing for a period of one (1) year, regardless of any investigation made by the parties hereto or by any person on their behalf. ARTICLE 9 MISCELLANEOUS 9.1. Entirety. This Agreement and the other Transaction Documents to be delivered in connection herewith embody the entire agreement among the parties with respect to the subject matter hereof and thereof, and all other prior agreements between the parties with respect thereto are hereby and thereby superseded in their entirety. 9.2. Counterparts. Any number of counterparts of this Agreement may be executed and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute one instrument. 9.3. Fees and Expenses. Except as otherwise provided herein and for that certain letter agreement dated August 21, 2001 between the Company and Dewey Ballantine LLP, the parties hereto shall each bear their respective expenses incurred in connection with the negotiation, preparation, execution, and performance of this Agreement, the other Transaction Documents and the transactions contemplated hereby and thereby, including without limitation, all fees and expenses of agents, representatives, investment bankers, counsel and accountants. 9.4. Notices and Waivers. All notices, requests, instructions, claims, demands, consents and other communications required or permitted to be given under this Agreement or the other Transaction Documents shall be in writing and shall be deemed to have been duly given on the date delivered by hand or by courier service such as Federal Express, or by other messenger (or, if delivery is refused, upon presentment) or upon receipt by facsimile transmission (with confirmation), or upon delivery by registered or certified mail (return receipt requested), postage prepaid, to the parties at the following addresses (or to such other persons or addresses as the person to whom notice is given may have previously furnished to the other parties hereto in writing in the manner set forth above (provided that notice of any change in address shall be effective only upon receipt thereof)): 37 (a) If to the Company: Pacific Aerospace & Electronics, Inc. 430 Old Station Road, Third Floor Wenatchee, WA 98801 Telephone: (509) 667-9600 Facsimile: (509) 667-9696 Attention: Donald A. Wright with a copy to: Milbank Tweed Hadley & McCloy 601 South Figueroa Street Los Angeles, CA 90017 Telephone: (213) 892-4333 Facsimile: (213) 892-4733 Attention: Kenneth J. Baronsky (b) If to the Holders: At the addresses set forth opposite each Holders' name in Exhibit A hereto with a copy to: Dewey Ballantine LLP 1301 Avenue of the Americas New York, NY 10019 Telephone: (212) 259-8000 Facsimile: (212) 259-6333 Attention: Jonathan L. Freedman Michael J. Sage 9.5. Table of Contents and Captions. The table of contents, table of exhibits and captions contained in this Agreement are solely for convenient reference and shall not be deemed to affect the meaning or interpretation of any article, section, or paragraph hereof or thereof. 9.6. No Assignment. No assignment of this Agreement or of any rights or obligations hereunder may be made by any party without the prior written consent of the other party hereto; provided, however, that the Holders may assign their respective rights and obligations hereunder without the Company's prior written consent to any assignee if such assignee agrees to be bound by the terms of this Agreement and the other Transaction Documents. 38 9.7. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of and be enforceable by the successors and permitted assigns of the parties hereto. 9.8. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remainder of the terms, provisions, covenants and restrictions shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 9.9. Applicable Law. This Agreement shall be governed by the laws of the State of New York applicable to contracts made and to be wholly performed in the State of New York without giving effect to the principles of conflicts of laws thereof. 9.10. Amendment. This Agreement may not be amended, modified or supplemented and no waivers of or consents to departures from the provisions hereof may be given unless consented to in writing by all parties hereto. Unless otherwise specified in such waiver or consent, a waiver or consent shall be effective only in the specific instance and for the specific purpose for which it is given. 9.11. Third Party Beneficiaries. Except as set forth in Section 5.8 hereof, nothing expressed or implied in this Agreement or any agreement delivered in connection herewith is intended or shall be construed to confer upon or give to any third party any rights or remedies against any party hereto. The persons entitled to indemnification pursuant to Section 5.8 are intended third party beneficiaries of such Section 5.8. 9.12. Publicity. None of the parties hereto shall issue any press release or make any public disclosure regarding the transactions contemplated hereby and by the other Transaction Documents unless such press release or public disclosure shall be approved by the other parties hereto. Notwithstanding the foregoing, each of the parties hereto may, in documents required to be filed by it with the SEC or other Governmental Entity, make such statements with respect to the transactions contemplated by this Agreement and by the other Transaction Documents as each may be advised by counsel is legally necessary, and may make such disclosure as it is advised by its counsel is required by Law. [Signature Pages Follow] 39 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed in their respective names by their respective duly authorized representatives, all as of the day and year first above written. PACIFIC AEROSPACE & ELECTRONICS, INC. By: /s/ Donald A. Wright ------------------------------------ Name: Donald A. Wright Title: President and Chief Executive Officer DONALD A. WRIGHT (solely for purposes of Sections 6.5, 6.6, 6.7 and 6.9 hereof) /s/ Donald A. Wright --------------------------------------- WERNER HAFELFINGER (solely for purposes of Sections 6.5, 6.6 and 6.7 hereof) /s/ Werner Hafelfinger --------------------------------------- AEROMET AMERICA, INC. By: /s/ Donald A. Wright ------------------------------------ Name: Donald A. Wright Title: Executive Vice President BALO PRECISION PARTS, INC. By: /s/ Donald A. Wright ------------------------------------ Name: Donald A. Wright Title: Executive Vice President CASHMERE MANUFACTURING CO., INC. By: /s/ Donald A. Wright ------------------------------------ Name: Donald A. Wright Title: Executive Vice President CERAMIC DEVICES, INC. By: /s/ Donald A. Wright ------------------------------------ Name: Donald A. Wright Title: Executive Vice President ELECTRONIC SPECIALTY CORPORATION By: /s/ Donald A. Wright ------------------------------------ Name: Donald A. Wright Title: Executive Vice President NORTHWEST TECHNICAL INDUSTRIES, INC. By: /s/ Donald A. Wright ------------------------------------ Name: Donald A. Wright Title: Executive Vice President PACIFIC COAST TECHNOLOGIES, INC. By: /s/ Donald A. Wright ------------------------------------ Name: Donald A. Wright Title: Executive Vice President PA&E INTERNATIONAL, INC. By: /s/ Donald A. Wright ----------------------------------- Name: Donald A. Wright Title: President SEISMIC SAFETY PRODUCTS, INC. By: /s/ Donald A. Wright ----------------------------------- Name: Donald A. Wright Title: Executive Vice President SKAGIT ENGINEERING & MANUFACTURING, INC. By: /s/ Donald A. Wright ----------------------------------- Name: Donald A. Wright Title: Executive Vice President HOLDERS: GSCP RECOVERY, INC. By: /s/ Matthew Kaufman ----------------------------------- Name: Matthew Kaufman Title: Managing Director ALLIANCE CAPITAL MANAGEMENT L.P., as investment advisor By: Alliance Capital Management Corp. By: /s/ Michael E. Sohr ----------------------------------- Name: Michael E. Sohr Title: Vice President M.W. POST ADVISORY GROUP L.L.C., as investment advisor By: /s/ Carl H. Goldsmith ----------------------------------- Name: Carl H. Goldsmith Title: Managing Director WILLIAM E. SIMON & SONS SPECIAL SITUATION PARTNERS II, L.P. By: WILLIAM E. SIMON & SONS SPECIAL SITUATION PARTNERS II, L.L.C. ITS GENERAL PARTNER By: /s/ John E. Klinge ----------------------------------- Name: John E. Klinge Title: Authorized Signatory HBK MASTER FUND L.P. By: HBK INVESTMENTS L.P. INVESTMENT MANAGER By: /s/ William E. Rose ----------------------------------- Name: William E. Rose Title: Authorized Signatory GSC RECOVERY II, L.P. By: GSC Recovery II GP, L.P., its general partner By: GSC RII, LLC, its general partner By: GSCP (NJ) Holdings, L.P., its sole member By: GSCP (NJ), Inc., its general partner By: /s/ Matthew Kaufman ----------------------------------- Name: Matthew Kaufman Title: Managing Director PACIFIC AEROSPACE & ELECTRONICS, INC. AEROMET AMERICA, INC. BALO PRECISION PARTS, INC. CASHMERE MANUFACTURING CO., INC. CERAMIC DEVICES, INC. ELECTRONIC SPECIALTY CORPORATION NORTHWEST TECHNICAL INDUSTRIES, INC. PACIFIC COAST TECHNOLOGIES, INC. PA&E INTERNATIONAL, INC. SEISMIC SAFETY PRODUCTS, INC. SKAGIT ENGINEERING & MANUFACTURING, INC. SCHEDULES TO EXCHANGE AGREEMENT DATED AS OF MARCH 19, 2002 These Schedules are furnished by Pacific Aerospace & Electronics, Inc., a Washington corporation ("PA&E," "PACIFIC AEROSPACE" or the "COMPANY") as of the date hereof pursuant to and as part of the Exchange Agreement dated as of March 19, 2002 (the "AGREEMENT"), by and among Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies Inc., PA&E International, Inc., Seismic Safety Products, Inc., and Skagit Engineering & Manufacturing Inc. (collectively, the "SUBSIDIARY GUARANTORS") and the holders of the outstanding 11 1/4% senior subordinated notes due 2005 of the Company participating in the Exchange (the "HOLDERS"). Unless otherwise provided herein, the defined terms in these Schedules have the same meaning as under the Agreement. All attachments hereto are incorporated into these Schedules. Matters disclosed for the purpose of one section of these Schedules shall constitute disclosure of such matters for the purposes of other sections only in the event it is manifestly obvious that such matters apply. The duplication or cross-referencing of any disclosures made herein shall not, in any instance or in the aggregate, effect a waiver of the foregoing statement. Headings have been provided for the sections of these Schedules for convenience of reference only and shall to no extent have the effect of amending or changing any express description of the sections set forth in the Agreement. These Schedules relate to certain matters concerning the disclosures required and transactions contemplated by the Agreement. These Schedules are qualified in their entirety by reference to specific provisions of the Agreement, and are not intended to constitute, and shall not be construed as an admission that such information is material except to the extent required by the Agreement. Copies of all agreements, contracts and documents referenced in this Disclosure Schedule have been made available for inspection by the Holders. SCHEDULE 3.1.3 COMPANY CONSENTS AND APPROVALS (GOVERNMENT) 1. SEC filings regarding the Exchange and the securities issued therein. 2. Filing of the Certificate of Designation for the Series C Convertible Preferred Stock and an amendment to the Company's Articles of Incorporation to increase the number of shares of Common Stock authorized for issuance, each with the State of Washington Secretary of State. 3. Securities filings that may be required under state blue sky laws. SCHEDULE 3.1.4 NO VIOLATIONS Currently exercisable warrants issued by the Company contain provisions requiring the Company to reserve at all times a sufficient number of shares of Common Stock to effect the exercise of such warrants. For the time between the date of the Exchange and the effective filing of an amendment to the Company's Articles of Incorporation increasing the number of shares of authorized Common Stock the Company may issue, the Company will not have a sufficient number of shares of Common Stock reserved if such warrants are exercised in technical breach of such warrant agreements. All such warrant agreements contain provisions that state the Company must take action as quickly as possible to again have a sufficient amount of Common Stock reserved for exercise of the warrants. The Company has obtained waivers from both Strong River and Bay Harbor for the covenant set forth in their respective warrants requiring the Company to reserve at all times and keep available out of the aggregate of its authorized but unissued Common Stock the number of Warrant Shares which are then issuable and deliverable upon the exercise of the Warrant. The waivers are effective until such time as the Company has amended its Articles of Incorporation to increase its authorized shares of Common Stock as required in the Restructuring. However, no waiver has been obtained from DDJ Capital Management, LLC ("DDJ") as of the date hereof, under the warrants issued under a warrant agreement dated March 1, 2001 between DDJ as agent for certain lenders (the "Holders"), the Holders and the Company. The Exchange will violate the Company's existing senior secured loan documents (under which DDJ acts as agent), under which the Company is already in payment default. The Company has been notified by KeyBank National Association ("KeyBank") that it is not in compliance with certain covenants of loans that are secured by the Company's headquarters building and other assets of the Company and its subsidiaries. Such defaults will not be cured by the completion of the Exchange. KeyBank has agreed, however, pursuant to a forbearance letter dated March 15, 2002, to continue to forbear from exercising its remedies under its two Promissory Notes until May 31, 2003. Such forbearance is conditioned upon there being no loan or lease payment delinquency or defaults after April 1, 2002. The Company has obtained the consent of KeyBank to the granting of certain security interests in connection with the Exchange and the Company's new senior secured financing. SCHEDULE 3.1.6 LITIGATION AND CLAIMS AGAINST THE COMPANY LITIGATION The Company has the three following litigation matters outstanding: 1. BONKOWSKI V. PACIFIC AEROSPACE & ELECTRONICS, INC., CHELAN COUNTY (WA) SUPERIOR COURT CAUSE NO. 00-2-00523-1 Date filed: June 2000 Location: Wenatchee, WA Nature of dispute: A former employee whose position was eliminated in 1999 has asserted claims for, among other things, unlawful termination and age discrimination. This matter is in the discovery stage, and trial is currently scheduled on June 17, 2002. The Company took Bonkowski's deposition on January 15 and 16, 2002, and is in the process of preparing a summary judgment motion. Amount at issue: Unknown Settlement: The Company has made a settlement offer of $10,000, which was rejected. The plaintiff also agreed to mediate and then changed his mind. 2. BOTHELL, d/b/a ATLAS TECHNOLOGIES V. HITACHI ZOSEN CORP., NORTHWEST TECHNICAL INDUSTRIES, INC., AND K. SHIMOTSUMA ASSOCIATES, INC., JEFFERSON COUNTY (WA) SUPERIOR COURT CAUSE NO. 99-2-00230-9 Date filed: August 1999 Location: Port Angeles, WA Nature of dispute: Northwest Technical Industries, Inc. ("NTI"), a wholly owned subsidiary of the Company, was sued on a 1994/1995 contract under which NTI bonded metals for vacuum flanges produced by Atlas for Hitachi prior to the Company's acquisition of NTI. Hitachi did not accept or pay for all of the flanges. Atlas claims that, if it is proved that the flanges were defective, NTI must have provided Atlas with defective materials and that NTI violated provisions of a confidentiality agreement. NTI produced discovery materials for plaintiff's counsel in approximately November 1999, which plaintiff's counsel has yet to pick up. A trial date was set recently for Fall 2002 after the Court threatened to dismiss the case for lack of activity, but the plaintiff's counsel has not yet followed up regarding discovery. Amount at issue: Unknown Settlement: N/A 3. SUPERIOR FORGE, INC. V. PACIFIC AEROSPACE & ELECTRONICS, INC., SUPERIOR COURT OF THE STATE OF CALIFORNIA, COUNTY OF ORANGE, CENTRAL JUSTICE CENTER, CASE NO. 02CC02864 Served on PA&E February 19, 2002 Collection claim for $51,631.04 SCHEDULE 3.1.7 OUTSTANDING OPTIONS 1. Authorized Capital: 100,000,000 shares of common stock, $.001 par value 5,000,000 shares of preferred stock, $.001 par value 2. Issued and Outstanding: 39,315,309 shares of common stock No shares of preferred stock 3. Options Outstanding under Stock Incentive Plan: 3,599,948 4. Warrants Outstanding:

- --------------------------------------------------------------------------------------------------------------- DATE ISSUED WARRANT HOLDER WARRANT WARRANT EXERCISE VESTED NON EXPIRATION # /OTHER SHARES PRICE VESTED DATE INFO - --------------------------------------------------------------------------------------------------------------- PUBLIC WARRANTS - --------------------------------------------------------------------------------------------------------------- 6/01/96 Interwest Transfer 693259-11-1 2,295,000 4.6875 0 6/15/03 Co. - --------------------------------------------------------------------------------------------------------------- NON-PUBLIC WARRANTS - --------------------------------------------------------------------------------------------------------------- 11/30/96(1) Donald A. Wright 001 100,000 $2.0000 100,000 0 12/24/04 - --------------------------------------------------------------------------------------------------------------- 11/30/96(1) Nick A. Gerde 001 25,000 $2.0000 25,000 0 02/01/05 - --------------------------------------------------------------------------------------------------------------- 11/30/96(2) Edward A. Taylor 003 35,000 $2.0000 35,000 0 05/31/02 - --------------------------------------------------------------------------------------------------------------- 06/03/97 Gregory K. Smith 20,000 $3.4500 50,000 0 06/03/02 - --------------------------------------------------------------------------------------------------------------- 06/03/97 Nestor Wiegand 5,000 $3.4500 5,000 0 06/03/02 - --------------------------------------------------------------------------------------------------------------- 04/17/00 Continental Capital & Equity Corporation CCEC1 50,000 $3.5000 50,000 0 04/17/03 - --------------------------------------------------------------------------------------------------------------- 04/17/00 Continental Capital & Equity Corporation CCEC2 50,000 $5.5000 50,000 0 04/17/03 - --------------------------------------------------------------------------------------------------------------- 04/17/00 Continental Capital & Equity Corporation CCEC3 50,000 $7.5000 50,000 0 04/17/03 - --------------------------------------------------------------------------------------------------------------- 04/17/00 Continental Capital & Equity Corporation CCEC4 50,000 $9.5000 50,000 0 04/17/03 - --------------------------------------------------------------------------------------------------------------- 07/27/00 Rochon Capital Group, Ltd. RCG1 79,150 $1.7688 79,150 0 07/26/04 - --------------------------------------------------------------------------------------------------------------- 07/27/00 Strong River Investments CW1 192,500 $2.0100 192,500 0 07/27/03 - --------------------------------------------------------------------------------------------------------------- 07/27/00 Bay Harbor Investments, Inc. CW 2 192,500 $2.0100 192,500 0 07/27/03 - ---------------------------------------------------------------------------------------------------------------

- --------------------------------------------------------------------------------------------------------------- DATE ISSUED WARRANT HOLDER WARRANT WARRANT EXERCISE VESTED NON EXPIRATION # /OTHER SHARES PRICE VESTED DATE INFO - --------------------------------------------------------------------------------------------------------------- B-III Capital DDJ-1 1,883,923 $0.0010 1,883,923 0 03/01/06 03/01/01 Partners, L.P. - --------------------------------------------------------------------------------------------------------------- 03/01/01 B-III A Capital DDJ-2 807,396 $0.0010 807,396 0 03/01/06 Partners, L.P. - --------------------------------------------------------------------------------------------------------------- 03/01/01 DDJ Canadian High DDJ-3 538,263 $0.0010 538,263 0 03/01/06 Yield Fund - --------------------------------------------------------------------------------------------------------------- 03/01/01 State Street Bank DDJ-4 807,396 $0.0010 807,396 03/01/06 & Trust, Custodian - --------------------------------------------------------------------------------------------------------------- 04/09/01 First Albany FAC-1 692,074 $0.4062 692,074 04/09/06 Corporation - ---------------------------------------------------------------------------------------------------------------

SCHEDULE 3.1.8 SEC REPORTS AND FINANCIAL STATEMENTS KPMG's report on the Company's consolidated financial statements for the fiscal year ended May 31, 2001 was a disclaimer of opinion. SCHEDULE 3.1.9 MATERIAL ADVERSE EFFECT The Company failed to make a semi-annual interest payment of approximately $3.6 million as required under the terms of its 11 1/4% Senior Subordinated Notes (the "Old Notes") that was due on August 1, 2001, and the Company also failed to make that payment within the 30-day grace period that expired on August 31, 2001. The Company also failed to make a payment of interest that was due on the Old Notes on February 1, 2002 and did not make such payment during the 30-day grace period provided therein In addition, the Company did not make a quarterly interest payment of approximately $618,000 that was due on its existing senior secured loan (the "Senior Debt") on September 30, 2001, or before the expiration of the 5-day grace period. The Company entered into a forbearance agreement with the holders of the Senior Debt to waive payment defaults and certain other defaults on the Senior Debt. However, this agreement expired on December 31, 2001. Additionally, the Company failed to repay the Senior Debt on December 31, 2001, its maturity debt. The Company has been notified by KeyBank National Association ("KeyBank") that it is not in compliance with certain covenants of loans that are secured by the Company's headquarters building and other assets of the Company and its subsidiaries. Such defaults will not be cured by the completion of the Exchange. KeyBank has agreed, however, pursuant to a forbearance letter dated March 15, 2002, to continue to forbear from exercising its remedies under its two Promissory Notes until May 31, 2003. Such forbearance is conditioned upon there being no loan or lease payment delinquency or defaults after April 1, 2002. The Company has obtained the consent of KeyBank to the granting of certain security interests in connection with the Exchange and the Company's new senior secured financing. On February 28, 2002, Sheryl A. Symonds, who served as Vice President Administration and General Counsel, left her employment with the Company. Werner Hafelfinger who is currently the Vice President Operations and Chief Operating Officer, will continue serving as the Vice President Operations and Chief Operating Officer until May 17, 2002. After those dates, the Company will be operating without several of its key personnel. There has been an overall economic decline in the Aerospace industry due to both the recent economic downturn and the September 11, 2001 attacks since May 31, 2001 that has contributed significantly to poor operating results. SCHEDULE 3.1.10 MATERIAL CONTRACTS The Company is in default under the following Material Contracts: 1. The Old Indenture; 2. The Term Loan Agreement governing the Company's Senior Debt; 3. KeyBank Deed of Trust on corporate headquarters dated September 30, 1998 and the related Promissory Note dated as of September 30. 1998; 4. KeyBank Promissory Note dated as of March 18, 1998 (relating to improvements on building #7); and 5. Technology transfer agreement dated September 30,1998 with Herman L. Jones relating to the following U.S. patent application and one European patent applications: (i) U.S. Serial No. 09/302,590, (ii) U.S. Serial No. 09/303,196 (now U.S. Patent No. 6,284,389) and (iii) E.P. Serial No. 99'920'345.8. The Company has entered into a Settlement Agreement with Mr. Jones dated February 28, 2002 regarding this dispute. SCHEDULE 3.1.12 TITLE TO PROPERTY AND ASSETS Pacific Aerospace & Electronics, Inc. Detail Actual Debt Listing As of January 31, 2002

Creditor Principal Balance Security -------- ----------------- -------- Pacific Aerospace: Term Debt: KeyBank $ 1,111,090 Real Estate - Corporate Building Ford Credit 19,707 Vehicle Ford Credit 29,078 Vehicle Ford Credit 15,634 Vehicle Ford Credit 24,878 Vehicle Ford Credit 12,411 Vehicle Ford Credit 18,731 Vehicle DDJ 13,731,446 Substantially all assets Senior Subordinated Notes 63,700,000 None Cashmere Manufacturing: Term Debt: KeyBank 121,959 Real Estate - Building #7 expansion Ford Credit 25,447 Vehicle Ellison Machinery Company 54,197 Fadal CNC machining center Ellison Machinery Company 43,549 Fadal CNC machining center Ellison Machinery Company 42,112 Fadal CNC machining center Ellison Machinery Company 42,112 Fadal CNC machining center Ellison Machinery Company 47,327 Fadal CNC machining center Ellison Machinery Company 47,327 Fadal CNC machining center Ellison Machinery Company 11,189 Komo CNC machining center Ellison Machinery Company 337,525 Mori Seiki machining cell Ellison Machinery Company 198,995 Mori Seiki machining cell Capital Leases GE Capital 41,980 Okuma cadet GE Capital 41,980 Okuma cadet NEC 83,999 Phone system Amada Leasing Corp. 34,078 Amada press break Pacific Coast Technologies: Term Debt: KeyBank 487,839 Real estate - building #7 expansion Capital Leases: GE Capital 35,256 Okuma cadet GE Capital 35,744 Okuma cadet

Creditor Principal Balance Security -------- ----------------- -------- GE Capital 41,196 Okuma crown GE Capital 98,759 Okuma CNC machining center CIT Group 70,397 Tornos screw machine CIT Group 98,444 Okuma crown Pacific A & E Limited: Term Debt: PA&E International, Inc. 38,908,000 None (Intercompany note) Pacific Aerospace & Electronics (UK) Limited: Term Debt: Pacific A & E Limited 29,481,000 None (Intercompany note) Aeromet International: Capital Lease: 476,000 Equipment Lloyds Bowmaker ------------ Total term debt and capital leases $ 149,569,386 ============

SCHEDULE 3.1.13 RELATED PARTY TRANSACTIONS Employment agreement with Donald A. Wright. Pursuant to the existing employment agreement, Mr. Wright is employed through fiscal 2003. Mr. Wright is expected to terminate his existing employment agreement in connection with the Exchange transaction and enter into a new employment agreement with the Company. On August 15, 2001, Nick Gerde, who served as Vice President Finance of the Company, as well as Treasurer and Assistant Secretary, left his employment with the Company. In accordance with Mr. Gerde's employment agreement and separation letter executed by Mr. Gerde and the Company, Mr. Gerde will receive severance pay of $150,000, which is the equivalent of one year's salary. This severance is payable on regular payroll days over a 12-month period. Mr. Gerde will also receive medical benefits for one year. On February 28, 2002, Sheryl A. Symonds, who served as Vice President Administration and General Counsel, left her employment with the Company. In accordance with Ms. Symonds' employment agreement and separation letter executed by Ms. Symonds and the Company, Ms. Symonds will receive $205,710, which is the equivalent of one year's salary. This severance is payable on regular payroll days over a 12-month period. Ms. Symonds will also receive medical benefits for one year. Werner Hafelfinger who is currently the Vice President Operations and Chief Operating Officer, will continue serving as the Vice President Operations and Chief Operating Officer until May 17, 2002. In accordance with Mr. Hafelfinger's employment agreement and separation letter executed by Mr. Hafelfinger and the Company, Mr. Hafelfinger will receive $210,000, which is the equivalent of one year's salary. This severance is payable on regular payroll days over a 12-month period. Mr. Hafelfinger will also receive medical benefits for one year. Donald A. Wright rents the fourth floor condominium in the headquarters building from PA&E and has an option to purchase the condominium for $250,000. The option terminates ten business days after Mr. Wright's employment with the Company ceases for any reason other than death. GSC Partners, CDO Fund, Limited, GSC Partners CDO Fund II, Limited, GSC Recovery II, L.P. and GSC Recovery IIA, L.P., affiliates of GSCP Recovery, Inc, and as applicable, GSC Recovery II, L.P. (participating noteholders in the Exchange), which will collectively own approximately 54% of the Company's Common Stock on a fully-diluted basis following the Exchange, intend to purchase, at or around the time of the Exchange transaction, certain senior secured discount notes of the Company. In August 2001, the Company entered into a lease agreement with North Central Educational Services District (the "NCESD"), pursuant to which the NCESD leased the second floor of the Company's Wenatchee headquarters building from the Company for $6,183 per month for a term of 24 months. In authorizing the lease, the Board of Directors determined that the lease was made for fair market value. Gene C. Sharratt, a director of the Company, is Superintendent of the NCESD. SCHEDULE 3.1.15 PROPRIETARY RIGHTS The Company was in default under a technology transfer agreement dated December 30,1998 with Herman L. Jones relating to the following U.S. patent applications and one European patent application: (i) U.S. Serial No. 09/302,590, (ii) U.S. Serial No. 09/303,196 (now U.S. Patent No. 6,284,389) and (iii) E.P. Serial No. 99'920'345.8 (the "Jones Patents"). However, a settlement was reached between Mr. Jones and the Company. Pursuant to the settlement agreement dated February 28, 2002, the Company is permitted to retain the Jones Patents upon payment by the Company to Mr. Jones of an amount equivalent to $950,000 (the "Purchase Price"). $200,000 of the Purchase Price will be paid by the Company transferring to Mr. Jones the building owned by the Company in Cashmere, WA. If the building in Cashmere, WA is not transferred to Mr. Jones by June 1, 2002, the $200,000 of the Purchase Price will be added to the outstanding principal balance of the promissory note. The remaining sum of $750,000 will be paid pursuant to a promissory note. Mr. Jones will retain a security interest in the Jones Patents until the promissory note is fully paid. SCHEDULE 3.1.16(a) EMPLOYEE BENEFIT PLANS PA&E'S EMPLOYEE BENEFIT PLANS Mutual of Omaha Medical, Dental & Vision Insurance ADP 401(k) Retirement Plan Conover Flexible Benefits Plan PA&E'S STOCK INCENTIVE PLANS 2002 Stock Option Plan (adopted by the Board of Directors on February 27, 2002) Amended and Restated Stock Incentive Plan Amendment No. 1 to the Amended and Restated Stock Incentive Plan Amended and Restated Independent Director Stock Plan 1999 Stock Incentive Plan 1997 Employee Stock Purchase Plan SCHEDULE 3.1.16(f) PAYMENTS, VESTINGS OR LIABILITIES No exceptions. SCHEDULE 3.1.16(g) CLAIMS WITH RESPECT TO PLANS None. SCHEDULE 3.1.16(h) POST-EMPLOYMENT LIFE OR HEALTH INSURANCE COVERAGE Medical benefits for the following people continue until the stated date, or earlier, if they become covered by new employers: Nick Gerde (until 8/15/02) Sheryl A. Symonds (until 2/28/03) Duncan Crighton (until 5/31/03) Werner Hafelfinger (until 5/17/03) SCHEDULE 3.1.18 ENVIRONMENTAL MATTERS No exceptions. SCHEDULE 3.1.21 TAX RETURNS The Company is in the process of discussions with the Inland Revenue service in the United Kingdom regarding the amount of taxes owing in the United Kingdom. The main issue concerns the interest on the loan of Sterling Pounds 23,700,000 from the Company to Pacific A&E (UK) Limited. The Company has not filed U.S. federal income tax returns for the years ending May 31, 2000 and May 31, 2001. Both returns are currently being completed by KPMG; and it is anticipated that no tax or penalties will be due with respect to either of these returns. Exhibit A HOLDERS/ALLOCATION OF NEW SECURITIES*

- ------------------------------------------------------------------------------------------------------------------------------ Number of Number of Aggregate Aggregate Shares of Shares of Principal Principal Common Preferred Amount of Amount of Stock Stock New Notes Old Notes Received Received Received Holders Address Held Hereunder Hereunder Hereunder - ------------------------------------------------------------------------------------------------------------------------------ GSCP Recovery, Inc. 500 Campus Drive, Suite 220 Florham Park, NJ 07932 $24,260,000 19,582,848 380.85 $ 5,712,716 - ------------------------------------------------------------------------------------------------------------------------------ GSC Recovery II, L.P. 500 Campus Drive, Suite 220 Florham Park, NJ 07932 $10,000,000 8,072,072 156.99 $ 2,354,788 - ------------------------------------------------------------------------------------------------------------------------------ Alliance Capital Management L.P. 1345 Avenue of the Americas 39th Floor New York, NY 10105 $ 8,500,000 6,861,262 133.44 $ 2,001,570 - ------------------------------------------------------------------------------------------------------------------------------ M.W. Post Advisory Group L.L.C. 1880 Century Park East Suite 820 Los Angeles, CA 90067 $17,145,000 13,839,568 269.15 $ 4,037,284 - ------------------------------------------------------------------------------------------------------------------------------- William E. Simon & Sons 10990 Wilshire Blvd. Special Situation Partners Suite 500 II, L.P. Los Angeles, CA 90024 $ 2,500,000 2,018,018 39.25 $ 588,697 - ------------------------------------------------------------------------------------------------------------------------------ HBK Master Fund L.P. 300 Crescent Ct. #700 Dallas, TX 75201 $ 295,000 238,126 4.63 $ 69,466 - ------------------------------------------------------------------------------------------------------------------------------ Unknown Holder $ 1,000,000 807,207 15.70 $ 235,479 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL: $63,700,000 51,419,101 1,000 $15,000,000 ------ - ------------------------------------------------------------------------------------------------------------------------------

- -------- * Amounts in this table may deviate in immaterial respects from the number of shares and/or notes actually received by the Holders due to rounding. For each $1,000 principal amount of Old Notes tendered, Holders shall receive $235.4788 principal amount of New Notes, 807.207 shares of Common Stock and 0.0158 shares of Preferred Stock. The number of shares of Common Stock and Preferred Stock received in the Exchange will be rounded down to the closest whole number of shares. The principal amount of New Notes received in the Exchange will be rounded down to the closest dollar. A-1 Exhibit B Certificate of Designation [Filed Separately] B-1 Exhibit C New Notes Indenture [Filed Separately] C-1 Exhibit D Opinion of Company Counsel as to matters of Washington Law [Intentionally Omitted] D-1 Exhibit E Opinion of Company Counsel as to matters other than Washington Law [Intentionally Omitted] E-1 Exhibit F Amendment to Employment Agreement [Filed Separately] F-1 Exhibit G Supplemental Indenture [Intentionally Omitted] G-1 Exhibit H Form of Guarantee [Filed Separately] H-1 Exhibit I Note Purchase Agreement [Filed Separately] I-1 EX-10.13 18 f80483ex10-13.txt EXHIBIT 10.13 EXHIBIT 10.13 (Face of Note) 10% Senior Subordinated Pay-In-Kind Notes due 2007 No. 1 CUSIP: 693758AE4 ISIN: US693758AE42 PACIFIC AEROSPACE & ELECTRONICS, INC. promises to pay to Cede & Co. or registered assigns, the principal sum of Fifteen Million Dollars ($15,000,000) on November 1, 2007. Interest Payment Dates: May 1 and November 1 Record Dates: April 15 and October 15 1 IN WITNESS WHEREOF, Pacific Aerospace & Electronics, Inc. has caused this instrument to be duly executed. PACIFIC AEROSPACE & ELECTRONICS, INC. By: /s/ Donald Wright ------------------------------------------- Donald Wright Chief Executive Officer and President By: /s/ Charles A. Miracle ------------------------------------------- Charles A. Miracle Chief Financial Officer and Vice President- Finance This is one of the 10% Senior Subordinated Pay-In-Kind Notes referred to in the within-mentioned Indenture: U.S. Bank National Association, as Trustee By: /s/ Frank P. Leslie, III --------------------------- Name: Frank P. Leslie, III Title: Vice President Dated: March 19, 2002 2 10% Senior Subordinated Pay-In-Kind Notes due 2007 THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE OR A DEPOSITARY OR A SUCCESSOR DEPOSITARY. UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN CERTIFICATED FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS MAY BE REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR SUCH OTHER ENTITY AS MAY BE REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. 1. Interest. Pacific Aerospace & Electronics, Inc., a Washington corporation (the "Company"), promises to pay interest on the principal amount of this Note (as set forth in this Section below) at ten percent (10%) per annum (increased as provided in the final paragraph of this Section 1) from March 19, 2002 until maturity. The Company will pay interest semi-annually on May 1 and November 1 of each year, or if any such day is not a Business Day, on the next succeeding Business Day (each an "Interest Payment Date"). On each Interest Payment Date the Company shall, in lieu of the payment of interest in cash on the Notes, pay interest on all outstanding Notes in whole, but not in part, through the issuance of additional 10% Senior Subordinated Pay-In-Kind Notes ("PIK Notes"), in denominations (rounded, if necessary to the nearest dollar) of $1 and integral multiples thereof, in an aggregate principal amount equal to the amount of interest that would be payable with respect to such Notes if such interest were paid in cash. On each such Interest Payment Date, the Company shall issue and deliver PIK Notes to the Trustee in the name of each holder of PIK Notes ("Holder") (in an aggregate amount of interest then due such Holder) as of the relevant Record Date in the aggregate principal amount required to pay such interest. Each PIK Note is an additional obligation of the Company, is guaranteed by each of the Guarantors and shall be governed by, and entitled to the benefits of, and shall be subject to the terms of, the Indenture and shall rank pari passu with and be subject to the same terms (including the interest rate from time to time payable thereon) as the Notes with respect to which such PIK Notes were issued (except, as the case may be, with respect to the issuance date and aggregate principal amount). At all times after the Company has issued PIK Notes, the term "Notes" shall also include any issued and outstanding PIK Notes. Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of issuance; provided that if there is no existing Default in the payment of interest, and if this Note is authenticated between a record date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such next succeeding Interest Payment Date. The first Interest Payment Date shall be May 1, 2002. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal and premium, if any, at the rate equal to 1% per annum in excess of the then applicable interest rate on the Notes to the extent lawful in accordance with Section 2.12 of the Indenture. Interest will be computed on the basis of a 360-day year of twelve 30-day months. Notwithstanding the foregoing, in the event that the Series C Preferred Stock of the Company is not converted into Common Stock, par value of $0.001 per share, pursuant to the terms of such Series C Preferred Stock (the "Automatic Conversion") on or prior to June 1, 2002, the Company, without any further action by the Trustee or any Holder, shall pay interest on the principal amount of this Note at an increased rate equal to fourteen percent (14%) per annum from and after such time until the Automatic Conversion takes place. The Company shall promptly notify the Trustee and the Holders in writing upon the occurrence of the Automatic Conversion. 2. Method of Payment. The Company will pay interest on the Notes to the Persons who are registered Holders of Notes at the close of business on the April 15 or October 15 next preceding the Interest Payment Date, even if such Notes are cancelled after such record date and on or before such Interest Payment Date, except as provided in Section 2.12 of the Indenture with respect to defaulted interest. The Notes will be payable as to principal and premium, if any, at the office or agency of the Company maintained for such purpose in the Borough of Manhattan, The City of New York, provided that payment by wire transfer of immediately available funds will be required with respect to principal of, and premium, if any, on all Notes the Holders of which shall have provided wire transfer instructions to the Company or the Paying Agent. For interest payments paid in kind, the Notes will be payable in accordance with Section 1 above. 3. Paying Agent and Registrar. Initially, U.S. Bank, National Association, the Trustee under the Indenture, will act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company or any of its Subsidiaries may act in any such capacity in accordance with the Indenture. 4. Indenture. The Company issued the Notes under an Indenture dated as of March 19, 2002 ("Indenture") between the Company, the Guarantors and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code ss.ss. 77aaa-77bbbb) 4 (the "Act"). The Notes are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. The Notes are limited to $15,000,000 in aggregate principal amount. Notwithstanding the foregoing, the aggregate principal amount of Notes permitted to be outstanding at any time may exceed $15,000,000 by an amount sufficient to permit payments of interest in kind as provided for herein and in the Indenture. 5. Optional Redemption. (a) The Company shall have the right to redeem the Notes, in whole or in part, at any time after the date of the Indenture at a redemption price equal to 100% of the principal amount of such notes being redeemed, together with accrued and unpaid interest thereon, to the date of redemption. (b) Notice of redemption will be mailed at least 15 days but not more than 60 days before the redemption date to each Holder whose Notes are to be redeemed at its registered address. If any Note or PIK Note is to be redeemed in part only, the notice of redemption that relates to such Note or PIK Note shall state the portion of the principal amount thereof to be redeemed. A new Note in principal amount equal to the unredeemed portion thereof will be issued in the name of Holder thereof upon cancellation of the original Note or PIK Note. Notes in denominations larger than $1,000 may be redeemed in part but only in integral multiples of $1,000, unless all of the Notes held by a Holder are to be redeemed. On and after the redemption date interest ceases to accrue on Notes or portions thereof called for redemption unless the Company defaults in such payments due on the redemption date. 6. Mandatory Redemption. The Company shall not be required to make mandatory redemption payments with respect to the Notes. 7. Repurchase at Option of Holder Upon Certain Events. After the Company has indefeasibly repaid in full or otherwise fully discharged all of the obligations in respect of Senior Indebtedness, then upon the occurrence of a Change of Control, each Holder shall have the right, at such Holder's option, pursuant to an offer (subject only to conditions required by applicable law, if any) by the Company (the "Change of Control Offer") to require the Company to repurchase all or any part of such Holder's Notes upon the terms set forth in the Indenture. 8. Denominations, Transfer, Exchange. The Notes are in registered form without coupons in denominations of $1,000 and integral multiples of $1,000. The transfer of Notes may be registered and Notes may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law but only to the extent contemplated by the Indenture. 9. Persons Deemed Owners. The registered Holder of a Note or a PIK Note may be treated as its owner for all purposes. 5 10. Amendment, Supplement and Waiver. Subject to certain exceptions, the Indenture or the Notes may be amended or supplemented with the written consent of the Holders of at least a majority in aggregate principal amount of the then outstanding Notes, and any existing default or compliance with any provision of the Indenture, the Notes or the Guarantees may be waived with the written consent of the Holders of at least a majority in aggregate principal amount of the then outstanding Notes in accordance with Section 9.02 of the Indenture. Without the consent of any Holder of a Note or a PIK Note, the Indenture or the Notes may be amended or supplemented to cure any ambiguity, defect or inconsistency, in a manner not adverse to any Holder, to provide for uncertificated Notes in addition to or in place of Certificated Notes, to provide for the assumption of the Company's obligations to the Holders of the Notes in case of a merger, sale or consolidation pursuant to Article 5 of the Indenture, to provide for additional Guarantors, successor guarantors or for the release or assumption of the Guarantee in compliance with the Indenture, to make any change that would provide any additional rights or benefits to the Holders of the Notes (including the addition of any Guarantors) or that does not adversely affect the rights under the Indenture of any such Holder, to comply with the requirements of the SEC in order to effect or maintain the qualification of the Indenture under the Act or to evidence, and provide for acceptance of, the appointment of a successor Trustee. 11. Subordination. The payment of principal of, premium, if any, and interest on the Notes will be subordinated in right of payment to all Senior Indebtedness as set forth in Article 10 of the Indenture. 12. Trustee Dealings with Company. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company or its Affiliates, and may otherwise deal with the Company or its Affiliates, as if it were not the Trustee. 13. No Recourse Against Others. A director, officer, employee, incorporator or shareholder, of the Company, as such, shall not have any liability for any Obligations of the Company under the Notes or the Indenture or for any claim based on, in respect of, or by reason of, such Obligations or their creation, except that this provision shall in no way limit the Obligation of any Guarantor pursuant to any guarantee of the Notes. Each Holder by accepting a Note or PIK Note waives and releases all such liability. This waiver and release are part of the consideration for the issuance of the Notes. 14. Authentication. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 15. Abbreviations. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 16. CUSIP Numbers. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers in notices of 6 redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to: Pacific Aerospace & Electronics, Inc. 430 Olds Station Road, Third Floor Wenatchee, Washington 98801 Telephone No.: (509) 667-9600 Telecopier No.: (509) 667-9696 Attention: President 7 SCHEDULE OF EXCHANGES OF CERTIFICATED NOTE The following exchanges of a part of this Global Note for Certificated Notes have been made:

Principal Amount of this Signature of Amount of decrease in Amount of increase in Global Note following authorized officer of Principal Amount of Principal Amount of this such decrease Trustee or Note Date of Exchange this Global Note Global Note (or increase) Custodian - ---------------- ---------------- ----------- ------------- ---------

8 Assignment Form To assign this Note, fill in the form below: (I) or (we) assign and transfer this Note to __________________________________________________________ (Insert assignee's soc. sec. or tax I.D. no.) ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Print or type assignee's name, address and zip code) and irrevocably appoint ___________________________________________ to transfer this Note on the books of the Company. The agent may substitute another to act for him. Date: ____________________ Your Signature: ____________________________________________________________ (Sign exactly as your name appears on the face of this Note) Signature Guarantee. 9 Option of Holder to Elect Purchase If you want to elect to have this Note purchased by the Company pursuant to Section 4.07 of the Indenture, check the box below: [ ] Section 4.07 If you want to elect to have only part of the Note purchased by the Company pursuant to Section 4.07 of the Indenture, state the amount you elect to have purchased: $__________ Date: ____________________ Your Signature: ____________________________________________________________ (Sign exactly as your name appears on the face of this Note) Signature Guarantee. 10 EX-10.14 19 f80483ex10-14.txt EXHIBIT 10.14 EXHIBIT 10.14 SUBSIDIARY GUARANTEE The Guarantors listed below (hereinafter referred to as the "Guarantors," which term includes any successor or assign under the Indenture (the "Indenture") and any additional Guarantors), have irrevocably and unconditionally guaranteed (i) the due and punctual payment of the principal of, premium, if any, and interest on the 10% Senior Subordinated Pay-In-Kind Notes due 2007 (the "Notes") of Pacific Aerospace & Electronics, Inc., a Washington corporation (the "Company"), whether at stated maturity, by acceleration or otherwise, the due and punctual payment of interest on the overdue principal and premium, if any, on the Notes, and the due and punctual performance of all other obligations of the Company, to the Holders or the Trustee all in accordance with the terms set forth in Article 11 of the Indenture, (ii) in case of any extension of time of payment or renewal of any Notes or any such other obligations, that the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise, and (iii) the payment of any and all costs and expenses (including reasonable attorneys' fees) incurred by the Trustee or any Holder in enforcing any rights under this Subsidiary Guarantee. The obligations of each Guarantor to the Holder and to the Trustee pursuant to this Subsidiary Guarantee and the Indenture are expressly set forth in Article 11 of the Indenture and reference is hereby made to such Indenture for the precise terms of this Subsidiary Guarantee. No shareholder, officer, director or incorporator, as such, past, present or future of each Guarantor shall have any liability under this Subsidiary Guarantee by reason of his or its status as such shareholder, officer, director or incorporator. This is a continuing Guarantee and shall remain in full force and effect and shall be binding upon each Guarantor and its successors and assigns until full and final payment of all of the Company's obligations under the Notes and Indenture and shall inure to the benefit of the successors and assigns of the Trustee and the Holders, and, in the event of any transfer or assignment of rights by any Holder or the Trustee, the rights and privileges herein conferred upon that party shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof. This is a Guarantee of payment and not of collectibility. This Subsidiary Guarantee shall not be valid or obligatory for any purpose until the certificate of authentication on the Notes to which this Subsidiary Guarantee relates shall have been executed by the Trustee under the Indenture by the manual signature of one of its authorized officers. The Obligations of each Guarantor under its Subsidiary Guarantee shall be limited to the extent necessary to insure that it does not constitute a fraudulent conveyance under applicable law. The Obligations of each Guarantor under its Subsidiary Guarantee pursuant to Article 11 of the Indenture shall be junior and subordinated to the Senior Indebtedness (as defined in the Indenture) of such Guarantor on the same basis as the Notes are junior and subordinated to the Senior Indebtedness of the Company. For the purposes of the foregoing sentence, (a) each Guarantor may make, and the Trustee and the Holders of the Notes shall have the right to receive and/or retain, payments by any of the Guarantors only at such times as they may receive and/or retain payments in respect of the Notes pursuant to the Indenture, including Article 10 thereof, and (b) the rights and obligations of the relevant parties relative to the Subsidiary Guarantees and Senior Indebtedness of any Guarantor shall be the same as their respective rights and obligations relative to the Notes and Senior Indebtedness of the Company pursuant to Article 10 of the Indenture. THE TERMS OF ARTICLE 11 OF THE INDENTURE ARE INCORPORATED HEREIN BY REFERENCE. Capitalized terms used herein have the same meanings given in the Indenture unless otherwise indicated. IN WITNESS WHEREOF, each of the parties have executed this Subsidiary Guarantee as of March 19, 2002. GUARANTORS: AEROMET AMERICA, INC. By: /s/ Donald A. Wright -------------------------------- Donald A. Wright Executive Vice President BALO PRECISION PARTS, 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 AEROSPACE & ELECTRONICS INTERNATIONAL, 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 SEISMIC SAFETY PRODUCTS, 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 EX-10.15 20 f80483ex10-15.txt EXHIBIT 10.15 EXHIBIT 10.15 CONVERSION ADJUSTMENT AGREEMENT Conversion Adjustment Agreement (this "Agreement"), dated as of March 19, 2002, by and among Pacific Aerospace & Electronics, Inc., a Washington corporation (the "Company"), GSCP Recovery, Inc., GSC Recovery II, L.P., Alliance Capital Management L.P., M.W. Post Advisory Group L.L.C., William E. Simon & Sons Special Situation Partners II, L.P. and HBK Master Fund L.P. (collectively, the "Holders"). RECITALS WHEREAS, reference is made to the Exchange Agreement, dated as of the date hereof (the "Exchange Agreement"), among, the Company, the Holders, and the Subsidiary Guarantors (as defined therein) pursuant to which each of the Holders have agreed to exchange their 11 1/4% Senior Subordinated Notes due 2005 of the Company (the "Old Notes") held by such Holders for certain other securities of the Company, including common stock, preferred stock and pay-in-kind senior subordinated notes (collectively, the "New Securities"), as more particularly described therein; WHEREAS, for each $1,000 of Old Notes tendered to the Company pursuant to the terms of the Exchange Agreement, the Holders will receive .0158 shares of the Company's Series C Convertible Preferred Stock, par value $0.001 (the "Preferred Stock"), rounded down to the nearest whole share; WHEREAS, upon receipt of requisite shareholder approval to amend the Articles of Incorporation of the Company to increase the number of authorized shares of common stock of the Company, par value $0.001 (the "Common Stock"), as necessary to effect the full conversion of the Preferred Stock into shares of Common Stock, the Preferred Stock shall automatically convert (the "Automatic Conversion") into the number of shares of Common Stock of the Company which when added to the number of shares of Common Stock of the Company received at Closing (as defined in the Exchange Agreement) will give the Holders on a fully-diluted basis, in the aggregate, 97.5% of the outstanding shares of Common Stock of the Company (the "Conversion Shares"); WHEREAS, the New Securities, including the shares of Preferred Stock, are being distributed to the Holders via the book-entry system of The Depository Trust Company ("DTC") upon tender of the Old Notes held by the Holders; WHEREAS, the distribution of the New Securities, including the Preferred Stock, via DTC's book-entry system and the effects of rounding down to the nearest whole share would, in the absence of this Agreement, otherwise result in a disproportionate allocation of shares of Preferred Stock among the Holders following such distribution that is inconsistent with the economic arrangement agreed to among the parties prior to the exchange transaction (the "Economic Arrangement"); and WHEREAS, as more particularly described herein, the Holders desire that the number of Conversion Shares to be received by each Holder upon the Automatic Conversion of the Preferred Stock be adjusted to reflect the Economic Arrangement. NOW THEREFORE, in consideration of the mutual covenants and obligations set forth herein, and subject to the terms and conditions contained herein, the Company and each Holder hereby agree as follows: Section I. NUMBER OF CONVERSION SHARES Section 1.1 Conversion Adjustment. Notwithstanding (i) the number of shares of Preferred Stock received by each Holder at Closing, (ii) the Conversion Price as set forth in the Designation of Rights and Preferences of Series C Voting Convertible Preferred Stock (the "Certificate of Designation") of the Company, and (iii) the number of accounts in which the Preferred Stock is held by the Holders, the Company and each Holder hereby agree that the number of Conversion Shares each Holder shall receive upon consummation of the Automatic Conversion shall be calculated on a pro-rata basis as determined by the aggregate principal amount of Old Notes tendered by such Holder in relation to the aggregate principal amount of Old Notes tendered by all of the Holders in the Exchange, the aggregate principal amount of which shall be $63,700,000 (the "Conversion Adjustment"). This Section 1.1 is designed solely to effect the true economic transaction agreed to between the Company and the Holders and to resolve any disproportionate distributions of Preferred Stock that would otherwise arise as a result of the rounding down of shares in DTC's book-entry system. Notwithstanding the foregoing, the Conversion Adjustment shall not serve to increase the aggregate number of Conversion Shares issuable upon the Automatic Conversion, as such terms are set forth in the Company's Certificate of Designation. Section 1.2 Amendment. This Agreement may not be amended, modified or supplemented unless consented to in writing by all parties hereto. Section 1.3 Governing Law. This Agreement shall be governed by the laws of the State of New York applicable to contracts made and to be wholly performed in the State of New York without giving effect to the principles of conflicts of laws thereof. Section 1.4 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. 2 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. THE COMPANY PACIFIC AEROSPACE & ELECTRONICS, INC. BY: /S/ Donald A. Wright _________________________________ Name: Donald A. Wright Title: President and Chief Executive Officer THE HOLDERS GSCP RECOVERY, INC By: /s/ Matthew Kaufman _________________________________ Name: Matthew Kaufman Title: Managing Director GSC RECOVERY II, L.P. By: GSC Recovery II GP, L.P., its general partner By: GSC RII, LLC, its general partner By: GSCP (NJ) Holdings, L.P., its sole member By: GSCP (NJ), Inc., its general partner By: /s/ Matthew Kaufman _________________________________ Name: Matthew Kaufman Title: Managing Director 3 ALLIANCE CAPITAL MANAGEMENT L.P., as investment advisor By: Alliance Capital Management Corp. By: /s/ Michael E. Sohr ___________________________________________ Name: Michael E. Sohr Title: Vice President M.W. POST ADVISORY GROUP L.L.C., as investment advisor By: /s/ Carl H. Goldsmith ___________________________________________ Name: Carl H. Goldsmith Title: Managing Director WILLIAM E. SIMON & SONS SPECIAL SITUATION PARTNERS II, L.P. By: William E. Simon & Sons Special Situations II, L.L.C., its General Partner By: /s/ John E. Klinge ___________________________________________ Name: John E. Klinge Title: Authorized Signatory HBK MASTER FUND L.P. By: HBK Investments L.P. Investment Manager By: /s/ William E. Rose ___________________________________________ Name: William E. Rose Title: Authorized Signatory 4 -----END PRIVACY-ENHANCED MESSAGE-----

EX-3.1

                                                                     EXHIBIT 3.1
                              ARTICLES OF AMENDMENT
                                       OF
                      PACIFIC AEROSPACE & ELECTRONICS, INC.


         Pursuant to the provisions of RCW 23B.06.020 of the Washington Business
Corporation Act, the following Articles of Amendment are executed by the
undersigned, a Washington corporation:

        1.     NAME. The name of the corporation is Pacific Aerospace &
Electronics, Inc.

        2.     TEXT OF AMENDMENTS. The Articles of Incorporation of the
corporation are amended to add a new Section C to Article II, which shall read
as follows:

                  The corporation's Certificate of Designation setting forth the
         rights and preferences of the corporation's Series C Voting Convertible
         Preferred Stock attached hereto and incorporated herein by this
         reference.

        3.     EXCHANGE, RECLASSIFICATION OR CANCELLATION OF ISSUED SHARES. The
amendment does not provide for the exchange, reclassification or cancellation of
issued shares.

        4.     DATE OF ADOPTION. The amendment was adopted on the 27th day of
February, 2002 by the Board of Directors of the corporation, in accordance with
the provisions of RCW 23B.10.020 and RCW 23B.06.020. Shareholder action was not
required.

        5.     EFFECTIVE DATE. These Articles of Amendment will be effective
upon filing.

         The undersigned hereby certifies that he is an officer of the
corporation and is authorized to execute these Articles of Amendment on behalf
of the corporation.

         DATED this 18th day of March, 2002.


                                        Pacific Aerospace & Electronics, Inc.,
                                        a Washington corporation


                                        By   /s/ Donald A. Wright
                                           -------------------------------------
                                           Donald A. Wright, President

EX-3.2

                                                                     Exhibit 3.2
                     DESIGNATION OF RIGHTS AND PREFERENCES
                                       OF
                  SERIES C VOTING CONVERTIBLE PREFERRED STOCK
                                       OF
                     PACIFIC AEROSPACE & ELECTRONICS, INC.



1.      Designation. The Series C Convertible Preferred Stock of Pacific
        Aerospace & Electronics, Inc. (the "Corporation") shall consist of 3,000
        shares, par value $0.001 per share, and shall be designated the "Series
        C Voting Convertible Preferred Stock" (the "Series C Stock"). The Series
        C Stock will rank senior in right of payment to all other classes or
        series of capital stock of the Corporation, including the common stock
        (the "Common Stock") and all other series of preferred stock of the
        Corporation as to dividends and upon liquidation, dissolution or winding
        up of the Corporation.

2.      Dividends. (a) The holders of issued and outstanding Series C Stock
        shall be entitled to receive, out of any funds and assets of the
        Corporation legally available therefor, cumulative preferential
        dividends accruing at the rate of ten percent (10%) of the Liquidation
        Preference (as defined below) thereof per share per annum (the "Dividend
        Rate"), payable only in shares of Series C Stock (in lieu of cash)
        (valued for this purpose at the Liquidation Preference). Such cumulative
        preferential dividends shall be payable prior and in preference to the
        payment of any dividend or other distribution on all other classes or
        series of capital stock of the Corporation, including, without
        limitation, the Corporation's Common Stock. In the event that the
        Automatic Conversion Date (as defined below) is not on or prior to June
        1, 2002, such Dividend Rate will increase, from and after June 1, 2002,
        to the rate of fourteen percent (14%) of the Liquidation Preference per
        share per annum. Such dividends shall accrue on each share of Series C
        Stock from the date of issuance and shall accrue from day-to-day until
        paid, whether earned or declared.

        (b)    Notwithstanding the foregoing paragraph:

               (i)    no dividend may be declared or paid on shares of Common
                      Stock or any other shares of capital stock of the
                      Corporation prior to the payment of any accrued dividends
                      on the Series C Stock, except upon any capital stock which
                      has been granted priority dividend rights pursuant to the
                      affirmative written approval or consent of the holders of
                      not less than two-thirds of the then issued and
                      outstanding shares of Series C Stock;

               (ii)   no dividend may be declared or paid on shares of capital
                      stock of the Corporation (other than the Series C Stock)
                      if the net assets of the Corporation thereafter would be
                      insufficient to make the liquidation payment described in
                      Section 3(a) on all outstanding shares of Series C Stock;
                      and

                      (iii) if the Board of Directors declares a dividend
                      payable on the outstanding shares of Common Stock or any
                      series of preferred stock (other than




                      Series C Stock), other than a dividend payable in shares
                      of Common Stock or shares of capital stock ranking, as to
                      dividends, liquidations and otherwise, junior to the
                      Series C Stock, the holders of Series C Stock shall be
                      entitled to a dividend per share of Series C Stock that
                      would be payable on that number of shares of Common Stock
                      contemplated to be received by the holders upon the
                      Automatic Conversion of Series C Stock as set forth in
                      Section 5 (without requiring such conversion) (as of the
                      record date for the determination of holders of Common
                      Stock entitled to receive such dividend) in addition to
                      any dividend which may be declared and payable on the
                      Series C Stock.

3.      Liquidation, Dissolution, or Winding Up.

        (a)    Treatment at Liquidation, Dissolution, or Winding Up.

               (i)    In the event of any liquidation, dissolution, or winding
                      up of the Corporation, whether voluntary or involuntary,
                      the holders of Series C Stock shall be entitled to be
                      paid, before any sums are paid or any assets distributed
                      among the holders of the shares of the Common Stock or any
                      other junior series or class of preferred stock, out of
                      the assets of the Corporation available for distribution
                      to holders of the Corporation's capital stock, an amount
                      (the "Liquidation Preference") equal to the greater of (i)
                      forty five thousand dollars ($45,000) (plus any declared
                      but unpaid dividends) per share of Series C Stock (which
                      amount shall be subject to proportionate adjustment on any
                      stock split, combination, reclassification, or other
                      similar event involving the Series C Stock) or (ii) the
                      amount the holders of the Series C Stock would be entitled
                      to receive as if all of the Series C Stock were converted
                      into that number of shares of Common Stock contemplated to
                      be received by the holders upon the Automatic Conversion
                      of Series C Stock as set forth in Section 5 hereof
                      (without requiring such conversion) immediately before
                      such liquidation, dissolution or winding up of the
                      Corporation.

               (ii)   If the assets of the Corporation are insufficient to
                      permit payment in full to the holders of Series C Stock as
                      provided in this subsection (a), then the entire assets of
                      the Corporation available for such distribution shall be
                      distributed ratably among the holders of Series C Stock.
                      After payment is made in full to the holders of Series C
                      Stock, or funds needed for such payments shall have been
                      set aside by the Corporation in trust for the account of
                      holders of Series C Stock so as to be available for such
                      payments, all remaining assets available for distribution
                      to shareholders shall be distributed ratably solely among
                      holders of shares of other classes of capital stock.

        (b)    Consolidations, Mergers, and Sales of Assets.




                                       2


               (i)    At least 20 days before the consolidation or merger of the
                      Corporation into or with another as a result of which the
                      holders of more than 50% of the shares of Common Stock
                      receive cash, securities of another entity, or other
                      property in exchange for their shares, or a sale of all or
                      substantially all of the assets of the Corporation, the
                      Corporation shall notify the holders of Series C Stock
                      thereof in writing, and the closing of such event shall be
                      regarded as a liquidation, dissolution, or winding up of
                      the affairs of the Corporation within the meaning of
                      Section 3(a); provided, however, that for 20 days after
                      the date of such notice, each holder of Series C Stock
                      shall have the right, exercisable by written notice to the
                      Corporation, to elect the benefits of Section 3(b)(ii)
                      hereof in lieu of receiving payment in liquidation,
                      dissolution, or winding up of the Corporation pursuant to
                      this Section 3(b)(i).

               (ii)   As part of any consolidation, merger, or sale of assets
                      described in Section 3(b)(i), provision shall be made so
                      that each holder of Series C Stock shall be entitled to
                      elect to receive in such transaction for or in respect of
                      the Series C Stock held by such holder, the number of
                      shares of stock or other securities or property to which
                      such holder would have been entitled if such holder had
                      converted its shares of Series C Stock into the number of
                      shares of the Corporation's Common Stock contemplated to
                      be received by such holder upon the Automatic Conversion
                      as set forth in Section 5 hereof (without requiring such
                      conversion) immediately before the closing of such
                      consolidation, merger, or sale of assets.

        (c)    Distribution Other Than Cash. If the distribution provided for in
               this Section 3 is to be paid in property other than cash, the
               value of such distribution shall be the fair market value of such
               property as determined in good faith by the Board of Directors of
               the Corporation.

4.      Voting Rights. The Series C Stock shall vote with the Corporation's
        Common Stock, together as a class, on all matters on which the Common
        Stock is entitled to vote and each share of Series C Stock shall have
        that number of votes equal to the number of shares of Common Stock into
        which such share of Series C Stock would be convertible upon the
        Automatic Conversion, as set forth in Section 5 hereof (without
        requiring such conversion). The holders of the Series C Stock then
        outstanding shall be entitled, voting together as a class, to elect all
        five (5) directors of the Corporation at each election of directors. The
        Series C Stock shall not be entitled to vote separately as a class
        except as otherwise provided herein or required by Washington law. In
        the event voting as a separate voting group by the holders of the Series
        C Stock is expressly required by Washington law, any vote by the holders
        of Series C Stock as a separate voting group shall be effective if
        approved by a majority of the outstanding shares of Series C Stock at a
        meeting or by written consent.




                                       3


5.      Automatic Conversion.

        (a)    The holders of shares of Series C Stock shall have the following
               rights with respect to the conversion of shares of Series C Stock
               into shares of Common Stock ("Conversion Rights"):

                      (i) On the date (the "Automatic Conversion Date") upon
        which an amendment to the Corporation's Articles of Incorporation
        increasing the number of authorized shares of Common Stock of the
        Corporation to at least 6,000,000,000 shares becomes effective, each
        share of then-unconverted Series C Stock (and all accrued dividends
        thereon) shall automatically convert (the "Automatic Conversion") into
        fully paid and nonassessable shares of Common Stock at a conversion
        price (the "Automatic Conversion Price") equal to $.008900664 without
        any action on the part of the holder by dividing the Liquidation
        Preference by the Automatic Conversion Price then in effect, and whether
        or not the certificates representing such shares are surrendered to the
        Corporation or its transfer agent; provided, however, that in the event
        the Series C Stock converts into a number of shares of Common Stock
        which in the aggregate, when added to the number of shares of Common
        Stock issued pursuant to an exchange transaction of the Company
        consummated on March 19, 2002 (in an amount of approximately 51,419,101
        shares) (the "Exchange Shares"), would exceed 97.5% of the shares of the
        Company's Common Stock on a fully-diluted, "as converted" basis, the
        Automatic Conversion Price shall be re-adjusted so that the aggregate
        number of shares of Common Stock issuable upon the Automatic Conversion
        shall equal in the aggregate, when added to the Exchange Shares, 97.5%
        of the Company's Common Stock on a fully-diluted, "as converted" basis.

                      (ii) The Automatic Conversion Price shall be adjusted from
        time to time in accordance with and subject to the provisions set forth
        in Section 5(b) below.

        (b)    Such Automatic Conversion Price shall be subject to adjustment
               from time to time as hereinafter provided in this Section 5(b).

               (i)    Automatic Conversion Price Adjustment Formulas. If, at any
                      time and from time to time after the date of original
                      issuance of the Series C Stock, the Corporation shall
                      issue or sell any share of Common Stock (excluding any
                      grant, issuance or sale described in Section 5(b)(vii))
                      for a consideration per share which is less than the
                      Automatic Conversion Price in effect at the time of such
                      issue or sale, then in each such case (except when a
                      different method of adjusting the Automatic Conversion
                      Price is provided in Section 5(b)(ii), 5(b)(iii) or
                      5(b)(v)), the Automatic Conversion Price shall be
                      forthwith changed (but only, except as otherwise provided
                      in Section 5(b)(ii)(C), if a reduction to the Automatic
                      Conversion Price would result) to the price (calculated to
                      the nearest one/one-hundredth of a cent) determined by
                      dividing (A) an amount equal to the sum of (x) the number
                      of shares of Common Stock outstanding and deemed (in
                      accordance with Section 5(b)(ii)) to be outstanding
                      immediately prior to such issue or sale, multiplied by the
                      then effective




                                       4


                      Automatic Conversion Price, plus (y) the total
                      consideration, if any, received and deemed (in accordance
                      with Section 5(b)(ii)) received by the Corporation upon
                      such issue or sale, by (B) the total number of shares of
                      Common Stock outstanding and deemed (in accordance with
                      Section 5(b)(ii)) outstanding immediately after such issue
                      or sale. No adjustment of the Automatic Conversion Price,
                      however, shall be made in an amount less than
                      one/one-hundredth of a cent per share, but any such lesser
                      adjustment shall be carried forward and shall be made at
                      the time of and together with the next subsequent
                      adjustment which together with any subsequent adjustments
                      so carried forward shall amount to one/one-hundredth of a
                      cent per share or more.

               (ii)   Constructive Issuances of Common Stock; Convertible
                      Securities; Rights and Options. For purposes of Section
                      5(b)(i), the following provisions shall also be
                      applicable:

                      (A)    If at any time the Corporation shall in any manner
                             grant any rights or options (except for the grant
                             of any rights or options referred to in Section
                             5(b)(vii)) to subscribe for or to purchase Common
                             Stock or any stock or securities convertible into
                             or exchangeable or exercisable for shares of Common
                             Stock (such convertible, exchangeable or
                             exercisable stock or securities being hereinafter
                             called "Convertible Securities"), whether or not
                             such rights or options or the right to convert,
                             exchange or exercise any such Convertible
                             Securities are immediately exercisable, and the
                             price per share for which Common Stock is issuable
                             upon the exercise of such rights or options or upon
                             conversion, exchange or exercise of such
                             Convertible Securities (determined by dividing (x)
                             the total amount, if any, received or receivable by
                             the Corporation as consideration for the granting
                             of such rights or options, plus the minimum
                             aggregate amount of additional consideration, if
                             any, payable to the Corporation upon the exercise
                             of such rights or options, plus, in the case of any
                             such rights or options which relate to such
                             Convertible Securities, the minimum aggregate
                             amount of additional consideration, if any, payable
                             upon the issue or sale of such Convertible
                             Securities and upon the conversion, exchange or
                             exercise thereof, by (y) the total maximum number
                             of shares of Common Stock issuable upon the
                             exercise of such rights or options or upon the
                             conversion, exchange or exercise of all such
                             Convertible Securities issuable upon the exercise
                             of such rights or options) shall be less than the
                             Automatic Conversion Price in effect as of the time
                             of granting such rights or options, then the total
                             maximum number of shares of Common Stock issuable
                             upon the exercise of such rights or options or upon
                             conversion, exchange or exercise of the total
                             maximum amount of such Convertible Securities
                             issuable upon the exercise of such rights or
                             options shall (on and after the date of the
                             granting of such rights or options) be




                                       5


                             deemed to be outstanding and to have been issued
                             for such price per share. Except as provided in
                             clause (C) below, no further adjustments of the
                             Automatic Conversion Price shall be made upon the
                             actual issue of shares of Common Stock or
                             Convertible Securities upon exercise of such rights
                             or options or upon the actual issue of shares of
                             Common Stock upon conversion, exchange or exercise
                             of such Convertible Securities.

                      (B)    If at any time the Corporation shall in any manner
                             issue or sell any Convertible Securities (other
                             than any Convertible Securities referred to in
                             Section 5(b)(vii)), whether or not the rights to
                             exchange or convert thereunder are immediately
                             exercisable, and the price per share for which
                             Common Stock is issuable upon such conversion,
                             exchange or exercise (determined by dividing (x)
                             the total amount received or receivable by the
                             Corporation as consideration for the issue or sale
                             of such Convertible Securities, plus the minimum
                             aggregate amount of additional consideration, if
                             any, payable to the Corporation upon the
                             conversion, exchange or exercise thereof, by (y)
                             the total maximum number of shares of Common Stock
                             issuable upon the conversion, exchange or exercise
                             of all such Convertible Securities) shall be less
                             than the Automatic Conversion Price in effect as of
                             the time of such issue or sale, then the total
                             maximum number of shares of Common Stock issuable
                             upon conversion, exchange or exercise of all such
                             Convertible Securities shall (on and after the date
                             of the issue or sale of such Convertible
                             Securities) be deemed to be outstanding and to have
                             been issued for such price per share, provided,
                             that, except as otherwise specified in clause (C)
                             below, (x) no further adjustments of the Automatic
                             Conversion Price shall be made upon the actual
                             issue of Common Stock upon conversion, exchange or
                             exercise of such Convertible Securities, and (y) if
                             any such issue or sale of such Convertible
                             Securities is made upon exercise of any rights to
                             subscribe for or to purchase or any option to
                             purchase any such Convertible Securities for which
                             adjustments of the Automatic Conversion Price have
                             been or are to be made pursuant to other provisions
                             of this Section 5(b)(ii)), no further adjustment of
                             the Automatic Conversion Price shall be made by
                             reason of such issue or sale.

                      (C)    If the exercise price provided for in any right or
                             option referred to in clause (A) of this Section
                             5(b)(ii), or the rate at which any Convertible
                             Securities referred to in clauses (A) and (B) of
                             this Section 5(b)(ii) are convertible into or
                             exchangeable for Common Stock, shall change or a
                             different exercise price or rate shall become
                             effective at any time or from time to time (other
                             than under or by reason of provisions designed to
                             protect against dilution) then, upon such change
                             becoming effective, the




                                       6


                             Automatic Conversion Price then in effect hereunder
                             shall forthwith be increased or decreased to such
                             Automatic Conversion Price as would have been
                             obtained had the adjustments made and required to
                             be made under this Section 5(b)(ii) upon the
                             issuance of such rights or options or Convertible
                             Securities been made upon the basis of (and the
                             total consideration received therefor) (x) the
                             issuance of the number of shares of Common Stock
                             theretofore actually delivered upon the exercise of
                             such options or rights or upon the conversion,
                             exchange or exercise of such Convertible
                             Securities, (y) the issuance of all of Common Stock
                             and all other rights, options and Convertible
                             Securities issued after the issuance of such
                             rights, options or Convertible Securities, and (z)
                             the original issuance at the time of such change of
                             any such options, rights and Convertible Securities
                             then still outstanding. On the expiration of any
                             such option or right or the termination of any such
                             right to convert, exchange or exercise such
                             Convertible Securities, the Automatic Conversion
                             Price then in effect hereunder shall forthwith be
                             increased or decreased to such Automatic Conversion
                             Price as would have obtained (x) had the
                             adjustments made upon the issuance of such rights
                             or options or such Convertible Securities been made
                             upon the basis of the issuance of only the number
                             of shares of Common Stock theretofore actually
                             delivered (and the total consideration received
                             therefor) upon the exercise of such rights or
                             options or upon the conversion, exchange or
                             exercise of such Convertible Securities, and (y)
                             had adjustments been made on the basis of the
                             Automatic Conversion Price as adjusted under the
                             immediately preceding clause (x) for all issues or
                             sales of Common Stock or rights, options or
                             Convertible Securities made after the issuance of
                             such rights or options or such Convertible
                             Securities. If the exercise price provided for in
                             any right or option referred to in clause (A) of
                             this Section 5(b)(ii), or the rate at which any
                             Convertible Securities referred to in clauses (A)
                             and (B) of this Section 5(b)(ii) are convertible
                             into or exchangeable for shares of Common Stock,
                             shall decrease at any time under or by reason of
                             provisions with respect thereto designed to protect
                             against dilution, then in the case of the delivery
                             of shares of Common Stock upon the exercise of any
                             such right or option or upon conversion, exchange
                             or exercise of any such Convertible Securities, the
                             Automatic Conversion Price then in effect hereunder
                             shall forthwith be decreased to such Automatic
                             Conversion Price as would have obtained had the
                             adjustments made upon issuance of such right or
                             option or such Convertible Securities been made
                             upon the basis of the issuance of (and the total
                             consideration received for) the shares of Common
                             Stock delivered as aforesaid.




                                       7


                      (D)    If at any time any shares of Common Stock or
                             Convertible Securities or any rights or options to
                             purchase any shares of Common Stock or Convertible
                             Securities shall be issued or sold for cash, the
                             consideration received therefor shall be deemed to
                             be the amount paid to the Corporation therefor
                             without deduction therefrom of any expenses
                             incurred or any underwriting commissions,
                             concessions or discounts, or finders' fees or
                             brokerage commissions, paid or allowed by the
                             Corporation in connection therewith, except to the
                             extent paid to any officer or director of the
                             Corporation or any affiliate of any such officer or
                             director. In case any shares of Common Stock or
                             Convertible Securities or any rights or options to
                             purchase any shares of Common Stock or Convertible
                             Securities shall be issued or sold for a
                             consideration other than cash, the amount of the
                             consideration other than cash payable to the
                             Corporation shall be deemed to be the fair value of
                             such consideration as determined in good faith by
                             the Board of Directors of the Corporation, without
                             deduction therefrom of any expenses incurred or any
                             underwriting commissions or concessions or
                             discounts paid or allowed by the Corporation in
                             connection therewith, except to the extent paid to
                             any officer or director of the Corporation or any
                             affiliate of any such officer or director. In case
                             any shares of Common Stock or Convertible
                             Securities or any rights or options to purchase any
                             share of Common Stock or Convertible Securities
                             shall be issued in connection with any merger of
                             another corporation into the Corporation, the
                             amount of consideration therefor shall be deemed to
                             be the fair value as determined in good faith by
                             the Board of Directors of the Corporation of such
                             portion of the assets of such merged corporation as
                             such Board shall determine to be attributable to
                             such shares of Common Stock, Convertible
                             Securities, rights or options, as the case may be.

                      (E)    If at any time the Corporation shall take a record
                             of the holders of Common Stock for the purpose of
                             entitling them (x) to receive a dividend or other
                             distribution payable in shares of Common Stock or
                             in Convertible Securities, or (y) to subscribe for
                             or purchase shares of Common Stock or Convertible
                             Securities, then such record date shall be deemed
                             to be the date of the issue or sale of the shares
                             of the Common Stock deemed to have been issued or
                             sold upon the declaration of such dividend or of
                             such other distribution or the date of the granting
                             of such right of subscription or purchase, as the
                             case may be.

               (iii)  Stock Dividends. If at any time the Corporation shall
                      declare a dividend or any other distribution upon any
                      capital stock of the Corporation which is payable in
                      shares of Common Stock, then the Automatic Conversion
                      Price in effect immediately prior to the declaration of
                      such dividend or




                                       8


                      distribution shall be reduced to the quotient obtained by
                      dividing (A) the product of (x) the number of shares of
                      Common Stock outstanding and deemed (in accordance with
                      Section 5(b)(ii)) to be outstanding immediately prior to
                      such declaration, multiplied by (y) the then effective
                      Automatic Conversion Price, by (B) the total number of
                      shares of Common Stock outstanding and deemed (in
                      accordance with Section 5(b)(ii)) to be outstanding
                      immediately after such declaration. For purposes of
                      clarification, all shares of Common Stock and all
                      Convertible Securities issuable in payment of any dividend
                      or other distribution upon the capital stock of the
                      Corporation shall be deemed after such declaration to have
                      been issued and sold without consideration.

               (iv)   Extraordinary Dividends and Distributions. If at any time
                      the Corporation shall declare a dividend or any other
                      distribution upon the Common Stock payable otherwise than
                      out of current earnings, retained earnings or earned
                      surplus and otherwise than in shares of Common Stock or
                      Convertible Securities, then, except to the extent that
                      such dividend or distribution shall have been paid to the
                      holders of Series C Stock pursuant to Section 2, the
                      Corporation shall set aside an equal per share dividend
                      (calculated, with respect to the Series C Stock, on an "as
                      converted" basis in accordance with the conversion
                      provisions set forth in this Section 5), which shall be
                      payable to the holder of the subject Series C Stock upon
                      conversion thereof into Common Stock. To the extent that
                      any dividend or distribution required to be set aside
                      under this Section 5(b)(iv) shall be in a form other than
                      cash, then the Corporation shall have the right, in lieu
                      of setting aside such non-cash property, to set aside a
                      cash amount equal to the fair value of such non-cash
                      property as determined by the Board of Directors of the
                      Corporation in good faith. For the purposes of the
                      foregoing, a dividend or distribution other than in cash
                      shall be considered payable out of earnings, retained
                      earnings or earned surplus only to the extent that such
                      current earnings, retained earnings or earned surplus are
                      charged an amount equal to the fair value of such dividend
                      or distribution at the time of the declaration thereof, as
                      determined by the Board of Directors of the Corporation in
                      good faith. Such reductions shall take effect as of the
                      date on which a record is taken for the purposes of such
                      dividend or distribution, or, if a record is not taken,
                      the date as of which the holders of record of Common Stock
                      entitled to such dividend or distribution are to be
                      determined.

               (v)    Stock Splits and Reverse Splits. If at any time the
                      Corporation shall subdivide its outstanding shares of
                      Common Stock into a greater number of shares, the
                      Automatic Conversion Price in effect immediately prior to
                      such subdivision shall be proportionately reduced and the
                      number of Conversion Shares receivable upon conversion of
                      outstanding Series C Stock immediately prior to such
                      subdivision shall be proportionately increased, and
                      conversely, in case at any time the Corporation shall
                      combine the outstanding shares of Common Stock into a
                      smaller number




                                       9


                      of shares, the Automatic Conversion Price in effect
                      immediately prior to such combination shall be
                      proportionately increased and the number of Conversion
                      Shares receivable upon conversion of outstanding Series C
                      Stock immediately prior to such combination shall be
                      proportionately reduced.

               (vi)   Adjustments for Consolidation, Merger, Sale of Assets,
                      Reorganization, etc. If at any time the Corporation shall
                      be a party to any transaction (including without
                      limitation a merger, consolidation, sale of all or
                      substantially all of the Corporation's assets or a
                      recapitalization of the Common Stock) in which the
                      previously outstanding shares of Common Stock shall be
                      changed into or exchanged for different securities of the
                      Corporation or changed into or exchanged for common stock
                      or other securities of another corporation or other
                      property (including cash) or any combination of any of the
                      foregoing (each such transaction being hereinafter
                      referred to as the "Transaction"; the Corporation (in the
                      case of a recapitalization of the Stock) or such other
                      corporation being hereinafter referred to as the
                      "Acquiring Corporation," and the common stock of the
                      Acquiring Corporation being hereinafter referred to as the
                      "Acquirer's Stock"), then, as a condition to the
                      consummation of the Transaction, lawful and adequate
                      provisions shall be made so that, upon the basis and the
                      terms and in the manner provided in this Section 5(b)(vi),
                      each holder of Series C Stock, upon conversion of such
                      Series C Stock at any time after the consummation of the
                      Transaction, shall be entitled to receive, in lieu of the
                      shares of Common Stock issuable upon such exercise prior
                      to such consummation, at the election of such holder given
                      by notice to the Corporation on or before the later of the
                      day on which the holders of Common Stock approve the
                      Transaction, or the thirtieth day following the date of
                      delivery or mailing to such holder of the last proxy
                      statement relating to the vote on the Transaction by the
                      holders of Common Stock:

                      (A)    the stock and other securities, cash and property
                             to which such holder would have been entitled upon
                             the consummation of the Transaction if such holder
                             had converted such Series C Stock into that number
                             of shares of Common Stock contemplated to be
                             received by such holder upon the Automatic
                             Conversion as set forth in this Section 5 (without
                             requiring such conversion) immediately prior
                             thereto (subject to adjustments from and after the
                             date of the consummation of the Transaction (the
                             "Consummation Date") as nearly equivalent as
                             possible to the adjustments provided for in this
                             Section 5(b)); or

                      (B)    only in the case of a Transaction other than a
                             Transaction in which the previously outstanding
                             shares of Common Stock shall be exchangeable for
                             cash only, if the Acquiring Corporation meets the
                             requirements set forth in this Section 5(b)(vi),
                             the number of shares of the Acquirer's Stock or, if
                             the Acquiring Corporation fails to




                                       10


                             meet, but a Parent (as defined in this Section
                             5(b)(vi)) does meet, such requirements, of such
                             Parent's common stock (subject to adjustments from
                             and after the Consummation Date as nearly
                             equivalent as possible to the adjustments provided
                             for in this Section 5(b)), determined by dividing
                             (x) the product obtained by multiplying (1) the
                             number of shares of Common Stock to which the
                             holder of such Series C Stock would have been
                             entitled had such holder converted such Series C
                             Stock into that number of shares of Common Stock
                             contemplated to be received by such holder upon the
                             Automatic Conversion as set forth in this Section 5
                             (without requiring such conversion) immediately
                             prior to the consummation of the Transaction, times
                             (2) the greater of the Automatic Conversion Price
                             or the Acquisition Price (as defined in this
                             Section 5(b)(vi)) in effect on the date immediately
                             prior to the consummation of the Transaction, by
                             (y) the Market Value of the Acquirer's Stock on the
                             date immediately preceding the Consummation Date.

                             For the purposes of this Section 5(b)(vi) only, the
                      term "Market Value" shall mean, for any share of common
                      stock on any date specified herein, the last sale price,
                      regular way, on such date, or, if no sale takes place on
                      such date, the average of the closing bid and asked prices
                      on such date, in each case as officially reported on the
                      New York Stock Exchange, or, if not so reported, on the
                      principal national securities exchange on which such stock
                      is listed or if not listed or admitted to trading, the
                      average of the closing bid and asked prices of such stock
                      in the over-the-counter market as reported by The Nasdaq
                      Stock Market or a similar organization; and the term
                      "Acquisition Price" shall mean the consideration per share
                      to be paid for or received by the holders of the
                      previously-outstanding shares of Common Stock in
                      accordance with the terms of the Transaction, determined
                      (x) in the case where the holders of the previously
                      outstanding Common Stock received solely shares of the
                      Acquirer's Stock in the Transaction, by multiplying the
                      Market Value of the Acquirer's Stock as of the date
                      immediately preceding the Consummation Date by a fraction
                      the numerator of which shall be the aggregate number of
                      shares of the Acquirer's Stock to be received in the
                      Transaction in exchange for all of the previously
                      outstanding shares of Common Stock and the denominator of
                      which shall be the aggregate number of such previously
                      outstanding shares of Common Stock, and (y) in any other
                      case, by dividing the aggregate fair market value (using
                      Market Value for any shares of the Acquirer's Stock), as
                      of the date immediately preceding the Consummation Date,
                      of the aggregate consideration to be received by the
                      holders of such previously outstanding shares of Common
                      Stock by the number of shares of such previously
                      outstanding Common Stock. The requirements referred to in
                      clause (B) of this Section 5(b)(vi) with reference to the
                      Acquiring Corporation or to a corporation (herein referred
                      to as a "Parent") which directly or indirectly




                                       11


                      controls the Acquiring Corporation are as follows: (x) its
                      common stock is listed on the New York Stock Exchange or a
                      principal national securities exchange or bid and asked
                      prices are reported with respect thereto by Nasdaq or a
                      similar organization and such common stock continues to
                      meet such requirements for listing thereon, (y) it is
                      required to file, and in each of its three fiscal years
                      immediately preceding the Consummation Date has filed,
                      reports with the Securities and Exchange Commission
                      pursuant to Section 13 or 15(d) of the Securities Exchange
                      Act of 1934, as amended, and (z) in the case of a Parent,
                      such Parent is required to include the Acquiring
                      Corporation in the consolidated financial statements
                      contained in the Parent's Annual Report on Form 10-K and
                      is not itself included in the consolidated financial
                      statements of any other person (other than its
                      consolidated subsidiaries). Notwithstanding anything
                      contained herein to the contrary, the Corporation shall
                      not effect any Transaction unless prior to or
                      simultaneously with the consummation of such Transaction
                      the survivor or successor corporation (if other than the
                      Corporation) resulting from such Transaction shall (AA)
                      assume by written instrument executed and delivered to
                      each holder of Series C Stock the obligation to deliver to
                      such holder of Series C Stock such shares of stock,
                      securities or assets as, in accordance with the foregoing
                      provisions, such holder may be entitled to receive, and
                      containing the express assumption of such successor
                      corporation of the due and punctual performance and
                      observance of every provision of the Series C Stock to be
                      performed and observed by the Corporation and of all
                      liabilities and obligations of the Corporation hereunder,
                      and (BB) deliver to the holders of Series C Stock an
                      opinion, in form, substance and from counsel reasonably
                      satisfactory to the holders of Series C Stock, to the
                      effect that such written instrument has been duly
                      authorized, executed and delivered by such successor
                      corporation and constitutes a legal, valid and binding
                      instrument enforceable (subject to applicable bankruptcy
                      and other similar laws affecting the enforcement of
                      creditors' rights generally) against such successor
                      corporation in accordance with its terms, and to such
                      further effects as the holders of Series C Stock may
                      reasonably request.

               (vii)  Exceptions to Adjustment of Automatic Conversion Price.
                      Anything herein to the contrary notwithstanding, the
                      Corporation shall not be required to make any adjustment
                      of the Automatic Conversion Price in the case of (A) the
                      issuance of Series C Stock or the issuance of shares of
                      Common Stock or other securities upon conversion of the
                      Series C Stock or any adjustment of the conversion price
                      with respect thereto, and (B) the issuance of shares of
                      Common Stock pursuant to (x) any warrants or options
                      outstanding on the date of first issuance of Series C
                      Stock or (y) stock options granted under and in accordance
                      with the Corporation's board-approved stock option plans.

               (viii) Treasury Shares. The number of shares of Common Stock
                      outstanding at any time shall not include shares owned or
                      held by or for the account of




                                       12


                      the Corporation, and the disposition of any such shares
                      shall be considered an issue or sale of Common Stock for
                      the purposes of this Section 5(b).

               (ix)   Certificate of Adjustment. Upon each adjustment of the
                      Automatic Conversion Price and upon each change in the
                      number of Conversion Shares issuable upon the conversion
                      of the Series C Stock, and in the event of any change in
                      the rights of the holders of the Series C Stock by reason
                      of other events herein set forth, then and in each such
                      case, the Corporation will promptly prepare a certificate
                      of adjustment stating the adjusted Automatic Conversion
                      Price and the new number of Conversion Shares so issuable,
                      or specifying the other shares of stock, securities or
                      assets and the amount thereof receivable as a result of
                      such change in rights, and setting forth in reasonable
                      detail the method of calculation and the facts upon which
                      such calculation is based. The Corporation will promptly
                      mail a copy of such certificate of adjustment to each
                      registered holder of Series C Stock.

               (x)    Other Notices. In case at any time (A) the Corporation
                      shall declare any dividend upon its Common Stock payable
                      in cash or stock or make any other distribution to the
                      holders of its Common Stock, (B) the Corporation shall
                      offer for subscription pro rata to the holders of its
                      Common Stock any additional shares of stock of any class
                      or other rights, (C) there shall be any capital
                      reorganization or reclassification of the capital stock of
                      the Corporation, or a consolidation or merger of the
                      Corporation with or into another entity or entities, or a
                      sale, lease, abandonment, transfer or other disposition of
                      all or substantially all of its assets, or there shall be
                      a voluntary or involuntary dissolution, liquidation or
                      winding up on the Corporation, then, in any one or more of
                      said cases, the Corporation shall give, by delivery in
                      person or by mail or telecopier, addressed to each holder
                      of Series C Stock at the address of such holder as shown
                      on the books of the Corporation, (x) at least twenty (20)
                      days' prior written notice of the date on which the books
                      of the Corporation shall close or a record shall be taken
                      for such dividend, distribution or subscription rights or
                      for determining rights to vote in respect of any such
                      reorganization, reclassification, consolidation, merger,
                      disposition, dissolution, liquidation or winding up, and
                      (y) in the case of any such reorganization,
                      reclassification, consolidation, merger, disposition,
                      dissolution, liquidation or winding up, at least twenty
                      (20) days' prior written notice of the date when the same
                      shall take place. Such notice in accordance with the
                      foregoing clause (x) shall also specify, in the case of
                      any such dividend, distribution or subscription rights,
                      the date on which the holders of Common Stock shall be
                      entitled thereto, and such notice in accordance with the
                      foregoing clause shall also specify the date on which the
                      holders of Common Stock shall be entitled to exchange
                      their Common Stock for securities or other property
                      deliverable upon such reorganization, reclassification,
                      consolidation, merger, disposition, dissolution,
                      liquidation or winding up, as the case may be.




                                       13


               (xi)   Corporation to Prevent Dilution. If at any time or from
                      time to time conditions arise by reason of action taken by
                      the Corporation which, in the good faith opinion of its
                      Board of Directors, are not adequately covered by the
                      provisions of this Section 5(b), and which might
                      materially and adversely affect the conversion rights of
                      the registered holders of Series C Stock, the Board of
                      Directors of the Corporation shall appoint a firm of
                      independent certified public accountants of recognized
                      national standing, which may be the firm regularly
                      retained by the Corporation, which shall give its opinion
                      upon the adjustment, if any, on a basis consistent with
                      the standards established in the other provisions of this
                      Section 5(b), necessary with respect to the Automatic
                      Conversion Price, so as to preserve, without dilution, the
                      conversion rights of the registered holders of the Series
                      C Stock. Upon receipt of such opinion, the Board of
                      Directors of the Corporation shall forthwith make the
                      adjustments described therein.

               (xii)  Closing of Books. The Corporation will at no time close
                      its transfer books against the transfer of any Series C
                      Stock or of any shares of Common Stock issued or issuable
                      upon the conversion of any shares of Series C Stock in any
                      manner which interferes with the timely conversion of such
                      Series C Stock, except as may otherwise be required to
                      comply with applicable securities laws.

               (xiii) Exercise Procedure. Any Automatic Conversion shall be
                      deemed to have occurred without any requirement of notice
                      from any holder or the surrender of any certificates for
                      shares converted (which shares and certificates shall,
                      upon such Automatic Conversion, be deemed to represent
                      solely the right to receive the shares of Common Stock to
                      which the holder is entitled by reason of the Automatic
                      Conversion). Promptly after the occurrence of the event
                      giving rise to Automatic Conversion and the surrender of
                      the certificate or certificates for the share or shares of
                      Series C Stock to be converted, the Corporation shall
                      issue and deliver, or cause to be issued and delivered, to
                      the holder, registered in such name or names as such
                      holder may direct, a certificate or certificates for the
                      number of whole shares of Common Stock issuable upon the
                      conversion of such share or shares of Series C Stock. To
                      the extent permitted by law, any Automatic Conversion
                      shall be deemed to have been effected and the number of
                      shares of Common Stock issuable upon such Automatic
                      Conversion shall be determined as the close of business
                      (Eastern time) on the Automatic Conversion Date (provided
                      that the Corporation shall not be required to issue the
                      certificate or certificates for the shares of the Common
                      Stock issuable upon such Automatic Conversion unless and
                      until the holder thereof shall have surrendered the
                      certificate or certificates for the shares converted).

               (xiv)  Fractional Shares; Dividends; Partial Conversion. No
                      fractional shares shall be issued upon conversion of
                      Series C Stock into Common Stock and




                                       14


                      no payment or adjustment shall be made upon any conversion
                      on account of any cash dividends on the Common Stock
                      issued upon such conversion. At the time of each
                      conversion, the Corporation shall pay in shares of Series
                      C Stock (in lieu of cash) (valued for this purpose at the
                      Liquidation Preference) an amount equal to all dividends
                      declared and unpaid on the shares of Series C Stock
                      surrendered for conversion to the date upon which such
                      conversion is deemed to take place as provided in Section
                      5(b)(xiii); provided that no payment or adjustment shall
                      be made on account of any accrued dividends that have not
                      been declared. In case the number of shares represented by
                      the certificate or certificates surrendered pursuant to
                      this Section 5(b)(xiv) exceeds the number of shares
                      converted, the Corporation shall, upon such conversion,
                      execute and deliver to the holder, at the expense of the
                      Corporation, a new certificate or certificates for the
                      number of shares represented by the certificate or
                      certificates surrendered which are not to be converted. If
                      any fractional share of Common Stock would, except for the
                      provisions of the first sentence of this Section
                      5(b)(xiv), be delivered upon such conversion, the
                      Corporation, in lieu of delivering such fractional share,
                      shall pay to the holder surrendering the Series C Stock
                      for conversion an amount in cash equal to such fraction
                      multiplied by the then applicable Automatic Conversion
                      Price.

               (xv)   Reservation of Shares. If at any time the number of
                      authorized but unissued shares of Common Stock shall not
                      be sufficient to effect the conversion of the Series C
                      Stock, the Corporation will forthwith take such corporate
                      action as may be necessary to increase its authorized but
                      unissued shares of Common Stock to such number of shares
                      as shall be sufficient for such purposes. The Corporation
                      will obtain any authorization, consent, approval or other
                      action by or make any filing with any court or
                      governmental, quasi-governmental or administrative body
                      that may be required under applicable law, including
                      without limitation state securities laws, in connection
                      with the issuance of the shares of Common Stock upon
                      conversion of the Series C Stock.

               (xvi)  Costs. The Corporation shall pay all documentary, stamp,
                      transfer or other transactional taxes attributable to the
                      issuance or delivery of Conversion Shares upon conversion
                      of any shares of the Series C Stock; provided, however,
                      that the Corporation shall not be required to pay any
                      federal or state income taxes or other taxes which may be
                      payable in respect of any transfer involved in the
                      issuance or delivery of any certificate for such
                      conversion shares received upon conversion in a name other
                      than that of the holder of the shares of the Series C
                      Stock in respect of which such shares are being issued.

        (c)    No Impairment. The Corporation shall not, by amendment of its
               Articles of Incorporation or through any reorganization, transfer
               of assets, consolidation, merger, dissolution, issuance or sale
               of securities, or any other voluntary action,




                                       15


               avoid or seek to avoid the observance or performance of any of
               the terms to be observed or performed hereunder by the
               Corporation, but will at all times in good faith assist in the
               performance of all the provisions of this Section 5 and in the
               taking of all such action needed to protect the Conversion Rights
               of the holders of the Series C Stock against impairment.

6.      No Redemption. The Corporation shall not be entitled to redeem or retire
        all or any part of the Series C Stock without the consent or affirmative
        vote of the holder of record of each share to be redeemed or retired.

7.      Required Approval by Holders of Series C Stock. At any time when there
        are outstanding any shares of Series C Stock, except where the vote or
        written consent of the holders of a greater number of shares is required
        by law or by the Articles of Incorporation, and in addition to any other
        vote required by law or the Articles of Incorporation, without the
        approval of the holders of two-thirds of the then outstanding shares of
        Series C Stock, given in writing or by vote at a meeting, consenting or
        voting (as the case may be) separately as a series, the Corporation will
        not:

        (a)    amend or modify this Certificate of Rights and Preferences;

        (b)    authorize or issue, or increase the authorized amount of, any
               class or series of capital stock of the Corporation ranking on a
               parity or superior to the Series C Stock as to dividends or upon
               liquidation, dissolution or winding up;

        (c)    repeal, amend, restate or otherwise modify any provision of the
               Corporation's Articles of Incorporation, excluding, however, the
               creation, authorization, issuance and/or increase of any class or
               series of capital stock of the Corporation that ranks junior to
               the Series C Stock as to dividends and upon liquidation,
               dissolution or winding up;

        (d)    consent to (i) the acquisition of the Corporation by means of any
               transaction or series of related transactions (including, without
               limitation, any reorganization, merger or consolidation) in which
               a majority of the outstanding capital stock of the Corporation or
               surviving entity is held by persons who were not stockholders of
               the Corporation prior to such transaction(s), or (ii) the sale of
               all or substantially all of the assets of the Corporation;

        (e)    consent to the liquidation, dissolution or winding up of the
               Corporation;

        (f)    purchase or set aside any sums for the purchase of any shares of
               stock; or

        (g)    change the authorized number of directors of the Corporation from
               five (5);

        (h)    agree to do any of the foregoing.

8.      Transferability. Subject to applicable securities laws, any restrictive
        legends on certificates evidencing the shares of Series C Stock and any
        other agreements governing or restricting transfer of the Series C
        Stock, the holders of the Series C Stock shall have




                                       16


        the right to freely sell, assign, transfer, give away or dispose of
        their respective shares of the Series C Stock, whether in whole or in
        part, to any person without restriction.

9.      Notices. All notices and other communications hereunder shall be in
        writing and shall be deemed given if delivered personally or by
        verifiable facsimile, or three business days after being mailed by
        certified or registered mail, postage prepaid, return-receipt requested,
        addressed to the Corporation at its offices or to the holder of record
        at its address appearing on the books of the Corporation, as applicable.

10.     No Preemptive Rights. No holder of Series C Stock shall be entitled as a
        matter of right to subscribe for, purchase, or receive any part of any
        new or additional shares of any class, whether now or hereinafter
        authorized, or of bonds or debentures, or other evidences of
        indebtedness convertible into or exchangeable for shares of any class,
        but all such new or additional shares of any class or bond or
        debentures, or other evidences of indebtedness convertible into or
        exchangeable for shares, may be issued and disposed of by the Board of
        Directors on such terms and for such consideration (to the extent
        permitted by law), and to such person or persons as the Board of
        Directors in their absolute discretion may deem advisable, subject to
        the terms hereof.

11.     Amendment; Waivers. Any provision of this Designation of Rights and
        Preferences may be amended or waived (i) by the holders of two-thirds of
        the then-outstanding shares of Series C Stock at a meeting at which such
        amendment or waiver is presented and which is attended by a majority of
        the shares of the then-outstanding Series C Stock, in person or by
        proxy; or (ii) by the written consent of the holders of two-thirds of
        all then-outstanding shares of Series C Stock.


                                         /s/ Jonathan Michaels
                                        ---------------------------------------
                                        Jonathan Michaels
                                        Secretary
                                        Pacific Aerospace & Electronics, Inc.




                                       17

EX-4.1

                                                                     EXHIBIT 4.1

                      Pacific Aerospace & Electronics, Inc.
                                    as Issuer


                              Aeromet America, Inc.
                           Balo Precision Parts, Inc.
                        Cashmere Manufacturing Co., Inc.
                              Ceramic Devices, Inc.
                        Electronic Specialty Corporation
                      Northwest Technical Industries, Inc.
                        Pacific Coast Technologies, Inc.
                            PA&E International, Inc.
                          Seismic Safety Products, Inc.
                     Skagit Engineering & Manufacturing, Inc
                                  as Guarantors


           $15,000,000 aggregate principal amount at Initial Issuance

                    10% Senior Subordinated Pay-In-Kind Notes
                                    due 2007


                              ---------------------

                                    INDENTURE

                           Dated as of March 19, 2002

                              ---------------------


                         U.S. Bank National Association
                                     Trustee




                                TABLE OF CONTENTS



                                                                                        
ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE........................................1
   SECTION 1.01      DEFINITIONS............................................................1
   SECTION 1.02      OTHER DEFINITIONS.....................................................11
   SECTION 1.03      INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.....................12
   SECTION 1.04      RULES OF CONSTRUCTION.................................................12

ARTICLE 2 THE NOTES........................................................................13
   SECTION 2.01      FORM AND DATING.......................................................13
   SECTION 2.02      EXECUTION AND AUTHENTICATION..........................................13
   SECTION 2.03      REGISTRAR AND PAYING AGENT............................................14
   SECTION 2.04      PAYING AGENT TO HOLD MONEY IN TRUST...................................14
   SECTION 2.05      HOLDER LISTS..........................................................14
   SECTION 2.06      TRANSFER AND EXCHANGE.................................................15
   SECTION 2.07      REPLACEMENT NOTES.....................................................17
   SECTION 2.08      OUTSTANDING NOTES.....................................................18
   SECTION 2.09      TREASURY NOTES........................................................18
   SECTION 2.10      TEMPORARY NOTES.......................................................18
   SECTION 2.11      CANCELLATION..........................................................19
   SECTION 2.12      DEFAULTED INTEREST....................................................19

ARTICLE 3 REDEMPTION AND PREPAYMENT........................................................19
   SECTION 3.01      NOTICES TO TRUSTEE....................................................19
   SECTION 3.02      SELECTION OF NOTES TO BE REDEEMED.....................................19
   SECTION 3.03      NOTICE OF REDEMPTION..................................................20
   SECTION 3.04      EFFECT OF NOTICE OF REDEMPTION........................................21
   SECTION 3.05      DEPOSIT OF REDEMPTION PRICE...........................................21
   SECTION 3.06      NOTES REDEEMED IN PART................................................21
   SECTION 3.07      OPTIONAL REDEMPTION...................................................21
   SECTION 3.08      NO MANDATORY REDEMPTION...............................................21
   SECTION 3.09      NO SINKING FUND.......................................................22

ARTICLE 4 COVENANTS........................................................................22
   SECTION 4.01      PAYMENT OF NOTES......................................................22
   SECTION 4.02      MAINTENANCE OF OFFICE OR AGENCY.......................................22
   SECTION 4.03      REPORTS...............................................................23
   SECTION 4.04      COMPLIANCE CERTIFICATE................................................23
   SECTION 4.05      TAXES.................................................................24
   SECTION 4.06      STAY, EXTENSION AND USURY LAWS........................................24
   SECTION 4.07      REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF
                     CONTROL...............................................................24
   SECTION 4.08      LIMITATION ON RESTRICTED PAYMENTS.....................................25
   SECTION 4.09      LIMITATION ON LIENS SECURING INDEBTEDNESS.............................26
   SECTION 4.10      LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING
                     SUBSIDIARIES..........................................................26
   SECTION 4.11      LIMITATIONS ON TRANSACTIONS WITH AFFILIATES...........................27
   SECTION 4.12      FUTURE SUBSIDIARY GUARANTORS..........................................28






                                       i



                                                                                        
   SECTION 4.13      RELEASE OF GUARANTORS.................................................28
   SECTION 4.14      CORPORATE EXISTENCE...................................................28
   SECTION 4.15      LIMITATION ON STATUS AS AN INVESTMENT COMPANY.........................28

ARTICLE 5 SUCCESSORS.......................................................................29
   SECTION 5.01      MERGER, SALE OR CONSOLIDATION.........................................29
   SECTION 5.02      SUCCESSOR CORPORATION SUBSTITUTED.....................................29

ARTICLE 6 DEFAULTS AND REMEDIES............................................................29
   SECTION 6.01      EVENTS OF DEFAULT.....................................................29
   SECTION 6.02      ACCELERATION..........................................................30
   SECTION 6.03      OTHER REMEDIES........................................................31
   SECTION 6.04      WAIVER OF PAST DEFAULTS...............................................31
   SECTION 6.05      CONTROL BY MAJORITY...................................................31
   SECTION 6.06      LIMITATION ON SUITS...................................................32
   SECTION 6.07      RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT.........................32
   SECTION 6.08      COLLECTION SUIT BY TRUSTEE............................................32
   SECTION 6.09      TRUSTEE MAY FILE PROOF OF CLAIM.......................................33
   SECTION 6.10      PRIORITIES............................................................33
   SECTION 6.11      UNDERTAKING FOR COSTS.................................................34
   SECTION 6.12      RESTORATION OF RIGHTS AND REMEDIES....................................34

ARTICLE 7 TRUSTEE..........................................................................34
   SECTION 7.01      DUTIES OF TRUSTEE.....................................................34
   SECTION 7.02      RIGHTS OF TRUSTEE.....................................................35
   SECTION 7.03      INDIVIDUAL RIGHTS OF TRUSTEE..........................................36
   SECTION 7.04      TRUSTEE'S DISCLAIMER..................................................36
   SECTION 7.05      NOTICE OF DEFAULTS....................................................36
   SECTION 7.06      REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES............................37
   SECTION 7.07      COMPENSATION AND INDEMNITY............................................37
   SECTION 7.08      REPLACEMENT OF TRUSTEE................................................38
   SECTION 7.09      SUCCESSOR TRUSTEE BY MERGER, ETC......................................39
   SECTION 7.10      ELIGIBILITY; DISQUALIFICATION.........................................39
   SECTION 7.11      PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.....................39

ARTICLE 8 LEGAL DEFEASANCE AND COVENANT DEFEASANCE.........................................40
   SECTION 8.01      OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE..............40
   SECTION 8.02      LEGAL DEFEASANCE AND DISCHARGE........................................40
   SECTION 8.03      COVENANT DEFEASANCE...................................................40
   SECTION 8.04      CONDITIONS TO LEGAL OR COVENANT DEFEASANCE............................41
   SECTION 8.05      DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST;
                     OTHER MISCELLANEOUS PROVISIONS........................................42
   SECTION 8.06      REPAYMENT TO COMPANY..................................................43
   SECTION 8.07      REINSTATEMENT.........................................................43

ARTICLE 9 AMENDMENT, SUPPLEMENT AND WAIVER.................................................44
   SECTION 9.01      WITHOUT CONSENT OF HOLDERS OF NOTES...................................44
   SECTION 9.02      WITH CONSENT OF HOLDERS OF NOTES......................................44






                                       ii



                                                                                        
   SECTION 9.03      COMPLIANCE WITH TRUST INDENTURE ACT...................................46
   SECTION 9.04      REVOCATION AND EFFECT OF CONSENTS.....................................46
   SECTION 9.05      NOTATION ON OR EXCHANGE OF NOTES......................................46
   SECTION 9.06      TRUSTEE TO SIGN AMENDMENTS, ETC.......................................46

ARTICLE 10 SUBORDINATION...................................................................47
   SECTION 10.01      AGREEMENT TO SUBORDINATE.............................................47
   SECTION 10.02      LIQUIDATION; DISSOLUTION; BANKRUPTCY.................................47
   SECTION 10.03      DEFAULT ON SENIOR INDEBTEDNESS.......................................48
   SECTION 10.04      ACCELERATION OF NOTES................................................49
   SECTION 10.05      WHEN DISTRIBUTION MUST BE PAID OVER..................................49
   SECTION 10.06      NOTICE BY COMPANY....................................................49
   SECTION 10.07      SUBROGATION..........................................................49
   SECTION 10.08      RELATIVE RIGHTS......................................................50
   SECTION 10.09      SUBORDINATION MAY NOT BE IMPAIRED BY COMPANY.........................50
   SECTION 10.10      DISTRIBUTION OR NOTICE TO REPRESENTATIVE.............................50
   SECTION 10.11      RIGHTS OF TRUSTEE AND PAYING AGENT...................................51
   SECTION 10.12      AUTHORIZATION TO EFFECT SUBORDINATION................................51
   SECTION 10.13      AMENDMENTS...........................................................51

ARTICLE 11 SUBSIDIARY GUARANTEES...........................................................51
   SECTION 11.01      SUBSIDIARY GUARANTEES................................................51
   SECTION 11.02      EXECUTION AND DELIVERY OF SUBSIDIARY GUARANTEES......................53
   SECTION 11.03      GUARANTORS MAY CONSOLIDATE, ETC., ON CERTAIN TERMS...................53
   SECTION 11.04      RELEASES FOLLOWING SALE OF ASSETS....................................54
   SECTION 11.05      LIMITATION OF GUARANTOR'S LIABILITY..................................54
   SECTION 11.06      APPLICATION OF CERTAIN TERMS AND PROVISIONS TO THE GUARANTOR.........55
   SECTION 11.07      SUBORDINATION OF SUBSIDIARY GUARANTEES...............................55

ARTICLE 12 MISCELLANEOUS...................................................................55
   SECTION 12.01      TRUST INDENTURE ACT CONTROLS.........................................55
   SECTION 12.02      NOTICES..............................................................56
   SECTION 12.03      COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS OF NOTES........57
   SECTION 12.04      CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT...................57
   SECTION 12.05      STATEMENTS REQUIRED IN CERTIFICATE OR OPINION........................57
   SECTION 12.06      RULES BY TRUSTEE AND AGENTS..........................................57
   SECTION 12.07      NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND
                      SHAREHOLDERS.........................................................58
   SECTION 12.08      GOVERNING LAW........................................................58
   SECTION 12.09      NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS........................58
   SECTION 12.10      SUCCESSORS...........................................................58
   SECTION 12.11      SEVERABILITY.........................................................58






                                      iii



                                                                                        
   SECTION 12.12      COUNTERPART ORIGINALS................................................58
   SECTION 12.13      TABLE OF CONTENTS, HEADINGS, ETC.....................................59









                                       iv



               INDENTURE dated as of March 19, 2002, among Pacific Aerospace &
Electronics, Inc., a Washington corporation (the "Company"), and Aeromet
America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc.,
Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical
Industries, Inc., Pacific Coast Technologies, Inc., PA&E International, Inc.,
Seismic Safety Products, Inc. and Skagit Engineering & Manufacturing, Inc., each
as guarantors and any other Subsidiaries (as defined herein) of the Company that
executes a Subsidiary Guarantee (as defined herein) guaranteeing the Notes in
accordance with the provisions hereof (collectively, the "Guarantors"), and U.S.
Bank National Association, a national banking association, as trustee (the
"Trustee").

               Each party agrees as follows for the benefit of each other and
for the equal and ratable benefit of the Holders of the 10% Senior Subordinated
Pay-in-Kind Notes due 2007 (the "Notes"). The term "Notes" as used herein shall
also include each of the additional 10% Senior Subordinated Pay-In-Kind Notes
issued in lieu of the cash payment of interest on the Notes.


                                    ARTICLE 1
                          DEFINITIONS AND INCORPORATION
                                  BY REFERENCE

SECTION 1.01          DEFINITIONS

               "Acquired Indebtedness" means Indebtedness or Disqualified
Capital Stock of any Person existing at the time such person becomes a
Subsidiary of the Company, including by designation, or is merged or
consolidated into or with the Company or one of its Subsidiaries.

               "Affiliate" means any Person directly or indirectly controlling
or controlled by or under direct or indirect common control with the Company.
For purposes of this definition, the term "control" means the power to direct
the management and policies of a person, directly or through one or more
intermediaries, whether through the ownership of voting securities, by contract,
or otherwise, provided that, with respect to ownership interest in the Company
and its Subsidiaries, a Beneficial Owner of 10% or more of the total voting
power normally entitled to vote in the election of directors, managers or
trustees, as applicable, shall for such purposes be deemed to constitute
control.

               "Agent" means any Registrar, Paying Agent or co-registrar.

               "Average Life" means, as of the date of determination, with
respect to any security or instrument, the quotient obtained by dividing (i) the
sum of the products (a) of the number of years from the date of determination to
the date or dates of each successive scheduled principal (or redemption) payment
of such security or instrument and (b) the amount of each such respective
principal (or redemption) payment by (ii) the sum of all such principal (or
redemption) payments.

               "Bank Indebtedness" means Indebtedness of the Company or any of
its Subsidiaries from financial institutions pursuant to a revolving credit or
term loan facility (including, but not limited to, all Indebtedness arising
under the Note Purchase Agreement, the New Senior Secured Notes and the other
Senior Credit Documents), including any related notes,




guarantees, collateral documents, instruments and agreements executed in
connection therewith. Without limiting the generality of the foregoing, the term
"Bank Indebtedness" shall also include Indebtedness pursuant to any amendment,
amendment and restatement, renewal, extension, restructuring, supplement or
modification to any such facility and all refundings, refinancings and
replacements of any such facility, including any agreement (i) extending the
maturity of any Indebtedness incurred thereunder or contemplated thereby, (ii)
adding or deleting borrowers or guarantors thereunder, so long as borrowers and
issuers include one or more of the Company and its Subsidiaries and their
respective successors and assigns, (iii) increasing the amount of Indebtedness
incurred thereunder or available to be borrowed thereunder, or (iv) otherwise
altering the terms and conditions thereof in a manner not prohibited by the
terms of the Indenture.

               "Bankruptcy Law" means title 11, U.S. Code or any similar Federal
or state law for the relief of debtors.

               "Beneficial Owner" or "beneficial owner" for purposes of the
definitions of Change of Control and Affiliate has the meaning attributed to it
in Rules 13d-3 and 13d-5 under the Exchange Act (as in effect on the Issue
Date), whether or not applicable, except that a "person" shall be deemed to have
"beneficial ownership" of all shares that any such person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time.

               "Board of Directors" means, with respect to any Person, the board
of directors of such person or any committee of the Board of Directors of such
Person authorized, with respect to any particular matter, to exercise the power
of the board of directors of such person.

               "Business Day" means each Monday, Tuesday, Wednesday, Thursday
and Friday which is not a day on which banking institutions in New York, New
York are authorized or obligated by law or executive order to close.

               "Capitalized Lease Obligation" means, as to any Person, the
obligations of such Person under a lease that are required to be classified and
accounted for as capital lease obligations under GAAP and, for purposes of this
definition, the amount of such obligations at any date shall be the capitalized
amount of such obligations at such date, determined on a consolidated basis in
accordance with GAAP.

               "Capital Stock" means, shares of capital stock, beneficial,
partnership or limited liability company interests, participations or other
equivalents (regardless of how designated) of or in a corporation, partnership,
limited liability company or equivalent entity, whether voting or non-voting,
and includes, without limitation, common stock and preferred stock.

               "Cash Equivalent" means (a) securities with maturities of one
year or less from the date of acquisition issued or fully guaranteed or insured
by the United States government or any agency thereof, (b) certificates of
deposit, eurodollar time deposits, overnight bank deposits and bankers'
acceptances of any financial institution having maturities of one year or less
from the date of acquisition, (c) commercial paper of an issuer rated at least
"A-1" by S&P or "P-1" by Moody's, or carrying an equivalent rating by a
nationally recognized rating agency if both of




                                       2


S&P and Moody's cease publishing ratings of investments, and (d) mutual funds
investing solely in investments of the type described in the foregoing clauses
(a) through (c).

               "Change of Control" means any transaction or series of
transactions in which any of the following occurs: (a) any "person" or "group"
(as such terms are used for purposes of Sections 13(d) and 14(d) of the Exchange
Act, whether or not applicable) (other than any of the Excluded Persons) becomes
following the Issue Date the "beneficial owner," directly or indirectly, of more
than 50% of the issued and outstanding Capital Stock entitled to vote in the
election of directors, managers, or trustees, as applicable, of the Company or
any Guarantor or the surviving entity or entities (if other than the Company or
any Guarantor); or (b) individuals who immediately following the Issue Date
after giving effect to the transactions contemplated by Section 6.6 of the
Exchange Agreement constituted the Board of Directors of the Company or any
Guarantor (together with any new directors whose election by such Board of
Directors or whose nomination for election by the shareholders of the Company or
any Guarantor, as applicable, was approved by a vote of at least a majority of
the directors of the Company or any Guarantor then still in office who were
either directors at the Issue Date or whose election or nomination for election
was previously so approved) cease for any reason to constitute a majority of the
Board of Directors of the Company or any Guarantor then in office.
Notwithstanding the foregoing to the contrary, a "Change of Control" shall
expressly exclude the Exchange Transaction and subsequent conversion of the
Company's Series C Preferred Stock into common stock.

               "Consolidated Net Income" means, with respect to any person for
any period, the net income (or loss) of such person and its Consolidated
Subsidiaries (determined in accordance with GAAP) for such period, adjusted to
exclude (only to the extent included in computing such net income (or loss) and
without duplication): (a) all gains (but not losses) which are either
extraordinary (as determined in accordance with GAAP) or are either unusual or
nonrecurring (including any gain from the sale or other disposition of assets
outside the ordinary course of business or from the issuance or sale of any
Capital Stock), (b) the net income, if positive, of any person, other than a
Consolidated Subsidiary, in which such person or any of its Consolidated
Subsidiaries has an interest, except to the extent of the amount of any
dividends or distributions actually paid in cash to such person or a
Consolidated Subsidiary of such person during such period, but in any case not
in excess of such person's pro rata share of such person's net income for such
period, (c) the net income or loss of any person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition, and
(d) the net income, if positive, of any of such person's Consolidated
Subsidiaries to the extent that the declaration or payment of dividends or
similar distributions is not at the time permitted by operation of the terms of
its charter or bylaws or any other agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to such Consolidated
Subsidiary.

               "Consolidated Subsidiary" means, for any person, each Subsidiary
of such person (whether now existing or hereafter created or acquired) the
financial statements of which are consolidated for financial statement reporting
purposes with the financial statements of such person in accordance with GAAP.




                                       3


               "Corporate Trust Administration Office of the Trustee" shall be
at the address of the Trustee specified in Section 12.02 hereof or such other
address as to which the Trustee may give notice to the Company.

               "Credit Parties" means, collectively, the Company and the
Guarantors, and "Credit Party" means any one of them, as the context may
require.

               "Default" means any event that is or with the passage of time or
the giving of notice or both would be an Event of Default.

               "Depositary" means, with respect to the Notes issuable or issued
in whole or in part in global form, the Person specified in Section 2.03 hereof
as the Depositary with respect to the Notes, until a successor shall have been
appointed and become such Depositary pursuant to the applicable provision of
this Indenture, and, thereafter, "Depositary" shall mean or include such
successor.

               "Disqualified Capital Stock" means (a) except as set forth in
(b), with respect to any Person, Capital Stock of such Person that, by its terms
or by the terms of any security into which it is convertible, exercisable or
exchangeable, is, or upon the happening of an event or the passage of time or
both would be, required to be redeemed or repurchased (including at the option
of the holder thereof) by such Person or any of its Subsidiaries, in whole or in
part, on or prior to the Stated Maturity of the Notes and (b) with respect to
any Subsidiary of such Person (including with respect to any Subsidiary of the
Company), any Capital Stock other than any common equity with no preference,
privileges, or redemption or repayment provisions.

               "Exchange Act" means the Securities Exchange Act of 1934, as
amended.

               "Exchange Agreement" means the Exchange Agreement, dated as of
March 19, 2002, among the Company, certain of its Subsidiaries and the holders
of the Old Notes.

               "Exchange Transaction" means the transaction whereby the holders
of the Company's Old Notes will exchange their Old Notes for shares of the
Company's common stock, preferred stock and Notes pursuant to the Exchange
Agreement.

               "Excluded Person" means any officer or director of the Company,
the other Persons listed on Exhibit C hereto, any Persons related to such
Persons by kinship or marriage, and any trust, corporation, partnership or other
entity which is beneficially owned 80% or more by any such Persons.

               "Exempted Affiliate Transactions" means (a) customary employee
compensation arrangements approved by a majority of independent (as to such
transactions) members of the Board of Directors of the Company, (b) dividends
permitted under the terms of the covenant discussed in Section 4.08, "Limitation
on Restricted Payments," and payable, in form and amount, on a pro rata basis to
all holders of common stock of the Company and (c) transactions solely between
the Company and any of its wholly owned Consolidated Subsidiaries or solely
among wholly owned Consolidated Subsidiaries of the Company.




                                       4


               "Foreign Subsidiary" means any Wholly-owned Subsidiary organized
and incorporated in a jurisdiction outside of the United States and is not a
Guarantor.

               "GAAP" means United States generally accepted accounting
principles set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board.

               "Global Note" means a Note that contains the paragraph referred
to in footnote 1 to the form of the Note attached hereto as Exhibit A.

               "Guarantee" by any Person means any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Indebtedness
or other obligation of any other Person and, without limiting the generality of
the foregoing, any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness or other obligation (whether arising by virtue
of partnership agreements, agreements to keep well, to purchase assets, goods,
securities or services, to take-or-pay or to maintain financial statement
conditions or otherwise) or (ii) entered into for the purpose of assuring in any
other manner the obligee of such Indebtedness or other obligation of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); provided, however, that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has corresponding meaning.

               "Guarantor" means each Subsidiary of the Company that executes a
Subsidiary Guarantee guaranteeing the Notes in accordance with the provisions of
the Indenture.

               "Holder" means a Person in whose name a Note is registered on the
Registrar's books or, at such time as the Notes are held in global form, the
beneficial owner of the Note.

               "Indebtedness" of any Person at any date means, without
duplication, (a) all obligations of such Person for borrowed money, (b) all
obligations of such Person evidenced by bonds, debentures, notes or other
similar instruments, (c) all obligations of such Person to pay the deferred
purchase price of property or services, (d) all Capitalized Lease Obligations of
such Person, (e) all contingent or non-contingent obligations of such Person to
reimburse any Person in respect of amounts paid or payable (currently or in the
future, on a contingent or non-contingent basis) under a letter of credit or
similar instrument, (f) all Indebtedness of others secured by a Lien on any
asset of such Person, and (g) all Indebtedness of others Guaranteed by such
Person.

               "Indenture" means this Indenture, as amended or supplemented from
time to time.

               "Investment" means any investment in any Person, whether by means
of share purchase, capital contribution, loan, advance, time deposit or
otherwise.

               "Issue Date" means the date of first issuance of the Notes under
this Indenture.




                                       5


               "Junior Securities" of the Company or any Guarantor means
securities of the Company or such Guarantor that are junior in right of payment
to the Notes or the applicable Guarantee.

               "Lien" means any mortgage, charge, pledge, lien (statutory or
otherwise), privilege, security interest, hypothecation or other encumbrance
upon or with respect to any property of any kind, real or personal, movable or
immovable, now owned or hereafter acquired.

               "Moody's" means Moody's Investors Service, Inc.

               "Net Cash Proceeds" means the aggregate amount of cash or Cash
Equivalents received by the Company in the case of a sale of Qualified Capital
Stock plus, upon any exercise, exchange or conversion of securities (including
options, warrants, rights and convertible or exchangeable debt) of the Company
that were issued for cash on or after the Issue Date, the amount of cash
originally received by the Company upon the issuance of such securities
(including options, warrants, rights and convertible or exchangeable debt) less,
in each case, the sum of all payments, fees, commissions and expenses
(including, without limitation, the fees and expenses of legal counsel and
investment banking fees and expenses) incurred in connection with such sale of
Qualified Capital Stock.

               "New Senior Secured Notes" means the Senior Secured Notes due
2007 issued pursuant to that certain Note Purchase Agreement.

               "Note Custodian" means the Trustee, as custodian with respect to
the Global Notes, or any successor entity thereto.

               "Note Purchase Agreement" means that certain Note Purchase
Agreement dated as of March 19, 2002 between the Company and Jefferies & Co., as
Initial Purchaser of the New Senior Secured Notes.

               "Noteholder Affiliate" means any Person directly or indirectly
controlling or controlled by or under direct or indirect common control with a
Noteholder. For purposes of this definition, the term "control" means the power
to direct the management and policies of a person, directly or through one or
more intermediaries, whether through the ownership of voting securities, by
contract or otherwise.

               "Noteholders" means, collectively, GSCP Recovery, Inc., William
E. Simon & Sons Special Situation Partners II, L.P., M.W. Post Advisory Group
L.L.C., Alliance Capital Management L.P. and any of their respective Noteholder
Affiliates.

               "Notes" has the meaning ascribed to such term in the preamble
hereto. The term Notes shall also include each of the additional 10% Senior
Subordinated Pay-In-Kind Notes issued in lieu of cash payment of interest on the
Notes.

               "Obligations" mean all Indebtedness, Guarantees (including the
guarantees made by the Guarantors pursuant to Article 11 hereof) and obligations
owed by the Company and each of the other Credit Parties pursuant to or in
connection with this Agreement and the other Subordinated Debt Documents,
including without limitation, all principal, interest,




                                       6


reimbursement obligations and fees and expenses payable to any Holder in
connection with the Subordinated Debt Documents and indemnification payments,
whether direct or indirect, absolute or contingent, liquidated or unliquidated,
now existing or hereafter arising hereunder or thereunder, and all obligations
and liabilities incurred in connection with collecting and enforcing the
foregoing, together with all renewals, extensions, modifications or refinancings
thereof.

               "Officer" means, with respect to any Person, the Chairman of the
Board, the Chief Executive Officer, the President, the Chief Operating Officer,
the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the General
Counsel, the Controller, the Secretary or any Vice-President of such Person.

               "Officers' Certificate" means a certificate signed on behalf of
the Company by two Officers of the Company, one of whom must be the principal
executive officer, the principal financial officer, the treasurer or the
principal accounting officer of the Company, that meets the requirements of
Section 12.05 hereof.

               "Old Notes" shall mean the Company's 11 1/4% senior subordinated
notes due 2005.

               "Opinion of Counsel" means a written opinion from legal counsel
that meets the requirements of Section 12.05 hereof. The counsel may counsel to
the Company, any Subsidiary of the Company or the Trustee.

               "Permitted Investment" means (a) Investments in any of the Notes;
(b) Investments in Cash Equivalents; (c) Indebtedness incurred by the Company to
any Guarantor and Indebtedness incurred by any Guarantor to the Company;
provided, that, in the case of Indebtedness of the Company, such obligations
shall be unsecured and subordinated in all respects to the Company's obligations
pursuant to the Notes; and (d) any Investment by the Company or any Subsidiary
in a Person if as a result of such Investment such Person immediately becomes a
Wholly-owned Subsidiary which is a Guarantor or such Person is immediately
merged with or into the Company or a Wholly-owned Guarantor.

               "Permitted Lien" means (a) Liens existing on the Issue Date; (b)
Liens imposed by governmental authorities for taxes, assessments or other
charges not yet subject to penalty or which are being contested in good faith
and by appropriate proceedings, if adequate reserves with respect thereto are
maintained on the books of the Company in accordance with GAAP; (c) statutory
liens of carriers, warehousemen, mechanics, material men, landlords, repairmen
or other like Liens arising by operation of law in the ordinary course of
business, provided that (i) the underlying obligations are not overdue for a
period of more than 60 days, or (ii) such Liens are being contested in good
faith and by appropriate proceedings and adequate reserves with respect thereto
are maintained on the books of the Company in accordance with GAAP; (d) Liens
securing the performance of bids, trade contracts (other than borrowed money),
leases, statutory obligations, surety and appeal bonds, performance bonds and
other obligations of a like nature incurred in the ordinary course of business
and consistent with the Company's past practice; (e) easements, rights-of-way,
zoning, similar restrictions and other similar encumbrances or title defects
which, singly or in the aggregate, do not in any case materially




                                       7


detract from the value of the property, subject thereto (as such property is
used by the Company or any of its Subsidiaries) or interfere with the ordinary
conduct of the business of the Company or any of its Subsidiaries; (f) Liens
arising by operation of law in connection with judgments, only to the extent,
for an amount and for a period not resulting in an Event of Default with respect
thereto; (g) pledges or deposits made in the ordinary course of business and
consistent with the Company's past practice in connection with workers'
compensation, unemployment insurance and other types of social security
legislation; (h) Liens securing the Notes; (i) Liens securing Indebtedness of a
Person existing at the time such Person becomes a Subsidiary or is merged with
or into the Company or a Subsidiary, provided that such Liens were in existence
prior to the date of such acquisition, merger or consolidation, were not
incurred in anticipation thereof, and do not extend to any other assets; (j)
leases or subleases granted to other persons in the ordinary course of business
not materially interfering with the conduct of the business of the Company or
any of its Subsidiaries or materially detracting from the value of the relative
assets of the Company or any Subsidiary; (k) Liens securing Indebtedness
incurred to refinance any Indebtedness that was previously so secured in a
manner no more adverse to the Holders of the Notes than the terms of the Liens
securing such refinanced Indebtedness, and provided that the Indebtedness
secured is not increased and the lien is not extended to any additional assets
or property that would not have been security for the Indebtedness refinanced;
(l) Liens securing Bank Indebtedness incurred in accordance with the terms
hereof; (m) purchase money Liens or purchase money security interests upon or in
any property acquired or held by the Company or any such Subsidiary of the
Company in the ordinary course of business to secure the purchase price of such
property or to secure Indebtedness incurred solely for the purpose of financing
the acquisition of such property, and Liens existing on such property at the
time of its acquisition (other than any such Lien created in contemplation of
such acquisition); provided, however, that the aggregate principal amount of the
Indebtedness secured by the Liens referred to in this clause (m) and in clause
(n) below shall not exceed $5,000,000 in the aggregate at any time outstanding;
(n) Liens to secure Capitalized Lease Obligations; provided, however, that: (i)
any such Lien is created solely for the purpose of securing Indebtedness
representing, or incurred to finance, refinance or refund, the cost (including,
without limitation, the cost of construction) of the property subject thereto,
(ii) the principal amount of the Indebtedness secured by such Lien does not
exceed 100% of such cost, and (iii) such Lien does not extend to or cover any
other property other than such item of property and any improvements on such
item and (iv) the aggregate principal amount of Indebtedness secured by the
Liens referred to in this clause (n) and in clause (m) above shall not exceed
$5,000,000 in the aggregate at any time outstanding; and (o) Liens affecting
assets existing at the time such assets are acquired provided that such Liens
are not created in contemplation of such acquisition.

               "Person" means any individual, corporation, partnership, joint
venture, trust, estate, limited liability company, unincorporated organization
or government or any agency or political subdivision thereof.

               "Qualified Capital Stock" means any Capital Stock of the Company
that is not Disqualified Capital Stock.

               "Qualified Exchange" means any legal defeasance, redemption,
retirement, repurchase or other acquisition of Capital Stock or of Indebtedness
of the Company issued on or after the Issue Date with the Net Cash Proceeds
received by the Company from the substantially




                                       8


concurrent sale of Qualified Capital Stock or any exchange of Qualified Capital
Stock for any Capital Stock or for Indebtedness of the Company issued on or
after the Issue Date.

               "Related Business" means the business conducted (or proposed to
be conducted) by the Company and its Subsidiaries as of the Issue Date and any
and all businesses that in the good faith judgment of the Board of Directors of
the Company are materially related businesses.

               "Representative" means the indenture trustee or other trustee,
agent or representative for any Senior Indebtedness. GSCP Recovery, Inc. (or its
Noteholder Affiliate) shall be the Representative for the New Senior Secured
Notes until a successor replaces it in accordance with the Note Purchase
Agreement and thereafter means the successor serving in such capacity
thereunder.

               "Responsible Officer," when used with respect to the Trustee,
means any officer within the Corporate Trust Department of the Trustee (or any
successor group of the Trustee) or any other officer of the Trustee customarily
performing functions similar to those performed by any of the above designated
officers and also means, with respect to a particular corporate trust matter,
any other officer to whom such matter is referred because of his knowledge of
and familiarity with the particular subject.

               "Restricted Investments" means, in one or a series of related
transactions, any Investment, other than: (a) Investments by the Company or any
Guarantor in any Guarantor, (b) Permitted Investments, (c) Investments
consisting of purchase money notes received in connection with the sale or
disposition of any asset, provided that such sale or disposition was made in
accordance with the terms of this Agreement and (d) Investments in Foreign
Subsidiaries which Investments are existing on the date of the Closing and
disclosed on Schedule 1.

               "Restricted Payment" means, with respect to the Company or any
Subsidiary, (a) the declaration or payment of any dividend or other distribution
in respect of Capital Stock or Stock Equivalents or to the holders of their
Capital Stock or Stock Equivalents other than (A) dividends or distributions
payable in their Capital Stock or dividends or distributions (or series of
dividends of distributions) made by the Company or any Guarantor to the Company
or any Guarantor or (B) dividends or distributions payable on the Series C
Preferred Stock issued by the Company in connection with the Exchange, (b) the
redemption, repurchase or other acquisition or retirement for value by the
Company or any Subsidiary, of any such Capital Stock or Stock Equivalents
(except shares acquired upon the conversion thereof into other shares of Capital
Stock or rights to acquire such Capital Stock, odd lot shares, and except for
the repurchase or acquisition of such Capital Stock held by directors, officers
or employees of the Company or any Guarantor upon death, disability, retirement
or termination of employment not to exceed $100,000 in the aggregate in any
fiscal year) or rights to acquire such Capital Stock or Stock Equivalents, or
(c) the direct or indirect redemption, repurchase, defeasance or other
acquisition or retirement for value, prior to any scheduled or mandatory
maturity, scheduled or mandatory repayment or scheduled sinking fund payment
(after giving effect to the exercise of any and all unconditional (other than as
to the giving of notice) options to extend the maturity), of the Indebtedness of
the Company or any Guarantor (other than each of the (i) Notes issued pursuant
to this Agreement, (ii) Senior Indebtedness and (iii) New Senior Secured Notes).




                                       9


               "S&P" means Standard and Poor's Rating Services, a division of
McGraw-Hill, Inc.

               "SEC" means the United States Securities and Exchange Commission.

               "Securities Act" means the Securities Act of 1933, as amended.

               "Senior Credit Documents" shall mean, collectively, (i) the Note
Purchase Agreement, (ii) any other credit agreement, loan agreement or other
debt instrument that governs any indebtedness that extends, refinances, renews,
replaces or refunds, in whole or in part, any indebtedness outstanding under the
Note Purchase Agreement, or that is incurred pursuant to a credit commitment
under a credit facility that extends, increases, refinances, renews, replaces or
refunds, in whole or in part, any indebtedness outstanding under the Note
Purchase Agreement, and (iii) all notes (including the New Senior Secured
Notes), guarantees (including the Subsidiary Guarantees (as defined in the Note
Purchase Agreement)), security agreements, mortgages, pledge agreements, hedging
agreements and other documents and instruments related to or delivered pursuant
to the foregoing agreements referred to in clauses (i) and (ii), as any of the
foregoing documents may be amended, restated, extended, renewed, supplemented or
otherwise modified from time to time.

               "Senior Indebtedness" of the Company or any Guarantor means
Indebtedness of the Company or such Guarantor arising under Bank Indebtedness
(including any monetary obligation in respect of Bank Indebtedness, and
interest, whether or not allowable, accruing on Indebtedness after the filing of
a petition initiating any proceeding under any bankruptcy, insolvency or similar
law) or that, by the terms of the instrument creating or evidencing such
Indebtedness, is expressly designated Senior Indebtedness and made senior in
right of payment to the Notes or the applicable Guarantee, provided, that in no
event shall Senior Indebtedness include (a) Indebtedness to any Subsidiary of
the Company or any officer, director or employee of the Company or any
Subsidiary of the Company, (b) Indebtedness incurred in violation of the terms
of the Indenture, (c) Indebtedness to trade creditors, (d) Disqualified Capital
Stock, (e) Capitalized Lease Obligations, and (f) any liability for taxes owed
or owing by the Company or such Guarantor.

               "Series C Preferred Stock" shall mean the Company's Series C
Convertible Preferred Stock, par value $0.001 per share.

               "Significant Subsidiary" shall have the meaning provided under
Regulation S-X of the Securities Act, as in effect on the Issue Date.

               "Stated Maturity," when used with respect to any Note, means
November 1, 2007.

               "Stock Equivalent" means all securities convertible into or
exchangeable for Capital Stock and all warrants, options or other rights to
purchase or subscribe for any Capital Stock, whether or not presently
convertible, exchangeable or exercisable.

               "Subordinated Debt Documents" means this Agreement, the Notes and
all other related agreements and documents issued or delivered by any Credit
Party hereunder or thereunder or pursuant hereto or thereto.




                                       10


               "Subordinated Indebtedness" means Indebtedness of the Company or
a Guarantor that is subordinated in right of payment by its terms or the terms
of any document or instrument relating thereto to the Notes or such Guarantee,
as applicable, in any respect or has a stated maturity after the Stated
Maturity.

               "Subsidiary," with respect to any person, means (i) a corporation
a majority of whose Capital Stock with voting power, under ordinary
circumstances, to elect directors is at the time, directly or indirectly, owned
by such person, by such person and one or more Subsidiaries of such person or by
one or more Subsidiaries of such person, (ii) any other person (other than a
corporation) in which such person, one or more Subsidiaries of such person, or
such person and one or more Subsidiaries of such person, directly, or
indirectly, at the date of determination thereof has at least majority ownership
interest, or (iii) a partnership in which such person or a Subsidiary of such
person is, at the time, a general partner. Unless the context requires
otherwise, Subsidiary means each direct and indirect Subsidiary of the Company.

               "Subsidiary Guarantees" means the Subsidiary Guarantees of the
Guarantors in the form set forth as Exhibit B hereto.

               "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections
77aaa-77bbbb) as in effect on the date on which this Indenture is qualified
under the TIA.

               "Trustee" means the party named as such above until a successor
replaces it in accordance with the applicable provisions of this Indenture and
thereafter means the successor serving hereunder.

               "U.S. Government Obligations" means securities issued or directly
and fully guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof).

               "Wholly-owned Subsidiary" of any Person means a Subsidiary of
such Person all of the outstanding Capital Stock of which (other than directors'
qualifying shares) shall at the time be owned by such Person or by one or more
Wholly-owned Subsidiaries of such Person.

SECTION 1.02          OTHER DEFINITIONS



               Term                                           Defined in Section
               ----                                           ------------------
                                                           
               "Acceleration Notice"                                6.02
               "Affiliate Transaction"                              4.11
               "Benefitted Party"                                   11.01
               "Certificated Note"                                  2.06
               "Change of Control Offer"                            4.07
               "Change of Control Purchase Price"                   4.07
               "Change of Control Purchase Date"                    4.07
               "Covenant Defeasance"                                8.03
               "Event of Default"                                   6.01
               "Legal Defeasance"                                   8.02
               "Paying Agent"                                       2.03





                                       11


                                                  
               "Payment Blockage Period"                            10.03
               "Payment Default"                                    10.03
               "Payment Notice"                                     10.03
               "Registrar"                                          2.03

               

SECTION 1.03          INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT

               Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a part of this Indenture.

               The following TIA terms used in this Indenture have the following
meanings:

               "indenture securities" means the Notes;

               "indenture security holder" means a Holder of a Note;

               "indenture to be qualified" means this Indenture;

               "indenture trustee" or "institutional trustee" means the Trustee;

               "obligor" on the Notes means the Company, the Guarantors and any
successor obligor upon the Notes.

               All other terms used in this Indenture that are defined by the
TIA, defined by TIA reference to another statute or defined by SEC rule under
the TIA have the meanings so assigned to them.

SECTION 1.04          RULES OF CONSTRUCTION

               Unless the context otherwise requires:

               (1) a term has the meaning assigned to it;

               (2) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP;

               (3) "or" is not exclusive;

               (4) words in the singular include the plural, and in the plural
include the singular;

               (5) provisions apply to successive events and transactions; and

               (6) references to sections of or rules under the Securities Act
shall be deemed to include substitute, replacement of successor sections or
rules adopted by the SEC from time to time.




                                       12


                                    ARTICLE 2
                                    THE NOTES


SECTION 2.01          FORM AND DATING

               The Notes and the Trustee's certificate of authentication shall
be substantially in the form of Exhibit A hereto. The Notes may have notations,
legends or endorsements required by law, stock exchange rule or usage. The
Company shall furnish any such legend not contained in Exhibit A to the Trustee
in writing. Each Note shall be dated the date of its authentication. The Notes
and any additional Notes issued in lieu of the cash payment of interest on the
Notes, in an aggregate principal amount equal to the amount of interest that
would be payable with respect to such Notes if such interest were paid in cash,
shall be issued in denominations (rounded, if necessary to the nearest dollar)
of $1 and integral multiples thereof.

               The terms and provisions contained in the Notes shall constitute,
and are hereby expressly made, a part of this Indenture and the Company and the
Trustee, by their execution and delivery of this Indenture, expressly agree to
such terms and provisions and to be bound thereby. In the event of a conflict,
the terms of the Indenture shall control.

               Global Notes shall be substantially in the form of Exhibit A
attached hereto (including the text referred to in footnote 1 thereto). Notes
issued in certificated form shall be substantially in the form of Exhibit A
attached hereto (but without including the text referred to in footnote 1
thereto). Each Global Note shall represent such of the outstanding Notes as
shall be specified therein and each shall provide that it shall represent the
aggregate amount of outstanding Notes from time to time endorsed thereon and
that the aggregate amount of outstanding Notes represented thereby may from time
to time be reduced or increased, as appropriate, to reflect exchanges and
redemptions. Any endorsement of a Global Note to reflect the amount of any
increase or decrease in the amount of outstanding Notes represented thereby
shall be made by the Trustee or the Note Custodian, at the direction of the
Trustee, in accordance with instructions given by the Holder thereof as required
by Section 2.06 hereof.

SECTION 2.02          EXECUTION AND AUTHENTICATION

               Two Officers shall sign the Notes for the Company by manual or
facsimile signature. If an Officer whose signature is on a Note no longer holds
that office at the time a Note is authenticated, the Note shall nevertheless be
valid.

               A Note shall not be valid until authenticated by the manual
signature of the Trustee. The signature shall be conclusive evidence that the
Note has been authenticated under this Indenture.

               The Trustee shall, upon receipt of a written order of the Company
signed by two Officers, authenticate Notes for original issue up to the
aggregate principal amount stated in paragraph 4 of the Notes. The aggregate
principal amount of Notes outstanding at any time may not exceed $15,000,000,
except as provided in Section 2.07 hereof. Notwithstanding the foregoing, the
aggregate principal amount of Notes permitted to be outstanding at any time may
exceed $15,000,000 by an amount sufficient to permit payments of interest in
kind as provided for in the Notes.




                                       13


               The Trustee may appoint an authenticating agent acceptable to the
Company to authenticate Notes. An authenticating agent may authenticate Notes
whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as an Agent to deal with the Company or
an Affiliate of the Company.

SECTION 2.03          REGISTRAR AND PAYING AGENT

               The Company shall maintain an office or agency where Notes may be
presented for registration of transfer or for exchange ("Registrar") and an
office or agency where Notes may be presented for payment ("Paying Agent"). The
Registrar shall keep a register of the Notes and of their transfer and exchange.
The Company may appoint one or more co-registrars and one or more additional
paying agents. The term "Registrar" includes any co-registrar and the term
"Paying Agent" includes any additional paying agent. The Company may change any
Paying Agent or Registrar without notice to any Holder. The Company shall notify
the Trustee in writing of the name and address of any Agent not a party to this
Indenture. If the Company fails to appoint or maintain another entity as
Registrar or Paying Agent, the Trustee shall act as such. The Company or any of
its Subsidiaries may act as Paying Agent or Registrar. The Company initially
appoints The Depositary Trust Company ("DTC") to act as depositary with respect
to the Global Notes (the "Depositary"). The Company initially appoints the
Trustee to act as the Registrar and Paying Agent and to act as Note Custodian
with respect to the Global Notes.

SECTION 2.04          PAYING AGENT TO HOLD MONEY IN TRUST

               The Company shall require each Paying Agent other than the
Trustee to agree in writing that the Paying Agent will hold in trust for the
benefit of Holders or the Trustee all money held by the Paying Agent solely for
the payment of principal, premium, if any, or interest on the Notes, and will
notify the Trustee in writing of any default by the Company in making any such
payment. While any such default continues, the Trustee may require a Paying
Agent to pay all money held by it to the Trustee. The Company at any time may
require a Paying Agent to pay all money held by it to the Trustee and account
for any funds disbursed, and the Trustee may at any time during the continuance
of any default in the payment of principal of, premium, if any, or accrued
interest on the Notes pursuant to Sections 6.01(i) and 6.01(ii) hereof, upon
written request to a Paying Agent, require such Paying Agent to pay all money
held by it to the Trustee and to account for all funds disbursed. Upon payment
over to the Trustee, the Paying Agent (if other than the Company or a
Subsidiary) shall have no further liability for the money. If the Company or any
Affiliate or any Subsidiary acts as Paying Agent, it shall segregate and hold in
a separate trust fund for the benefit of the Holders all money held by it as
Paying Agent. Upon any bankruptcy or reorganization proceedings relating to the
Company, the Company shall so notify the Trustee in writing, and thereafter the
Trustee shall serve as Paying Agent for the Notes.

SECTION 2.05          HOLDER LISTS

               The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
all Holders and shall otherwise comply with TIA ss. 312(a). If the Trustee is
not the Registrar, the Company shall furnish to the Trustee at least seven
Business Days before each interest payment date and at such other times as




                                       14


the Trustee may request in writing, a list in such form and as of such date as
the Trustee may reasonably require of the names and addresses of the Holders of
Notes and the Company shall otherwise comply with TIA ss. 312(a).

SECTION 2.06   TRANSFER AND EXCHANGE

               (a)Transfer and Exchange of Certificated Notes. When certificated
notes ("Certificated Notes") are presented by a Holder to the Registrar with a
request: (x) to register the transfer of the Certificated Notes; or (y) to
exchange such Certificated Notes for an equal principal amount of Certificated
Notes of other authorized denominations, the Registrar shall register the
transfer or make the exchange as requested if its reasonable requirements for
such transactions are met; provided, however, that the Certificated Notes
presented or surrendered for register of transfer or exchange shall be duly
endorsed or accompanied by a written instruction of transfer in form reasonably
satisfactory to the Registrar duly executed by such Holder or by his attorney,
duly authorized in writing.

               (b)Transfer of a Certificated Note for a Beneficial Interest in a
Global Note. A Certificated Note may not be exchanged for a beneficial interest
in a Global Note except upon satisfaction of the requirements set forth below
and only if the Company, at the time of such transfer, has appointed a
Depositary that is registered as a clearing agency under the Exchange Act. Upon
receipt by the Trustee of a Certificated Note, duly endorsed or accompanied by
appropriate instruments of transfer, in form reasonably satisfactory to the
Trustee, together with written instructions from the Holder thereof directing
the Trustee to make, or to direct the Note Custodian to make, an endorsement on
the Global Note to reflect an increase in the aggregate principal amount of the
Notes represented by the Global Note, in which case the Trustee shall cancel
such Certificated Note in accordance with Section 2.11 hereof and cause, or
direct the Note Custodian to cause, in accordance with the standing instructions
and procedures existing between the Depositary and the Note Custodian, the
aggregate principal amount of Notes represented by the Global Note to be
increased accordingly. If no Global Notes are then outstanding, the Company
shall issue and, upon receipt of an authentication order in accordance with
Section 2.02 hereof, the Trustee shall authenticate a new Global Note in the
appropriate principal amount.

               (c)Transfer and Exchange of Global Notes. The transfer and
exchange of Global Notes or beneficial interests therein shall be effected
through the Depositary, in accordance with this Indenture and the procedures of
the Depositary therefor, which shall include restrictions on transfer comparable
to those set forth herein to the extent required by the Securities Act.

               (d)Transfer of a Beneficial Interest in a Global Note for a
Certificated Note.

               (i) Any Person having a beneficial interest in a Global Note may
        upon request exchange such beneficial interest for a Certificated Note.
        Upon receipt by the Trustee of written instructions or such other form
        of instructions as is customary for the Depositary, from the Depositary
        or its nominee on behalf of any Person having a beneficial interest in a
        Global Note, the Trustee or the Note Custodian, at the direction of the
        Trustee, shall, in accordance with the standing instructions and
        procedures existing between the Depositary and the Note Custodian, cause
        the aggregate principal amount of Global Notes to be




                                       15


        reduced accordingly and, following such reduction, the Company shall
        execute and, upon receipt of an authentication order in accordance with
        Section 2.02 hereof, the Trustee shall authenticate and deliver to the
        transferee a Certificated Note in the appropriate principal amount.

               (ii) Certificated Notes issued in exchange for a beneficial
        interest in a Global Note pursuant to this Section 2.06(d) shall be
        registered in such names and in such authorized denominations as the
        Depositary, pursuant to instructions from its direct or indirect
        participants or otherwise, shall instruct the Trustee. The Trustee shall
        deliver such Certificated Notes to the Persons in whose names such Notes
        are so registered.

               (e) Restrictions on Transfer and Exchange of Global Notes.
Notwithstanding any other provision of this Indenture (other than the provisions
set forth in subsection (f) of this Section 2.06), a Global Note may not be
transferred as a whole except by the Depositary to a nominee of the Depositary
or by a nominee of the Depositary to the Depositary or another nominee of the
Depositary or by the Depositary or any such nominee to a successor Depositary or
a nominee of such successor Depositary.

               (f) Authentication of Certificated Notes in Absence of
Depositary. If at any time: (i) the Depositary for the Notes notifies the
Company that the Depositary is unwilling or unable to continue as Depositary for
the Global Notes and a successor Depositary for the Global Notes is not
appointed by the Company within 90 days after delivery of such notice; or (ii)
the Company, at its option, notifies the Trustee in writing that it elects to
cause the issuance of Certificated Notes under this Indenture; or (iii) there
shall have occurred and be continuing a Default or an Event of Default with
respect to the Notes, then the Company shall execute, and the Trustee shall,
upon receipt of an authentication order in accordance with Section 2.02 hereof,
authenticate and deliver Certificated Notes in accordance with Section
2.06(d)(ii) above in an aggregate principal amount equal to the principal amount
of the Global Notes in exchange for such Global Notes.

               (g) Cancellation and/or Adjustment of Global Notes. At such time
as all beneficial interests in Global Notes have been exchanged for Certificated
Notes, redeemed, repurchased or cancelled, all Global Notes shall be returned to
or retained and cancelled by the Trustee in accordance with Section 2.11 hereof.
At any time prior to such cancellation, if any beneficial interest in a Global
Note is exchanged for Certificated Notes, redeemed, repurchased or cancelled,
the principal amount of Notes represented by such Global Note shall be reduced
accordingly and an endorsement shall be made on such Global Note, by the Trustee
or the Notes Custodian, at the direction of the Trustee, to reflect such
reduction.

               (h) General Provisions Relating to Transfers and Exchanges.

               (i) To permit registrations of transfers and exchanges, the
        Company shall execute and the Trustee shall authenticate Certificated
        Notes and Global Notes at the Registrar's request.




                                       16


               (ii) No service charge shall be made to a Holder for any
        registration of transfer or exchange, but the Company may require
        payment of a sum sufficient to cover any transfer tax or similar
        governmental charge payable in connection therewith.

               (iii) The Registrar shall not be required to register the
        transfer of or exchange any Note selected for redemption in whole or in
        part, except the unredeemed portion of any Note being redeemed in part.

               (iv) All Certificated Notes and Global Notes issued upon any
        registration of transfer or exchange of Certificated Notes or Global
        Notes shall be the valid obligations of the Company, evidencing the same
        debt, and entitled to the same benefits under this Indenture, as the
        Certificated Notes or Global Notes surrendered upon such registration of
        transfer or exchange.

               (v) The Company and the Registrar shall not be required: (A) to
        issue, to register the transfer of or to exchange Notes during a period
        beginning at the opening of business 15 days before the day of any
        selection of Notes for redemption under Section 3.02 hereof and ending
        at the close of business on the day of selection; or (B) to register the
        transfer of or to exchange any Note so selected for redemption in whole
        or in part, except the unredeemed portion of any Note being redeemed in
        part; or (C) to register the transfer of or to exchange a Note between a
        record date and the next succeeding interest payment date.

               (vi) Prior to due presentment for the registration of a transfer
        of any Note, the Trustee, any Agent and the Company may deem and treat
        the Person in whose name any Note is registered as the absolute owner of
        such Note for the purpose of receiving payment of principal of and
        interest on such Notes, and neither the Trustee, any Agent nor the
        Company shall be affected by notice to the contrary.

               (vii) The Trustee shall authenticate Certificated Notes and
        Global Notes in accordance with the provisions of Section 2.02 hereof.

SECTION 2.07          REPLACEMENT NOTES

               If any mutilated Note is surrendered to the Trustee, or the
Company or the Trustee receives evidence to its reasonable satisfaction of the
destruction, loss or theft of any Note, the Company shall issue and the Trustee,
upon the written order of the Company signed by two Officers of the Company,
shall authenticate a replacement Note if the Trustee's reasonable requirements
are met. If required by the Trustee or the Company, an indemnity bond must be
supplied by the Holder that is sufficient in the reasonable judgment of the
Trustee and the Company to protect the Company, the Trustee, any Agent and any
authenticating agent from any loss that any of them may suffer if a Note is
replaced.

               Every replacement Note is an additional Obligation of the Company
and shall be entitled to all of the benefits of this Indenture equally and
proportionately with all other Notes duly issued hereunder.




                                       17


SECTION 2.08          OUTSTANDING NOTES

               The Notes outstanding at any time are all the Notes authenticated
by the Trustee except for those cancelled by it, those delivered to it for
cancellation, those reductions in the interest in a Global Note effected by the
Trustee in accordance with the provisions hereof, and those described in this
Section as not outstanding. Except as set forth in Section 2.09 hereof, a Note
does not cease to be outstanding because the Company or an Affiliate of the
Company holds the Note.

               If a Note is replaced pursuant to Section 2.07 hereof, it ceases
to be outstanding unless the Trustee receives proof reasonably satisfactory to
it that the replaced Note is held by a bona fide purchaser.

               If the principal amount of any Note is considered paid under
Section 4.01 hereof, it ceases to be outstanding and interest on it ceases to
accrue.

               If the Paying Agent (other than the Company, a Subsidiary of the
Company or an Affiliate) holds, on a redemption date or maturity date, money
sufficient to pay Notes payable on that date, then on and after that date such
Notes shall be deemed to be no longer outstanding and shall cease to accrue
interest.

SECTION 2.09          TREASURY NOTES

               In determining whether the Holders of the required principal
amount of Notes have concurred in any direction, amendment, supplement, waiver
or consent, or the taking of any other action, Notes owned by the Company, or by
any Subsidiary or Affiliate (other than a Noteholder or a Noteholder Affiliate),
shall be considered as though not outstanding, except that for the purposes of
determining whether the Trustee shall be protected in relying on any such
direction, amendment, supplement, waiver or consent, only Notes that a
Responsible Officer of the Trustee actually knows are owned by the Company, any
Subsidiary or an Affiliate (other than a Noteholder or a Noteholder Affiliate)
shall be so disregarded. The Company shall notify the Trustee promptly in
writing, when it, any Subsidiary or any Affiliate (other than a Noteholder or a
Noteholder Affiliate) repurchases or otherwise acquires Notes of the aggregate
principal amount of such Notes so repurchased or otherwise acquired.

SECTION 2.10          TEMPORARY NOTES

               Until Certificated Notes are ready for delivery, the Company may
prepare and the Trustee shall authenticate temporary Notes upon a written order
of the Company signed by two Officers of the Company. Temporary Notes shall be
substantially in the form of Certificated Notes but may have variations that the
Company considers appropriate for temporary Notes and as shall be reasonably
acceptable to the Trustee. Without unreasonable delay, the Company shall prepare
and the Trustee shall, upon a written order of the Company signed by two
Officers, authenticate Certificated Notes in exchange for temporary Notes.

               Holders of temporary Notes shall be entitled to all of the
benefits of this Indenture.




                                       18


SECTION 2.11          CANCELLATION

               The Company at any time may deliver Notes to the Trustee for
cancellation. The Registrar and Paying Agent shall deliver to the Trustee any
Notes surrendered to them for registration of transfer, exchange or payment. The
Trustee and no one else shall cancel all Notes surrendered for registration of
transfer, exchange, payment, replacement or cancellation in accordance with its
customary procedures (subject to the record retention requirement of the
Exchange Act). Certification of the cancellation of all cancelled Notes shall be
delivered to the Company. The Company may not issue new Notes to replace Notes
that it has paid or that have been delivered to the Trustee for cancellation.

SECTION 2.12          DEFAULTED INTEREST

               If the Company defaults in a payment of interest on the Notes, it
shall pay the defaulted interest in any lawful manner to the Persons who are
Holders on a subsequent special record date, in each case at the rate provided
in the Notes and in Section 4.01 hereof. The Company shall, in lieu of paying
defaulted interest on the Notes in cash, execute and deliver to each Noteholder
one or more promissory notes in the form of the promissory note attached hereto
as Exhibit A in a principal amount equal to the sum of defaulted interest due to
such Noteholder under this Section 2.12. The Company shall notify the Trustee in
writing of the amount of defaulted interest proposed to be paid on each Note and
the date of the proposed payment. The Company shall fix or cause to be fixed
each such special record date and payment date, provided that no such special
record date shall be less than 10 days prior to the related payment date for
such defaulted interest. At least 15 days before the special record date, the
Company (or, upon the written request of the Company, the Trustee in the name
and at the expense of the Company) shall mail or cause to be mailed to Holders a
notice that states the special record date, the related payment date and the
amount of such interest to be paid.


                                    ARTICLE 3
                            REDEMPTION AND PREPAYMENT

SECTION 3.01          NOTICES TO TRUSTEE

               If the Company elects to redeem Notes pursuant to the optional
redemption provisions of Section 3.07 hereof, it shall furnish to the Trustee,
at least 30 days (unless a shorter period is consented to in writing by the
Trustee) but not more than 60 days before a redemption date, an Officers'
Certificate setting forth (i) the redemption date, (ii) the principal amount of
Notes to be redeemed and (iii) the redemption price.

SECTION 3.02          SELECTION OF NOTES TO BE REDEEMED

               If less than all of the Notes are to be redeemed at any time, the
Trustee shall select the Notes to be redeemed among the Holders of the Notes in
compliance with the requirements of the principal national security exchange, if
any, on which the Notes are listed or, if the Notes are not so listed, on a pro
rata basis, by lot or in accordance with any other method the Trustee considers
fair and appropriate. In the event of partial redemption by lot, the particular
Notes to be redeemed shall be selected, unless otherwise provided herein, not
less than 20 nor more than 60




                                       19


days prior to the redemption date by the Trustee from the outstanding Notes not
previously called for redemption.

               The Trustee shall promptly notify the Company in writing of the
Notes selected for redemption and, in the case of any Note selected (other than
Notes issued pursuant to Section 4.01 hereunder) for partial redemption, the
principal amount thereof to be redeemed. Notes and portions of Notes selected
shall be in amounts of $1,000 or integral multiples of $1,000; except that if
all of the Notes of a Holder are to be redeemed, the entire outstanding amount
of Notes held by such Holder, even if not an integral multiple of $1,000, shall
be redeemed. Except as provided in the preceding sentence, provisions of this
Indenture that apply to Notes called for redemption also apply to portions of
Notes called for redemption.

SECTION 3.03          NOTICE OF REDEMPTION

               Subject to the provisions of Section 3.07 hereof, at least 30
days but not more than 60 days before a redemption date, the Company shall mail
or cause to be mailed, by first class mail, a notice of redemption to each
Holder whose Notes are to be redeemed at its registered address as shown upon
the registry books of the Registrar.

               The notice shall identify the Notes to be redeemed by CUSIP
number or PPN number and shall state:

               (a) the redemption date;

               (b) the redemption price;

               (c) if any Note is being redeemed in part, the portion of the
principal amount of such Note to be redeemed, the portion of the principal
amount equal to the unredeemed portion thereof, and that, after the redemption
date upon surrender of such Note, a new Note or Notes in principal amount equal
to the unredeemed portion shall be issued upon cancellation of the original
Note;

               (d) the name and address of the Paying Agent;

               (e) that Notes called for redemption must be surrendered to the
Paying Agent to collect the redemption price;

               (f) that, unless the Company defaults in making such redemption
payment, interest on Notes called for redemption ceases to accrue on and after
the redemption date;

               (g) that no representation is made as to the correctness or
accuracy of the CUSIP number, if any, listed in such notice or printed on the
Notes.

               At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at its expense; provided, however, that the
Company shall have delivered to the Trustee, at least 45 days prior to the
redemption date, an Officers' Certificate requesting that the Trustee give such
notice and setting forth the information to be stated in such notice as provided
in the preceding paragraph.




                                       20


SECTION 3.04          EFFECT OF NOTICE OF REDEMPTION

               Once notice of redemption is mailed in accordance with Section
3.03 hereof, Notes called for redemption become irrevocably due and payable on
the redemption date at the redemption price. A notice of redemption may not be
conditional.

SECTION 3.05          DEPOSIT OF REDEMPTION PRICE

               On or prior to the redemption date, the Company shall deposit
with the Trustee or with the Paying Agent immediately available funds sufficient
to pay the redemption price of and accrued interest on all Notes to be redeemed
on that date. The Trustee or the Paying Agent shall promptly return to the
Company any money deposited with the Trustee or the Paying Agent by the Company
in excess of the amounts necessary to pay the redemption price of and accrued
interest on all Notes to be redeemed.

               If the Company complies with the provisions of the preceding
paragraph, on and after the redemption date, interest shall cease to accrue on
the Notes or the portions of Notes called for redemption unless the Company
defaults in such payments due on the redemption date. If a Note is redeemed on
or after an interest record date but on or prior to the related interest payment
date, then any accrued and unpaid interest shall be paid to the Person in whose
name such Note was registered at the close of business on such record date. If
any Note called for redemption shall not be so paid upon surrender for
redemption due to the Company's failure to fund the Redemption Price, interest
shall be paid on the unpaid principal from the redemption date until such
principal is paid and, to the extent lawful, on any interest not paid on such
unpaid principal, in each case at the rate provided in the Notes and in Section
4.01 hereof.

SECTION 3.06          NOTES REDEEMED IN PART

               Upon surrender of a Note that is redeemed in part, the Company
shall issue and the Trustee shall upon a written order of the Company signed by
two Officers authenticate for the Holder at the expense of the Company a new
Note equal in principal amount to the unredeemed portion of the Note
surrendered.

SECTION 3.07          OPTIONAL REDEMPTION

               (a)The Company shall have the right to redeem the Notes, in whole
or in part, at any time after the date of this Indenture upon not less than 15
days nor more than 60 days notice to each holder of Notes at a redemption price
equal to 100% of the principal amount of such notes being redeemed, together
with accrued and unpaid interest thereon, to the date of redemption.

               (b)Any redemption pursuant to this Section 3.07 shall be made
pursuant to the provisions of Section 3.01 through 3.06 hereof.

SECTION 3.08          NO MANDATORY REDEMPTION

               The Company shall not be required to make mandatory redemption
payments with respect to the Notes.




                                       21


SECTION 3.09          NO SINKING FUND

               The Notes shall not have the benefit of a sinking fund.


                                    ARTICLE 4
                                    COVENANTS

SECTION 4.01          PAYMENT OF NOTES

               The Company shall pay or cause to be paid the principal of,
premium, if any, and interest on the Notes on the dates and in the manner
provided in this Indenture and the Notes. Principal, premium, if any, and
interest shall be considered paid on the date due if the Trustee or Paying
Agent, if other than the Company or any Affiliate or Subsidiary thereof, holds
as of 12:00 p.m. (noon) New York time on the due date money deposited by the
Company in immediately available funds and designated for and sufficient to pay
all principal, premium, if any, and interest then due.

               The Company shall pay interest (including post-petition interest
in any proceeding under any Bankruptcy Law) on overdue principal and premium, if
any, at the rate equal to 1% per annum in excess of the then applicable interest
rate on the Notes to the extent lawful. The Company shall, in lieu of paying
such interest on the Notes in cash, execute and deliver to each Noteholder one
or more promissory notes in the form of the promissory note attached hereto as
Exhibit A in a principal amount equal to the sum of interest due to such
Noteholder under this Section 4.01.

SECTION 4.02          MAINTENANCE OF OFFICE OR AGENCY

               The Company shall maintain in the Borough of Manhattan, the City
of New York, an office or agency (which may be an office of the Trustee or an
affiliate of the Trustee, Registrar or co-registrar) where Notes may be
surrendered for registration of transfer or for exchange and where notices and
demands to or upon the Company in respect of the Notes and this Indenture may be
served. The Company shall give prompt written notice to the Trustee of the
location, and any change in the location, of such office or agency. If at any
time the Company shall fail to maintain any such required office or agency or
shall fail to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the Corporate Trust
Administration Office of the Trustee.

               The Company may also from time to time designate one or more
other offices or agencies where the Notes may be presented or surrendered for
any or all such purposes and may from time to time rescind such designations;
provided, however, that no such designation or rescission shall in any manner
relieve the Company of its obligation to maintain an office or agency in the
Borough of Manhattan, the City of New York for such purposes. The Company shall
give prompt written notice to the Trustee of any such designation or rescission
and of any change in the location of any such other office or agency.

               The Company hereby designates the Corporate Trust Administration
Office of the Trustee as one such office or agency of the Company in accordance
with Section 2.03 hereof.




                                       22


SECTION 4.03          REPORTS

               (a) Whether or not the Company is subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company shall
deliver to the Trustee and to each Holder of the Notes within 15 days after it
is or would have been (if it were subject to such reporting obligations)
required to file such with the SEC, all annual and quarterly financial
statements substantially equivalent to financial statements that would have been
included in reports filed with the SEC on Forms 10-K and 10-Q, if the Company
were subject to the requirements of Section 13 or 15(d) of the Exchange Act,
including, with respect to annual information only, a report thereon by the
Company's certified independent public accountants as such would be required in
such reports to the SEC and (ii) all current reports that would be required to
be filed with the SEC on Form 8-K if the Company were required to file such
reports; and, in each case, together with a management's discussion and analysis
of financial condition and results of operations which would be so required and,
unless the SEC will not accept such reports, file with the SEC the annual,
quarterly and other reports which it is or would have been required to file with
the SEC.

               (b) Notwithstanding Section 4.03(a) hereof, if the Company timely
files all required reports under Section 13 and 15(d) of the Exchange Act via
EDGAR, the Company shall be deemed to have satisfied in full its obligations
contained in Section 4.03(a) above; provided, however, that this Section 4.03(b)
shall not apply to any current reports required to be filed with the SEC on Form
8-K, which reports shall remain subject to the delivery requirements of Section
4.03(a).

SECTION 4.04          COMPLIANCE CERTIFICATE

               (a) The Company shall deliver to the Trustee, within 90 days
after the end of each fiscal year, an Officers' Certificate stating that a
review of the activities of the Company and its Subsidiaries during the
preceding fiscal year has been made under the supervision of the signing
Officers with a view to determining whether the Company has kept, observed,
performed and fulfilled its obligations under this Indenture, and further
stating, as to each such Officer signing such certificate, that to the best of
his or her knowledge the Company has kept, observed, performed and fulfilled
each and every covenant contained in this Indenture and is not in default in the
performance or observance of any of the terms, provisions and conditions of this
Indenture (or, if a Default or Event of Default shall have occurred, describing
all such Defaults or Events of Default of which he or she may have knowledge and
what action the Company is taking or proposes to take with respect thereto) and
that to the best of his or her knowledge no event has occurred and remains in
existence by reason of which payments on account of the principal of or premium,
if any, or interest on the Notes is prohibited or if such event has occurred, a
description of the event and what action the Company is taking or proposes to
take with respect thereto.

               (b) So long as not contrary to the then current recommendations
of the American Institute of Certified Public Accountants, the year-end
financial statements delivered pursuant to Section 4.03(a) hereof shall be
accompanied by a written statement of the Company's independent public
accountants (who shall be a firm of established national reputation) that in
making the examination necessary for certification of such financial statements,
nothing has come to their attention that would lead them to believe that the
Company has violated any




                                       23


provisions of Article 4 or Article 5 hereof or, if any such violation has
occurred, specifying the nature and period of existence thereof, it being
understood that such accountants shall not be liable directly or indirectly to
any Person for any failure to obtain knowledge of any such violation.

               (c) The Company shall, so long as any of the Notes are
outstanding, deliver to the Trustee, forthwith upon any Officer becoming aware
of any Default or Event of Default, an Officers' Certificate specifying such
Default or Event of Default and what action the Company is taking or proposes to
take with respect thereto.

SECTION 4.05          TAXES

               The Company and Guarantors shall pay, and shall cause each of
their Subsidiaries to pay, prior to delinquency, all material taxes,
assessments, and governmental levies except such as are contested in good faith
and by appropriate proceedings or where the failure to effect such payment is
not adverse in any material respect to the Holders of the Notes.

SECTION 4.06          STAY, EXTENSION AND USURY LAWS

               The Company covenants (to the extent that it may lawfully do so)
that it shall not at any time insist upon, plead, or in any manner whatsoever
claim or take the benefit or advantage of, any stay, extension or usury law
wherever enacted, now or at any time hereafter in force, that may affect the
covenants or the performance of this Indenture; and the Company (to the extent
that it may lawfully do so) hereby expressly waives all benefit or advantage of
any such law, and covenants that it shall not, by resort to any such law,
hinder, delay or impede the execution of any power herein granted to the Trustee
or to any Holder, but shall suffer and permit the execution of every such power
as though no such law has been enacted.

SECTION 4.07          REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER
                      UPON A CHANGE OF CONTROL

               After the Company has indefeasibly repaid in full or otherwise
fully discharged all of the Obligations in respect of Senior Indebtedness, then
upon the occurrence of a Change of Control, each Holder of Notes shall have the
right, at such Holder's option, pursuant to an offer (subject only to conditions
required by applicable law, if any) by the Company (the "Change of Control
Offer"), to require the Company to repurchase all or any part of such Holder's
Notes (provided, that the principal amount of such Notes must be $1,000 or an
integral multiple thereof) on a date (the "Change of Control Purchase Date")
that is no later than 35 Business Days after the occurrence of such Change of
Control at a cash price equal to 101% of the principal amount thereof (the
"Change of Control Purchase Price"), together with accrued and unpaid interest
to the Change of Control Purchase Date. The Change of Control Offer shall be
made within 10 Business Days following a Change of Control and shall remain open
for 20 Business Days following its commencement (the "Change of Control Offer
Period"). Upon expiration of the Change of Control Offer Period, the Company
promptly shall purchase all Notes properly tendered in response to the Change of
Control Offer. The Company shall comply with the applicable requirements of
Regulation 14E under the Exchange Act and the rules and regulations thereunder
and all other federal and state securities laws. To the extent that the




                                       24


provisions of any securities laws or regulations conflict with the provisions of
this Section 4.07, compliance by the Company or any of the Guarantors with such
laws and regulations shall not in and of itself cause a breach of its
obligations under this Section 4.07.

               On or before the Change of Control Purchase Date, the Company
shall (i) accept for payment Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent cash
sufficient to pay the Change of Control Purchase Price (together with accrued
and unpaid interest) of all Notes so tendered and (iii) deliver to the Trustee
Notes so accepted together with an Officers' Certificate listing the Notes or
portions thereof being purchased by the Company. The Paying Agent promptly will
pay the Holders of Notes so accepted an amount equal to the Change of Control
Purchase Price (together with accrued and unpaid interest), and the Trustee
promptly will authenticate and deliver to such Holders, a new Note equal in
principal amount to any unpurchased portion of the Note surrendered. Any Notes
not so accepted will be delivered promptly by the Company to the Holder thereof.
The Company publicly will announce the results of the Change of Control Offer on
or as soon as practicable after the Change of Control Purchase Date.

               If the Change of Control Purchase Date hereunder is on or after
an interest payment record date and on or before the associated interest payment
date, any accrued and unpaid interest due on such interest payment date will be
paid to the person in whose name a Note is registered at the close of business
on such Record Date, and such interest will not be payable to Holders who tender
the Notes pursuant to the Change of Control Offer.

SECTION 4.08          LIMITATION ON RESTRICTED PAYMENTS

               The Company and the Guarantors shall not, and shall not permit
any of their Subsidiaries to, directly or indirectly make any Restricted Payment
if, after giving effect to such Restricted Payment on a pro forma basis:

               (a) a Default or an Event of Default shall have occurred and be
continuing; or

               (b) the aggregate amount of all Restricted Payments made by the
Company and its Subsidiaries, including after giving effect to such proposed
Restricted Payment, from and after the Issue Date, would exceed, without
duplication, the sum of (a) 50% of the aggregate Consolidated Net Income of the
Company for the period (taken as one accounting period), commencing on the first
day of the first full fiscal quarter commencing after the Issue Date, to and
including the last day of the fiscal quarter ended immediately prior to the date
of each such calculation (or, in the event Consolidated Net Income for such
period is a deficit, then minus 100% of such deficit), plus (b) the aggregate
Net Cash Proceeds received by the Company from the sale of its Qualified Capital
Stock (other than (i) to a Subsidiary of the Company, (ii) to the extent applied
in connection with a Qualified Exchange and (iii) to the extent credited in (x)
in the following paragraph), after the Issue Date, plus (c) other than amounts
credited pursuant to clause (x) of the next following paragraph, the net amount
of any Restricted Investments (not to exceed the original amount of such
Investment) made after the Issue Date that is returned to the Company or the
Subsidiary that made such prior Investment, without restriction in cash on or
prior to the date of any such calculation.




                                       25


               The foregoing clauses (a) and (b) of the immediately preceding
paragraphs, however, will not prohibit (x) Restricted Investments in a Related
Business, (y) a Qualified Exchange or (z) the payment of any dividend on
Qualified Capital Stock within 60 days after the date of its declaration if such
dividend could have been made on the date of such declaration in compliance with
the foregoing provisions. The full amount of any Restricted Payment made
pursuant to the foregoing clauses (x) and (z) (but not pursuant to clause (y))
of the immediately preceding sentence, however, will be deducted in the
calculation of the aggregate amount of Restricted Payments available to be made
referred to in clause (c) of the immediately preceding paragraph.

               For purposes of this Section 4.08, the amount of any Restricted
Payment, if other than in cash, shall be the fair market value thereof, as
determined in the good faith reasonable judgment of the Board of Directors of
the Company. Additionally, on the date of each Restricted Payment, the Company
shall deliver an Officers' Certificate to the Trustee describing in reasonable
detail the nature of such Restricted Payment, stating the amount of such
Restricted Payment, stating in reasonable detail the provisions of this
Indenture pursuant to which such Restricted Payment was made and certifying that
such Restricted Payment was made in compliance with the terms of this Indenture.

SECTION 4.09         LIMITATION ON LIENS SECURING INDEBTEDNESS

               The Company and the Subsidiaries shall not, and shall not permit
any of their Subsidiaries to, directly or indirectly, create, incur, assume or
suffer to exist any Lien of any kind, other than Permitted Liens, upon any of
their respective assets now owned or acquired on or after the date of this
Indenture or upon any income or profits therefrom securing any Indebtedness of
the Company or any Subsidiary other than Senior Indebtedness, unless the Company
and such Subsidiary provides, and causes its Subsidiaries to provide,
concurrently therewith, that the Notes are equally and ratably so secured;
provided that, if such Indebtedness is Subordinated Indebtedness, the Lien
securing such Subordinated Indebtedness shall be subordinate and junior to the
Lien securing the Notes with the same relative priority as such Subordinated
Indebtedness shall have with respect to the Notes; and provided, further, that
this Section 4.09 shall not be applicable to any Liens securing any such
Indebtedness which became Indebtedness of the Company pursuant to a transaction
subject to the provisions described in Section 5.01 hereof or which constitutes
Acquired Indebtedness and which in either case were in existence at the time of
such transaction (unless such Indebtedness was incurred or such Lien created in
connection with or in contemplation of such transaction), so long as such Liens
do not extend to or cover any property or assets of the Company or any
Subsidiary of the Company other than property or assets acquired in such
transaction.

SECTION 4.10          LIMITATION ON DIVIDENDS AND OTHER PAYMENT
                      RESTRICTIONS AFFECTING SUBSIDIARIES

               The Company and the Guarantors shall not, and shall not permit
any of their Subsidiaries to, directly or indirectly, create, assume or suffer
to exist any consensual restriction on the ability of any Subsidiary of the
Company to pay dividends or make other distributions to or on behalf of, or to
pay any obligation to or on behalf of, or otherwise to transfer assets or
property to or on behalf of, or make or pay loans or advances to or on behalf
of, the Company or




                                       26


any Subsidiary of the Company, except (a) restrictions imposed by the Notes or
this Indenture, (b) restrictions imposed by applicable law, (c) existing
restrictions under Indebtedness outstanding on the Issue Date, (d) restrictions
under any Acquired Indebtedness not incurred in violation of this Indenture or
any agreement relating to any property, asset, or business acquired by the
Company or any of its Subsidiaries, which restrictions in each case existed at
the time of acquisition, were not put in place in connection with or in
anticipation of such acquisition and are not applicable to any person, other
than the person acquired, or to any property, asset or business, other than the
property, assets and business so acquired, (e) any such restriction or
requirement imposed by Bank Indebtedness, (f) restrictions with respect solely
to a Subsidiary of the Company imposed pursuant to a binding agreement which has
been entered into for the sale or disposition of all or substantially all of the
Capital Stock or assets of such Subsidiary, provided such restrictions apply
solely to the Capital Stock or assets of such Subsidiary which are being sold,
and (g) in connection with and pursuant to permitted refinancings, replacements
of restrictions imposed pursuant to clauses (a), (c) or (d) of this Section 4.10
that are not more restrictive than those being replaced and do not apply to any
other person or assets than those that would have been covered by the
restrictions in the Indebtedness so refinanced. Notwithstanding the foregoing,
neither (a) customary provisions restricting subletting or assignment of any
lease entered into in the ordinary course of business, consistent with industry
practice, nor (b) Liens permitted under the terms of this Indenture on assets
securing Senior Indebtedness incurred in accordance with the terms of Section
4.09 hereof shall in and of themselves be considered a restriction on the
ability of the applicable Subsidiary to transfer such agreement or assets, as
the case may be.

SECTION 4.11          LIMITATIONS ON TRANSACTIONS WITH AFFILIATES

               The Company shall not, and shall not permit any of its
Subsidiaries on or after the Issue Date to enter into or suffer to exist any
contract, agreement, arrangement or transaction with any Affiliate (an
"Affiliate Transaction"), or any series of related Affiliate Transactions,
(other than Exempted Affiliate Transactions), (i) unless the Company reasonably
and in good faith determines that the terms of such Affiliate Transaction are
fair and reasonable to the Company, and no less favorable to the Company than
could have been obtained in an arm's length transaction with a non-Affiliate,
and (ii) if involving consideration to either party in excess of $1.0 million,
unless such Affiliate Transaction(s) is evidenced by an Officers' Certificate
addressed and delivered to the Trustee certifying that such Affiliate
Transaction (or Transactions) has been approved by a majority of the members of
the Board of Directors that are disinterested in such transaction and (iii) if
involving consideration to either party in excess of $5.0 million, unless in
addition the Company, prior to the consummation thereof, obtains a written
favorable opinion as to the fairness of such transaction to the Company from a
financial point of view from an independent investment banking firm of national
reputation or, if pertaining to a matter for which such investment banking firms
do not customarily render such opinions, an appraisal or valuation firm of
national reputation. Notwithstanding the foregoing, the Company and its
Subsidiaries shall be permitted to enter into transactions with Affiliates
pursuant to agreements or other documents entered into simultaneously herewith
on the Issue Date, including without limitation, the agreements and other
documents relating to the New Senior Secured Notes and the issuance of the
Company's Series C Preferred Stock.




                                       27


SECTION 4.12          FUTURE SUBSIDIARY GUARANTORS

               All present and future Subsidiaries (other than Foreign
Subsidiaries) of the Company jointly and severally will guarantee irrevocably
and unconditionally all principal, premium, if any, and interest on the Notes on
a senior subordinated basis to the extent provided in Section 11 hereof;
provided that any Foreign Subsidiary that guarantees any Indebtedness of the
Company or any Subsidiary (other than a Foreign Subsidiary) and guarantees the
Indebtedness outstanding under the Note Purchase Agreement and the New Senior
Secured Notes, shall become a Guarantor, in each case by executing a counterpart
signature page hereof.

SECTION 4.13          RELEASE OF GUARANTORS

               No Guarantor shall consolidate or merge with or into (whether or
not such Guarantor is the surviving Person), or shall sell all or substantially
all of its assets to, another Person unless (i) subject to the provisions of
this Section 4.13 and Section 5.01 of this Indenture (as if such Guarantor were
the Company), the Person formed by or surviving any such consolidation or merger
(if other than such Guarantor) assumes all the obligations of such Guarantor
pursuant to a supplemental indenture in form reasonably satisfactory to the
Trustee, pursuant to which such person shall unconditionally guarantee, on a
senior subordinated basis, all of such Guarantor's obligations under such
Guarantor's guarantee, on the terms set forth in this Indenture; and (ii)
immediately before and immediately after giving effect to such transaction on a
pro forma basis, no Default or Event of Default shall have occurred or be
continuing.

SECTION 4.14          CORPORATE EXISTENCE

               Subject to Article 5 hereof, the Company shall do or cause to be
done all things necessary to preserve and keep in full force and effect (i) its
corporate existence, and the corporate, partnership or other existence of each
of its Subsidiaries, in accordance with the respective organizational documents
(as the same may be amended from time to time) of the Company or any such
Subsidiary and (ii) the rights (charter and statutory), licenses and franchises
of the Company and its Subsidiaries; provided, however, that the Company shall
not be required to preserve any such right, license or franchise, or the
corporate, partnership or other existence of any of its Subsidiaries if the
Board of Directors shall reasonably and in good faith determine that the
preservation thereof is no longer desirable in the conduct of the business of
the Company and its Subsidiaries, taken as a whole, and that the loss thereof is
not adverse in any material respect to the Holders of the Notes.

SECTION 4.15          LIMITATION ON STATUS AS AN INVESTMENT COMPANY

               The Company and its Subsidiaries shall not register as an
"investment company" (as that term is defined in the Investment Company Act of
1940, as amended), or otherwise become subject to regulation under the
Investment Company Act.




                                       28


                                    ARTICLE 5
                                   SUCCESSORS

SECTION 5.01          MERGER, SALE OR CONSOLIDATION

               The Company will not consolidate with or merge with or into
another person or, directly or indirectly, sell, lease, convey or transfer all
or substantially all of its assets (computed on a consolidated basis), whether
in a single transaction or a series of related transactions, to another Person
or group of affiliated Persons unless (i) either (a) the Company is the
continuing entity or (b) the resulting, surviving or transferee entity is a
corporation organized under the laws of the United States, any state thereof or
the District of Columbia and expressly assumes, by supplemental indenture in
form reasonably satisfactory to the Trustee, all of the obligations of the
Company in connection with the Notes and this Indenture; and (ii) no Default or
Event of Default shall exist or shall occur immediately after giving effect on a
pro forma basis to such transaction; and the Company or such entity shall have
delivered to the Trustee an Officers' Certificate and an Opinion of Counsel,
each stating that such consolidation, merger, sale, lease, conveyance or
transfer and, if a supplemental indenture is required in connection with such a
transaction, such supplemental indenture comply with this provision of this
Indenture and all conditions precedent in this Indenture relating to such a
transaction have been satisfied.

SECTION 5.02          SUCCESSOR CORPORATION SUBSTITUTED

               Upon any consolidation or merger, or any transfer of all or
substantially all of the assets of the Company in accordance with Section 5.01
hereof, the successor corporation formed by such consolidation or into or with
which the Company is merged or to which such transfer is made shall succeed to
and (except in the case of a lease) be substituted for, and may exercise every
right and power of the Company under this Indenture with the same effect as if
such successor corporation had been named herein as the Company, and (except in
the case of a lease) the Company shall be released from the obligations under
the Notes and this Indenture except with respect to any obligations that arise
from, or are related to, such transaction.

               For purposes of this Article 5, the transfer (by lease,
assignment, sale or otherwise) of all or substantially all of the properties and
assets of one or more Subsidiaries, the Company's interest in which constitutes
all or substantially all of the properties and assets of the Company, shall be
deemed to be the transfer of all or substantially all of the properties and
assets of the Company.


                                    ARTICLE 6
                              DEFAULTS AND REMEDIES

SECTION 6.01          EVENTS OF DEFAULT

               An "Event of Default" is defined as:

               (i) the failure by the Company to pay any installment of interest
        on the Notes as and when the same becomes due and payable and the
        continuance of any such failure for 30 days,




                                       29


               (ii) the failure by the Company to pay all or any part of the
        principal, or premium, if any, on the Notes when and as the same becomes
        due and payable at maturity, redemption, by acceleration or otherwise,
        including, without limitation, payment of the Change of Control Purchase
        Price or otherwise,

               (iii) the failure by the Company or any Subsidiary of the Company
        to observe or perform any other covenant or agreement contained in the
        Notes or this Indenture and, the continuance of such failure for a
        period of 30 days after written notice is given to the Company by the
        Trustee or to the Company and the Trustee by the holders of at least
        33.3% in aggregate principal amount of the Notes outstanding, stating
        that such notice is a "notice of default" under Section 6.01(iii) of
        this Indenture,

               (iv) the following events of bankruptcy, insolvency or
        reorganization under applicable Bankruptcy Laws in respect of the
        Company or any of its Significant Subsidiaries:

                      (a) the Company or any of its Significant Subsidiaries
               pursuant to or within the meaning of any Bankruptcy Law (i)
               commences a voluntary case, (ii) consents to the entry of an
               order for relief against it in an involuntary case, (iii)
               consents to the appointment of a custodian of it or for all or
               substantially all of its property, (iv) makes a general
               assignment for the benefit of its creditors, or generally is not
               paying its debts as they become due; or

                      (b) a court of competent jurisdiction enters an order or
               decree under any Bankruptcy Law that (i) is for relief against
               the Company or any Significant Subsidiary in an involuntary case,
               (ii) appoints a custodian of the Company or any Significant
               Subsidiary or for all or substantially all of the property of the
               Company or a Significant Subsidiary, or (iii) orders the
               liquidation of the Company or any Significant Subsidiary, and, in
               each case of the preceding (i), (ii) or (iii), the order or
               decree remains unstayed and in effect for 60 consecutive days.

               (v) a default in any issue of Indebtedness of the Company or any
        of its Subsidiaries with an aggregate principal amount in excess of $5.0
        million (a) resulting from any payment default or (b) as a result of
        which the maturity of such Indebtedness has been accelerated prior to
        its stated maturity, and

               (vi) final unsatisfied judgments not covered by insurance
        aggregating in excess of $5.0 million, at any one time rendered against
        the Company or any of its Subsidiaries and not stayed, bonded or
        discharged within 60 days.

SECTION 6.02          ACCELERATION

               If an Event of Default occurs and is continuing (other than an
Event of Default specified in Section 6.01(iv) relating to the Company or any of
its Significant Subsidiaries), then in every such case, unless the principal of
all of the Notes shall have already become due and payable, either the Trustee
or the Holders of at least 33.3% in aggregate principal amount of the Notes then
outstanding, by notice in writing to the Company (and to the Trustee if given by




                                       30


Holders) (an "Acceleration Notice"), may declare all principal, determined as
set forth below, and accrued interest thereon to be due and payable immediately;
provided, however, that if any Bank Indebtedness is outstanding, upon a
declaration of such acceleration, such principal and interest shall be due and
payable upon the earlier of (x) the third Business Day after the sending to the
Company and the holders of such Bank Indebtedness or their representative of
such written notice, unless such Event of Default is cured or waived prior to
such date and (y) the date of acceleration of any Bank Indebtedness. If an Event
of Default specified in Section 6.01(iv) occurs, all principal and accrued
interest thereon will be immediately due and payable on all outstanding Notes
without any declaration or other act on the part of the Trustee or the Holders
of the Notes. The Holders of a majority in aggregate principal amount of Notes
are authorized to rescind such acceleration if all existing Events of Default,
other than the non-payment of the principal of, premium, if any, and interest on
the Notes which have become due solely by such acceleration and except on
default with respect to any provision requiring a supermajority approval to
amend, which default may only be waived by such a supermajority, have been cured
or waived.

SECTION 6.03          OTHER REMEDIES

               If an Event of Default occurs and is continuing, the Trustee may
pursue any available remedy by proceeding at law or in equity to collect the
payment of principal, premium, if any, and interest on the Notes or to enforce
the performance of any provision of the Notes or this Indenture. Except as
provided in Section 6.06 below, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request, order
or direction of any of the Holders of the Notes, unless such Holders have
offered to the Trustee reasonable security or, at the option of the Trustee, in
lieu of such security, reasonable indemnity.

               The Trustee may maintain a proceeding even if it does not possess
any of the Notes or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Holder of a Note in exercising any right or
remedy accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. All remedies are
cumulative to the extent permitted by law.

SECTION 6.04          WAIVER OF PAST DEFAULTS

               Prior to the declaration of acceleration of the maturity of the
Notes, the Holders of a majority in aggregate principal amount of the Notes at
the time outstanding may waive on behalf of all the Holders of the Notes any
default, except a default with respect to any provision requiring a
supermajority approval to amend, which default may only be waived by such a
supermajority, and except a default in the payment of principal of or interest
on any Note not yet cured or a default with respect to any covenant or provision
which cannot be modified or amended without the consent of the Holder of each
outstanding Note affected.

SECTION 6.05          CONTROL BY MAJORITY

               Holders of a majority in principal amount of the then outstanding
Notes may direct the time, method and place of conducting any proceeding for
exercising any remedy available to the Trustee or exercising any trust or power
conferred on it. However, the Trustee




                                       31


may refuse to follow any direction that conflicts with law or this Indenture
that the Trustee, in its reasonable discretion, determines may be unduly
prejudicial to the rights of other Holders of Notes, that may involve the
Trustee in personal liability or if the Trustee determines that it does not have
reasonable security or at the option of the Trustee, in lieu of such security,
reasonable indemnification against any loss or expense; provided, that the
Trustee may take any other action deemed proper by the Trustee which is not
inconsistent with such direction. This Section 6.05 shall be in lieu of TIA ss.
315(d)(3) and said TIA section is hereby expressly excluded from this Indenture,
as permitted by the TIA.

SECTION 6.06          LIMITATION ON SUITS

               A Holder of a Note may pursue a remedy with respect to this
Indenture or the Notes only if:

               (a) the Holder gives to the Trustee written notice of a
continuing Event of Default;

               (b) the Holders of at least 33.3% in principal amount of the then
outstanding Notes make a written request to the Trustee to pursue the remedy;

               (c) such Holder or Holders offer and, if requested, provide to
the Trustee reasonable security or at the option of the Trustee, in lieu of such
security, reasonable indemnity against any loss, liability or expense;

               (d) the Trustee does not comply with the request within 30 days
after receipt of the request and the offer and, if requested, the provision of
the security or, at the option of the Trustee, in lieu of such security, the
indemnity described in clause (c) above; and

               (e) during such 30-day period the Holders of a majority in
aggregate principal amount of the then outstanding Notes do not give the Trustee
a direction which, in the opinion of the Trustee, is inconsistent with the
request.

A Holder may not use this Indenture to prejudice the rights of another Holder or
to obtain a preference or priority over another Holder.

SECTION 6.07          RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT

               Notwithstanding any other provision of this Indenture, the right
of any Holder to receive payment of principal, premium, if any, and interest on
the Notes, on or after the respective due dates expressed in the Notes
(including in connection with an offer to purchase), or to bring suit for the
enforcement of any such payment on or after such respective dates, shall not be
impaired or affected without the consent of such Holder.

SECTION 6.08          COLLECTION SUIT BY TRUSTEE

               If an Event of Default occurs and is continuing, the Trustee is
authorized to recover judgment in its own name and as trustee of an express
trust against the Company for the whole amount of principal of, premium, if any,
and interest remaining unpaid on the Notes and




                                       32


interest on overdue principal and, to the extent lawful, interest and such
further amount as shall be sufficient to cover the costs and expenses of
collection, including the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel and any other amounts due to the
Trustee pursuant to Section 7.07.

SECTION 6.09          TRUSTEE MAY FILE PROOF OF CLAIM

               The Trustee is authorized to file such proofs of claim and other
papers or documents as may be necessary or advisable in order to have the claims
of the Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and the
Holders allowed in any judicial proceedings relative to the Company (or any
other obligor upon the Notes), its creditors or its property and shall be
entitled and empowered to collect, receive and distribute any money or other
property payable or deliverable on any such claims and any custodian in any such
judicial proceeding is hereby authorized by each Holder to make such payments to
the Trustee, and in the event that the Trustee shall consent to the making of
such payments directly to the Holders, to pay to the Trustee any amount due to
it for the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 7.07 hereof. To the extent that the payment of any such compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel, and
any other amounts due the Trustee under Section 7.07 hereof out of the estate in
any such proceeding shall be denied for any reason, payment of the same shall be
secured by a Lien on, and shall be paid out of, any and all distributions,
dividends, money, securities and other properties that the Holders may be
entitled to receive in such proceeding, whether in liquidation or under any plan
of reorganization or arrangement or otherwise. Nothing herein contained shall be
deemed to authorize the Trustee to authorize or consent to or accept or adopt on
behalf of any Holder any plan of reorganization, arrangement, adjustment or
composition affecting the Notes or the rights of any Holder, or to authorize the
Trustee to vote in respect of the claim of any Holder in any such proceeding.

SECTION 6.10          PRIORITIES

               If the Trustee collects any money pursuant to this Article, it
shall pay out the money in the following order:

               First: to the Trustee, its agents and attorneys for amounts due
under Section 7.07 hereof, including payment of all reasonable compensation,
expense and liabilities incurred, and all advances made, by the Trustee and the
costs and expenses of collection;

               Second: to Holders for amounts due and unpaid on the Notes for
principal, premium, if any, and interest, ratably, without preference or
priority of any kind, according to the amounts due and payable on the Notes for
principal, premium, if any, and interest, respectively; and

               Third: to the Company or to such party as a court of competent
jurisdiction shall direct.

               The Trustee may fix a record date and payment date for any
payment to Holders pursuant to this Section 6.10.




                                       33


SECTION 6.11          UNDERTAKING FOR COSTS

               In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as Trustee, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees and expenses, against any party litigant in the suit, having due
regard to the merits and good faith of the claims or defenses made by the party
litigant. This Section does not apply to a suit by the Trustee, a suit by a
Holder pursuant to Section 6.07 hereof, or a suit by Holders of more than 10% in
principal amount of the then outstanding Notes.

SECTION 6.12          RESTORATION OF RIGHTS AND REMEDIES

               If the Trustee or any Holder has instituted any proceeding to
enforce any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every case, subject to any
determination in such proceeding, the Company, the Trustee and the Holders shall
be restored severally and respectively to their former positions hereunder and
thereafter all rights and remedies of the Trustee and the Holders shall continue
as though no such proceeding had been instituted.


                                    ARTICLE 7
                                     TRUSTEE

SECTION 7.01          DUTIES OF TRUSTEE

               (a) If an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in its exercise, as a
prudent person would exercise or use under the circumstances in the conduct of
his own affairs.

               (b) Except during the continuance of an Event of Default of which
the Trustee is charged with knowledge pursuant to Section 7.02(g):

               (i) the duties of the Trustee shall be determined solely by the
        express provisions of this Indenture and the Trustee need perform only
        those duties that are specifically set forth in this Indenture and no
        others, and no implied covenants or obligations shall be read into this
        Indenture against the Trustee; and

               (ii) in the absence of negligence, bad faith or willful
        misconduct on its part, the Trustee may conclusively rely, as to the
        truth of the statements and the correctness of the opinions expressed
        therein, upon certificates or opinions furnished to the Trustee and
        conforming to the requirements of this Indenture. However, in the case
        of an Officers' Certificate or Opinion of Counsel, the Trustee shall
        examine the certificates and opinions to determine whether or not they
        conform to the requirements of this Indenture. This subparagraph (b)(ii)
        shall be in lieu of TIA ss. 315(d)(3) and said TIA section is hereby
        expressly excluded from this Indenture, as permitted by the TIA.




                                       34


               (c) The Trustee may not be relieved from liabilities for its own
negligent action, its own negligent failure to act, or its own bad faith or
willful misconduct, except that:

               (i) this paragraph does not limit the effect of paragraph (b) of
        this Section;

               (ii) the Trustee shall not be liable for any error of judgment
        made in good faith by a Responsible Officer, unless it is proved that
        the Trustee was negligent in ascertaining the pertinent facts; and

               (iii) the Trustee shall not be liable with respect to any action
        it takes or omits to take in good faith in accordance with a direction
        received by it pursuant to Section 6.05 hereof.

               (d) Whether or not therein expressly so provided, every provision
of this Indenture that in any way relates to the Trustee is subject to
paragraphs (a), (b), and (c) of this Section.

               (e) No provision of this Indenture shall require the Trustee to
expend or risk its own funds or incur any liability. The Trustee shall be under
no obligation to exercise any of its rights and powers under this Indenture at
the request of the Company or any Holder, unless the Company or such Holder, as
the case may be, shall have offered to the Trustee security and indemnity
reasonably satisfactory to it against any loss, liability or expense.

               (f) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Company.
Money held in trust by the Trustee need not be segregated from other funds
except to the extent required by law.

SECTION 7.02          RIGHTS OF TRUSTEE

               (a) The Trustee may conclusively rely upon any document believed
by it to be genuine and to have been signed or presented by the proper Person.
The Trustee need not investigate any fact or matter stated in the document.

               (b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel or both, which shall
conform to Section 10.05 hereof. The Trustee shall not be liable for any action
it takes or omits to take in good faith in reliance on such Officers'
Certificate or Opinion of Counsel. The Trustee may consult with counsel of its
selection as to legal matters and the advice of such counsel or any Opinion of
Counsel shall be full and complete authorization and protection from liability
in respect of any action taken, suffered or omitted by it hereunder in good
faith and in reliance thereon with respect to such legal matters.

               (c) The Trustee may act through its attorneys and agents and
shall not be responsible for the misconduct or negligence of any agent appointed
with due care.

               (d) The Trustee shall not be liable for any action it takes or
omits to take in good faith that it believes to be authorized or within the
rights or powers conferred upon it by this Indenture.




                                       35


               (e) Unless otherwise specifically provided in this Indenture, any
demand, request, direction or notice from the Company shall be sufficient if
signed by two Officers of the Company.

               (f) The Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Indenture at the request or direction
of any of the Holders unless such Holders shall have offered to the Trustee
reasonable security or reasonable indemnity against the costs, expenses and
liabilities that might be incurred by it in compliance with such request or
direction.

               (g) Except with respect to Section 4.01 herein, the Trustee shall
have no duty to inquire as to the performance of the Company's covenants in
Article 4 hereof. In addition, the Trustee shall not be deemed to have knowledge
of any Default or Event of Default except (i) any Event of Default occurring
pursuant to Sections 6.01(i) or 6.01(ii) and Section 4.01 or (ii) any Default or
Event of Default of which a Responsible Officer of the Trustee shall have
received written notification in accordance with Section 12.02 hereof from the
Company or any Holder.

SECTION 7.03          INDIVIDUAL RIGHTS OF TRUSTEE

               The Trustee in its individual or any other capacity may become
the owner or pledgee of Notes and may otherwise deal with the Company or any
Affiliate with the same rights it would have if it were not Trustee. However, in
the event that the Trustee acquires any conflicting interest, it must eliminate
such conflict within 90 days, apply to the SEC for permission to continue as
Trustee or resign. Any Agent may do the same with like rights and duties.

SECTION 7.04          TRUSTEE'S DISCLAIMER

               The Trustee shall not be responsible for and makes no
representation as to the validity or adequacy of this Indenture or the Notes, it
shall not be accountable for the Company's use of the proceeds from the Notes or
any money paid to the Company or upon the Company's direction under any
provision of this Indenture, it shall not be responsible for the use or
application of any money received by any Paying Agent other than the Trustee,
and it shall not be responsible for any statement or recital herein or any
statement in the Notes or any other document in connection with the sale of the
Notes or pursuant to this Indenture other than its certificate of
authentication.

SECTION 7.05          NOTICE OF DEFAULTS

               If a Default or Event of Default occurs and is continuing and if
the Trustee is charged with knowledge thereof pursuant to Section 7.02(g)
hereof, the Trustee shall mail to Holders of Notes a notice of the Default or
Event of Default within 90 days after it obtains actual knowledge of said
Default. Except in the case of a Default or Event of Default in payment of
principal of, premium, if any, or interest on any Note, the Trustee may withhold
the notice if and so long as a committee of at least two of its Responsible
Officers in good faith determines that withholding the notice is in the
interests of the Holders of the Notes. The second sentence of this Section 7.05
shall be in lieu of the proviso to TIA ss. 315(b) and said TIA section is hereby
expressly excluded from this Indenture, as permitted by the TIA.




                                       36


SECTION 7.06          REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES

               Within 60 days after each May 15, beginning with the May 15
following the date of this Indenture, and for so long as Notes remain
outstanding, the Trustee shall mail to the Holders of the Notes a brief report
dated as of such reporting date that complies with TIA ss. 313(a) (but if no
event described in TIA ss. 313(a) has occurred within the twelve months
preceding the reporting date, no report need be transmitted). The Trustee also
shall comply with TIA ss. 313(b)(2). The Trustee shall also transmit by mail all
reports as required by TIA ss. 313(c).

               A copy of each report at the time of its mailing to the Holders
of Notes shall be mailed to the Company and filed with the SEC and each stock
exchange on which the Notes are listed in accordance with TIA ss. 313(d). The
Company shall promptly notify the Trustee in writing when the Notes are listed
on any stock exchange or national securities market.

SECTION 7.07          COMPENSATION AND INDEMNITY

               The Company shall pay to the Trustee from time to time
compensation for its acceptance of this Indenture and services hereunder in
accordance with a written agreement between the Trustee and the Company. The
Trustee's compensation shall not be limited by any law on compensation of a
trustee of an express trust. The Company shall reimburse the Trustee promptly
upon request for all reasonable disbursements, advances and expenses incurred or
made by it in addition to the compensation for its services. Such expenses shall
include the reasonable compensation, disbursements and expenses of the Trustee's
agents, accountants, experts and counsel.

               The Company shall indemnify the Trustee for, and hold the Trustee
harmless against, any and all losses, liabilities, claims, damages or expenses
(including, without limitation reasonable attorneys' fees and expenses) incurred
by it arising out of or in connection with the acceptance or administration of
its duties under this Indenture, including the costs and expenses of enforcing
this Indenture against the Company (including this Section 7.07) and defending
itself against any claim (whether asserted by the Company or any Holder or any
other Person) or liability in connection with the exercise or performance of any
of its powers or duties hereunder, except to the extent any such loss, liability
or expense may be attributable to its negligence, bad faith or willful
misconduct. The Trustee shall notify the Company promptly of any claim for which
it may seek indemnity. Failure by the Trustee to so notify the Company shall not
relieve the Company of its obligations hereunder unless the Company is
materially prejudiced thereby. The Company shall defend the claim with counsel
designated by the Company, who may be outside counsel to the Company but shall
in all events be reasonably satisfactory to the Trustee, and the Trustee shall
cooperate in the defense. In addition, the Trustee may retain separate counsel
and, if the Trustee shall have been advised by such counsel that there may be
one or more legal defenses available to the Trustee which are different from or
in addition to those available to the Company and which the counsel designated
by the Company would be precluded from asserting or that the Trustee has one or
more interests that conflict with those of the Company, the Company shall pay
the reasonable fees and expenses of such separate counsel. The indemnification
herein extends to any settlement, provided that the Company will not be




                                       37


liable for any settlement made without its written consent, provided, further,
that such consent will not be unreasonably withheld.

               The obligations of the Company under this Section 7.07 shall
survive the resignation or removal of the Trustee and/or the satisfaction and
discharge of this Indenture.

               To secure the Company's payment obligations in this Section, the
Trustee shall have a Lien prior to the Notes on all money or property held or
collected by the Trustee, except that held in trust to pay principal, premium,
if any, and interest on particular Notes. Such Lien shall survive the
satisfaction and discharge of this Indenture.

               When the Trustee incurs expenses or renders services after an
Event of Default specified in Section 6.01(iv) hereof occurs, the expenses and
the compensation for the services (including the fees and expenses of its agents
and counsel) are intended to constitute expenses of administration under any
Bankruptcy Law.

               The Trustee shall comply with the provisions of TIA ss. 313(b)(2)
to the extent applicable.

SECTION 7.08          REPLACEMENT OF TRUSTEE

               A resignation or removal of the Trustee and appointment of a
successor Trustee shall become effective only upon the successor Trustee's
acceptance of appointment as provided in this Section.

               The Trustee may resign in writing at any time and be discharged
from the trust hereby created by so notifying the Company. The Holders of a
majority in principal amount of the then outstanding Notes may remove the
Trustee by so notifying the Trustee and the Company in writing, and may appoint
a successor Trustee with the Company's consent (which shall not be unreasonably
withheld, delayed or conditioned). The Company may remove the Trustee if:

               (a) the Trustee fails to comply with Section 7.10 hereof, unless
the Trustee's duty to resign is stayed as provided in TIA ss. 310(b);

               (b) the Trustee is adjudged a bankrupt or an insolvent or an
order for relief is entered with respect to the Trustee under any Bankruptcy
Law;

               (c) a custodian or public officer takes charge of the Trustee or
its property; or

               (d) the Trustee becomes incapable of acting.

               If the Trustee resigns or is removed or if a vacancy exists in
the office of Trustee for any reason, the Company shall promptly appoint a
successor Trustee. Within one year after the successor Trustee takes office, the
Holders of a majority in aggregate principal amount of the then outstanding
Notes may appoint a successor Trustee to replace the successor Trustee appointed
by the Company.




                                       38


               If a successor Trustee does not take office within 60 days after
the retiring Trustee resigns or is removed, the retiring Trustee (at the expense
of the Company), the Company, or the Holders of at least 10% in aggregate
principal amount of the then outstanding Notes may petition any court of
competent jurisdiction for the appointment of a successor Trustee.

               If the Trustee fails to comply with Section 7.10, unless the
Trustee's duty to resign is stayed as provided in TIA ss. 310(b), any Holder,
who has been a bona fide Holder for at least six (6) months, may petition any
court of competent jurisdiction for the removal of the Trustee and the
appointment of a successor Trustee.

               A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon, the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Holders of the Notes. The retiring Trustee shall promptly transfer
all property held by it as Trustee to the successor Trustee, provided all sums
owing to the Trustee hereunder have been paid and subject to the Lien provided
for in Section 7.07 hereof. Notwithstanding replacement of the Trustee pursuant
to this Section 7.08, the Company's obligations under Section 7.07 hereof shall
continue for the benefit of the retiring Trustee.

SECTION 7.09          SUCCESSOR TRUSTEE BY MERGER, ETC.

               Subject to Section 7.10, if the Trustee consolidates, merges or
converts into, or transfers all or substantially all of its corporate trust
business to, another corporation, the successor corporation without any further
act shall be the successor Trustee. The provisions of TIA ss. 310 shall apply to
the Company as obligor on the Notes.

SECTION 7.10          ELIGIBILITY; DISQUALIFICATION

               There shall at all times be a Trustee hereunder that is a
corporation organized and doing business under the laws of the United States of
America or of any state thereof that is authorized under such laws to exercise
corporate trustee power, that is subject to supervision or examination by
federal or state authorities and that has a combined capital and surplus of at
least $50,000,000 as set forth in its most recent published annual report of
condition.

               This Indenture shall always have a Trustee who satisfies the
requirements of TIA ss. 310(a)(1), (2) and (5). The Trustee is subject to TIA
Section 310(b).

SECTION 7.11          PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY

               The Trustee is subject to TIA ss. 311(a), excluding any creditor
relationship listed in TIA ss. 311(b). A Trustee who has resigned or been
removed shall be subject to TIA ss. 311(a) to the extent indicated therein. The
provisions of TIA ss. 311 shall apply to the Company as obligor on the Notes.




                                       39


                                    ARTICLE 8
                    LEGAL DEFEASANCE AND COVENANT DEFEASANCE

SECTION 8.01          OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE

               The Company may, at the option of its Board of Directors
evidenced by a resolution set forth in an Officers' Certificate, at any time,
elect to have either Section 8.02 or 8.03 hereof be applied to all outstanding
Notes upon compliance with the conditions set forth below in this Article 8.

SECTION 8.02          LEGAL DEFEASANCE AND DISCHARGE

               Upon the Company's exercise under Section 8.01 hereof of the
option applicable to this Section 8.02, the Company and each of the Guarantors,
as applicable, shall, subject to the satisfaction of the conditions set forth in
Section 8.04 hereof, be deemed to have been discharged from its obligations with
respect to all outstanding Notes and Guarantees, as applicable, on the date the
conditions set forth below are satisfied (hereinafter, "Legal Defeasance"). Such
Legal Defeasance means that the Company shall be deemed to have paid and
discharged all amounts owed under the outstanding Notes and this Indenture shall
cease to be of further effect as to all outstanding Notes and Guarantees, except
as to (i) rights of Holders to receive payments in respect of the principal of,
premium, if any, and interest on such Notes when such payments are due from the
trust funds described in Section 8.04 below; (ii) the Company's obligations with
respect to such Notes concerning issuing temporary Notes, registration of Notes,
mutilated, destroyed, lost or stolen Notes, and the maintenance of an office or
agency for payment and money for security payments held in trust; (iii) the
rights, powers, trust, duties, and immunities of the Trustee, and the Company's
obligations in connection therewith; and (iv) this Article 8. The Company may
exercise its option under this Section 8.02 notwithstanding the prior exercise
of its option under Section 8.03 hereof.

SECTION 8.03          COVENANT DEFEASANCE

               Upon the Company's exercise under Section 8.01 hereof of the
option applicable to this Section 8.03, the Company and each of the Guarantors
shall, subject to the satisfaction of the conditions set forth in Section 8.04
hereof, be released from their respective obligations under the covenants
contained in Sections 4.03, 4.04, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13 and
4.15 hereof with respect to the outstanding Notes and the Guarantors shall be
released from their obligations under Section 11.03(b) hereof in each case, on
and after the date the conditions set forth below are satisfied (hereinafter,
"Covenant Defeasance"), and the Notes and the Guarantees shall thereafter be
deemed not "outstanding" for the purposes of any direction, waiver, consent or
declaration or act of Holders (and the consequences of any breach thereof) in
connection with such covenants, but shall continue to be deemed "outstanding"
for all other purposes hereunder (it being understood that such Notes and
Guarantees shall not be deemed outstanding for accounting purposes). For this
purpose, Covenant Defeasance means that, with respect to the outstanding Notes,
the Company and the Guarantors may omit to comply with and shall have no
liability in respect of any term, condition or limitation set forth in any such
covenant, whether directly or indirectly, by reason of any reference elsewhere
herein to any such covenant or by




                                       40


reason of any reference in any such covenant to any other provision herein or in
any other document and such omission to comply shall not constitute a Default or
an Event of Default under Section 6.01 hereof, but, except as specified above,
the remainder of this Indenture and such Notes and Guarantees shall be
unaffected thereby. In addition, upon the Company's exercise under Section 8.01
hereof of the option applicable to this Section 8.03, subject to the
satisfaction of the conditions set forth in Section 8.04, Section 6.01(iii)
hereof shall not constitute an Event of Default for all purposes hereunder.

SECTION 8.04          CONDITIONS TO LEGAL OR COVENANT DEFEASANCE

               The following shall be the conditions to the application of
either Section 8.02 or 8.03 hereof to the outstanding Notes:

               In order to exercise either Legal Defeasance or Covenant
Defeasance:

               (i) the Company must irrevocably deposit with the Trustee, in
        trust, for the benefit of the Holders, U.S. legal tender, U.S.
        Government Obligations or a combination thereof, in such amounts as will
        be sufficient, in the opinion of a nationally recognized firm of
        independent public accountants, to pay the principal of, premium, if
        any, and interest on such Notes on the stated date for payment thereof
        or on the redemption date of such principal or installment of principal
        of, premium, if any, or interest on such Notes, and the Holders must
        have a valid, perfected, first priority exclusive security interest in
        such trust;

               (ii) in the case of Legal Defeasance only, the Company shall have
        delivered to the Trustee an opinion of counsel of national standing with
        respect to tax law in the United States reasonably acceptable to the
        Trustee confirming that (A) the Company has received from, or there has
        been published by the Internal Revenue Service, a ruling or (B) since
        the date of the Indenture, there has been a change in the applicable
        federal income tax law, in either case to the effect that, and based
        thereon such opinion of counsel shall confirm that, the Holders will not
        recognize income, gain or loss for federal income tax purposes as a
        result of such Legal Defeasance and will be subject to federal income
        tax on the same amounts, in the same manner and at the same times as
        would have been the case if such Legal Defeasance had not occurred;

               (iii) in the case of Covenant Defeasance only, the Company shall
        have delivered to the Trustee an opinion of counsel of national standing
        with respect to tax law in the United States reasonably acceptable to
        such Trustee confirming that the Holders will not recognize income, gain
        or loss for federal income tax purposes as a result of such Covenant
        Defeasance and will be subject to federal income tax on the same
        amounts, in the same manner and at the same times as would have been the
        case if such Covenant Defeasance had not occurred;

               (iv) no Default or Event of Default shall have occurred and be
        continuing on the date of such deposit and the Company shall have
        delivered to the Trustee an Officer's Certificate, to the effect that,
        assuming no intervening bankruptcy of the Company between the date of
        deposit and a date that is one year plus one day following the deposit,




                                       41


        after the date that is one year plus one day following the deposit, the
        trust funds will not be subject to the effect of any applicable
        bankruptcy, insolvency, reorganization or similar laws affecting
        creditors rights generally (it being understood that this condition to
        Legal Defeasance may not be satisfied until such date that is one year
        plus one calendar day after the date of deposit);

               (v) such Legal Defeasance or Covenant Defeasance shall not result
        in a breach or violation of, or constitute a default under this
        Indenture or any other material agreement or instrument to which the
        Company or any of its Subsidiaries is a party or by which the Company or
        any of its Subsidiaries is bound;

               (vi) the Company shall have delivered to the Trustee an Officers'
        Certificate stating that the deposit was not made by the Company with
        the intent of preferring the holders of such Notes over any other
        creditors of the Company or with the intent of defeating, hindering,
        delaying or defrauding any other creditors of the Company or others;

               (vii) the monies held in trust by the Trustee on behalf of the
        Holders shall not be considered or required to register as an
        "investment company" (as that term is defined in the Investment Company
        Act of 1940, as amended), or otherwise become subject to regulation
        under the Investment Company Act.; and

               (viii) the Company shall have delivered to the Trustee an
        Officers' Certificate and an opinion of counsel, each stating that the
        conditions precedent provided for in, in the case of the Officers'
        Certificate, (i) through (vi) and, in the case of the opinion of
        counsel, clauses (i) (with respect to the validity and perfection of the
        security interest), and (ii), (iii), (iv), (v) and (vii) of this Section
        8.04 have been complied with.

               If the funds deposited with the Trustee to effect Covenant
Defeasance are insufficient to pay the principal of, premium, if any, and
interest on the Notes when due, then the obligations of the Company and the
Guarantors under this Indenture and the Collateral Agreement will be revived and
no such defeasance will be deemed to have occurred.

               Legal Defeasance and Covenant Defeasance shall be deemed to occur
on the date all of the applicable conditions set forth in this Section 8.04 are
satisfied.

SECTION 8.05          DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE
                      HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS

               Subject to Section 8.06 hereof, all money and U.S. Government
Obligations (including the proceeds thereof) deposited with the Trustee pursuant
to Section 8.04 hereof in respect of the outstanding Notes shall be held in
trust and applied by the Trustee, in accordance with the provisions of such
Notes and this Indenture, to the payment, either directly or through any Paying
Agent (including the Company acting as Paying Agent) as the Trustee may
determine, to the Holders of such Notes of all sums due and to become due
thereon in respect of principal, premium, if any, and interest, but such money
need not be segregated from other funds except to the extent required by law.




                                       42


               The Company shall pay and indemnify the Trustee against any tax,
fee or other charge imposed on or assessed against the cash or U.S. Government
Obligations deposited pursuant to Section 8.04 hereof or the principal and
interest received in respect thereof other than any such tax, fee or other
charge which by law is for the account of the Holders.

               Anything in this Article 8 to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon the written
request of the Company any money or U.S. Government Obligations held by it as
provided in Section 8.04 hereof which, in the opinion of a nationally recognized
firm of independent public accountants expressed in a written certification
thereof delivered to the Trustee are in excess of the amount thereof that would
then be required to be deposited to effect an equivalent Legal Defeasance or
Covenant Defeasance.

SECTION 8.06          REPAYMENT TO COMPANY

               Any money deposited with the Trustee or any Paying Agent, or then
held by the Company, in trust for the payment of the principal of, premium, if
any, or interest on any Note and remaining unclaimed for two years after such
principal, and premium, if any, or interest has become due and payable shall be
paid to the Company on its written request or (if then held by the Company)
shall be discharged from such trust; and the Holders of the Notes shall
thereafter, as a secured creditor, look only to the Company for payment thereof,
and all liability of the Trustee or such Paying Agent with respect to such trust
money, and all liability of the Company as trustee thereof, shall thereupon
cease.

SECTION 8.07          REINSTATEMENT

               If the Trustee or Paying Agent is unable to apply any United
States dollars or U.S. Government Obligations in accordance with Section 8.02 or
8.03 hereof, as the case may be, by reason of any order requiring any Holder to
return or refund any amount paid to it pursuant to this Article 8, or directing
the repayment of the deposited money to the Company or otherwise making the
deposit unavailable to make payments on the Notes when due, or if any court or
other government authority enters an order or judgment enjoining, restraining or
otherwise prohibiting such application, or requiring any Holder to return or
refund any amount paid to it pursuant to this Article 8, then (for so long as
the insufficiency exists or the order remains in effect) the Company's and the
Guarantors' obligations under this Indenture, the Notes and the Guarantees shall
be revived and reinstated as though no deposit had occurred pursuant to Section
8.02 or 8.03 hereof until such time as the Trustee or Paying Agent is permitted
to apply all such money in accordance with Section 8.02 or 8.03 hereof, as the
case may be; provided, however, that, if the Company makes any payment of
principal of, premium, if any, or interest on any Note following the
reinstatement of its obligations, the Company shall be subrogated to the rights
of the Holders of such Notes to receive such payment from the money held by the
Trustee or Paying Agent.




                                       43


                                    ARTICLE 9
                        AMENDMENT, SUPPLEMENT AND WAIVER

SECTION 9.01          WITHOUT CONSENT OF HOLDERS OF NOTES

               Notwithstanding Section 9.02 of this Indenture, the Company, the
Guarantors and the Trustee may amend or supplement this Indenture or the Notes
without the consent of any Holder of a Note:

               (a) to cure any ambiguity, defect or inconsistency in a manner
not adverse to any Holder;

               (b) to provide for uncertificated Notes in addition to or in
place of Certificated Notes;

               (c) to provide for the assumption of the Company's obligations to
the Holders in the case of a merger, sale or consolidation pursuant to Article 5
hereof;

               (d) to provide for additional Guarantors as set forth in Section
4.11, successor Guarantors as set forth in Section 11.03 or for the release or
assumption of a Guarantee in compliance with this Indenture;

               (e) to make any change that would provide any additional rights
or benefits to the Holders (including the addition of any Guarantors) or that
does not adversely affect the rights hereunder of any Holder;

               (f) to comply with requirements of the SEC in order to effect or
maintain the qualification of this Indenture under the TIA; or

               (g) to evidence, and provide for acceptance of, the appointment
of a successor Trustee hereunder.

               Upon the request of the Company accompanied by a resolution of
its Board of Directors authorizing the execution of any such amended or
supplemental indenture, and upon receipt by the Trustee of the documents
described in Section 9.06 hereof, stating that the execution of such amended or
supplemental indenture is authorized or permitted by this Indenture, the Trustee
shall join with the Company in the execution of any amended or supplemental
indenture authorized or permitted by the terms of this Indenture and to make any
further appropriate agreements and stipulations that may be therein contained,
but the Trustee shall not be obligated to enter into such amended or
supplemental indenture that affects its own rights, duties or immunities under
this Indenture or otherwise.

SECTION 9.02          WITH CONSENT OF HOLDERS OF NOTES

               Except as provided below in this Section 9.02, the Company and
the Trustee may amend or supplement this Indenture and the Notes may be amended
or supplemented with the written consent of the Holders of at least a majority
in aggregate principal amount of the Notes then outstanding (including consents
obtained in connection with a tender offer or exchange




                                       44


offer for the Notes), and, subject to Sections 6.04 and 6.07 hereof, any
existing Default or Event of Default (other than a Default or Event of Default
in the payment of the principal of, premium, if any, or interest on the Notes,
except a payment default resulting from an acceleration that has been rescinded)
or compliance with any provision of this Indenture, the Notes or the Guarantees
may be waived with the written consent of the Holders of at least a majority in
aggregate principal amount of the then outstanding Notes (including consents
obtained in connection with a tender offer or exchange offer for the Notes);
provided that no such amendment, supplement or waiver may, without the consent
of Holders of at least 66 2/3% in aggregate principal amount of Notes at the
time outstanding, modify the provisions (including the defined terms used
therein) of Section 4.07 hereof in a manner adverse to the Holders.

               Upon the request of the Company accompanied by a resolution of
its Board of Directors authorizing the execution of any such amended or
supplemental indenture, and upon the filing with the Trustee of evidence
reasonably satisfactory to the Trustee of the consent of the Holders of Notes as
aforesaid, and upon receipt by the Trustee of the documents described in Section
9.06 hereof, the Trustee shall join with the Company in the execution of such
amended or supplemental indenture unless such amended or supplemental indenture
affects the Trustee's own rights, duties or immunities under this Indenture or
otherwise, in which case the Trustee may in its sole discretion, but shall not
be obligated to, enter into such amended or supplemental indenture.

               It shall not be necessary for the consent of the Holders under
this Section 9.02 to approve the particular form of any proposed amendment or
waiver, but it shall be sufficient if such consent approves the substance
thereof. The calculation of Holders of Notes so consenting shall be made
pursuant to Section 2.09 hereof.

               After an amendment, supplement or waiver under this Section 9.02
becomes effective, the Company shall mail to the Holders of Notes affected
thereby a notice briefly describing the amendment, supplement or waiver. Any
failure of the Company to mail such notice, or any defect therein, shall not,
however, in any way impair or affect the validity of any such amended or
supplemental indenture or waiver.

               Subject to Sections 6.04 and 6.07 hereof, the Holders of a
majority in aggregate principal amount of the Notes then outstanding may waive
compliance in a particular instance by the Company or a Guarantor with any
provision of this Indenture or the Notes. However, without the written consent
of each Holder affected, an amendment or waiver may not (with respect to any
Notes held by a non-consenting Holder):

               (i) change the Stated Maturity on any Note, or reduce the
        principal amount thereof or the rate (or extend the time for payment) of
        interest thereon or any premium, if any, payable upon the redemption at
        the option of the Company thereof, or change the place of payment where,
        or the coin or currency in which, any Note or any premium or the
        interest thereon is payable, or impair the right to institute suit for
        the enforcement of any such payment on or after the Stated Maturity
        thereof (or, in the case of redemption at the option of the Company, on
        or after the Redemption Date), or reduce the Change of Control Purchase
        Price or alter the provisions (including the defined terms used therein)
        requiring the Company to offer to repurchase the Notes upon a Change of
        Control or




                                       45


        regarding the right of the Company to redeem the Notes in a manner
        adverse to the holders of the Notes, or

               (ii) reduce the percentage in principal amount of the outstanding
        Notes, the consent of whose holders is required for any such amendment,
        supplemental indenture or waiver provided for in the Indenture, or

               (iii) change in any manner materially adverse to the Holders, the
        provisions of Article 10 hereof (and the definitions relating thereto),
        or

               (iv) modify any of the waiver provisions, except to increase any
        required percentage or to provide that certain other provisions of this
        Indenture cannot be modified or waived without the consent of the Holder
        of each outstanding Note affected thereby.

SECTION 9.03          COMPLIANCE WITH TRUST INDENTURE ACT

               Every amendment or supplement to this Indenture or the Notes
shall be set forth in a amended or supplemental indenture that complies with the
TIA as then in effect.

SECTION 9.04          REVOCATION AND EFFECT OF CONSENTS

               Until an amendment, supplement or waiver becomes effective, a
consent to it by a Holder of a Note is a continuing consent by such Holder and
every subsequent Holder of a Note or portion of a Note that evidences the same
debt as the consenting Holder's Note, even if notation of the consent is not
made on any Note. However, any such Holder of a Note or subsequent Holder of a
Note may revoke the consent as to its Note if the Trustee receives written
notice of revocation before the date the waiver, supplement or amendment becomes
effective. An amendment, supplement or waiver becomes effective in accordance
with its terms and thereafter binds every Holder.

SECTION 9.05          NOTATION ON OR EXCHANGE OF NOTES

               The Trustee may place an appropriate notation about an amendment,
supplement or waiver on any Note thereafter authenticated. The Company in
exchange for all Notes may issue and the Trustee shall authenticate new Notes
that reflect the amendment, supplement or waiver.

               Failure to make the appropriate notation or issue a new Note
shall not affect the validity and effect of such amendment, supplement or
waiver.

SECTION 9.06          TRUSTEE TO SIGN AMENDMENTS, ETC.

               The Trustee shall sign any amended or supplemental indenture
authorized pursuant to this Article 9 if the amendment or supplement does not
adversely affect the rights, duties, liabilities or immunities of the Trustee.
The Company may not sign an amendment or supplemental indenture until the Board
of Directors approves it. In executing any amended or supplemental indenture,
the Trustee shall be provided with and (subject to Section 7.01) shall be




                                       46


fully protected in relying upon, an Officers' Certificate and an Opinion of
Counsel stating that the execution of such amended or supplemental indenture is
authorized or permitted by this Indenture and that such supplemental indenture
and this Indenture, as so amended or supplemented, constitute the valid and
binding obligations of the Company and the Guarantors, enforceable against each
of them in accordance with their respective terms (subject to customary and
necessary exceptions) and all conditions precedent have been complied with.


                                   ARTICLE 10
                                  SUBORDINATION

SECTION 10.01         AGREEMENT TO SUBORDINATE

               The Company agrees, and each Holder by accepting a Note agrees,
that the Indebtedness evidenced by the Note is subordinated in right of payment,
to the extent and in the manner provided in this Article 10, to the prior
payment in full in cash or Cash Equivalents of all Obligations in respect of
Senior Indebtedness (whether outstanding on the date hereof or hereafter
created, incurred, assumed or guaranteed), and that the subordination is for the
benefit of the holders of Senior Indebtedness. This Article 10 shall constitute
a continuing offer to all Persons who become holders of, or continue to hold,
Senior Indebtedness, and such provisions are made for the benefit of the holders
of Senior Indebtedness.

SECTION 10.02         LIQUIDATION; DISSOLUTION; BANKRUPTCY

               Upon any distribution of assets of the Company or any Guarantor
upon any dissolution, winding up, total or partial liquidation or reorganization
of the Company or a Guarantor, whether voluntary or involuntary, in bankruptcy,
insolvency, receivership or a similar proceeding or upon assignment for the
benefit of creditors or any marshalling of assets or liabilities:

               (i) the holders of all Senior Indebtedness of the Company or such
        Guarantor, as applicable, will first be entitled to receive payment in
        full in cash or Cash Equivalents (or have such payment duly provided
        for) or otherwise to the extent such holders accept satisfaction of
        amounts due by settlement in other than cash or Cash Equivalents before
        the holders of the Notes are entitled to receive any payment on account
        of any Obligation in respect of the Notes, including the principal of,
        premium, if any, and interest on the Notes (other than Junior
        Securities) and

               (ii) any payment or distribution of assets of the Company or such
        Guarantor of any kind or character from any source, whether in cash,
        property or securities (other than Junior Securities) to which the
        holders of the Notes or the Trustee on behalf of such holders would be
        entitled (by set-off or otherwise), except for the subordination
        provisions contained in this Indenture, will be paid by the liquidating
        trustee or agent or other person making such a payment or distribution
        directly to the holders of such Senior Indebtedness or their
        representative to the extent necessary to make payment in full (or have
        such payment duly provided for) on all such Senior Indebtedness
        remaining unpaid, after giving effect to any concurrent payment or
        distribution to the holders of such Senior Indebtedness.




                                       47


SECTION 10.03         DEFAULT ON SENIOR INDEBTEDNESS

               No payment (by set-off or otherwise) may be made by or on behalf
of the Company or a Guarantor, as applicable, on account of any Obligation in
respect of the Notes, including the principal of, premium, if any, or interest
on the Notes (including any repurchases of Notes), or on account of the
redemption provisions of the Notes for cash or property (other than Junior
Securities), (i) upon the maturity of any Senior Indebtedness of the Company or
such Guarantor by lapse of time, acceleration (unless waived) or otherwise,
unless and until all principal of, premium, if any, and the interest on such
Senior Indebtedness are first paid in full in cash or Cash Equivalents (or such
payment is duly provided for) or otherwise to the extent holders accept
satisfaction of amounts due by settlement in other than cash or Cash
Equivalents, or (ii) in the event of default in the payment of any principal of,
premium, if any, or interest on Senior Indebtedness of the Company or such
Guarantor when it becomes due and payable, whether at maturity or at a date
fixed for prepayment or by declaration or otherwise (a "Payment Default"),
unless and until such Payment Default has been cured or waived or otherwise has
ceased to exist.

               Upon (i) the happening of an event of default other than a
Payment Default that permits the holders of Senior Indebtedness to declare such
Senior Indebtedness to be due and payable and (ii) written notice of such event
of default given to the Company and the Trustee by the holders of an aggregate
of at least $10.0 million principal amount outstanding of any Senior
Indebtedness or their Representative (a "Payment Notice"), then, unless and
until such event of default has been cured or waived or otherwise has ceased to
exist, no payment (by set-off or otherwise) may be made by or on behalf of the
Company or any Guarantor which is an obligor under such Senior Indebtedness on
account of any Obligation in respect of the Notes, including the principal of,
premium, if any, or interest on the Notes, (including any repurchases of any of
the Notes), or on account of the redemption provisions of the Notes, in any such
case, other than payments made with Junior Securities. Notwithstanding the
foregoing, unless the Senior Indebtedness in respect of which such event of
default exists has been declared due and payable in its entirety within 179 days
after the Payment Notice is delivered as set forth above (the "Payment Blockage
Period") (and such declaration has not been rescinded or waived), at the end of
the Payment Blockage Period, the Company and the Guarantors shall be required to
pay all sums not paid to the holders of the Notes during the Payment Blockage
Period due to the foregoing prohibitions and to resume all other payments as and
when due on the Notes. Any number of Payment Notices may be given; provided,
however, that (i) not more than one Payment Notice shall be given within a
period of any 360 consecutive days, and (ii) no default that existed upon the
date of such Payment Notice or the commencement of such Payment Blockage Period
(whether or not such event of default is on the same issue of Senior
Indebtedness) shall be made the basis for the commencement of any other Payment
Blockage Period (it being acknowledged that any subsequent action, or any
subsequent breach of any financial covenant for a period commencing after the
expiration of such Payment Blockage Period that, in either case, would give rise
to a new event of default, even though it is an event that would also have been
a separate breach pursuant to any provision under which a prior event of default
previously existed, shall constitute a new event of default for this purpose).




                                       48


SECTION 10.04         ACCELERATION OF NOTES

               If payment of the Notes is accelerated because of an Event of
Default, the Company shall promptly notify holders of Senior Indebtedness of the
acceleration.

SECTION 10.05         WHEN DISTRIBUTION MUST BE PAID OVER

               In the event that the Trustee or any Holder receives any payment
or distribution of assets of the Company or any Guarantor (other than Junior
Securities) at a time when the Trustee or such Holder, as applicable, has actual
knowledge that such payment is prohibited by Section 10.03 hereof, such payment
or distribution shall be held in trust for the benefit of the holders of such
Senior Indebtedness, and shall be paid or delivered by the Trustee or the
Holders of the Notes, as the case may be, to the holders of such Senior
Indebtedness remaining unpaid or unprovided for or to their Representative or
Representatives ratably according to the aggregate principal amounts remaining
unpaid on account of such Senior Indebtedness held or represented by each, for
application to the payment of all such Senior Indebtedness remaining unpaid, to
the extent necessary to pay or to provide for the payment of all such Senior
Indebtedness in full in cash or Cash Equivalents or otherwise to the extent
holders accept satisfaction of amounts due by settlement in other than cash or
Cash Equivalents after giving effect to any concurrent payment or distribution
to the holders of such Senior Indebtedness.

               With respect to the holders of Senior Indebtedness, the Trustee
undertakes to perform only such obligations on the part of the Trustee as are
specifically set forth in this Article 10, and no implied covenants or
obligations with respect to the holders of Senior Indebtedness shall be read
into this Indenture against the Trustee. The Trustee shall not be deemed to owe
any fiduciary duty to the holders of Senior Indebtedness and shall not be liable
to any such holders if the Trustee shall pay over or distribute to or on behalf
of Holders or the Company or any other Person money or assets to which any
holders of Senior Indebtedness shall be entitled by virtue of this Article 10,
except if such payment is made as a result of the willful misconduct or gross
negligence of the Trustee.

SECTION 10.06         NOTICE BY COMPANY

               The Company shall promptly notify in writing the Trustee and the
Paying Agent of any facts known to the Company that would cause a payment of any
Obligations with respect to the Notes to violate this Article 10, but failure to
give such notice shall not affect the subordination of the Notes to the Senior
Indebtedness as provided in this Article 10.

SECTION 10.07         SUBROGATION

               After all Senior Indebtedness is paid in full and until the Notes
are paid in full, Holders shall be subrogated (equally and ratably with all
other Indebtedness pari passu with the Notes) to the rights of holders of Senior
Indebtedness to receive distributions applicable to Senior Indebtedness to the
extent that distributions otherwise payable to the Holders have been applied to
the payment of Senior Indebtedness. A distribution made under this Article 10 to
holders of Senior Indebtedness that otherwise would have been made to Holders is
not, as between the Company and Holders, a payment by the Company on the Notes.




                                       49


SECTION 10.08         RELATIVE RIGHTS

               This Article 10 defines the relative rights of Holders and
holders of Senior Indebtedness. Nothing in this Indenture shall:

                     (1) impair, as between the Company, the Guarantors and
        Holders, the obligation of the Company and the Guarantors, which is
        absolute and unconditional, to pay, when due, principal of, premium, if
        any, and interest on the Notes in accordance with their terms;

                      (2) affect the relative rights of Holders and creditors of
        the Company other than their rights in relation to holders of Senior
        Indebtedness; or

                     (3) prevent the occurrence of any Default or Event of
        Default under this Indenture or limit the Trustee or any Holder from
        exercising its available remedies upon a Default or Event of Default,
        subject to the rights of holders and owners of Senior Indebtedness to
        receive distributions and payments otherwise payable to Holders.

               If the Company fails because of this Article 10 to pay principal
of or interest on a Note on the due date, the failure is still a Default or
Event of Default.

SECTION 10.09         SUBORDINATION MAY NOT BE IMPAIRED BY COMPANY

               No right of any holder of Senior Indebtedness to enforce the
subordination of the Indebtedness evidenced by the Notes shall be impaired by
any act or failure to act by the Company or any Holder or by the failure of the
Company or a Guarantor, as applicable, or any Holder to comply with this
Indenture.

SECTION 10.10         DISTRIBUTION OR NOTICE TO REPRESENTATIVE

               Whenever a distribution is to be made or a notice given to
holders of Senior Indebtedness, the distribution may be made and the notice
given to their Representative. The Company shall provide to the Trustee, in
writing, notice of the name and address of any Representative. In the absence of
such a notice, the Trustee may conclusively assume that no Representative
exists.

               Upon any payment or distribution of assets of the Company
referred to in this Article 10, the Trustee and the Holders shall be entitled to
rely upon any order or decree made by any court of competent jurisdiction or
upon any certificate of such Representative or of the liquidating trustee or
agent or other Person making any distribution to the Trustee or to the Holders
for the purpose of ascertaining the Persons entitled to participate in such
distribution, the holders of the Senior Indebtedness and other Indebtedness of
the Company, the amount thereof or payable thereon, the amount or amounts paid
or distributed thereon and all other facts pertinent thereto or to this Article
10.




                                       50



SECTION 10.11         RIGHTS OF TRUSTEE AND PAYING AGENT

               Notwithstanding the provisions of this Article 10 or any other
provision of this Indenture, the Trustee shall not be charged with knowledge of
the existence of any facts that would prohibit the making of any payment or
distribution by the Trustee, and the Trustee and the Paying Agent may continue
to make payments on the Notes, unless the Trustee shall have received at the
Corporate Trust Administration Office of the Trustee at least five Business Days
prior to the date of such payment written notice (which may be via facsimile) of
facts that would cause the payment of any Obligations with respect to the Notes
to violate this Article 10. Only the Company or a Representative of Senior
Indebtedness previously identified by the Company to the Trustee pursuant to
Section 10.10 may give the notice. Nothing in this Article 10 shall impair the
claims of, or payments to, the Trustee under or pursuant to Section 7.07 hereof.

               The Trustee in its individual or any other capacity may hold
Senior Indebtedness with the same rights it would have if it were not Trustee.
Any Agent may do the same with like rights. Any Holder or any Affiliate of any
Holder may hold Senior Indebtedness with the same rights it would have if it
were not a Holder or an Affiliate of a Holder.

SECTION 10.12         AUTHORIZATION TO EFFECT SUBORDINATION

               Each Holder of a Note by the Holder's acceptance thereof
authorizes and directs the Trustee on the Holder's behalf to take such action as
may be necessary or appropriate to effectuate the subordination as provided in
this Article 10, and appoints the Trustee to act as the Holder's
attorney-in-fact for any and all such purposes. If the Trustee does not file a
proper proof of claim or proof of debt in the form required in any proceeding
referred to in Section 6.09 hereof at least 30 days before the expiration of the
time to file such claim, the Representative is hereby authorized to file an
appropriate claim for and on behalf of the Holders of the Notes.

SECTION 10.13         AMENDMENTS

               The provisions of this Article 10 shall not be amended or
modified in a manner materially adverse to the holders of Senior Indebtedness
without the written consent of the Representative or Representatives of all
holders of Senior Indebtedness.


                                   ARTICLE 11
                              SUBSIDIARY GUARANTEES

SECTION 11.01         SUBSIDIARY GUARANTEES

               Subject to the provisions of this Article 11, by its execution
hereof, each Guarantor, jointly and severally, hereby unconditionally guarantees
to each Holder of a Note authenticated and delivered by the Trustee and to the
Trustee and its successors and assigns, that: (a) the principal of, and premium,
if any, and interest on the Notes will be duly and punctually paid in full when
due, whether at maturity, by acceleration, upon a Change in Control or
otherwise, and interest on overdue principal of, and premium, if any, and (to
the extent permitted by law) interest on any interest, if any, on the Notes and
all other obligations of the Company to the Holders or the Trustee hereunder or
under the Notes (including fees, expenses or other) will be promptly paid in
full or performed, all in accordance with the terms hereof; and (b) in case of




                                       51


any extension of time of payment or renewal of any Notes or any of such other
obligations, the same will be promptly paid in full when due or performed in
accordance with the terms of the extension or renewal, whether at stated
maturity, by acceleration or otherwise. Failing payment when due of any amount
so guaranteed or failing performance of any other obligation of the Company to
the Holders, for whatever reason, each Guarantor will be obligated to pay, or to
perform or to cause the performance of, the same immediately. An Event of
Default under this Indenture or the Notes shall constitute an event of default
under this Subsidiary Guarantee, and shall entitle the Holders of Notes to
accelerate the obligations of each Guarantor hereunder in the same manner and to
the same extent as the obligations of the Company. Each Guarantor hereby agrees
that its obligations hereunder shall be unconditional, irrespective of the
validity, regularity or enforceability of the Notes or this Indenture, the
absence of any action to enforce the same, any waiver or consent by any Holder
of the Notes with respect to any thereof, the entry of any judgment against the
Company, any action to enforce the same or any other circumstance which might
otherwise constitute a legal or equitable discharge or defense of a Guarantor.
Each Guarantor hereby waives and relinquishes: (a) any right to require the
Trustee, the Holders or the Company (each, a "Benefitted Party") to proceed
against the Company, the Subsidiaries or any other Person or to proceed against
or exhaust any security held by a Benefitted Party at any time or to pursue any
other remedy in any secured party's power before proceeding against the
Guarantors; (b) any defense that may arise by reason of the incapacity, lack of
authority, death or disability of any other Person or Persons or the failure of
a Benefitted Party to file or enforce a claim against the estate (in
administration, bankruptcy or any other proceeding) of any other Person or
Persons; (c) demand, protest and notice of any kind (except as expressly
required by this Indenture), including but not limited to notice of the
existence, creation or incurring of any new or additional Indebtedness or
obligation or of any action or non-action on the part of the Guarantors, the
Company, the Subsidiaries, any Benefitted Party, any creditor of the Guarantors,
the Company or the Subsidiaries or on the part of any other Person whomsoever in
connection with any obligations the performance of which are hereby guaranteed;
(d) any defense based upon an election of remedies by a Benefitted Party,
including but not limited to an election to proceed against the Guarantors for
reimbursement; (e) any defense based upon any statute or rule of law which
provides that the obligation of a surety must be neither larger in amount nor in
other respects more burdensome than that of the principal; (f) any defense
arising because of a Benefitted Party's election, in any proceeding instituted
under Bankruptcy Law, of the application of Section 1111(b)(2) of the United
States Federal Bankruptcy Code; and (g) any defense based on any borrowing or
grant of a security interest under Section 364 of the Bankruptcy Code. The
Guarantors hereby covenant that the Subsidiary Guarantee will not be discharged
except by payment in full of all principal, premium, if any, and interest on the
Notes and all other costs provided for under this Indenture, or as provided in
Section 8.01.

               If any Holder or the Trustee is required by any court or
otherwise to return to either the Company or the Guarantors, or any trustee or
similar official acting in relation to either the Company or the Guarantors, any
amount paid by the Company or the Guarantors to the Trustee or such Holder, the
Subsidiary Guarantees, to the extent theretofore discharged, shall be reinstated
in full force and effect. Each of the Guarantors agrees that it will not be
entitled to any right of subrogation in relation to the Holders in respect of
any obligations guaranteed hereby until payment in full of all obligations
guaranteed hereby. Each Guarantor agrees that, as between it, on the one hand,
and the Holders of Notes and the Trustee, on the other hand, (x) the maturity of
the obligations guaranteed hereby may be accelerated as provided in Article 6
hereof




                                       52


for the purposes hereof, notwithstanding any stay, injunction or other
prohibition preventing such acceleration in respect of the obligations
guaranteed hereby, and (y) in the event of any acceleration of such obligations
as provided in Article 6 hereof, such obligations (whether or not due and
payable) shall forthwith become due and payable by such Guarantor for the
purpose of the Subsidiary Guarantee.

SECTION 11.02         EXECUTION AND DELIVERY OF SUBSIDIARY GUARANTEES

               To evidence the Subsidiary Guarantees set forth in Section 11.01
hereof, each of the Guarantors agrees that a notation of the Subsidiary
Guarantees substantially in the form included in Exhibit B shall be endorsed on
each Note authenticated and delivered by the Trustee and that this Indenture
shall be executed on behalf of each Guarantor by the Chairman of the Board, any
Vice Chairman, the President or one of the Vice Presidents of such Guarantor and
attested to by any other Officer thereof.

               Each of the Guarantors agree that the Subsidiary Guarantees set
forth in this Article 11 will remain in full force and effect and apply to all
the Notes notwithstanding any failure to endorse on each Note a notation of the
Subsidiary Guarantees.

               If an Officer whose facsimile signature is on a Note no longer
holds that office at the time the Trustee authenticates the Note on which the
Subsidiary Guarantees are endorsed, the Subsidiary Guarantees shall be valid
nevertheless.

               The delivery of any Note by the Trustee, after the authentication
thereof hereunder, shall constitute due delivery of the Subsidiary Guarantees
set forth in this Indenture on behalf of the Guarantors.

SECTION 11.03         GUARANTORS MAY CONSOLIDATE, ETC., ON CERTAIN TERMS

               (a) Nothing contained in this Indenture or in the Notes shall
prevent any consolidation or merger of a Guarantor with or into the Company or
another Guarantor, or shall prevent the transfer of all of the assets of a
Guarantor to the Company or another Guarantor. Upon any such consolidation,
merger, transfer or sale, the Subsidiary Guarantee of such Guarantor shall no
longer have any force or effect.

               (b) Except as set forth in paragraph (a) of this Section 11.03,
no Guarantor may consolidate or merge with or into (whether or not such
Guarantor is the surviving Person) another Person or, directly or indirectly,
sell, lease, convey or transfer all or substantially all of its assets (computed
on a consolidated basis), whether in a single transaction or a series of
transactions, to another Person or group of affiliated Persons unless (i) the
Person formed by or surviving any such consolidation or merger (if other than
such Guarantor) is a corporation organized under the laws of the United States,
any state thereof or the District of Columbia and expressly assumes all the
obligations of such Guarantor pursuant to a supplemental indenture in form
reasonably satisfactory to the Trustee pursuant to which such person shall
unconditionally assume all of such Guarantor's obligations under such
Guarantor's Guarantee, on the terms set forth under this Indenture; and (ii)
immediately before and immediately after giving effect to such transaction on a
pro forma basis, no Default or Event of Default shall have occurred or be
continuing. In case of any such consolidation, merger or transfer of assets and
upon the




                                       53


assumption by the successor corporation, by supplemental indenture, executed and
delivered to the Trustee and reasonably satisfactory in form to the Trustee, of
the Subsidiary Guarantee endorsed upon the Notes and the due and punctual
performance of all of the covenants and conditions of this Indenture to be
performed by such Guarantor, such successor corporation shall succeed to and be
substituted for such Guarantor with the same effect as if it had been named
herein as a Guarantor. Such successor corporation thereupon may cause to be
signed any or all of the Subsidiary Guarantees to be endorsed upon all of the
Notes issuable hereunder which theretofore shall not have been signed by the
Company and delivered to the Trustee. All the Subsidiary Guarantees so issued
shall in all respects have the same legal rank and benefit under this Indenture
as the Subsidiary Guarantees theretofore and thereafter issued in accordance
with the terms of this Indenture as though all of such Subsidiary Guarantees had
been issued at the date of the execution hereof.

               (c) The Trustee, subject to the provisions of Section 12.04
hereof, shall be entitled to receive an Officers' Certificate as conclusive
evidence that any such consolidation, merger, sale or conveyance, and any such
assumption of Obligations, comply with the provisions of this Section 11.03.
Such certificate shall comply with the provisions of Section 12.05.

SECTION 11.04         RELEASES FOLLOWING SALE OF ASSETS

               Upon the sale or disposition (whether by merger, stock purchase,
asset sale or otherwise) of a Guarantor of all of its assets to an entity which
is not a Guarantor, which transaction is otherwise in compliance with this
Indenture (including, without limitation, the provisions of Section 11.03), such
Guarantor shall be deemed released from its obligations under its Guarantee of
the Notes or Section 11.03 hereof, as the case may be; provided, however, that
any such termination shall occur only in the event that all obligations of such
Guarantor under all of its Guarantees of, and under all of its pledges of assets
or other security interests which secure, any Indebtedness of the Company or any
other Subsidiary of the Company shall also terminate upon such release, sale or
transfer. Upon delivery by the Company to the Trustee of an Officers'
Certificate and Opinion of Counsel, each to the effect that such sale or other
disposition was made by the Company in accordance with the provisions of this
Indenture, the Trustee shall execute any documents reasonably required in order
to evidence the release of any such Guarantor from its obligations under its
Subsidiary Guarantee. Any Guarantor not released from its obligations under its
Subsidiary Guarantee shall remain liable for the full amount of principal of,
premium, if any, and interest on the Notes and for the other obligations of any
Guarantor under this Indenture as provided in this Article 11.

SECTION 11.05         LIMITATION OF GUARANTOR'S LIABILITY

               Each Guarantor, and by its acceptance hereof each Holder, hereby
confirms that it is the intention of all such parties that the guarantee by such
Guarantor pursuant to its Subsidiary Guarantee not constitute a fraudulent
transfer or conveyance for purposes of Bankruptcy Law, the Uniform Fraudulent
Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or
state law. To effectuate the foregoing intention, the Holders and such Guarantor
hereby irrevocably agree that the obligations of such Guarantor under this
Article 11 shall be limited to the maximum amount as will, after giving effect
to all other contingent and fixed liabilities of such Guarantor and after giving
effect to any collections from or payments made by




                                       54


or on behalf of any other Guarantor in respect of the Obligations of such other
Guarantor under this Article 11, result in the Obligations of such Guarantor
under the Subsidiary Guarantee of such Guarantor not constituting a fraudulent
transfer or conveyance.

SECTION 11.06         APPLICATION OF CERTAIN TERMS AND PROVISIONS
                      TO THE GUARANTOR

               (a) For purposes of any provision of this Indenture which
provides for the delivery by any Guarantor of an Officers' Certificate and/or an
Opinion of Counsel, the definitions of such terms in Section 1.01 shall apply to
such Guarantor as if references therein to the Company were references to such
Guarantor.

               (b) Any request, direction, order or demand which by any
provision of this Indenture is to be made by any Guarantor, shall be sufficient
if evidenced as described in Section 12.02 as if references therein to the
Company were references to such Guarantor.

               (c) Any notice or demand which by any provision of this Indenture
is required or permitted to be given or served by the Trustee or by the Holders
to or on any Guarantor may be given or served as described in Section 12.02 as
if references therein to the Company were references to such Guarantor.

               (d) Upon any demand, request or application by any Guarantor to
the Trustee to take any action under this Indenture, such Guarantor shall
furnish to the Trustee such certificates and opinions as are required in Section
12.04 hereof as if all references therein to the Company were references to such
Guarantor.

SECTION 11.07         SUBORDINATION OF SUBSIDIARY GUARANTEES

               The Obligations of each Guarantor under its Subsidiary Guarantee
pursuant to this Article 11 shall be junior and subordinated to all obligations
in respect of the Senior Indebtedness of such Guarantor on the same basis as the
Notes are junior and subordinated to all obligations in respect of the Senior
Indebtedness of the Company. For the purposes of the foregoing sentence, (a)
each Guarantor may make, and the Trustee and the Holders of the Notes shall have
the right to receive and/or retain, payments by any of the Guarantors only at
such times as they may receive and/or retain payments in respect of the Notes
pursuant to this Indenture, including Article 10 hereof, and (b) the rights and
obligations of the relevant parties relative to the Subsidiary Guarantees shall
be the same as their respective rights and obligations relative to the Notes and
Senior Indebtedness of the Company pursuant to Article 10.


                                   ARTICLE 12
                                  MISCELLANEOUS

SECTION 12.01         TRUST INDENTURE ACT CONTROLS

               If any provision of this Indenture limits, qualifies or conflicts
with the duties imposed by TIA ss. 318(c), the imposed duties shall control.




                                       55


SECTION 12.02         NOTICES

               Any notice or communication by the Company or the Trustee to the
other is duly given if in writing and delivered in person or mailed by first
class mail (registered or certified, return receipt requested, postage prepaid),
telecopier or overnight air courier guaranteeing next day delivery, to the
other's address:

               If to the Company:       Pacific Aerospace & Electronics, Inc.
                                        430 Olds Station Road
                                        Wenatchee, Washington 98801
                                        Telephone No.: (509) 667-9600
                                        Telecopier No.: (509) 667-9696
                                        Attention: President

               If to the Trustee:       U.S. Bank National Association
                                        180 East Fifth Street
                                        EP-MN-T2CT
                                        St. Paul, Minnesota 55101
                                        Telephone No.: (651) 244-8677
                                        Telecopier No.: (651) 244-0711
                                        Attention:  Frank P. Leslie III

               The Company or the Trustee, by notice to the other may designate
additional or different addresses for subsequent notices or communications.

               All notices and communications (other than those sent to Holders)
shall be deemed to have been duly given: at the time delivered by hand, if
personally delivered; when receipt acknowledged, if telecopied; and the next
Business Day after timely delivery to the courier, if sent by overnight air
courier guaranteeing next day delivery.

               Any notice or communication to a Holder shall be mailed by first
class mail, certified or registered, return receipt requested, or by overnight
air courier guaranteeing next day delivery to its address shown on the register
kept by the Registrar. Any notice or communication shall also be so mailed to
any Person described in TIA ss. 313(c), to the extent required by the TIA.
Failure to mail a notice or communication to a Holder or any defect in it shall
not affect its sufficiency with respect to other Holders.

               If a notice or communication is mailed in the manner provided
above within the time prescribed, it is duly given, whether or not the addressee
receives it.

               If the Company mails a notice or communication to Holders, it
shall mail a copy to the Trustee and each Agent at the same time. If the Trustee
or an Agent mails a notice or communication to Holders, it shall mail a copy to
the Company at the same time.




                                       56


SECTION 12.03         COMMUNICATION BY HOLDERS OF NOTES WITH OTHER
                      HOLDERS OF NOTES

               Holders may communicate pursuant to TIA ss. 312(b) with other
Holders with respect to their rights under this Indenture or the Notes. The
Company, the Trustee, the Registrar and any other relevant Person shall have the
protection of TIA ss. 312(c).

SECTION 12.04         CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT

               Upon any request or application by the Company to the Trustee to
take any action under this Indenture, the Company shall furnish to the Trustee:

               (a) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set forth in
Section 12.05 hereof) stating that, in the opinion of the signers, all
conditions precedent and covenants, if any, provided for in this Indenture
relating to the proposed action have been satisfied; and

               (b) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of such counsel, all
such conditions precedent and covenants have been satisfied.

SECTION 12.05         STATEMENTS REQUIRED IN CERTIFICATE OR OPINION

               Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (other than a certificate
provided pursuant to TIA ss. 314(a)(4)) shall comply with the provisions of TIA
ss. 314(e) and shall include:

               (a) a statement that the Person making such certificate or
opinion has read such covenant or condition;

               (b) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions contained in
such certificate or opinion are based;

               (c) a statement that, in the opinion of such Person, he or she
has made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such covenant or condition has
been satisfied; and

               (d) a statement as to whether or not, in the opinion of such
Person, such condition or covenant has been satisfied.

SECTION 12.06         RULES BY TRUSTEE AND AGENTS

               The Trustee may make reasonable rules for action by or at a
meeting of Holders. The Registrar or Paying Agent may make reasonable rules and
set reasonable requirements for its functions.




                                       57


SECTION 12.07         NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS,
                      EMPLOYEES AND SHAREHOLDERS

               No direct or indirect shareholder, employee, officer or director,
as such, past, present or future of the Company, the Guarantors or any successor
entity shall have any personal liability in respect of the Obligations of the
Company or the Guarantors under this Indenture or the Notes solely by reason of
his or its status as such shareholder, employee, officer or director, except
that this provision shall in no way limit the Obligation of any Guarantor
pursuant to any guarantee of the Notes.

SECTION 12.08         GOVERNING LAW

               THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE
USED TO CONSTRUE THIS INDENTURE, THE NOTES AND THE SUBSIDIARY GUARANTEES,
WITHOUT REGARD TO THE CONFLICTS OF LAWS PROVISIONS THEREOF TO THE EXTENT THAT
THE APPLICATION OF THE LAW OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. IF
ANY ACTION OR PROCEEDING SHALL BE BROUGHT BY A HOLDER OF ANY OF THE NOTES OR BY
THE TRUSTEE IN ORDER TO ENFORCE ANY RIGHT OR REMEDY UNDER THIS INDENTURE OR
UNDER THE NOTES, THE COMPANY AND THE GUARANTORS HEREBY CONSENT AND WILL SUBMIT
TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK SITTING IN THE CITY
OF NEW YORK OR ANY FEDERAL COURT SITTING IN THE CITY OF NEW YORK. THE COMPANY
AND THE GUARANTORS HEREBY AGREE TO ACCEPT SERVICE OF PROCESS BY NOTICE GIVEN TO
THE COMPANY PURSUANT TO THE PROVISIONS OF SECTION 12.02.

SECTION 12.09         NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS

               This Indenture may not be used to interpret any other indenture,
loan or debt agreement of the Company or its Subsidiaries or of any other
Person. Any such indenture, loan or debt agreement may not be used to interpret
this Indenture.

SECTION 12.10         SUCCESSORS

               All agreements of the Company in this Indenture and the Notes
shall bind its successors. All agreements of the Trustee in this Indenture shall
bind its successors.

SECTION 12.11         SEVERABILITY

               In case any provision in this Indenture or in the Notes shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.

SECTION 12.12         COUNTERPART ORIGINALS

               The parties may sign any number of copies of this Indenture. Each
signed copy shall be an original, but all of them together represent the same
agreement.




                                       58


SECTION 12.13         TABLE OF CONTENTS, HEADINGS, ETC.

               The Table of Contents, Cross-Reference Table and headings of the
Articles and Sections of this Indenture have been inserted for convenience of
reference only, are not to be considered a part of this Indenture and shall in
no way modify or restrict any of the terms or provisions hereof.



                         [Signatures on following pages]





                                       59


               IN WITNESS WHEREOF, each of the parties have executed this
Indenture as of the date first written above.

                                     THE COMPANY:

                                     PACIFIC AEROSPACE & ELECTRONICS, INC.




                                     By:  /s/ Donald Wright
                                          --------------------------------
                                           Donald Wright
                                           Chief Executive Officer and President

                                     THE GUARANTORS:

                                     AEROMET AMERICA, INC.



                                     By:  /s/ Donald Wright
                                          --------------------------------
                                           Donald A. Wright
                                           Executive Vice President



                                     BALO PRECISION PARTS, INC.



                                     By:  /s/ Donald Wright
                                          --------------------------------
                                            Donald Wright
                                            Executive Vice President



                                     CASHMERE MANUFACTURING CO., INC.



                                     By:  /s/ Donald Wright
                                          --------------------------------
                                            Donald Wright
                                            Executive Vice President




                                     CERAMIC DEVICES, INC.



                                     By:  /s/ Donald Wright
                                          --------------------------------
                                            Donald Wright
                                            Executive Vice President



                                     ELECTRONIC SPECIALTY CORPORATION



                                     By:  /s/ Donald Wright
                                          --------------------------------
                                            Donald Wright
                                            Executive Vice President



                                     NORTHWEST TECHNICAL INDUSTRIES, INC.



                                     By:  /s/ Donald Wright
                                          --------------------------------
                                            Donald Wright
                                            Executive Vice President



                                     PACIFIC COAST TECHNOLOGIES, INC.



                                     By:  /s/ Donald Wright
                                          --------------------------------
                                            Donald Wright
                                            Executive Vice President



                                     SEISMIC SAFETY PRODUCTS, INC.


                                     By:  /s/ Donald Wright
                                          --------------------------------
                                            Donald Wright
                                            Executive Vice President





                                     PA&E INTERNATIONAL, INC.


                                     By:  /s/ Donald Wright
                                         _______________________________________
                                            Donald Wright
                                            President




                                     THE TRUSTEE:

                                     U. S. BANK NATIONAL ASSOCIATION



                                     By:    /s/ Frank P. Leslie, III
                                        _______________________________________
                                            Name:  Frank P. Leslie, III
                                            Title: Vice President




                             CROSS-REFERENCE TABLE*





                   Trust Indenture
                     Act Section                        Indenture Section
                   ---------------                      -----------------
                                                     
                 310(a)(1)                                   7.10
                    (a)(2)                                   7.10
                    (a)(3)                                   N.A.
                    (a)(4)                                   N.A.
                    (b)                                      7.08; 7.10; 12.02
                    (c)                                      N.A.
                 311(a)                                      7.11
                    (b)                                      7.11
                    (c)                                      N.A.
                 312(a)                                      2.05
                    (b)                                      12.03
                    (c)                                      12.03
                 313(a)                                      7.06
                    (b)(1)                                   N.A.
                    (b)(2)                                   7.06
                    (c)                                      7.06; 12.02
                    (d)                                      7.06
                 314(a)                                      4.08; 12.02
                    (b)                                      N.A.
                    (c)(1)                                   12.04
                    (c)(2)                                   7.02; 12.04
                    (c)(3)                                   N.A.
                    (d)                                      N.A.
                    (e)                                      12.05
                    (f)                                      N.A.
                 315(a)                                      7.01(b)
                    (b)                                      7.05; 12.02
                    (c)                                      7.01(a)
                    (d)                                      7.01(c)
                    (e)                                      6.11
                 316(a)(last sentence)                       2.09
                    (a)(1)(A)                                6.05
                    (a)(1)(B)                                6.04
                    (a)(2)                                   N.A.
                    (b)                                      6.07
                 317(a)(1)                                   6.08
                    (a)(2)                                   6.09
                    (b)                                      2.04
                 318(a)                                      12.01



- ---------------------
N.A. means not applicable.
*This Cross-Reference Table is not part of the Indenture.

                                                                     SCHEDULE I

                      INVESTMENTS IN FOREIGN SUBSIDIARIES


                      Pacific Aerospace & Electronics, Inc.
                       Investments in Foreign Subsidiaries
                             as of January 31, 2001



                                                      Common     Intercompany     Total
                                                      Stock       Investments   Investment
                                                    ----------   ------------   ----------
                                                                       
Subsidiary

    PA&E International, Inc.                        33,709,232                  33,709,232
                                                    ----------                  ----------

    Total investment in foreign subsidiaries        33,709,232                  33,709,232


    Intercompany investments change on a daily basis due to PA&E's cash
    management system which transfers funds to and from subsidiaries as needed.


                                                                       EXHIBIT A


                                  FORM OF NOTE
                               [FILED SEPARATELY]

                                                                      EXHIBIT B


                          FORM OF SUBSIDIARY GUARANTEE
                               [FILED SEPARATELY]

                                                                       EXHIBIT C



                                EXCLUDED PERSONS


GSCP Recovery, Inc.

GSC Recovery II, L.P.

William E. Simon & Sons Special Situation Partners II, L.P.

M.W. Post Advisory Group L.L.C.

Alliance Capital Management L.P.

HBK Master Fund L.P.

EX-10.1

                                                                    EXHIBIT 10.1

                                    CONSENT

            THIS CONSENT (the "Consent") is made and given as of March 18, 2002
by KeyBank National Association ("KeyBank") in favor of Pacific Aerospace &
Electronics, Inc. (the "Company") and Pacific Coast Technologies, Inc. ("PCT").
Reference is made to that certain Deed of Trust dated as of September 30, 1998
in favor of KeyBank and recorded in the official records of Chelan County as
Auditor's No. 2037983 (the "Deed of Trust"), pursuant to which the Company
granted KeyBank a security interest in certain real property located in
Wenatchee, Washington (the "Property").

                                    RECITALS

            WHEREAS, the Company executed a Promissory Note (Loan No. 9002)
dated as of September 30, 1998 in the amount of $1,200,000 in favor of KeyBank
(the "Promissory Note") and in connection with the Promissory Note, the Company
executed the Deed of Trust in favor of KeyBank;

            WHEREAS, the Company executed a Promissory Note (Loan No. 9001)
dated as of March 18, 1998 in the amount of $712,086 in favor of KeyBank, and in
connection with such promissory note, the Company, PCT and KeyBank entered into
a Commercial Security Agreement dated as of March 18, 1998 (the "KeyBank
Security Agreement");

            WHEREAS, in connection with the Note Purchase Agreement (the "Note
Purchase Agreement") to be entered into by and among the Company, Jefferies &
Company, Inc. and First Union National Bank, as collateral agent (the
"Collateral Agent"), the Company and certain of its subsidiaries intend to
execute a Deed of Trust, Security Agreement and Fixture Filing with Assignment
of Rents (the "Junior Deed of Trust") in favor of the Collateral Agent for the
benefit of the Secured Parties (as defined in that certain Security Agreement to
be entered into by and among the Company, certain of its subsidiaries and the
Collateral Agent (the "Security Agreement")), pursuant to which the Company will
grant a junior security interest in the Property to the Collateral Agent (for
the benefit of the Secured Parties);

            WHEREAS, pursuant to the Deed of Trust, the Company must obtain
KeyBank's consent prior to granting any security interest in the Property; and

            WHEREAS, pursuant to the KeyBank Security Agreement, PCT must obtain
KeyBank's consent prior to entering into the Security Agreement and the
Subsidiary Guaranty Agreement to be made in favor of the Holders (as defined
therein) and the Collateral Agent (the "Subsidiary Guaranty").

            NOW, THEREFORE, in consideration of the foregoing and subject to the
terms and conditions set forth herein, KeyBank hereby agrees as follows:

            1. KeyBank hereby consents to (i) the granting by the Company of a
second priority, perfected security interest and mortgage in the Property in
favor of the Collateral Agent (for the benefit of the Secured Parties) pursuant
to the Junior Deed of Trust, which security




interest shall be junior to KeyBank's existing security interest in the
Property, (ii) the recording of the Junior Deed of Trust in the real property
records of Chelan County and (iii) the entering into the Note Purchase
Agreement, the Subsidiary Guaranty, and the Collateral Documents (as defined in
the Note Purchase Agreement) by the Company and certain of its subsidiaries, as
applicable, and the transactions contemplated therein.

            2. Miscellaneous.

                  a. This Consent shall be construed in accordance with the laws
of the state of Washington, without regard to principles of conflicts of law
thereof.

                  b. This Consent shall bind the legal and equitable successors
and assigns of KeyBank, including any that occur by operation of law.




            IN WITNESS WHEREOF, KeyBank has issued this Consent executed as of
the date and year first written above.

                                            KEYBANK NATIONAL ASSOCIATION



                                            By:   /s/ Monty D. Sampson
                                                 ------------------------------
                                                 Name:  Monty D. Sampson
                                                 Title: Vice President

EX-10.2

                                                                   EXHIBIT 10.2

                     [LETTERHEAD OF KEYBANK OF WASHINGTON]


March 15, 2002

Pacific Aerospace and Electronics Inc.                          VIA MAIL AND FAX
434 Olds Station Road
Wenatchee, WA  98801

Attn: Charlie Miracle; Donald Wright

Re: Loans #357577-9001 & 357577-9002 and Lease #8800017858

Gentlemen:

Pacific Aerospace and Electronics Inc. is currently out of compliance with all
financial covenants related to the above referenced obligations. In addition,
the loans and the lease are past due for several payments each.

The Bank has elected, as you know, to forbear from enforcing its remedies
regarding the financial covenant violations and payment defaults so long as
Pacific Aerospace and Electronics Inc. maintained payments within 90 days of
current status. Forbearance has been intended to provide additional time to the
company to make necessary restructuring and refinancing arrangements that have
been in process for the past several months. We understand these transactions
are now scheduled to close in the next few days, or approximately by March 20,
2002.

Mr. Miracle has advised us that although the company will be able to bring all
loan and lease payment obligations with Key Bank current once the refinancing
process is complete, compliance with all covenants will probably not be possible
for some time. While the Bank is not willing to waive covenants established in
connection with these loans, we will agree to continue to forbear from declaring
covenant defaults until May 31, 2003. Such forbearance is conditioned upon there
being no loan or lease payment delinquency or defaults after April 1, 2002.

Should the company be unable to comply with all covenants by May 31, 2003, the
Bank will be willing to revisit the matter in order to consider continued
forbearance of those covenant violations not met at that time. Such
consideration will be at the sole discretion of the Bank.

Sincerely,

/s/ Monty D. Sampson

Monty D. Sampson
Vice President

EX-10.3

                                                                    EXHIBIT 10.3

After Recording Return To:
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York 10019
Attention: Val A. Soupios, Esq.



                        DEED OF TRUST, SECURITY AGREEMENT
                       AND FIXTURE FILING WITH ASSIGNMENT
                               OF LEASES AND RENTS



GRANTOR:

1.     PACIFIC AEROSPACE & ELECTRONICS, INC.

2.     CASHMERE MANUFACTURING CO., INC.

3.     NORTHWEST TECHNICAL INDUSTRIES, INC.

GRANTEE:

1.     FIRST UNION NATIONAL BANK, as collateral agent for Holders listed on
       Schedule A to Note Purchase Agreement (Beneficiary)

2.     LAND TITLE COMPANY OF CHELAN -- DOUGLAS COUNTY, INC. (Trustee)

Legal Description:

Abbreviated form:   Units 1-4 Confluence Pk Condo (Exhibit A)
                    Portion of East half of West half of Section 20, Township 30
                     North, Range 2 West, Clallam County, Washington (Exhibit B)
                    Lts 6-14, Block 1, Steward's Plat of Mission & ptn lot 16 &
                     Lts 17-18 JF Woodring's Plat of Mission (Exhibit C)
Additional legal on Exhibits A- C of document

Assessor's Property Tax Parcel Account Number(s):
23-20-28-525-010          (Unit 1, Exhibit A)
23-20-28-525-020          (Unit 2, Exhibit A)
23-20-28-525-030          (Unit 3, Exhibit A)
23-20-28-525-040          (Unit 4, Exhibit A)
023020-31000              (Exhibit B)
23-19-04-850-065          (Portion of Exhibit C)
23-19-04-850-065          (Balance of Exhibit C)




Reference number(s) of Related Document(s):


                                       2


                        DEED OF TRUST, SECURITY AGREEMENT
                       AND FIXTURE FILING WITH ASSIGNMENT
                               OF LEASES AND RENTS

              THIS DEED OF TRUST is made this 25th day of March, 2002, between
PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington corporation, CASHMERE
MANUFACTURING CO., INC., a Washington corporation, and NORTHWEST TECHNICAL
INDUSTRIES, INC., a Washington corporation (individually and collectively, as
Grantor), whose address is 430 Olds Station Road, Wenatchee, Washington 98020 to
LAND TITLE COMPANY OF CHELAN - DOUGLAS COUNTY, INC., as Trustee, whose address
is 16 South Mission Street, P.O. Box 1726, Wenatchee, Washington 98807-1726 to
FIRST UNION NATIONAL BANK, as collateral agent for the holders set forth on
Schedule A (each a "Holder" and collectively the "Holders") to that certain Note
Purchase Agreement dated as of March 19, 2002 (the "Note Purchase Agreement") by
and among Pacific Aerospace & Electronics, Inc., a Washington corporation
("Grantor"), Jefferies & Company, Inc. ("Initial Purchaser") and First Union
National Bank, as Collateral Agent ("Agent" or "Beneficiary") whose address is
401 South Tryon Street - Suite 1200, Mail Code NC-1179, Charlotte, North
Carolina 28202.

       1. Granting Clause. Grantor irrevocably grants, bargains, sells and
conveys to Trustee and its successors and assigns in trust, with power of sale
and with right of entry and possession as provided herein, all of Grantor's
estate, right, title, interest, claim and demand, now owned or hereafter
acquired, in and to the following:

              (a) The property in Chelan and Clallam Counties, Washington,
described in Exhibits "A" -- "C" attached hereto and incorporated herein by this
reference (individually and collectively, the "Property" which term shall
include all or any part of the Property, any improvements thereon and all of the
property described in this Section 1).

              (b) All land lying in streets and roads adjoining the Property,
and all access rights and easements pertaining to the Property.

              (c) All the lands, tenements, privileges, reversions, remainders,
irrigation and water rights and stock, oil and gas rights, royalties, minerals
and mineral rights, all development rights and credits, air rights,
hereditaments and appurtenances belonging or in any way pertaining to the
Property.

              (d) All buildings, structures, improvements, fixtures, equipment
and machinery and property now or hereafter attached to or used in connection
with the use, occupancy or operation of the Property including, but not limited
to, heating and incinerating apparatus and equipment, boilers, engines, motors,
generating equipment, telephone and other communication systems, piping and
plumbing fixtures, ranges, cooking apparatus and mechanical kitchen equipment,
refrigerators, cooling, ventilating, sprinkling and vacuum cleaning systems,
fire extinguishing apparatus, gas and electric fixtures, irrigation equipment,
carpeting, underpadding, elevators, escalators, partitions,




mantles, built-in mirrors, window shades, blinds, screens, storm sash, awnings,
furnishings of public spaces, halls and lobbies, and shrubbery and plants. All
property mentioned in this subsection 1(d) shall be deemed part of the realty
and not severable wholly or in part without material injury to the Property.

              (e) All rents, royalties, issues, profits, revenue, income,
recoveries, reimbursements and other benefits of the Property, all existing and
future leases of the Property (including extensions, renewals and subleases),
all agreements for use and occupancy of the Property (all such leases and
agreements whether written or oral, are hereafter referred to as the "Leases"),
and all right, title and interest of Grantor thereunder, including, without
limitation, all guaranties of lessees' performance under the Leases, together
with the immediate and continuing right to collect and receive all of the rents,
income, receipts, revenues, issues, profits and other income of any nature now
or hereafter due (including any income of any nature coming due during any
redemption period) under the Leases or from or arising out of the Property
including minimum rents, additional rents, percentage rents, parking or common
area maintenance contributions, tax and insurance contributions, deficiency
rents, liquidated damages following default in any Lease, all proceeds payable
under any policy of insurance covering loss of rents resulting from
untenantability caused by destruction or damage to the Property, all proceeds
payable as a result of exercise of an option to purchase the Property, all
proceeds derived from the termination or rejection of any Lease in a bankruptcy
or other insolvency proceeding, all security deposits or other deposits for the
performance of any lessee's obligations under the Leases, and all proceeds from
any rights and claims of any kind which Grantor may have against any lessee
under the Leases or any occupants of the Property (all of the above are
hereafter collectively referred to as the "Rents"). This subsection 1(e) is in
addition to other provisions of this Deed of Trust providing for the assignment
of rents and leases to Beneficiary, and is subject to the right, power and
authority given to the Beneficiary in Section 7 hereof to collect and apply the
Rents.

              (f) All of Grantor's rights to further encumber said Property for
debt and all Grantor's rights to enter into any lease agreement which would
create a tenancy that is or may become subordinate in any respect to any
mortgage or deed of trust other than this Deed of Trust.

              (g) All reciprocal easement agreements, declarations, development
agreements, developer's or utility agreements, and any similar such agreements
or declarations now or hereafter affecting the Collateral (as defined below) or
any part thereof.

              (h) All (a) development work product prepared in connection with
the Collateral, including, but not limited to, engineering, drainage, traffic,
soil and other studies and tests; water, sewer, gas, electrical and telephone
approvals, taps and connections; surveys, drawings, plans and specifications;
and subdivision, zoning and platting materials; (b) building and other permits,
rights, licenses and approvals relating to the Collateral; (c) contracts and
agreements (including, without limitation, contracts with architects and
engineers, construction contracts and contracts for the maintenance, management
or leasing of the Collateral), contract rights, logos, trademarks, trade names,


                                       2


copyrights and other general intangibles used or useful in connection with the
ownership, operation or occupancy of the Collateral or any part thereof; (d)
financing commitments (debt or equity) issued to Grantor in respect of the
Collateral and all amounts payable to Grantor thereunder; (e) contracts for the
sale of all or any portion of the Collateral, and all amounts payable by the
purchasers thereunder; (f) operating and other bank accounts, and monies
therein, of Grantor relating to the Collateral, including, without limitation,
any accounts relating to real estate taxes or assessments; (g) interest rate
protection agreements entered into by Grantor in respect of the loan, whether
pursuant to the Note Purchase Agreement or otherwise; and (h) commercial tort
claims related to the Collateral.

              (i) All rights of Grantor under promissory notes, letters of
credit, electronic chattel paper, proceeds from accounts, payment intangibles,
and general intangibles related to the Collateral, as the terms "accounts",
"general intangibles", and "payment intangibles" are defined in the applicable
Uniform Commercial Code Article 9, as the same may be modified or amended from
time to time.

              (j) All other assets of Grantor related in any way to the
Collateral, subject to certain limitations that may be set forth herein.

              (k) All proceeds of the conversion, voluntary or involuntary, of
any of the foregoing into cash or liquidated claims, including, without
limitation, proceeds of insurance and condemnation awards, and all rights of
Grantor to refunds of real estate taxes and assessments.

              (l) All of Grantor's right, title and interest, as lessee, in, to
and under the leases listed on Exhibit D hereto (the "Leased Property"), subject
to Grantor's obtaining any required approvals by Landlord.

              The Property is not used principally or primarily for agricultural
purposes.

       2. Collateral. The following described estate, property and rights of
Grantor are also included as security for the performance of each covenant and
agreement of Grantor contained herein and the payment of all sums of money
secured hereby:

              (a) All furniture, furnishings, appliances, machinery, vehicles,
equipment and all other property of any kind now or hereafter located on the
Property, used or intended to be used on the Property wherever actually located,
or purchased with the proceeds of the Notes (as defined herein), and all rights
of Grantor as lessee of any property described in this Section 2 and subsection
1(d) above.

              (b) All compensation, awards, damages, rights of action and
proceeds (including insurance proceeds and any interest on any of the foregoing)
arising out of or relating to a taking or damaging of the Property by reason of
any public or private improvement, condemnation proceeding (including change of
grade), fire, earthquake or other casualty, injury or decrease in the value of
the Property.


                                       3


              (c) All returned premiums or other payments on any insurance
policies pertaining to the Property and any refunds or rebates of taxes or
assessments on the Property.

              (d) All rights to the payment of money, accounts receivable,
deferred payments, refunds, cost savings, payments and deposits, whether now or
later to be received from third parties (including all utility deposits),
architectural and engineering plans, specifications and drawings, contract
rights, governmental permits and licenses, and agreements and purchase orders
which pertain to or are incidental to the design or construction of any
improvements on the Property, Grantor's rights under any payment, performance,
or other bond in connection with construction of improvements on the Property,
and all construction materials, supplies, and equipment delivered to the
Property or intended to be used in connection with the construction of
improvements on the Property wherever actually located.

              (e) All contracts and agreements pertaining to or affecting the
Property including, but not limited to, management, operating and franchise
agreements, licenses, trade names and trademarks.

              (f) All of Grantor's interest in and to the loan account, the loan
funds, whether disbursed or not, and Grantor's own funds now or later to be held
on deposit as equity funds or for payment of bills relating to the Property.

              (g) All commitments or agreements, now or hereafter in existence,
which will provide Grantor with proceeds to satisfy the Secured Obligations
(defined below) and the right to receive the proceeds due under such commitments
or agreements including refundable deposits and fees.

              (h) All books and records pertaining to any and all of the
property described above, including computerreadable memory and any computer
hardware or software necessary to access and process such memory.

              (i) All additions, accessions, replacements, substitutions,
proceeds and products of the property described in this Section 2 and of any of
the Property which is personal property.

              The Property and all of the property and rights described in
Section 1 and 2 are referred to herein collectively as the "Collateral."

       3. Security Agreement. To the extent that any of the Collateral may be
determined to be personal property, Grantor as debtor hereby grants Holders and
Beneficiary as agent for the Holders as secured party a security interest in all
such personal property or fixtures to secure payment and performance of the
Secured Obligations (defined below). This Deed of Trust constitutes a security
agreement, a financing statement and fixture filing pursuant to the Uniform
Commercial Code with respect to any and all property now or hereafter described
in any Uniform Commercial Code Financing Statement naming Grantor as Debtor and
Beneficiary as Secured Party affecting or related to the use and enjoyment of
the Property. Grantor agrees that it will


                                       4


not terminate or amend any financing statements filed in connection with the
Secured Obligations (as hereinafter defined) without Beneficiary's prior
consent. The remedies for any violation of the covenants, terms and conditions
of the agreements herein contained shall be (a) as prescribed herein, or (b) by
general law, or (c) as to such part of the security which is also reflected in
any such Financing Statement by the specific statutory consequences now or
hereafter enacted and specified in the Uniform Commercial Code, all at
Beneficiary's sole election. Grantor and Beneficiary agree that the filing of
such a Financing Statement in the records normally having to do with personal
property shall never be construed as in anywise derogating from or impairing
this declaration and hereby stated intention of the parties hereto, that
everything used in connection with the production of income from the property
that is the subject of this Deed of Trust and/or adapted for use therein and/or
which is described or reflected in this Deed of Trust is, and at all times and
for all purposes and in all proceedings both legal or equitable shall be,
regarded as part of the real estate irrespective of whether (a) any such item is
physically attached to the improvements, (b) serial numbers are used for the
better identification of certain equipment items capable of being thus
identified in any list filed with the Beneficiary, or (c) any such item is
referred to or reflected in any such Financing Statement so filed at any time.

       4. Financing Statement. This Deed of Trust shall also serve as a
financing statement filed for record in the real estate records as a fixture
filing pursuant to the Uniform Commercial Code. This Deed of Trust may be given
to secure an obligation incurred to refinance an obligation incurred for the
construction of an improvement on the Property, including the acquisition of the
Property.

       5. Obligations Secured. THIS DEED OF TRUST IS FOR THE PURPOSE OF SECURING
the following ("Secured Obligations"):

              (a) Payment of the sum of up to THIRTY-SIX MILLION DOLLARS
($36,000,000) or so much thereof with interest thereon as shall be evidenced by
all notes described in the Note Purchase Agreement or other instruments
evidencing the indebtedness secured by this Deed of Trust including all
renewals, amendments, modifications or extensions thereof and substitutions
therefor.

              (b) Payment of any further sums now or hereafter advanced or
loaned by Beneficiary or Holders (including any assignee of Beneficiary or
Holders) to any Borrower under the Note Purchase Agreement or any of their
successors or assigns, and payment of every other present and future obligation
owing by any Borrower to Beneficiary or Holders (or any such assignee) of any
kind, and all renewals, modifications, and extensions thereof, including any
interest, fees, costs, service charges and expenses connected with such
obligations (this Deed of Trust, the Note Purchase Agreement and all such other
documents, evidencing or securing the loan are hereafter collectively referred
to as the "Loan Documents") together with interest thereon at the rate set forth
in the Note Purchase Agreement unless otherwise specified in the Loan Documents
or agreed to in writing.


                                       5


              (c) Performance of each agreement, term and condition set forth or
incorporated by reference in the Loan Documents, as such may be amended,
including without limitation the Note Purchase Agreement, which are incorporated
herein by reference, or contained herein.

       6. Performance of Obligations. Grantor shall promptly and timely pay all
sums due pursuant to the Loan Documents, strictly comply with all the terms and
conditions of the Loan Documents, and perform each Secured Obligation in
accordance with its terms.

       7. Assignment of Rents and Leases. Grantor hereby absolutely and
irrevocably assigns to Beneficiary all Grantor's interest in the Rents and
Leases whether now due, past due or to become due, and hereby gives to and
confers upon Beneficiary the right, power and authority to collect such Rents
and proceeds, and Grantor, without limiting the generality of the Granting
Clause hereof, specifically hereby presently, absolutely, unconditionally and
irrevocably assigns, transfers and sets over all of the Rents now or hereafter
accruing to Beneficiary. Grantor irrevocably appoints Beneficiary its true and
lawful attorney at the option of Beneficiary at any time to demand, receive and
enforce payment, to give receipts, releases and satisfactions, and to sue,
either in the name of Grantor or in the name of Beneficiary, for all such Rents
and proceeds. It is understood and agreed that neither the foregoing assignment
of Rents and proceeds to Beneficiary nor the exercise by Beneficiary of any of
its rights or remedies under this Deed of Trust shall be deemed to make
Beneficiary a "mortgagee-in-possession" or otherwise responsible or liable in
any manner with respect to the Property or the use, occupancy or enjoyment or
operation of all or any portion thereof, unless and until Beneficiary, in person
or by agent, assumes actual possession thereof; nor shall appointment of a
receiver for the Property by any court at the request of Beneficiary or by
agreement with Grantor or the entering into possession of the Property or any
part thereof by such receiver be deemed to make Beneficiary a
"mortgagee-in-possession" or otherwise responsible or liable in any manner with
respect to the Property or the use, occupancy, enjoyment or operation of all or
any portion thereof. This assignment is intended to be specific, perfected and
choate upon the recording of this Deed of Trust as provided in RCW 7.28.230.
This assignment shall be subject to the terms and conditions of any separate
assignment of leases and/or rents, whenever executed, in favor of Beneficiary
and covering the Property. Grantor warrants that it has made no prior assignment
of the Rents or Leases and will make no subsequent assignment without the prior
written consent of Beneficiary.

              (a) Unless otherwise provided in any separate assignment of leases
and/or rents, and so long as Grantor is not in default under the Loan Documents,
Grantor may collect the Rents as they become due and not more than one (1) month
in advance. Grantor shall use the Rents to pay normal operating expenses for the
Property and sums due and payments required under the Loan Documents. No Rents
shall be collected for a period subsequent to the current one month rental
period and first or last month's rent. Grantor's right to collect the Rents
shall not constitute Beneficiary's consent to the use of cash collateral in any
bankruptcy proceeding.


                                       6


              (b) If Grantor is in default under the Loan Documents, without
notice to Grantor, Beneficiary or its agents, or a court appointed receiver, may
collect the Rents. In doing so, Beneficiary may (i) evict lessees for nonpayment
of rent, (ii) terminate in any lawful manner any tenancy or occupancy, (iii)
lease the Property in the name of the then owner on such terms as it may deem
best and (iv) institute proceedings against any lessee for past due Rents. The
Rents received shall be applied to payment of the costs and expenses of
collecting the Rents, including a reasonable fee to Beneficiary, a receiver or
an agent, operating expenses for the Property and any sums due or payments
required under the Loan Documents, in such order as Beneficiary may determine.
Any excess shall be paid to Grantor, however, Beneficiary may withhold from any
excess a reasonable amount to pay sums anticipated to become due which exceed
the anticipated future Rents. Beneficiary's failure to collect or discontinuing
collection at any time shall not in any manner affect the subsequent enforcement
by Beneficiary of its rights to collect the Rents. Except in the case of a full
reinstatement of the Secured Obligations, the collection of the Rents shall not
cure or waive any default under the Loan Documents. Any Rents paid to
Beneficiary or a receiver shall be credited against the amount due from the
lessees under the Leases. In the event any lessee under the Leases becomes the
subject of any proceeding under the Bankruptcy Code or any other federal, state
or local statute which provides for the possible termination or rejection of the
Leases assigned hereby, Grantor covenants and agrees that in the event any of
the Leases are so rejected, no damages settlement shall be made without the
prior written consent of Beneficiary; any check in payment of damages for
rejection or termination of any such Lease will be made payable both to the
Grantor and Beneficiary; and Grantor hereby assigns any such payment to
Beneficiary and further covenants and agrees that upon request of Beneficiary,
it will duly endorse to the order of Beneficiary any such check, the proceeds of
which will be applied to any portion of the indebtedness secured hereunder in
such manner as Beneficiary may elect.

              (c) Regardless of whether or not Beneficiary, in person or by
agent, takes actual possession of the Property or any part thereof, Beneficiary
is not and shall not be deemed to be:

                     (i) "a mortgagee in possession" for any purpose; or

                     (ii) responsible for performing any of the obligations of
the lessor under any Lease; or

                     (iii) responsible for any waste committed by lessees or any
other parties, any dangerous or defective condition of the Property, or any
negligence in the management, upkeep, repair or control of the Property; or

                     (iv) liable in any manner for the Property or the use,
occupancy, enjoyment or operation of all or any part of it.

              In exercising its rights under this Section Beneficiary shall be
liable only for the proper application of and accounting for the Rents collected
by Beneficiary or its agents.


                                       7


       8. Leases.

              (a) Grantor shall fully comply with all of the terms, conditions
and provisions of the Leases so that the same shall not become in default and to
do all that is needful to preserve all said Leases in force. With respect to any
Lease of the whole or any part of the Property, Grantor shall not, without the
prior written consent of Beneficiary, which consent shall not be unreasonably
withheld, (i) permit assignment or subletting of all or part of the lessee's
rights under the Lease unless the right to assign or sublet is expressly
reserved by the lessee under the Lease, (ii) execute an assignment of the rents
or any part thereof from the Collateral without Beneficiary's prior consent,
(iii) modify or amend any lease so as to shorten the unexpired term thereof or
so as to decrease, waive or compromise in any manner the amount of rents payable
thereunder or materially expand the obligations of the lessor thereunder, (iv)
accept surrender of the Lease or terminate the Lease except in accordance with
the terms of the Lease providing for termination in the event of a default, (v)
accept prepayments of any installments of rents to become due under such leases,
except prepayments in the nature of security for the performance of the lessees
thereunder, (vi) modify, release or terminate any guaranties of any such lease
or (vii) in any other manner impair the value of the Property or the security
hereof. Any proceeds or damages resulting from a lessee's default under any such
Lease, at Beneficiary's option, shall be paid to Beneficiary and applied against
sums owed under the Loan Documents even though such sums may not be due and
payable. Except for non-delinquent real estate taxes and assessments, Grantor
shall not permit any lien to be created against the Property which may be or may
become prior to any Lease. If the Property is partially condemned or suffers a
casualty, Grantor shall promptly repair and restore the Property in order to
comply with the Leases.

              (b) Grantor will not execute any lease of all or a substantial
portion of the Property except for actual occupancy by the lessee thereunder,
and will at all times promptly and faithfully perform, or cause to be performed,
all of the covenants, conditions and agreements contained in all leases of the
Property or portions thereof now or hereafter existing, on the part of the
lessor thereunder to be kept and performed and will at all times do all things
necessary to compel performance by the lessee under each lease of all
obligations, covenants and agreements by such lessee to be performed thereunder.
If any of such leases provide for the giving by the lessee of certificates with
respect to the status of such leases, Grantor shall exercise its right to
request such certificates within five (5) days of any demand therefor by
Beneficiary and shall deliver copies thereof to Beneficiary promptly upon
receipt.

              (c) Each lease of the Property, or of any part thereof, executed
after the date hereof, shall provide that, in the event of the enforcement by
Trustee or Beneficiary of the remedies provided for hereby or by law, the lessee
thereunder will, upon request of any person succeeding to the interest of
Grantor as a result of such enforcement, automatically become the lessee of said
successor in interest, without change in the terms or other provisions of such
lease, provided, however, that said successor in interest shall not be bound by
(i) any payment of rent or additional rent for more than one (1) month in
advance, except prepayments in the nature of security for the performance by
said lessee of its obligations under said lease or (ii) any amendment or


                                       8


modification of the lease made without the consent of Beneficiary or such
successor in interest. Each lease shall also provide that, (x) the lease is
subordinate to this Deed (but shall also provide that Beneficiary, at its
option, may subordinate this Deed to such lease) and (y) upon request by said
successor in interest, such lessee shall execute and deliver an instrument or
instruments confirming such attornment.

              (d) Grantor shall furnish to Beneficiary upon request, but not
more than semi-annually, a certified leasing status report in respect of the
Property and a certified rent roll containing the names of all lessees of the
Property, the terms of their respective leases, the space occupied and the
rentals payable thereunder, together with copies, certified to be true and
complete, of such leases as may be requested by Beneficiary.

              (e) Grantor shall, promptly upon Beneficiary's request, deposit
all tenant security deposits in respect of the Property into an account with
Beneficiary or as designated by Beneficiary, which deposits shall be held and
disbursed to tenants as required under the terms of their respective leases.

       9. Warranty of Title. Grantor warrants that it (i) has good and
marketable title to an indefeasible fee simple estate in the Property, unless
Grantor's present interest in the Property is described in Exhibits A through C
as a leasehold interest, in which case Grantor warrants that it lawfully
possesses and holds a valid leasehold interest in the Property as stated in
Exhibits A through C, (ii) has good and marketable title to the personal
property Collateral, and (iii) holds a valid leasehold interest as tenant under
the leases described in Exhibit D, and that said leases are prior to all liens,
charges and encumbrances on the lessor's interest thereunder, subject, in each
case, to no liens, encumbrances, easements, assessments, security interests,
claims or defects of any kind prior or subordinate to the lien of this Deed of
Trust, except those listed in Beneficiary's title insurance policy, listed on
Exhibit E hereto, or approved by Beneficiary in writing (the "Permitted
Exceptions") and real estate taxes for the current year. Grantor warrants that
the Permitted Exceptions and the real estate taxes are not delinquent or in
default, and that Grantor has the right to convey the Property to Trustee for
the benefit of Beneficiary, and the right to grant a security interest in the
personal property Collateral. Grantor has the full power and authority to
subject the Property to the lien hereof in the manner and form herein done and
intended hereafter to be done. Grantor will preserve such title, and Grantor
will forever warrant and defend title to the Collateral and will defend the
validity and priority of the lien of this Deed of Trust and the security
interest granted herein against any claims or demands.

       10. Prohibited Liens.

              (a) Grantor shall not permit any governmental or statutory liens
(including tax, mechanic's or materialmen's liens) to be filed against the
Property except for real estate taxes and assessments not yet delinquent by
non-payment and liens permitted by the Loan Documents or approved by Beneficiary
in writing. Grantor will pay, from time to time when the same shall become due,
all lawful claims and demands of mechanics, materialmen, laborers, and others
which, if unpaid, might result in, or


                                       9


permit the creation of, a lien on the Property or any part thereof, and in
general will do or cause to be done everything necessary so that the lien and
effect hereof shall be fully preserved, at the cost of Grantor and without
expense to Trustee or Beneficiary.

              (b) Grantor will have the right to contest in good faith by an
appropriate legal or administrative proceeding the validity of any prohibited
lien, encumbrance or charge so long as (i) no default exists under the Loan
Documents, (ii) Grantor first deposits with Beneficiary a bond or other security
satisfactory to Beneficiary in the amount reasonably required by Beneficiary,
but not more than one and one--half (1 1/2) (i.e., 150%) of the amount of the
claim; (iii) Grantor immediately commences its contest of such lien, provided,
however, that within twenty (20) days after the filing of such lien Grantor
discharges said lien of record or records a bond which complies with the
requirements of RCW 60.04.161 eliminating such lien as an encumbrance on the
Property, and continuously pursues the contest in good faith and with due
diligence; (iv) foreclosure of the lien, encumbrance or charge is stayed; and
(v) Grantor pays any judgment rendered for the lien claimant or other third
party within ten (10) days after the entry of the judgment. If the contested
item is a mechanic's or materialmen's lien, Grantor will furnish Beneficiary
with an endorsement to its title insurance policy which insures the priority of
this Deed of Trust over the lien being contested. Grantor will discharge or
elect to contest and post an appropriate bond or other security within twenty
(20) days of written demand by Beneficiary.

       11. Payment of Taxes and Other Encumbrances. Grantor will pay when due:

              (a) All taxes, assessments and other governmental or public
charges affecting the Property, including assessments on appurtenant water
stock, and any accrued interest, cost and/or penalty thereon and upon request by
Beneficiary will submit receipts therefor to Beneficiary promptly following
payment;

              (b) All encumbrances (including any debt secured by deeds of
trust), ground rents, liens and/or charges, with interest, on the Property or
any part thereof which appear to be prior, superior or on a parity hereto, and
all costs and fees related thereto;

              (c) All charges for utilities or services, including, but not
limited to, electricity, gas, sewer and water;

              (d) All costs, fees and expenses of this Deed of Trust, including
cost of evidence of title, Trustee's fees and attorneys' fees in connection with
sale pursuant to this Deed of Trust (whether completed or not) together with
interest from and after ten (10) days following demand for repayment at the
default interest rate set forth in the Note Purchase Agreement until paid in
full.

       12. Maintenance -- No Waste.

              (a) Keep the Property in good condition and repair and not commit
or permit any waste or deterioration of the Property;


                                       10


              (b) Not remove, demolish or substantially alter any portion of the
Property, except as approved in writing by Beneficiary and except such
alterations as may be required by laws, ordinances or regulations of
governmental authorities;

              (c) Comply with all laws, ordinances, rules, regulations and
orders of governmental authorities now or hereafter affecting the Property or
requiring any alterations or improvements to be made thereon, and perform all of
its obligations under any covenant, condition, restriction or agreement of
record affecting the Property;

              (d) Complete promptly and in good and workmanlike manner any
portion of the Property which may be constructed hereafter, and promptly restore
in like manner as obligated in Section 14, any portion of the Property which may
be damaged or destroyed, and pay, when due, all costs incurred and claims for
labor performed and materials furnished therefor;

              (e) Not commit, suffer or permit any act to be done in, upon or to
the Property in violation of any law or ordinance or any covenant, condition or
restriction affecting the Property;

              (f) Do any and all acts which, from the character or use of the
Property, may be reasonably necessary to protect and preserve the security of
Beneficiary, the specific enumerations herein not excluding the general;

              (g) Not permit any construction liens against the Property;

              (h) Not take or permit to be taken any actions that might
invalidate any insurance carried on the Property;

              (i) Maintain in full force and effect all licenses (including but
not limited to any operating licenses or similar matters) required or permitted
in the operation of the improvements on the Property.

       13. Alterations Removal and Demolition. Grantor shall not structurally
alter, remove or demolish any building or improvement on the Property without
Beneficiary's prior written consent. Grantor shall not remove any fixture or
other item of property which is part of the Collateral without Beneficiary's
prior written consent unless the fixture or item of property is replaced by an
article of equal suitability owned by Grantor free and clear of any lien or
security interest.

       14. Restoration.

              (a) After the happening of any casualty to the Property whether or
not required to be insured against under the policies to be provided by Grantor
hereunder, Grantor shall give prompt written notice thereof to Beneficiary
generally describing the nature and cause of such casualty and the extent of the
damage or destruction to the Property.


                                       11


              (b) Grantor hereby assigns to Beneficiary all proceeds of
insurance ("Insurance Proceeds") which Grantor may be entitled to receive. In
the event of any damage to or destruction of the Collateral, then, provided
there is not an Event of Default under the Note Purchase Agreement, the Notes,
the Deed of Trust or any of the Loan Documents (as defined in the Note Purchase
Agreement) and Beneficiary has reasonably determined that its security has not
been impaired, Grantor shall commence and diligently pursue to completion in
accordance with this Section 14 the repair, restoration and rebuilding of any
portion of the Collateral that has been partially damaged or destroyed in full
compliance with all legal requirements and to the same condition, character and
at least equal value and general utility as nearly as possible to that existing
prior to such damage or destruction (the "Restoration"), and Beneficiary shall
hold and disburse the Insurance Proceeds (less the cost, if any, to Beneficiary
of recovering and paying out such proceeds (including, without limitation,
attorneys' fees and expenses, adjuster's fees, and fees incurred in
Beneficiary's performance of its obligations hereunder)) (the "Net Insurance
Proceeds") in the manner hereinafter provided to the Restoration. In the event
that the Collateral is substantially destroyed or Beneficiary has determined
that its security has been impaired, the Beneficiary may, at its option, apply
the Net Insurance Proceeds to the reduction of the Secured Obligations and
secured by this Deed of Trust in such order as Beneficiary may determine and, at
Beneficiary's option and in its sole discretion, Beneficiary, may declare the
Secured Obligations immediately due and payable.

              (c) In the event the Net Insurance Proceeds are to be used for the
Restoration, Grantor shall, prior to disbursement of any Net Insurance Proceeds
for any work in connection with the Restoration (the "Work"), deliver or furnish
to Beneficiary (i) complete plans and specifications for the Work which (A) have
been approved by all governmental authorities whose approval is required, (B)
bear the signed approval of an architect reasonably satisfactory to Beneficiary
(the "Architect") and (C) are accompanied by Architect's signed estimate of the
total estimated cost of the Restoration. Such plans and specifications shall be
subject to Beneficiary's approval, which approval shall not be unreasonably
withheld or delayed (the "Approved Plans and Specifications"); (ii) the amount
of money which, as determined by Beneficiary, will be sufficient when added to
the Net Insurance Proceeds, if any, to pay the entire cost of the Restoration
(all money as held by Beneficiary is referred to herein as the "Restoration
Funds"); (iii) copies of all permits and approvals required by law in connection
with the commencement and conduct of the Restoration; and (iv) a contract for
construction executed by Grantor and a contractor satisfactory to Beneficiary
(the "Contractor") in form, scope and substance satisfactory to Beneficiary
(including the customary retention) for performance of the Work.

              (d) After commencing the Work, Grantor shall perform or cause
Contractor to perform the Work diligently and in good faith in accordance with
the Approved Plans and Specifications approved by Beneficiary. So long as
Grantor is not in default under any of the Loan Documents, Beneficiary shall
disburse the Restoration Funds in increments to Grantor or as Grantor may
direct, from time to time as the Work progresses, to pay (or reimburse Grantor
for) the costs of the Restoration, but subject to the following conditions, any
of which Beneficiary may waive in its sole discretion:


                                       12


                     (i) Beneficiary shall make such payments only upon not less
than ten (10) days' prior written notice from Grantor to Beneficiary and
Grantor's delivery to Beneficiary of (A) Grantor's written request for payment
(a "Request for Payment") accompanied by a certificate by Architect in form,
scope and substance satisfactory to Beneficiary which states that all of the
Work completed to that date has been done in compliance with the Approved Plans
and Specifications and in accordance with all provisions of law, that the amount
requested has been paid or is then due and payable and is properly a part of the
cost of the Restoration and that when added to all sums, if any, previously paid
out by Beneficiary, the requested amount does not exceed the value of the Work
done to the date of such certificate; (B) evidence satisfactory to Beneficiary
that there are no construction or similar liens for labor or material supplied
in connection with the Work to date or that any such liens have been adequately
provided for to Beneficiary's satisfaction; and (C) evidence satisfactory to
Beneficiary that the balance of the Restoration Funds remaining after making the
payments shall be sufficient to pay the balance of the cost of the Restoration
not completed to date (giving in such reasonable detail as Beneficiary may
require an estimate of the cost of such completion). Each Request for Payment
shall be accompanied by waivers of liens satisfactory to Beneficiary covering
that part of the Work previously paid for, if any, and by a search prepared by a
title company or by other evidence satisfactory to Beneficiary that no
construction liens or other liens or instruments for the retention of title in
respect of any part of the Work have been filed against the Property and not
discharged of record and that no encumbrance exists on or affecting the Property
other than encumbrances, if any, which are set forth in the title policy issued
to Beneficiary insuring the lien of this Deed of Trust; and

                     (ii) Any Request for Payment after the Restoration has been
completed shall be accompanied by a copy of any certificate or certificates
required by law to render occupancy of the Property legal.

              (e) Upon Beneficiary's receipt of the certificate of occupancy for
the Property and other customary evidence requested by Beneficiary that the
Restoration has been completed and the costs thereof paid in full, and
satisfactory evidence that no mechanic's or similar liens for labor or material
supplied in connection with the Restoration are outstanding against the Property
and Beneficiary's disbursement under the final Request for Payment, and provided
that Grantor is not then in default under any of the Loan Documents (as defined
in the Note Purchase Agreement), Beneficiary shall pay any remaining Restoration
Funds then held by Beneficiary to Grantor; provided, however, nothing contained
herein shall prevent Beneficiary from applying at any time the whole or any part
of the Restoration Funds to the curing of any Event of Default under the Loan
Documents.

              (f) If (i) within sixty (60) days after the occurrence of any
damage or destruction to the Property requiring Restoration, Grantor fails to
submit to Beneficiary and receive Beneficiary's approval of plans and
specifications or fails to deposit with Beneficiary the additional amount
necessary to accomplish the Restoration as provided in Section 14, or (ii) after
such plans and specifications are approved by all such governmental authorities
and Beneficiary, Grantor fails to commence promptly or


                                       13


diligently continue to completion the Restoration, or (iii) Grantor becomes
delinquent in payment to mechanics, materialmen or others for the costs incurred
in connection with the Restoration, then, in addition to all of the rights
herein set forth, Beneficiary may apply the Restoration Funds then or thereafter
held by Beneficiary to reduce the unpaid indebtedness secured hereby in such
order as Beneficiary may determine, and at Beneficiary's option and in its sole
discretion, Beneficiary may declare the Secured Obligations immediately due and
payable.

              (g) In the event that Beneficiary applies all or any portion of
the Restoration Funds to reduce the unpaid indebtedness secured hereby as
provided in this Section 14, after payment in full of all sums secured hereby,
any remaining Restoration Funds shall be paid to Grantor.

       15. Compliance with Laws. Grantor shall comply with all laws, ordinances,
regulations, covenants, conditions, and restrictions affecting the Property,
including, without limitation, all applicable requirements of the Fair Housing
Act of 1968 (as amended) and the Americans With Disabilities Act of 1990 (as the
same may be amended from time to time), and shall not commit or permit any act
upon or concerning the Property in violation of any such laws, ordinances,
regulations, covenants, conditions, and restrictions. Grantor agrees to protect,
defend, indemnify and hold Beneficiary harmless from and against all liability
threatened against or suffered by Beneficiary by reason of a breach by Grantor
of the foregoing representations, warranties, covenants and agreements. The
foregoing indemnity shall include the cost of all alterations to the Property
(including architectural, engineering, legal and accounting costs), all fines,
fees and penalties, and all legal and other expenses (including attorneys' fees)
incurred in connection with the Property being in violation of any such laws,
ordinances, regulations, covenants, conditions and restrictions, and for the
cost of collection of the sums due under the indemnity. In the event that
Beneficiary or its designee shall become the owner of or acquire an interest in
or rights to the Property by foreclosure or deed in lieu of foreclosure of this
Deed of Trust or by other means, the foregoing indemnification obligation shall
survive such foreclosure or deed in lieu of foreclosure or other acquisition of
the Property.

       16. Leased Premises. Grantor shall undertake, and shall use its
commercially reasonable efforts, to obtain, within sixty (60) days of the date
hereof, (a) any and all required approvals by, and consents of, all landlords
with respect to the assignment of leases to Beneficiary pursuant to Section 1(l)
hereof, and (b) any and all subordination and non-disturbance agreements
required by Beneficiary in connection with the Leased Premises, on terms and
conditions reasonably satisfactory to Beneficiary.

       17. Impairment of Collateral. Grantor will faithfully perform each and
every covenant to be performed by Grantor under any lien or encumbrance,
including, without limiting the generality hereof, mortgages, deeds of trust,
leases, declarations or covenants, conditions and/or restrictions and other
agreements which affect the Property, in law or in equity, which Beneficiary
reasonably believes may be prior or superior to or on a parity with the lien or
charge of this Deed of Trust. Grantor shall not, without Beneficiary's prior
written consent, change the general nature of the occupancy of the


                                       14


Property, initiate, acquire or permit any change in any public or private
restrictions (including without limitation a zoning reclassification) limiting
the uses which may be made of the Property, or take or permit any action which
would impair the Collateral or Beneficiary's lien or security interest in the
Collateral. A breach of or a default under any such lien or encumbrance, or a
breach of any requirement of this Section 16 shall constitute an event of
default under this Deed of Trust.

       18. Inspection of Property. Beneficiary is authorized, by itself, its
agents, employees or workmen, to enter at any reasonable time upon any part of
the Property for the purpose of inspecting the same upon reasonable prior notice
(except in the case of an emergency for which no prior notice need be given),
and for the purpose of performing any of the acts it is authorized to perform
under the terms of this Deed of Trust. Grantor agrees to cooperate with
Beneficiary to facilitate such inspections.

       19. Grantor's Defense of Collateral. Grantor shall appear in and defend
any action or proceeding which may affect the Collateral or the rights or powers
of Beneficiary or Trustee, and to pay all costs and expenses, including cost of
evidence of title and attorneys' fees in a reasonable sum, in any action or
proceeding in which Beneficiary and/or Trustee may appear or be made a party,
including, but not limited to, foreclosure or other proceeding commenced by
those claiming a right to any part of the Property under subordinate liens, in
any action to partition or condemn all or part of the Property, whether or not
pursued to final judgment, and in any exercise of the power of sale contained
herein, whether or not the sale is actually consummated.

       20. Beneficiary's Right to Protect Collateral. Beneficiary may commence,
appear in, and defend any action or proceeding which may affect the Collateral
or the rights or powers of Beneficiary or Trustee, and in such event,
Beneficiary shall be allowed and paid all of Beneficiary's costs, charges and
expenses, including cost of evidence of title and attorneys' fees incurred in
such action or proceeding in which Beneficiary may appear. Beneficiary may pay,
purchase, contest or compromise any encumbrance, charge or lien not listed as a
Permitted Exception which in its judgment appears to be prior or superior to the
lien of this Deed of Trust. If Grantor fails to make any payment or do any act
required under the Loan Documents, Beneficiary, without any obligation to do so
and without releasing Grantor from any obligations under the Loan Documents, may
make the payment or cause the act to be performed in such manner and to such
extent as Beneficiary may deem necessary to protect the Collateral. Beneficiary
is authorized to enter upon the Property for such purposes. In exercising any of
these powers Beneficiary may incur such expenses, in its absolute discretion, it
deems necessary, including cost of evidence of title, employ an attorney, and
pay said attorneys' reasonable fees. Grantor hereby agrees to pay immediately
following demand, together with interest from and after ten (10) days following
demand for payment at the default interest rate set forth in the Note Purchase
Agreement until paid in full, all of Beneficiary's costs, charges, expenses and
accounts referred to above in this Section 19, including cost of evidence of
title and reasonable attorneys' fees incurred in such action or proceeding in
which Beneficiary may appear. All costs, charges and expenses so incurred,
together with interest thereon as aforesaid, shall be secured by the lien of
this Deed of Trust.


                                       15


       21. Hazardous Substances. Grantor represents and warrants to Beneficiary
that to the best of Grantor's knowledge after due and diligent inquiry, no
hazardous or toxic waste or substances are being stored on the Property or any
adjacent property except in strict compliance with all Environmental Laws nor
have any such waste or substances been stored or used in, on, under, over or
about the Property or any adjacent property prior to or during Grantor's
ownership, possession or control of the Property. Grantor agrees to provide
written notice to Beneficiary immediately upon Grantor becoming aware that the
Property or any adjacent property is being or has been contaminated with
hazardous or toxic waste or substances. Grantor will not cause nor permit any
activities on the Property which directly or indirectly could result in the
Property or any other property becoming contaminated with hazardous or toxic
waste or substances. For purposes of this Deed of Trust, the term "hazardous or
toxic waste or substances " means any substance or material defined or
designated as hazardous or toxic wastes, hazardous or toxic material, hazardous,
toxic or radioactive substance or other similar term by any applicable federal,
state or local statute, regulation or ordinance now or hereafter in effect.

       22. Insurance.

              (a) Grantor shall maintain insurance on the Property with premiums
prepaid providing replacement cost coverage and insuring against loss by fire
and such other risks covered by extended coverage insurance, flood (but only if
the Property is in a federally-designated flood plain), and such other perils
and risks, including loss of rents and business interruption as may be required
by Beneficiary. Grantor shall also maintain commercial general liability
insurance. All insurance shall be with companies satisfactory to Beneficiary and
in such amounts as required by Beneficiary with lender's loss payable clauses in
favor of and in form satisfactory to Beneficiary. At least thirty (30) days
prior to the expiration of the term of any insurance policy, Grantor shall
furnish Beneficiary with written evidence of renewal or issuance of a
satisfactory replacement policy. If requested Grantor shall deliver copies of
all policies to Beneficiary. If Grantor fails to maintain such insurance
satisfactory to Beneficiary, Beneficiary may make the payment on behalf of
Grantor and any sums expended shall be added to principal and bear interest at
the default interest rate set forth in the Note Purchase Agreement. Each policy
of insurance shall provide Beneficiary with no less than forty-five (45) days
prior written notice of any cancellation, expiration, nonrenewal or
modification.

              (b) In the event of any loss or damage to the Property, all
Insurance Proceeds shall be payable to Beneficiary, and Grantor hereby
authorizes and directs any affected insurance company to make payment of the
Insurance Proceeds directly to Beneficiary. The application or release by
Beneficiary of any Insurance Proceeds shall not cure or waive any default or
notice of default hereunder or invalidate any act done pursuant to such notice.

              (c) In the event of the foreclosure of this Deed of Trust or other
transfer of the title to the Property in extinguishment, in whole or in part, of
the indebtedness secured hereby, all right, title and interest of Grantor in and
to any insurance policy, or premiums or payments in satisfaction of claims or
any other rights thereunder


                                       16


then in force, shall pass to the purchaser or grantee notwithstanding the amount
of any bid at such foreclosure sale. Nothing contained herein shall prevent
accrual of interest as provided in the Note Purchase Agreement on any portion of
the principal balance due under the Note Purchase Agreement until such time as
the Insurance Proceeds are actually received and applied to reduce the principal
balance outstanding.

       23. Condemnation. Should the Property or any part thereof be taken or
damaged by reason of any public improvement, condemnation proceeding, or
conveyance in lieu thereof, or in any other manner, Beneficiary shall be
entitled to all compensation, awards and other payments or relief therefor, and
shall be entitled, at its option, to commence, appear in and prosecute in its
own name any action or proceeding. Grantor shall have the right, with the prior
written consent of the Beneficiary, to make a compromise or settlement in
connection with such taking or damage. All such compensation, awards, damages,
rights of action and proceeds (the "Condemnation Proceeds") are hereby assigned
to Beneficiary, who shall, after deducting therefrom all its reasonable
expenses, including attorneys' fees, apply or release the Condemnation Proceeds
with the same effect as provided in Section 14 above with respect to disposition
of insurance proceeds; provided, that if such Condemnation Proceeds are to be
utilized for restoration of the Property and there are any excess Condemnation
Proceeds after application thereof to the restoration of the Property,
Beneficiary shall be entitled to apply such excess to the reduction of any
indebtedness outstanding under the Note Purchase Agreement. Grantor agrees to
execute such further assignments of the Condemnation Proceeds as Beneficiary may
require. Nothing contained herein shall prevent the accrual of interest as
provided in the Note Purchase Agreement on any portion of the Condemnation
Proceeds to be applied to the principal balance due under the Note Purchase
Agreement until such Condemnation Proceeds are actually received and applied.

       24. Reserve Account.

              (a) If Beneficiary so requires, Grantor shall pay to Beneficiary
monthly, together with and in addition to any payments of principal and/or
interest due under the Note Purchase Agreement, a sum, as estimated by the
Beneficiary, equal to the ground rents, if any, the real estate taxes and
assessments next due on the Property and the premiums next due on insurance
policies required under the Loan Documents, less all sums already paid therefor,
divided by the number of months to elapse before two (2) months prior to the
date when the ground rents, real estate taxes, assessments and insurance
premiums will become delinquent. The monthly reserve account payments and any
principal and/or interest payments due shall be paid in a single payment and
applied by Beneficiary in the following order: (i) ground rents, real estate
taxes, assessments and insurance premiums, (ii) expenditures made pursuant to
the Loan Documents and interest thereon, (iii) interest on the obligations of
Borrowers under Note Purchase Agreement, and (iv) principal due on the
obligations of Borrowers under Note Purchase Agreement. Grantor shall promptly
deliver to Beneficiary all bills and notices pertaining to the ground rents,
taxes, assessments and insurance premiums.


                                       17


              (b) The reserve account is solely for the protection of
Beneficiary. Beneficiary shall have no responsibility except to credit properly
the sums actually received by it. No interest will be paid on the funds in the
reserve account and Beneficiary shall have no obligation to deposit the funds in
an interest-bearing account. Upon assignment of this Deed of Trust by
Beneficiary, any funds in the reserve account shall be turned over to the
assignee and any responsibility of Beneficiary with respect thereto shall
terminate. Each transfer of the Property shall automatically transfer to the
grantee all rights of Grantor to any funds in the reserve account.

              (c) If the total of the payments to the reserve exceeds the amount
of payments actually made by Beneficiary, plus such amounts as have been
reasonably accumulated in the reserve account toward payments to become due,
such excess may, at Beneficiary's election, be (i) credited by Beneficiary
against sums then due and payable under the Loan Documents or (ii) refunded to
Grantor as its name appears on the records of Beneficiary. If, however, the
reserve account does not have sufficient funds to make the payments when they
become due, Grantor shall pay to Beneficiary the amount necessary to make up the
deficiency within fifteen (15) days after written notice to Grantor. If this
Deed of Trust is foreclosed or if Beneficiary otherwise acquires the Property,
the Beneficiary shall, at the time of commencement of the proceedings or at the
time the Property is otherwise acquired, apply the remaining funds in the
reserve account, less such sums as will become due during the pendency of the
proceedings, against the sums due under the Loan Documents and/or to make
payments required under the Loan Documents.

       25. Repayment of Beneficiary's Expenditures. Grantor shall pay within ten
(10) days after written notice from Beneficiary all sums expended by Beneficiary
and all costs and expenses incurred by Beneficiary in taking any actions
pursuant to the Loan Documents, including attorneys' fees, accountants' fees,
appraisal and inspection fees, and the costs for title reports. If any laws or
regulations are passed subsequent to the date of this Deed of Trust which
require Beneficiary to incur out-of-pocket expenses in order to maintain,
modify, extend or foreclose this Deed of Trust, or revise the terms of the loan
secured hereby, Grantor shall reimburse Beneficiary for such expenses within ten
(10) days after written notice from Beneficiary. Expenditures by Beneficiary
shall bear interest from the date of such advance or expenditure at the default
interest rate set forth in the Note Purchase Agreement until paid, shall
constitute advances made under this Deed of Trust and shall be secured by and
have the same priority as the lien of this Deed of Trust. If Grantor fails to
pay any such expenditures, costs and expenses and interest thereon, Beneficiary
may, at its option, without foreclosing the lien of this Deed of Trust, commence
an independent action against Grantor for the recovery of the expenditures
and/or advance any undisbursed loan proceeds to pay the expenditures.

       26. Additional Security Documents. Grantor shall within fifteen (15) days
after request by Beneficiary execute and deliver any financing statement,
renewal, affidavit, certificate, continuation statement, or other document as
Beneficiary may request in order to perfect, preserve, continue, extend, or
maintain security interests or liens previously granted and the priority of the
security interests or liens. Grantor shall


                                       18


pay all costs and expenses incurred by Beneficiary in connection with the
preparation, execution, recording, filing, and refiling of any such document.

       27. Conveyance of Property; Further Encumbrance. In the event that all or
any part of or any interest in the Property shall be sold, transferred, leased
(other than space leases without options to purchase), further encumbered,
conveyed, or a contract of sale or other conveyance entered into with respect
thereto, without the prior written consent of Beneficiary, then, upon the
occurrence of any one or more of the foregoing events, and regardless of whether
or not Grantor shall be in default under the Note Purchase Agreement or this
Deed of Trust or any Loan Document, Beneficiary may, at its option, declare the
then outstanding principal balance evidenced by the Note Purchase Agreement plus
accrued interest thereon immediately due and payable or, at its sole option, it
may consent to said conveyance or transfer in writing and may increase the rate
of the loan to the interest rate which Beneficiary would then commit to make a
mortgage loan to a borrower of comparable financial strength and managerial
expertise, and secured by similar security of comparable value and character,
and impose whatever other conditions it shall deem necessary to compensate it
for such increased risk resulting from the breach of the foregoing covenants.
Such increase in interest rate or imposition of additional terms shall entitle
Beneficiary to increase monthly payments under the Notes so that the increased
monthly installments will fully amortize the outstanding balance of the
indebtedness evidenced thereby over the unexpired amortization term of the
Notes. The execution and delivery by the Grantor of any joint venture agreement,
partnership agreement, declaration of trust or option agreement whereunder any
other person or corporation may become entitled, directly or indirectly, to the
possession or enjoyment of the Property, or the income or other benefits derived
or to be derived therefrom shall in each case be deemed to be a conveyance or
assignment of the Grantor's interest in the Property for the purposes of this
section, and shall require the prior written consent of the Beneficiary.

       28. Release of Parties or Collateral. Without affecting the obligations
of any party under the Loan Documents and without affecting the lien of this
Deed of Trust and Beneficiary's security interest in the Collateral, Beneficiary
and/or Trustee may, without notice (a) release all or any Grantor, any Borrower
and/or any other party now or hereafter liable for any of the Secured
Obligations (including guarantors), (b) release all or any part of the
Collateral, (c) subordinate the lien of this Deed of Trust or Beneficiary's
security interest in the Collateral, (d) take and/or release any other security
for or guarantees of the Secured Obligations, (e) grant an extension of time for
performance of the Secured Obligations, (f) modify, waive, forbear, delay or
fail to enforce any of the Secured Obligations, (g) sell or otherwise realize on
any other security or guaranty prior to, contemporaneously with or subsequent to
a sale of all or any part of the Collateral, (h) make advances pursuant to the
Loan Documents including advances in excess of the amount provided for under the
Note Purchase Agreement, (i) consent to the making of any map or plat of the
Property, and (j) join in the grant of any easement on the Property. Any
subordinate lienholder shall be subject to all such releases, extensions or
modifications without notice to or consent from the subordinate lienholder.
Grantor shall pay any Trustee's, attorneys', title insurance, recording,
inspection or other fees or


                                       19


expenses incurred in connection with release of Collateral, the making of a map,
plat or the grant of an easement.

       29. Default--Remedies. The occurrence of any Event of Default (as defined
in the Note Purchase Agreement) or Grantor's failure to comply with any term or
condition of the Loan Documents, including without limitation, this Deed of
Trust and payments due under the Note Purchase Agreement or other obligations
secured by this Deed of Trust, shall constitute an Event of Default. Upon the
occurrence of an Event of Default Beneficiary may declare all amounts owed under
the Secured Obligations, and all accrued and unpaid interest and other sums in
respect thereof, immediately due and payable after applicable notice as set
forth herein and/or exercise its rights and remedies under the Loan Documents
and applicable law including foreclosure of this Deed of Trust judicially or non
judicially by the Trustee pursuant to the power of sale. In the event of any
such Event of Default and upon written request of Beneficiary, Trustee shall
sell the Property in accordance with the Deed of Trust Act of the state of
Washington (RCW Chapter 61.24 as existing now or hereafter amended) and the
Uniform Commercial Code of the state of Washington, where applicable, at public
auction to the highest bidder. Any person except Trustee may bid at Trustee's
sale. Trustee shall apply the proceeds of the sale as follows: (i) to the
expenses of sale, including a reasonable Trustee's fee and attorneys' fee; (ii)
to all the Secured Obligations (principal and interest) and all other
indebtedness secured by this Deed of Trust or any other instrument, in such
order and amounts as Beneficiary may elect; (iii) the surplus, if any, shall be
distributed in accordance with said Deed of Trust Act. Trustee shall deliver to
the purchaser at the sale its deed, without warranty, which shall convey to the
purchaser the interest in the property which Grantor had or had the power to
convey at the time of its execution of this Deed of Trust and such as it may
have acquired thereafter. Trustee's deed shall recite the facts showing that the
sale was conducted in compliance with all the requirements of the law and of
this Deed of Trust, which recital shall be prima facie evidence of such
compliance and conclusive evidence thereof in favor of bona fide purchasers and
encumbrances for value. The power of sale conferred by this Deed of Trust and by
the Deed of Trust Act of the state of Washington is not an exclusive remedy, and
when not exercised Beneficiary may foreclose this Deed of Trust as a mortgage.

              Trustee is not obligated to notify any party hereto of pending
sale under any other deed of trust or of any action or proceeding in which
Grantor, Trustee or Beneficiary shall be a party, unless such action or
proceeding is brought by Trustee.

              Beneficiary may proceed as to the Collateral which constitutes
personal property in accordance with Beneficiary's rights and remedies in
respect to the Property or sell the Personal Property Collateral separately and
without regard to the remainder of the Property in accordance with Beneficiary's
rights and remedies provided by the Washington Uniform Commercial Code as well
as other rights and remedies available at law or in equity. Beneficiary's
exercise of any of its rights and remedies shall not constitute a waiver or cure
of a default. Beneficiary's failure to enforce any default shall not constitute
a waiver of the default or any subsequent default. In the event of foreclosure,
the cost of the title premium for the trustee sale guarantee (or equivalent
policy) shall be paid for by Grantor. In the event the Loan Documents are
referred to an


                                       20


attorney for enforcement or preservation of Beneficiary's rights or remedies,
whether or not suit is filed or any proceedings are commenced, Grantor shall pay
all Beneficiary's costs and expenses including Trustee's and attorneys' fees
(including attorneys' fees for any appeal, bankruptcy proceeding or any other
proceeding), accountants' fees, appraisal and inspection fees and cost of a
title report.

       30. Cumulative Remedies. To the extent allowed by law, all Beneficiary's
and Trustee's rights and remedies specified in the Loan Documents are
cumulative, not mutually exclusive and not in substitution for any rights or
remedies available in law or equity. In order to obtain performance of Grantor's
obligations under the Loan Documents, without waiving its rights in the
Collateral, Beneficiary may proceed against Grantor or any Borrower or may
proceed against any other security or guaranty for the Secured Obligations, in
such order and manner as Beneficiary may elect. The commencement of proceedings
to enforce a particular remedy shall not preclude the discontinuance of the
proceedings and the commencement of proceedings to enforce a different remedy.

       31. Entry. Beneficiary, in person, by agent or by court appointed
receiver, may enter, take possession of, manage and operate all or any part of
the Property, and may also do any and all other things in connection with those
actions that Beneficiary may in its sole discretion consider necessary and
appropriate to protect the security of this Deed of Trust. Such other things may
include: taking and possessing all of Grantor's or the then owner's books and
records; entering into, enforcing, modifying, or canceling Leases on such terms
and conditions as Beneficiary may consider proper; obtaining and evicting
tenants; fixing or modifying Rents; collecting and receiving any payment of
money owing to Grantor; completing any unfinished construction; and/or
contracting for and making repairs and alterations. Grantor hereby irrevocably
constitutes and appoints Beneficiary as its attorney-in-fact to perform such
acts and execute such documents as Beneficiary in its sole discretion may
consider to be appropriate in connection with taking these measures.

       32. Appointment of Receiver. In the event of a default, Grantor consents
to and Beneficiary shall be entitled, without notice, without bond, and without
regard to the adequacy of the Collateral, to the appointment of a receiver for
the Collateral. The receiver shall have, in addition to all the rights and
powers customarily given to and exercised by a receiver, all the rights and
powers granted to Beneficiary by the Loan Documents. The receiver shall be
entitled to receive a reasonable fee for management of the Property. If Grantor
is an occupant of the Property, Beneficiary has the right to require Grantor to
pay rent at fair market rates and the right to remove Grantor from Property if
Grantor fails to pay rent.

       33. Sale of Property After Default. The Collateral may be sold separately
or as a whole, at the option of Beneficiary following a default. In the event of
a Trustee's sale of all the Collateral, Beneficiary hereby assigns its security
interest in the personal property Collateral to the Trustee. Beneficiary may
also realize on the personal property Collateral in accordance with the remedies
available under the Uniform Commercial Code or at law. In the event of a
Trustee's sale, Grantor, and the holder of any


                                       21


subordinate liens or security interest with actual or constructive notice
hereof, waive any equitable, statutory or other right they may have to require
marshaling of assets in connection with the exercise of any of the remedies
permitted by applicable law or provided herein, or to direct the order in which
any of the Collateral will be sold in the event of any sale under this Deed of
Trust or foreclosure in the inverse order of alienation.

       34. Foreclosure of Lessee's Rights--Subordination. Beneficiary shall have
the right, of its option, to foreclose this Deed of Trust subject to the rights
of any lessees of the Property. Beneficiary's failure to foreclose against any
lessee shall not be asserted as a claim against Beneficiary or as a defense
against any claim by Beneficiary in any action or proceeding. Beneficiary at any
time may subordinate this Deed of Trust to any or all of the Leases except that
Beneficiary shall retain its priority claim to any condemnation or insurance
proceeds.

       35. Repairs During Redemption. In the event of a judicial foreclosure the
purchaser during any redemption period may make such repairs and alterations to
the Property as may be reasonably necessary for the proper operation, care,
preservation, protection and insuring of the Property. Any sums so paid,
together with interest from the date of the expenditure at the rate provided in
the judgment, shall be added to the amount required to be paid for redemption of
the Property.

       36. Reconveyance After Payment. Upon written request of Beneficiary
stating that all obligations secured by this Deed of Trust have been paid,
Trustee shall reconvey, without warranty, the Property then subject to the lien
of this Deed of Trust. The recitals in any reconveyance of any matters of fact
shall be conclusive proof of the truthfulness thereof. The grantee in the
reconveyance may be described as "the person or persons legally entitled
thereto." Grantor shall pay any costs, Trustee's fees and recording fees
incurred in so reconveying the Property.

       37. Nonwaiver of Terms and Conditions. Time is of the essence with
respect to performance of the obligations due under the Loan Documents.
Beneficiary's failure to require prompt enforcement of any required obligation
shall not constitute a waiver of the obligation due or any subsequent required
performance of the obligation. No term or condition of the Loan Documents may be
waived, modified or amended except by a written agreement signed by Grantor and
Beneficiary. Any waiver of any term or condition of the Loan Documents shall
apply only to the time and occasion specified in the waiver and shall not
constitute a waiver of the term or condition at any subsequent time or occasion.

       38. Waivers by Grantor. Without affecting any of Grantor's obligations
under the Loan Documents, Grantor waives the following:

              (a) Any right to require Beneficiary to proceed against any
specific party liable for sums due under the Loan Documents or to proceed
against or exhaust any specific security for sums due under the Loan Documents.


                                       22


              (b) Diligence, demand for performance, notice of nonperformance,
presentment, protest and notice of dishonor and notice of new or additional
indebtedness of any Grantor, any Borrower or any other party liable for sums due
under the Loan Documents to Beneficiary.

              (c) Any defense arising out of Beneficiary entering into
additional financing or other arrangements with any Grantor, any Borrower or any
party liable for sums due under the Loan Documents not relating to the Property
and any action taken by Beneficiary in connection with any such financing or
other arrangements or any pending financing or other arrangements not related to
the Property.

              (d) Any defense arising out of the absence, impairment, or loss of
any or all rights of recourse, reimbursement, contribution or subrogation or any
other rights or remedies of Beneficiary against any Grantor, any Borrower or any
other party liable for sums due under the Loan Documents or any Collateral.

              (e) Any obligation of Beneficiary to see to the proper use and
application of any proceeds advanced pursuant to the Loan Documents.

       39. Right of Subrogation. Beneficiary is subrogated to the rights,
whether legal or equitable, of all beneficiaries, mortgagees, lienholders and
owners directly or indirectly paid off or satisfied in whole or in part by any
proceeds advanced by Beneficiary under the Loan Documents, regardless of whether
these parties assigned or released of record their rights or liens upon payment.

       40. Joint and Several Liability. If there is more than one Grantor of
this Deed of Trust, their obligations shall be joint and several.

       41. Statement of Amount Owing. Grantor upon request by Beneficiary will
furnish a written statement duly acknowledged of the amount due under the Loan
Documents and whether any offsets or defenses exist against the amount due.

       42. Books and Records Financial Statements. Grantor will keep and
maintain at Grantor's address stated above, or such other place as Beneficiary
may approve in writing, books of accounts and records adequate to reflect
correctly the results of the operation of the Property and copies of all written
contracts, leases and other instruments which affect the Property. Such books,
records, contracts, leases and other instruments shall be subject to
examination, inspection and copying at any reasonable time by Beneficiary.
Grantor shall provide to Beneficiary within ninety (90) days after the end of
each of Grantor's fiscal years (or within twenty (20) days of Beneficiary's
written request therefor if Grantor is in default), for each Grantor, each
Borrower and for each guarantor of the Secured Obligations, a complete and
current financial statement and copy of its most recent federal income tax
return, together with a statement of income and expenses of the Property and a
statement of changes in financial position with respect to the Property for the
prior year, each in reasonable detail and certified by Grantor, each Borrower or
guarantor, as the case may be, and if Beneficiary shall require, by an
independent certified public accountant. At the same time, Grantor shall also
furnish a


                                       23


current rent roll for the Property, certified by Grantor, showing the name of
each tenant, the space occupied, the lease expiration date, the monthly rent, a
schedule of gross receipts for each tenant obligated to pay rent based on a
percentage of receipts, the date to which rent has been paid and any deposit
Grantor is holding. Grantor's compliance with these provisions shall not limit
or affect Grantor's obligations to comply with financial, tax and operation
covenants and reporting requirements under any other agreement between Grantor
and Beneficiary whether or not such other agreement is related to the Secured
Obligations.

       43. Appraisals. In the event of a default Beneficiary may obtain a
current appraisal of the Property which is to be paid for by Grantor. Appraisals
may be commissioned by Beneficiary when required by laws and regulations which
govern Beneficiary's lending practices. The cost of all such appraisals will be
home by Grantor.

       44. Maximum Interest Rate. If any payment of interest, fees and/or
charges under the Loan Documents shall exceed the maximum amounts permitted by
any applicable law of the State of Washington, then the payment made or to be
made shall be reduced so that in no event shall any obligor pay or Beneficiary
receive an amount in excess of the maximum amount permitted by any applicable
law. If Beneficiary receives an excess amount, it shall be treated as a
prepayment of principal or shall be returned to the payor, at Beneficiary's
option.

       45. Evasion of Prepayment Fee. If Grantor is in default, whether
Beneficiary has accelerated the maturity of the indebtedness or not, any tender
of payment sufficient to satisfy all sums due under the Loan Documents trade at
any time prior to foreclosure sale shall constitute an evasion of the prepayment
terms of the Note Purchase Agreement, if any, and shall be deemed a voluntary
prepayment. Any such payment, to the extent permitted by law, shall include the
additional payment required under the prepayment fee provision in the Note
Purchase Agreement, if any.

       46. Payment of New Taxes. If any federal, state or local law is passed
subsequent to the date of this Deed of Trust which requires Beneficiary to pay
any tax because of this Deed of Trust or the sums due under the Loan Documents
(excluding income taxes), then Grantor shall pay to Beneficiary on demand any
such taxes if it is lawful for Grantor to pay them, or, in the alternative
Grantor may repay all sums due under the Loan Documents plus any prepayment fee
within thirty (30) days of such demand. If it is not lawful for Grantor to pay
such taxes, then at its option Beneficiary may declare a default under the Loan
Documents.

       47. Insolvency Proceedings. Grantor or any party liable on the Secured
Obligations (including guarantors) shall not make any assignment for the benefit
of creditors and shall not permit the institution of any proceedings under any
federal or state statutes pertaining to bankruptcy, insolvency, arrangement,
dissolution, liquidation or receivership whether or not an order for relief is
entered.


                                       24


       48. Substitution of Trustee. Beneficiary may at any time discharge the
Trustee and appoint a successor Trustee who shall have all of the powers of the
original Trustee.

       49. In-House Counsel Fees. Whenever Grantor is obligated to pay or
reimburse Beneficiary or Trustee for any attorneys' fees, those fees shall
include the allocated costs for services of in-house counsel.

       50. Notices. Any notice given by Grantor, Trustee or Beneficiary shall be
in writing and shall be effective (a) on personal delivery to the party
receiving the notice, or (b) on the third day after deposit in the United States
mail, postage prepaid with return receipt requested, addressed to the party at
the address set forth above, or with respect to the Grantor, to the address at
which Beneficiary customarily or last communicated with Grantor.

       51. Time. Time is of the essence in connection with all obligations of
Grantor herein.

       52. Successors and Assigns. This Deed of Trust applies to, inures to the
benefit of, and binds all parties hereto and their successors and assigns. The
terms "Grantor," "Trustee" and "Beneficiary" include their successors and
assigns.

       53. Controlling Document; Definitions. In the event of a conflict or
inconsistency between the terms and conditions of this Deed of Trust and the
terms and conditions of any other of the Loan Documents (except for any separate
assignment of rents and/or leases and any Note Purchase Agreement which shall
prevail over this Deed of Trust), the terms and conditions of this Deed of Trust
shall prevail. All capitalized terms not otherwise defined herein shall have the
same meaning as in the Note Purchase Agreement.

       54. Invalidity of Terms and Conditions. If any term or condition of this
Deed of Trust is found to be invalid, the invalidity shall not affect any other
term or condition of the Deed of Trust and the Deed of Trust shall be construed
as if not containing the invalid term or condition.

       55. Legislation Affecting Beneficiary's Rights. If enactment or
expiration of applicable laws has the effect of rendering any provision of the
Note Purchase Agreement or this Deed of Trust unenforceable according to its
terms, Beneficiary, at its option, may require immediate payment in full of all
sums secured by this Deed of Trust and may invoke any remedies permitted herein.

       56. Rules of Construction. This Deed of Trust shall be construed so that,
whenever applicable, the use of the singular shall include the plural, the use
of the plural shall include the singular, and the use of any gender shall be
applicable to all genders and shall include corporations, partnerships and
limited partnerships.


                                       25


       57. Section Headlines. The headings to the various sections have been
inserted for convenience of reference only and shall not be used to construe
this Deed of Trust.

       58. Applicable Law. This Deed of Trust shall be governed by and construed
in accordance with the laws of the State of Washington.

       59. Commercial Purposes. The Secured Obligations were incurred primarily
for commercial, investment or business purposes and not for personal, family or
household purposes.

       60. Counterpart Notice. This Deed of Trust encumbers real property
situated in Chelan County and Clallam County in the State of Washington. In
order to facilitate recording in each of the two counties at the same time, this
Deed of Trust has been prepared in counterparts, each of which is identical to
this counterpart, except that Exhibits A and C of this counterpart describe only
the portion of the Mortgaged Property situated in the county in which this
counterpart is recorded. Grantor and Beneficiary intend and agree that the two
counterparts constitute one and the same deed of trust, that the lien thereof
shall attach to all property encumbered thereby on execution and delivery of any
one of the counterparts, and that to the extent permitted by law, foreclosure
thereof may be accomplished in a single judicial or nonjudicial proceeding in
any county in which any of the Mortgaged Property is located. [TO BE INCLUDED
ONLY IN THE DEED OF TRUST COUNTERPART RECORDED IN CHELAN COUNTY; INTENTIONALLY
OMITTED FROM THE CLALLAM COUNTY DEED OF TRUST COUNTERPART]

       61. Counterpart Notice. This Deed of Trust encumbers real property
situated in Chelan County and Clallam County in the State of Washington. In
order to facilitate recording in each of the two counties at the same time, this
Deed of Trust has been prepared in counterparts, each of which is identical to
this counterpart, except that Exhibits [A-C (TO CHANGE DEPENDING ON COUNTY IN
WHICH THE DEED OF TRUST IS RECORDED] of this counterpart describe only the
portion of the Mortgaged Property situated in the county in which this
counterpart is recorded. Grantor and Beneficiary intend and agree that the two
counterparts constitute one and the same deed of trust, that the lien thereof
shall attach to all property encumbered thereby on execution and delivery of any
one of the counterparts, and that to the extent permitted by law, foreclosure
thereof may be accomplished in a single judicial or nonjudicial proceeding in
any county in which any of the Mortgaged Property is located.

       62. Washington State Notice. Beneficiary hereby notifies Grantor as
follows: 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.

       63. Prior Mortgages. If this Deed of Trust is subordinate to any other
mortgage(s) or similar security document(s) on all or part of the Collateral,
the following modifications shall apply hereto:

              1. The following definition is added hereto:


                                       26


                     "Prior Mortgage" means the mortgage(s) or similar security
              document(s) of all or part of the Collateral, to which this Deed
              of Trust is subordinate, set forth in the title policy insuring
              the lien hereof together with the note(s) secured thereby and all
              other documents securing said note(s).

              2. The following is added at the end of the Granting Clause:

                     (m) all sums held by or under the control of the holder of
              the Prior Mortgage which were deposited on account of real estate
              taxes, insurance premiums or otherwise.

              3. The following is added to the end of Section 9:

              Grantor further represents that neither Grantor nor any of its
              affiliates (nor any person or entity acting on behalf of any of
              them) is the holder of the Prior Mortgage or any participation or
              other interest therein or is the owner of a legal or equitable
              interest in any such holder.

              4. The following is added to the end of Section 14:

                     (h) The foregoing provisions of this Section are subject to
              any provision of the Prior Mortgage requiring the application of
              insurance proceeds to restoration or requiring the payment of such
              proceeds to the holder of the Prior Mortgage.

              5. The following is added to the end of Section 23:

              The foregoing provisions of this Section are subject to any
              provision of the Prior Mortgage requiring the application of
              condemnation proceeds to restoration or requiring the payment of
              such proceeds to the holder of the Prior Mortgage.

       64. Additional Provisions Concerning Prior Mortgages.

              (a) Grantor shall perform or observe all covenants and conditions
to be performed or observed by the Grantor or grantor under the Prior Mortgage.

              (b) Upon notice from Beneficiary, simultaneously with the making
of each payment of principal and interest on the Prior Mortgage, Grantor shall
deliver to Beneficiary a copy of the check in the amount of such payment
delivered to the holder of the Prior Mortgage. Beneficiary shall have the right,
exercisable by notice to Grantor, to require Grantor to make payment of
principal and interest on the Prior Mortgage through Beneficiary and, if
Beneficiary exercises such right, Grantor shall deliver to Beneficiary a check
in the amount of each installment of such principal and interest, payable to the
order of the holder of the Prior Mortgage, not later than three (3) days prior
to the due date thereof and Beneficiary shall promptly forward such check to
said holder.


                                       27


              (c) Grantor hereby irrevocably designates Beneficiary its agent
and attorney-in-fact to perform or observe on behalf of Grantor any covenant or
condition which Grantor fails to perform or observe under the Prior Mortgage
within any applicable grace period specified in the Prior Mortgage, and any
advances made by Beneficiary in connection with such performance or observance
shall be repaid by Grantor on demand with interest at the default interest rate
set forth in the Note Purchase Agreement and the amount so advanced, with
interest, shall be secured hereby. Beneficiary shall have the right, but not the
obligation, to so perform or so observe. The performance or observance of such
covenant or condition by Beneficiary shall not prevent Grantor's failure to so
perform or observe from constituting an Event of Default. In performing or
observing any such covenant or condition, Beneficiary shall have the right to
enter upon the Collateral. Upon receipt by Beneficiary from the holder of the
Prior Mortgage of any notice of default under the Prior Mortgage, Beneficiary
may rely thereon and take any action permitted by this Section to remedy such
default notwithstanding that the existence of such default or the nature thereof
may be questioned or denied by Grantor.

              (d) Grantor shall not enter into any modification, amendment or
supplement to the Prior Mortgage nor acquire, whether directly or indirectly,
any interest whatsoever in the Prior Mortgage.


                                       28


              The undersigned Grantor requests that a copy of any notices,
including but not limited to any Notice of Sale, be mailed to it at the address
herein before set forth.

                                        PACIFIC AEROSPACE & ELECTRONICS, INC.,
                                        a Washington corporation


                                        By:     /s/ Donald A. Wright
                                           -------------------------------------
                                           Name: Donald A. Wright
                                           Title: President and Chief Executive
                                                  Officer


                                        CASHMERE MANUFACTURING CO., INC.,
                                        a Washington corporation


                                        By:     /s/ Donald A. Wright
                                           -------------------------------------
                                           Name: Donald A. Wright
                                           Title: Executive Vice President


                                        NORTHWEST TECHNICAL INDUSTRIES, INC.,
                                        a Washington corporation


                                        By:     /s/ Donald A. Wright
                                           -------------------------------------
                                           Name: Donald A. Wright
                                           Title: Executive Vice President




STATE OF WASHINGTON    )
                       )ss.
COUNTY OF KING         )

              I certify that I know or have satisfactory evidence that
Donald A. Wright is the person who appeared before me, and said person
acknowledged that he/she signed this instrument, on oath stated that he/she was
authorized to execute the instrument and acknowledged it as the President and
Chief Executive Officer of PACIFIC AEROSPACE & ELECTRONICS, INC. to be the free
and voluntary act of such party for the uses and purposes mentioned in the
instrument.

Dated: March 15, 2002

                              Notary Public: /s/ Susan R. Benson
                              Print Name: Susan R. Benson
                              My commission expires: October 11, 2002

(Use this space for notarial stamp/seal)




STATE OF WASHINGTON    )
                       )ss.
COUNTY OF KING         )

              I certify that I know or have satisfactory evidence that
Donald A. Wright is the person who appeared before me, and said person
acknowledged that he/she signed this instrument, on oath stated that he/she was
authorized to execute the instrument and acknowledged it as the Executive Vice
President of CASHMERE MANUFACTURING CO., INC. to be the free and voluntary act
of such party for the uses and purposes mentioned in the instrument.

Dated:  March 15, 2002

                              Notary Public: /s/ Susan R. Benson
                              Print Name: Susan R. Benson
                              My commission expires: October 11, 2002

(Use this space for notarial stamp/seal)




STATE OF WASHINGTON    )
                       )ss.
COUNTY OF KING         )

              I certify that I know or have satisfactory evidence that
Donald A. Wright is the person who appeared before me, and said person
acknowledged that he/she signed this instrument, on oath stated that he/she was
authorized to execute the instrument and acknowledged it as the Executive Vice
President of NORTHWEST TECHNICAL INDUSTRIES, INC. to be the free and voluntary
act of such party for the uses and purposes mentioned in the instrument.

Dated: March 15, 2002

                              Notary Public:  /s/ Susan R. Benson
                              Print Name: Susan R. Benson
                              My commission expires: October 11, 2002

(Use this space for notarial stamp/seal)


                                    EXHIBIT A

                          Legal Description of Project

PARCEL "A"

Units 1, 2, 3 and 4, Confluence Park Condominium, Chelan County, Washington,
according to the plat thereof recorded November 6, 1998 under Auditor's No.
2040202, TOGETHER WITH limited common elements and garage spaces.




                                    EXHIBIT B

                          Legal Description of Property


That portion of the East half of the West half of Section 20, Township 30 North,
Range 2 West, W.M., Clallam County, Washington, described as follows:

Beginning at a portion which is the Northeast corner of the Northwest quarter of
said Section 20; Thence South along the North-South center line of said Section
20 of a distance of 1,403 feet to the TRUE POINT OF BEGINNING of this
description; Thence continuing South along said center line 2,755 feet to the
intersection of the Northerly right of way boundary of the existing road
designated as the DNR P-1200 Road; Thence North 68 degrees 00 minutes West along
said boundary 615 feet; Thence North, parallel to said North-South center line,
2,525 feet; Thence East, parallel to the North East-West center line of said
Section 20, a distance of 577.5 feet, more or less, to the TRUE POINT OF
BEGINNING.




                                    EXHIBIT C

                          Legal Description of Property


Lots 6, 7, 8, 9, 10, 11, 12, 13 and 14, Block 1, Steward's Plat of Mission (now
Cashmere), according to the plat thereof recorded in Book 1 of Plats, Page 19,
records of Chelan County, and Lots 17 and 18 and that portion of Lot 16,
hereinafter described, Block 1, J.F. Woodring's Plat of Mission (now Cashmere)
according to the plat thereof recorded in Book 1 of Plats, Page 18, records of
said county, said portion of Lot 16, described as follows:

Beginning at the Northeast corner of said Lot 16; thence Westerly along the
Northerly line thereof 29.25 feet to the Northwest corner of a building lying
Easterly and the Northeast corner of a building lying Westerly and from said
building corner the Northwest corner of said Lot 16 bears Westerly 0.75 feet;
thence Southerly along the coincident line between said buildings, the Easterly
and Westerly faces of which are the same or coincident line between said
buildings, 104.67 feet to the Southwest corner and the Southeast corner of said
buildings; thence continue along the extension of said coincident line Southerly
15.39 feet to a point of intersection with the Southerly line of said Lot 16
from which the Southwest corner of said Lot 16 bears Westerly 0.56 feet; thence
from said point of intersection Easterly along the Southerly line of said Lot
16, 29.44 feet to the Southeast corner thereof; thence Northerly 120.05 feet to
the Northeast corner thereof and the True Point of Beginning.




                                    EXHIBIT D

                                     Leases

(1) Lease Agreement, Cashmere Manufacturing, Inc. 1994, dated November 4, 1994,
between Port of Chelan County and Cashmere Manufacturing Co., Inc.

(2) Lease Agreement, Pacific Coast Technologies, Inc. 1993, dated February 1,
1993, between Port of Chelan County and Pacific Coast Technologies, Inc.

(3) Lease Agreement 1999, dated December 30, 1998, between Port of Chelan County
and Pacific Aerospace & Electronics, Inc., as amended by that certain First
Addendum to 1999 Lease, dated November 21, 2001, between Port of Chelan County
and Pacific Aerospace & Electronics, Inc.

(4) Lease Agreement - PA&E IB#9 2000, dated July 13, 2000, between Port of
Chelan County and Pacific Aerospace & Electronics, Inc.

(5) Lease Agreement, dated March 31, 1994, between Erickson Realty, Ltd. and
Electronic Specialty Corporation.

(6) Lease, dated April 3, 1998, between Sea-Land Development Corporation and
Skagit Engineering & Manufacturing, Inc., as amended by that certain Amendment
to Lease, dated June 19, 2000, between Sea-Land Development Corporation and
Skagit Engineering & Manufacturing, Inc., as amended by that certain Amendment
to Lease, dated January 25, 2002, between Sea-Land Development Corporation and
Skagit Engineering & Manufacturing, Inc., as amended by that certain Amendment
to Lease, dated January 31, 2002, Sea-Land Development Corporation and Skagit
Engineering & Manufacturing, Inc.

(7) Lease Agreement, dated June 2, 2000, between 220TH Street, LLC and Skagit
Engineering Manufacturing, Inc. (d/b/a Pacific Aerospace Electronics, Inc. -
Engineering & Fabrication Division).

(8) Lease Agreement, dated August 6, 2001, between Pacific Aerospace &
Electronics, Inc. and North Central Educational Service District, as amended by
that certain Amendment No. 1 to Lease Agreement, dated December 17, 2001,
between Pacific Aerospace & Electronics, Inc. and North Central Educational
Service District.




                                    EXHIBIT E

                                  Encumbrances

1. Property described in Exhibit A, as to Certain Equipment:

       (a) Master Equipment Lease Agreement, dated as of May 27, 1999, between
KeyCorp Leasing, A Division of Key Corporate Capital Inc., as Lessor, and
Pacific Aerospace & Electronics, Inc., as Lessee, as amended by Equipment
Schedule No. 02, dated as of June 14, 1999, between KeyCorp Leasing, A Division
of Key Corporate Capital Inc. and Pacific Aerospace & Electronics, Inc., with a
total cost of $233,443.08.

2. Lease Agreement, Pacific Coast Technologies, Inc. 1993, dated February 1,
1993, between Port of Chelan County and Pacific Coast Technologies, Inc.:

       (a) Commercial Security Agreement between Pacific Aerospace &
Electronics, Inc., as Borrower, Pacific Coast Technologies, Inc., as Grantor,
and KeyBank National Association, as Lender, securing the Promissory Note
between Pacific Aerospace & Electronics, Inc. and KeyBank National Association
in principal amount of $712,085.00, and

       (b) UCC-2 fixture filing between Pacific Coast Technologies, Inc., as
Debtor, and KeyBank National Association, as Secured Party, dated March 18,
1998.

EX-10.4

                                                                    EXHIBIT 10.4

After Recording Return To:
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York 10019
Attention:   Val A. Soupios, Esq.



                       DEED OF TRUST, SECURITY AGREEMENT
                       AND FIXTURE FILING WITH ASSIGNMENT
                               OF LEASES AND RENTS

GRANTOR:

1.      PACIFIC AEROSPACE & ELECTRONICS, INC.

2.      CASHMERE MANUFACTURING CO., INC.

3.      NORTHWEST TECHNICAL INDUSTRIES, INC.

GRANTEE:

1.      FIRST UNION NATIONAL BANK, as collateral agent for Holders listed on
        Schedule A to Note Purchase Agreement (Beneficiary)

2.      LAND TITLE COMPANY OF CHELAN -- DOUGLAS COUNTY, INC. (Trustee)

Legal Description:

Abbreviated form:  Units 1-4 Confluence Pk Condo (Exhibit A)
                   Portion of East half of West half of Section 20, Township 30
                     North, Range 2 West, Clallam County, Washington (Exhibit B)
                   Lts 6-14, Block 1, Steward's Plat of Mission & ptn lot 16 &
                     Lts 17-18 JF Woodring's Plat of Mission (Exhibit C)

Additional legal on Exhibits A- C of document

Assessor's Property Tax Parcel Account Number(s):
23-20-28-525-010          (Unit 1, Exhibit A)
23-20-28-525-020          (Unit 2, Exhibit A)
23-20-28-525-030          (Unit 3, Exhibit A)
23-20-28-525-040          (Unit 4, Exhibit A)
023020-31000              (Exhibit B)
23-19-04-850-065          (Portion of Exhibit C)
23-19-04-850-065          (Balance of Exhibit C)





Reference number(s) of Related Document(s):


                                       2



                        DEED OF TRUST, SECURITY AGREEMENT
                       AND FIXTURE FILING WITH ASSIGNMENT
                               OF LEASES AND RENTS

               THIS DEED OF TRUST is made this 25th day of March, 2002, between
PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington corporation, CASHMERE
MANUFACTURING CO., INC., a Washington corporation, and NORTHWEST TECHNICAL
INDUSTRIES, INC., a Washington corporation (individually and collectively, as
Grantor), whose address is 430 Olds Station Road, Wenatchee, Washington 98020 to
LAND TITLE COMPANY OF CHELAN - DOUGLAS COUNTY, INC., as Trustee, whose address
is 16 South Mission Street, P.O. Box 1726, Wenatchee, Washington 98807-1726 to
FIRST UNION NATIONAL BANK, as collateral agent for the holders set forth on
Schedule A (each a "Holder" and collectively the "Holders") to that certain Note
Purchase Agreement dated as of March 19, 2002 (the "Note Purchase Agreement")
by and among Pacific Aerospace & Electronics, Inc., a Washington corporation
("Grantor"), Jefferies & Company, Inc. ("Initial Purchaser") and First Union
National Bank, as Collateral Agent ("Agent" or "Beneficiary") whose address is
401 South Tryon Street - Suite 1200, Mail Code NC-1179, Charlotte, North
Carolina 28202.

           1. Granting Clause. Grantor irrevocably grants, bargains, sells and
conveys to Trustee and its successors and assigns in trust, with power of sale
and with right of entry and possession as provided herein, all of Grantor's
estate, right, title, interest, claim and demand, now owned or hereafter
acquired, in and to the following:

                  (a) The property in Chelan and Clallam Counties, Washington,
described in Exhibits "A" -- "C" attached hereto and incorporated herein by this
reference (individually and collectively, the "Property" which term shall
include all or any part of the Property, any improvements thereon and all of the
property described in this Section 1).

                  (b) All land lying in streets and roads adjoining the
Property, and all access rights and easements pertaining to the Property.

                  (c) All the lands, tenements, privileges, reversions,
remainders, irrigation and water rights and stock, oil and gas rights,
royalties, minerals and mineral rights, all development rights and credits, air
rights, hereditaments and appurtenances belonging or in any way pertaining to
the Property.

                  (d) All buildings, structures, improvements, fixtures,
equipment and machinery and property now or hereafter attached to or used in
connection with the use, occupancy or operation of the Property including, but
not limited to, heating and incinerating apparatus and equipment, boilers,
engines, motors, generating equipment, telephone and other communication
systems, piping and plumbing fixtures, ranges, cooking apparatus and mechanical
kitchen equipment, refrigerators, cooling, ventilating, sprinkling and vacuum
cleaning systems, fire extinguishing apparatus, gas and electric fixtures,
irrigation equipment, carpeting, underpadding, elevators, escalators,
partitions,





mantles, built-in mirrors, window shades, blinds, screens, storm sash, awnings,
furnishings of public spaces, halls and lobbies, and shrubbery and plants. All
property mentioned in this subsection 1(d) shall be deemed part of the realty
and not severable wholly or in part without material injury to the Property.

                  (e) All rents, royalties, issues, profits, revenue, income,
recoveries, reimbursements and other benefits of the Property, all existing and
future leases of the Property (including extensions, renewals and subleases),
all agreements for use and occupancy of the Property (all such leases and
agreements whether written or oral, are hereafter referred to as the "Leases"),
and all right, title and interest of Grantor thereunder, including, without
limitation, all guaranties of lessees' performance under the Leases, together
with the immediate and continuing right to collect and receive all of the rents,
income, receipts, revenues, issues, profits and other income of any nature now
or hereafter due (including any income of any nature coming due during any
redemption period) under the Leases or from or arising out of the Property
including minimum rents, additional rents, percentage rents, parking or common
area maintenance contributions, tax and insurance contributions, deficiency
rents, liquidated damages following default in any Lease, all proceeds payable
under any policy of insurance covering loss of rents resulting from
untenantability caused by destruction or damage to the Property, all proceeds
payable as a result of exercise of an option to purchase the Property, all
proceeds derived from the termination or rejection of any Lease in a bankruptcy
or other insolvency proceeding, all security deposits or other deposits for the
performance of any lessee's obligations under the Leases, and all proceeds from
any rights and claims of any kind which Grantor may have against any lessee
under the Leases or any occupants of the Property (all of the above are
hereafter collectively referred to as the "Rents"). This subsection 1(e) is in
addition to other provisions of this Deed of Trust providing for the assignment
of rents and leases to Beneficiary, and is subject to the right, power and
authority given to the Beneficiary in Section 7 hereof to collect and apply the
Rents.

                  (f) All of Grantor's rights to further encumber said Property
for debt and all Grantor's rights to enter into any lease agreement which would
create a tenancy that is or may become subordinate in any respect to any
mortgage or deed of trust other than this Deed of Trust.

                  (g) All reciprocal easement agreements, declarations,
development agreements, developer's or utility agreements, and any similar such
agreements or declarations now or hereafter affecting the Collateral (as defined
below) or any part thereof.

                  (h) All (a) development work product prepared in connection
with the Collateral, including, but not limited to, engineering, drainage,
traffic, soil and other studies and tests; water, sewer, gas, electrical and
telephone approvals, taps and connections; surveys, drawings, plans and
specifications; and subdivision, zoning and platting materials; (b) building and
other permits, rights, licenses and approvals relating to the Collateral; (c)
contracts and agreements (including, without limitation, contracts with
architects and engineers, construction contracts and contracts for the
maintenance, management or leasing of the Collateral), contract rights, logos,
trademarks, trade names,


                                       2



copyrights and other general intangibles used or useful in connection with the
ownership, operation or occupancy of the Collateral or any part thereof; (d)
financing commitments (debt or equity) issued to Grantor in respect of the
Collateral and all amounts payable to Grantor thereunder; (e) contracts for the
sale of all or any portion of the Collateral, and all amounts payable by the
purchasers thereunder; (f) operating and other bank accounts, and monies
therein, of Grantor relating to the Collateral, including, without limitation,
any accounts relating to real estate taxes or assessments; (g) interest rate
protection agreements entered into by Grantor in respect of the loan, whether
pursuant to the Note Purchase Agreement or otherwise; and (h) commercial tort
claims related to the Collateral.

                  (i) All rights of Grantor under promissory notes, letters of
credit, electronic chattel paper, proceeds from accounts, payment intangibles,
and general intangibles related to the Collateral, as the terms "accounts",
"general intangibles", and "payment intangibles" are defined in the applicable
Uniform Commercial Code Article 9, as the same may be modified or amended from
time to time.

                  (j) All other assets of Grantor related in any way to the
Collateral, subject to certain limitations that may be set forth herein.

                  (k) All proceeds of the conversion, voluntary or involuntary,
of any of the foregoing into cash or liquidated claims, including, without
limitation, proceeds of insurance and condemnation awards, and all rights of
Grantor to refunds of real estate taxes and assessments.

                  (l) All of Grantor's right, title and interest, as lessee, in,
to and under the leases listed on Exhibit D hereto (the "Leased Property"),
subject to Grantor's obtaining any required approvals by Landlord.

               The Property is not used principally or primarily for
agricultural purposes.

           2. Collateral. The following described estate, property and rights of
Grantor are also included as security for the performance of each covenant and
agreement of Grantor contained herein and the payment of all sums of money
secured hereby:

                  (a) All furniture, furnishings, appliances, machinery,
vehicles, equipment and all other property of any kind now or hereafter located
on the Property, used or intended to be used on the Property wherever actually
located, or purchased with the proceeds of the Notes (as defined herein), and
all rights of Grantor as lessee of any property described in this Section 2 and
subsection 1(d) above.

                  (b) All compensation, awards, damages, rights of action and
proceeds (including insurance proceeds and any interest on any of the foregoing)
arising out of or relating to a taking or damaging of the Property by reason of
any public or private improvement, condemnation proceeding (including change of
grade), fire, earthquake or other casualty, injury or decrease in the value of
the Property.


                                       3



                  (c) All returned premiums or other payments on any insurance
policies pertaining to the Property and any refunds or rebates of taxes or
assessments on the Property.

                  (d) All rights to the payment of money, accounts receivable,
deferred payments, refunds, cost savings, payments and deposits, whether now or
later to be received from third parties (including all utility deposits),
architectural and engineering plans, specifications and drawings, contract
rights, governmental permits and licenses, and agreements and purchase orders
which pertain to or are incidental to the design or construction of any
improvements on the Property, Grantor's rights under any payment, performance,
or other bond in connection with construction of improvements on the Property,
and all construction materials, supplies, and equipment delivered to the
Property or intended to be used in connection with the construction of
improvements on the Property wherever actually located.

                  (e) All contracts and agreements pertaining to or affecting
the Property including, but not limited to, management, operating and franchise
agreements, licenses, trade names and trademarks.

                  (f) All of Grantor's interest in and to the loan account, the
loan funds, whether disbursed or not, and Grantor's own funds now or later to be
held on deposit as equity funds or for payment of bills relating to the
Property.

                  (g) All commitments or agreements, now or hereafter in
existence, which will provide Grantor with proceeds to satisfy the Secured
Obligations (defined below) and the right to receive the proceeds due under such
commitments or agreements including refundable deposits and fees.

                  (h) All books and records pertaining to any and all of the
property described above, including computerreadable memory and any computer
hardware or software necessary to access and process such memory.

                  (i) All additions, accessions, replacements, substitutions,
proceeds and products of the property described in this Section 2 and of any of
the Property which is personal property.

               The Property and all of the property and rights described in
Section 1 and 2 are referred to herein collectively as the "Collateral."

           3. Security Agreement. To the extent that any of the Collateral may
be determined to be personal property, Grantor as debtor hereby grants Holders
and Beneficiary as agent for the Holders as secured party a security interest in
all such personal property or fixtures to secure payment and performance of the
Secured Obligations (defined below). This Deed of Trust constitutes a security
agreement, a financing statement and fixture filing pursuant to the Uniform
Commercial Code with respect to any and all property now or hereafter described
in any Uniform Commercial Code Financing Statement naming Grantor as Debtor and
Beneficiary as Secured Party affecting or related to the use and enjoyment of
the Property. Grantor agrees that it will


                                       4



not terminate or amend any financing statements filed in connection with the
Secured Obligations (as hereinafter defined) without Beneficiary's prior
consent. The remedies for any violation of the covenants, terms and conditions
of the agreements herein contained shall be (a) as prescribed herein, or (b) by
general law, or (c) as to such part of the security which is also reflected in
any such Financing Statement by the specific statutory consequences now or
hereafter enacted and specified in the Uniform Commercial Code, all at
Beneficiary's sole election. Grantor and Beneficiary agree that the filing of
such a Financing Statement in the records normally having to do with personal
property shall never be construed as in anywise derogating from or impairing
this declaration and hereby stated intention of the parties hereto, that
everything used in connection with the production of income from the property
that is the subject of this Deed of Trust and/or adapted for use therein and/or
which is described or reflected in this Deed of Trust is, and at all times and
for all purposes and in all proceedings both legal or equitable shall be,
regarded as part of the real estate irrespective of whether (a) any such item is
physically attached to the improvements, (b) serial numbers are used for the
better identification of certain equipment items capable of being thus
identified in any list filed with the Beneficiary, or (c) any such item is
referred to or reflected in any such Financing Statement so filed at any time.

           4. Financing Statement. This Deed of Trust shall also serve as a
financing statement filed for record in the real estate records as a fixture
filing pursuant to the Uniform Commercial Code. This Deed of Trust may be given
to secure an obligation incurred to refinance an obligation incurred for the
construction of an improvement on the Property, including the acquisition of the
Property.

           5. Obligations Secured. THIS DEED OF TRUST IS FOR THE PURPOSE OF
SECURING the following ("Secured Obligations"):

                  (a) Payment of the sum of up to THIRTY-SIX MILLION DOLLARS
($36,000,000) or so much thereof with interest thereon as shall be evidenced by
all notes described in the Note Purchase Agreement or other instruments
evidencing the indebtedness secured by this Deed of Trust including all
renewals, amendments, modifications or extensions thereof and substitutions
therefor.

                  (b) Payment of any further sums now or hereafter advanced or
loaned by Beneficiary or Holders (including any assignee of Beneficiary or
Holders) to any Borrower under the Note Purchase Agreement or any of their
successors or assigns, and payment of every other present and future obligation
owing by any Borrower to Beneficiary or Holders (or any such assignee) of any
kind, and all renewals, modifications, and extensions thereof, including any
interest, fees, costs, service charges and expenses connected with such
obligations (this Deed of Trust, the Note Purchase Agreement and all such other
documents, evidencing or securing the loan are hereafter collectively referred
to as the "Loan Documents") together with interest thereon at the rate set forth
in the Note Purchase Agreement unless otherwise specified in the Loan Documents
or agreed to in writing.


                                       5



                  (c) Performance of each agreement, term and condition set
forth or incorporated by reference in the Loan Documents, as such may be
amended, including without limitation the Note Purchase Agreement, which are
incorporated herein by reference, or contained herein.

           6. Performance of Obligations. Grantor shall promptly and timely pay
all sums due pursuant to the Loan Documents, strictly comply with all the terms
and conditions of the Loan Documents, and perform each Secured Obligation in
accordance with its terms.

           7. Assignment of Rents and Leases. Grantor hereby absolutely and
irrevocably assigns to Beneficiary all Grantor's interest in the Rents and
Leases whether now due, past due or to become due, and hereby gives to and
confers upon Beneficiary the right, power and authority to collect such Rents
and proceeds, and Grantor, without limiting the generality of the Granting
Clause hereof, specifically hereby presently, absolutely, unconditionally and
irrevocably assigns, transfers and sets over all of the Rents now or hereafter
accruing to Beneficiary. Grantor irrevocably appoints Beneficiary its true and
lawful attorney at the option of Beneficiary at any time to demand, receive and
enforce payment, to give receipts, releases and satisfactions, and to sue,
either in the name of Grantor or in the name of Beneficiary, for all such Rents
and proceeds. It is understood and agreed that neither the foregoing assignment
of Rents and proceeds to Beneficiary nor the exercise by Beneficiary of any of
its rights or remedies under this Deed of Trust shall be deemed to make
Beneficiary a "mortgagee-in-possession" or otherwise responsible or liable in
any manner with respect to the Property or the use, occupancy or enjoyment or
operation of all or any portion thereof, unless and until Beneficiary, in person
or by agent, assumes actual possession thereof; nor shall appointment of a
receiver for the Property by any court at the request of Beneficiary or by
agreement with Grantor or the entering into possession of the Property or any
part thereof by such receiver be deemed to make Beneficiary a
"mortgagee-in-possession" or otherwise responsible or liable in any manner with
respect to the Property or the use, occupancy, enjoyment or operation of all or
any portion thereof. This assignment is intended to be specific, perfected and
choate upon the recording of this Deed of Trust as provided in RCW 7.28.230.
This assignment shall be subject to the terms and conditions of any separate
assignment of leases and/or rents, whenever executed, in favor of Beneficiary
and covering the Property. Grantor warrants that it has made no prior assignment
of the Rents or Leases and will make no subsequent assignment without the prior
written consent of Beneficiary.

                  (a) Unless otherwise provided in any separate assignment of
leases and/or rents, and so long as Grantor is not in default under the Loan
Documents, Grantor may collect the Rents as they become due and not more than
one (1) month in advance. Grantor shall use the Rents to pay normal operating
expenses for the Property and sums due and payments required under the Loan
Documents. No Rents shall be collected for a period subsequent to the current
one month rental period and first or last month's rent. Grantor's right to
collect the Rents shall not constitute Beneficiary's consent to the use of cash
collateral in any bankruptcy proceeding.


                                       6



                  (b) If Grantor is in default under the Loan Documents, without
notice to Grantor, Beneficiary or its agents, or a court appointed receiver, may
collect the Rents. In doing so, Beneficiary may (i) evict lessees for nonpayment
of rent, (ii) terminate in any lawful manner any tenancy or occupancy, (iii)
lease the Property in the name of the then owner on such terms as it may deem
best and (iv) institute proceedings against any lessee for past due Rents. The
Rents received shall be applied to payment of the costs and expenses of
collecting the Rents, including a reasonable fee to Beneficiary, a receiver or
an agent, operating expenses for the Property and any sums due or payments
required under the Loan Documents, in such order as Beneficiary may determine.
Any excess shall be paid to Grantor, however, Beneficiary may withhold from any
excess a reasonable amount to pay sums anticipated to become due which exceed
the anticipated future Rents. Beneficiary's failure to collect or discontinuing
collection at any time shall not in any manner affect the subsequent enforcement
by Beneficiary of its rights to collect the Rents. Except in the case of a full
reinstatement of the Secured Obligations, the collection of the Rents shall not
cure or waive any default under the Loan Documents. Any Rents paid to
Beneficiary or a receiver shall be credited against the amount due from the
lessees under the Leases. In the event any lessee under the Leases becomes the
subject of any proceeding under the Bankruptcy Code or any other federal, state
or local statute which provides for the possible termination or rejection of the
Leases assigned hereby, Grantor covenants and agrees that in the event any of
the Leases are so rejected, no damages settlement shall be made without the
prior written consent of Beneficiary; any check in payment of damages for
rejection or termination of any such Lease will be made payable both to the
Grantor and Beneficiary; and Grantor hereby assigns any such payment to
Beneficiary and further covenants and agrees that upon request of Beneficiary,
it will duly endorse to the order of Beneficiary any such check, the proceeds of
which will be applied to any portion of the indebtedness secured hereunder in
such manner as Beneficiary may elect.

                  (c) Regardless of whether or not Beneficiary, in person or by
agent, takes actual possession of the Property or any part thereof, Beneficiary
is not and shall not be deemed to be:

                      (i)    "a mortgagee in possession" for any purpose; or

                      (ii)   responsible for performing any of the obligations
of the lessor any Lease; or

                      (iii)  responsible for any waste committed by lessees or
any other, any dangerous or defective condition of the Property, or any
negligence in the, upkeep, repair or control of the Property; or

                      (iv)   liable in any manner for the Property or the use,
occupancy, or operation of all or any part of it.

               In exercising its rights under this Section Beneficiary shall be
liable only for the proper application of and accounting for the Rents collected
by Beneficiary or its agents.


                                       7



           8.  Leases.


                  (a) Grantor shall fully comply with all of the terms,
conditions and provisions of the Leases so that the same shall not become in
default and to do all that is needful to preserve all said Leases in force. With
respect to any Lease of the whole or any part of the Property, Grantor shall
not, without the prior written consent of Beneficiary, which consent shall not
be unreasonably withheld, (i) permit assignment or subletting of all or part of
the lessee's rights under the Lease unless the right to assign or sublet is
expressly reserved by the lessee under the Lease, (ii) execute an assignment of
the rents or any part thereof from the Collateral without Beneficiary's prior
consent, (iii) modify or amend any lease so as to shorten the unexpired term
thereof or so as to decrease, waive or compromise in any manner the amount of
rents payable thereunder or materially expand the obligations of the lessor
thereunder, (iv) accept surrender of the Lease or terminate the Lease except in
accordance with the terms of the Lease providing for termination in the event of
a default, (v) accept prepayments of any installments of rents to become due
under such leases, except prepayments in the nature of security for the
performance of the lessees thereunder, (vi) modify, release or terminate any
guaranties of any such lease or (vii) in any other manner impair the value of
the Property or the security hereof. Any proceeds or damages resulting from a
lessee's default under any such Lease, at Beneficiary's option, shall be paid to
Beneficiary and applied against sums owed under the Loan Documents even though
such sums may not be due and payable. Except for non-delinquent real estate
taxes and assessments, Grantor shall not permit any lien to be created against
the Property which may be or may become prior to any Lease. If the Property is
partially condemned or suffers a casualty, Grantor shall promptly repair and
restore the Property in order to comply with the Leases.

                  (b) Grantor will not execute any lease of all or a substantial
portion of the Property except for actual occupancy by the lessee thereunder,
and will at all times promptly and faithfully perform, or cause to be performed,
all of the covenants, conditions and agreements contained in all leases of the
Property or portions thereof now or hereafter existing, on the part of the
lessor thereunder to be kept and performed and will at all times do all things
necessary to compel performance by the lessee under each lease of all
obligations, covenants and agreements by such lessee to be performed thereunder.
If any of such leases provide for the giving by the lessee of certificates with
respect to the status of such leases, Grantor shall exercise its right to
request such certificates within five (5) days of any demand therefor by
Beneficiary and shall deliver copies thereof to Beneficiary promptly upon
receipt.

                  (c) Each lease of the Property, or of any part thereof,
executed after the date hereof, shall provide that, in the event of the
enforcement by Trustee or Beneficiary of the remedies provided for hereby or by
law, the lessee thereunder will, upon request of any person succeeding to the
interest of Grantor as a result of such enforcement, automatically become the
lessee of said successor in interest, without change in the terms or other
provisions of such lease, provided, however, that said successor in interest
shall not be bound by (i) any payment of rent or additional rent for more than
one (1) month in advance, except prepayments in the nature of security for the
performance by said lessee of its obligations under said lease or (ii) any
amendment or


                                       8



modification of the lease made without the consent of Beneficiary or such
successor in interest. Each lease shall also provide that, (x) the lease is
subordinate to this Deed (but shall also provide that Beneficiary, at its
option, may subordinate this Deed to such lease) and (y) upon request by said
successor in interest, such lessee shall execute and deliver an instrument or
instruments confirming such attornment.

                  (d) Grantor shall furnish to Beneficiary upon request, but not
more than semi-annually, a certified leasing status report in respect of the
Property and a certified rent roll containing the names of all lessees of the
Property, the terms of their respective leases, the space occupied and the
rentals payable thereunder, together with copies, certified to be true and
complete, of such leases as may be requested by Beneficiary.

                  (e) Grantor shall, promptly upon Beneficiary's request,
deposit all tenant security deposits in respect of the Property into an account
with Beneficiary or as designated by Beneficiary, which deposits shall be held
and disbursed to tenants as required under the terms of their respective leases.

           9. Warranty of Title. Grantor warrants that it (i) has good and
marketable title to an indefeasible fee simple estate in the Property, unless
Grantor's present interest in the Property is described in Exhibits A through C
as a leasehold interest, in which case Grantor warrants that it lawfully
possesses and holds a valid leasehold interest in the Property as stated in
Exhibits A through C, (ii) has good and marketable title to the personal
property Collateral, and (iii) holds a valid leasehold interest as tenant under
the leases described in Exhibit D, and that said leases are prior to all liens,
charges and encumbrances on the lessor's interest thereunder, subject, in each
case, to no liens, encumbrances, easements, assessments, security interests,
claims or defects of any kind prior or subordinate to the lien of this Deed of
Trust, except those listed in Beneficiary's title insurance policy, listed on
Exhibit E hereto, or approved by Beneficiary in writing (the "Permitted
Exceptions") and real estate taxes for the current year. Grantor warrants that
the Permitted Exceptions and the real estate taxes are not delinquent or in
default, and that Grantor has the right to convey the Property to Trustee for
the benefit of Beneficiary, and the right to grant a security interest in the
personal property Collateral. Grantor has the full power and authority to
subject the Property to the lien hereof in the manner and form herein done and
intended hereafter to be done. Grantor will preserve such title, and Grantor
will forever warrant and defend title to the Collateral and will defend the
validity and priority of the lien of this Deed of Trust and the security
interest granted herein against any claims or demands.

           10. Prohibited Liens.

(a) Grantor shall not permit any governmental or statutory liens (including tax,
mechanic's or materialmen's liens) to be filed against the Property except for
real estate taxes and assessments not yet delinquent by non-payment and liens
permitted by the Loan Documents or approved by Beneficiary in writing. Grantor
will pay, from time to time when the same shall become due, all lawful claims
and demands of mechanics, materialmen, laborers, and others which, if unpaid,
might result in, or


                                       9



permit the creation of, a lien on the Property or any part thereof, and in
general will do or cause to be done everything necessary so that the lien and
effect hereof shall be fully preserved, at the cost of Grantor and without
expense to Trustee or Beneficiary.

                  (b) Grantor will have the right to contest in good faith by an
appropriate legal or administrative proceeding the validity of any prohibited
lien, encumbrance or charge so long as (i) no default exists under the Loan
Documents, (ii) Grantor first deposits with Beneficiary a bond or other security
satisfactory to Beneficiary in the amount reasonably required by Beneficiary,
but not more than one and one--half (1 1/2) (i.e., 150%) of the amount of the
claim; (iii) Grantor immediately commences its contest of such lien, provided,
however, that within twenty (20) days after the filing of such lien Grantor
discharges said lien of record or records a bond which complies with the
requirements of RCW 60.04.161 eliminating such lien as an encumbrance on the
Property, and continuously pursues the contest in good faith and with due
diligence; (iv) foreclosure of the lien, encumbrance or charge is stayed; and
(v) Grantor pays any judgment rendered for the lien claimant or other third
party within ten (10) days after the entry of the judgment. If the contested
item is a mechanic's or materialmen's lien, Grantor will furnish Beneficiary
with an endorsement to its title insurance policy which insures the priority of
this Deed of Trust over the lien being contested. Grantor will discharge or
elect to contest and post an appropriate bond or other security within twenty
(20) days of written demand by Beneficiary.

           11. Payment of Taxes and Other Encumbrances. Grantor will pay when
due:

                  (a) All taxes, assessments and other governmental or public
charges affecting the Property, including assessments on appurtenant water
stock, and any accrued interest, cost and/or penalty thereon and upon request by
Beneficiary will submit receipts therefor to Beneficiary promptly following
payment;

                  (b) All encumbrances (including any debt secured by deeds of
trust), ground rents, liens and/or charges, with interest, on the Property or
any part thereof which appear to be prior, superior or on a parity hereto, and
all costs and fees related thereto;

                  (c) All charges for utilities or services, including, but not
limited to, electricity, gas, sewer and water;

                  (d) All costs, fees and expenses of this Deed of Trust,
including cost of evidence of title, Trustee's fees and attorneys' fees in
connection with sale pursuant to this Deed of Trust (whether completed or not)
together with interest from and after ten (10) days following demand for
repayment at the default interest rate set forth in the Note Purchase Agreement
until paid in full.

           12. Maintenance -- No Waste.

                  (a) Keep the Property in good condition and repair and not
commit or permit waste or deterioration of the Property;


                                       10



                  (b) Not remove, demolish or substantially alter any portion of
the Property, except as approved in writing by Beneficiary and except such
alterations as may be required by laws, ordinances or regulations of
governmental authorities;

                  (c) Comply with all laws, ordinances, rules, regulations and
orders of governmental authorities now or hereafter affecting the Property or
requiring any alterations or improvements to be made thereon, and perform all of
its obligations under any covenant, condition, restriction or agreement of
record affecting the Property;

                  (d) Complete promptly and in good and workmanlike manner any
portion of the Property which may be constructed hereafter, and promptly restore
in like manner as obligated in Section 14, any portion of the Property which may
be damaged or destroyed, and pay, when due, all costs incurred and claims for
labor performed and materials furnished therefor;

                  (e) Not commit, suffer or permit any act to be done in, upon
or to the Property in violation of any law or ordinance or any covenant,
condition or restriction affecting the Property;

                  (f) Do any and all acts which, from the character or use of
the Property, may be reasonably necessary to protect and preserve the security
of Beneficiary, the specific enumerations herein not excluding the general;

                  (g) Not permit any construction liens against the Property;

                  (h) Not take or permit to be taken any actions that might
invalidate any insurance carried on the Property;

                  (i) Maintain in full force and effect all licenses (including
but not limited to any operating licenses or similar matters) required or
permitted in the operation of the improvements on the Property.

           13. Alterations Removal and Demolition. Grantor shall not
structurally alter, remove or demolish any building or improvement on the
Property without Beneficiary's prior written consent. Grantor shall not remove
any fixture or other item of property which is part of the Collateral without
Beneficiary's prior written consent unless the fixture or item of property is
replaced by an article of equal suitability owned by Grantor free and clear of
any lien or security interest.

           14. Restoration.

                  (a) After the happening of any casualty to the Property
whether or not required to be insured against under the policies to be provided
by Grantor hereunder, Grantor shall give prompt written notice thereof to
Beneficiary generally describing the nature and cause of such casualty and the
extent of the damage or destruction to the Property.


                                       11



                  (b) Grantor hereby assigns to Beneficiary all proceeds of
insurance ("Insurance Proceeds") which Grantor may be entitled to receive. In
the event of any damage to or destruction of the Collateral, then, provided
there is not an Event of Default under the Note Purchase Agreement, the Notes,
the Deed of Trust or any of the Loan Documents (as defined in the Note Purchase
Agreement) and Beneficiary has reasonably determined that its security has not
been impaired, Grantor shall commence and diligently pursue to completion in
accordance with this Section 14 the repair, restoration and rebuilding of any
portion of the Collateral that has been partially damaged or destroyed in full
compliance with all legal requirements and to the same condition, character and
at least equal value and general utility as nearly as possible to that existing
prior to such damage or destruction (the "Restoration"), and Beneficiary shall
hold and disburse the Insurance Proceeds (less the cost, if any, to Beneficiary
of recovering and paying out such proceeds (including, without limitation,
attorneys' fees and expenses, adjuster's fees, and fees incurred in
Beneficiary's performance of its obligations hereunder)) (the "Net Insurance
Proceeds") in the manner hereinafter provided to the Restoration. In the event
that the Collateral is substantially destroyed or Beneficiary has determined
that its security has been impaired, the Beneficiary may, at its option, apply
the Net Insurance Proceeds to the reduction of the Secured Obligations and
secured by this Deed of Trust in such order as Beneficiary may determine and, at
Beneficiary's option and in its sole discretion, Beneficiary, may declare the
Secured Obligations immediately due and payable.

                  (c) In the event the Net Insurance Proceeds are to be used for
the Restoration, Grantor shall, prior to disbursement of any Net Insurance
Proceeds for any work in connection with the Restoration (the "Work"), deliver
or furnish to Beneficiary (i) complete plans and specifications for the Work
which (A) have been approved by all governmental authorities whose approval is
required, (B) bear the signed approval of an architect reasonably satisfactory
to Beneficiary (the "Architect") and (C) are accompanied by Architect's signed
estimate of the total estimated cost of the Restoration. Such plans and
specifications shall be subject to Beneficiary's approval, which approval shall
not be unreasonably withheld or delayed (the "Approved Plans and
Specifications"); (ii) the amount of money which, as determined by Beneficiary,
will be sufficient when added to the Net Insurance Proceeds, if any, to pay the
entire cost of the Restoration (all money as held by Beneficiary is referred to
herein as the "Restoration Funds"); (iii) copies of all permits and approvals
required by law in connection with the commencement and conduct of the
Restoration; and (iv) a contract for construction executed by Grantor and a
contractor satisfactory to Beneficiary (the "Contractor") in form, scope and
substance satisfactory to Beneficiary (including the customary retention) for
performance of the Work.

                  (d) After commencing the Work, Grantor shall perform or cause
Contractor to perform the Work diligently and in good faith in accordance with
the Approved Plans and Specifications approved by Beneficiary. So long as
Grantor is not in default under any of the Loan Documents, Beneficiary shall
disburse the Restoration Funds in increments to Grantor or as Grantor may
direct, from time to time as the Work progresses, to pay (or reimburse Grantor
for) the costs of the Restoration, but subject to the following conditions, any
of which Beneficiary may waive in its sole discretion:


                                       12



                      (i) Beneficiary shall make such payments only upon not
less than ten (10) days' prior written notice from Grantor to Beneficiary and
Grantor's delivery to Beneficiary of (A) Grantor's written request for payment
(a "Request for Payment") accompanied by a certificate by Architect in form,
scope and substance satisfactory to Beneficiary which states that all of the
Work completed to that date has been done in compliance with the Approved Plans
and Specifications and in accordance with all provisions of law, that the amount
requested has been paid or is then due and payable and is properly a part of the
cost of the Restoration and that when added to all sums, if any, previously paid
out by Beneficiary, the requested amount does not exceed the value of the Work
done to the date of such certificate; (B) evidence satisfactory to Beneficiary
that there are no construction or similar liens for labor or material supplied
in connection with the Work to date or that any such liens have been adequately
provided for to Beneficiary's satisfaction; and (C) evidence satisfactory to
Beneficiary that the balance of the Restoration Funds remaining after making the
payments shall be sufficient to pay the balance of the cost of the Restoration
not completed to date (giving in such reasonable detail as Beneficiary may
require an estimate of the cost of such completion). Each Request for Payment
shall be accompanied by waivers of liens satisfactory to Beneficiary covering
that part of the Work previously paid for, if any, and by a search prepared by a
title company or by other evidence satisfactory to Beneficiary that no
construction liens or other liens or instruments for the retention of title in
respect of any part of the Work have been filed against the Property and not
discharged of record and that no encumbrance exists on or affecting the Property
other than encumbrances, if any, which are set forth in the title policy issued
to Beneficiary insuring the lien of this Deed of Trust; and

                      (ii) Any Request for Payment after the Restoration has
been completed shall be accompanied by a copy of any certificate or certificates
required by law to render occupancy of the Property legal.

                  (e) Upon Beneficiary's receipt of the certificate of occupancy
for the Property and other customary evidence requested by Beneficiary that the
Restoration has been completed and the costs thereof paid in full, and
satisfactory evidence that no mechanic's or similar liens for labor or material
supplied in connection with the Restoration are outstanding against the Property
and Beneficiary's disbursement under the final Request for Payment, and provided
that Grantor is not then in default under any of the Loan Documents (as defined
in the Note Purchase Agreement), Beneficiary shall pay any remaining Restoration
Funds then held by Beneficiary to Grantor; provided, however, nothing contained
herein shall prevent Beneficiary from applying at any time the whole or any part
of the Restoration Funds to the curing of any Event of Default under the Loan
Documents.

                  (f) If (i) within sixty (60) days after the occurrence of any
damage or destruction to the Property requiring Restoration, Grantor fails to
submit to Beneficiary and receive Beneficiary's approval of plans and
specifications or fails to deposit with Beneficiary the additional amount
necessary to accomplish the Restoration as provided in Section 14, or (ii) after
such plans and specifications are approved by all such governmental authorities
and Beneficiary, Grantor fails to commence promptly or


                                       13



diligently continue to completion the Restoration, or (iii) Grantor becomes
delinquent in payment to mechanics, materialmen or others for the costs incurred
in connection with the Restoration, then, in addition to all of the rights
herein set forth, Beneficiary may apply the Restoration Funds then or thereafter
held by Beneficiary to reduce the unpaid indebtedness secured hereby in such
order as Beneficiary may determine, and at Beneficiary's option and in its sole
discretion, Beneficiary may declare the Secured Obligations immediately due and
payable.

                  (g) In the event that Beneficiary applies all or any portion
of the Restoration Funds to reduce the unpaid indebtedness secured hereby as
provided in this Section 14, after payment in full of all sums secured hereby,
any remaining Restoration Funds shall be paid to Grantor.

           15. Compliance with Laws. Grantor shall comply with all laws,
ordinances, regulations, covenants, conditions, and restrictions affecting the
Property, including, without limitation, all applicable requirements of the Fair
Housing Act of 1968 (as amended) and the Americans With Disabilities Act of 1990
(as the same may be amended from time to time), and shall not commit or permit
any act upon or concerning the Property in violation of any such laws,
ordinances, regulations, covenants, conditions, and restrictions. Grantor agrees
to protect, defend, indemnify and hold Beneficiary harmless from and against all
liability threatened against or suffered by Beneficiary by reason of a breach by
Grantor of the foregoing representations, warranties, covenants and agreements.
The foregoing indemnity shall include the cost of all alterations to the
Property (including architectural, engineering, legal and accounting costs), all
fines, fees and penalties, and all legal and other expenses (including
attorneys' fees) incurred in connection with the Property being in violation of
any such laws, ordinances, regulations, covenants, conditions and restrictions,
and for the cost of collection of the sums due under the indemnity. In the event
that Beneficiary or its designee shall become the owner of or acquire an
interest in or rights to the Property by foreclosure or deed in lieu of
foreclosure of this Deed of Trust or by other means, the foregoing
indemnification obligation shall survive such foreclosure or deed in lieu of
foreclosure or other acquisition of the Property.

           16. Leased Premises. Grantor shall undertake, and shall use its
commercially reasonable efforts, to obtain, within sixty (60) days of the date
hereof, (a) any and all required approvals by, and consents of, all landlords
with respect to the assignment of leases to Beneficiary pursuant to Section 1(l)
hereof, and (b) any and all subordination and non-disturbance agreements
required by Beneficiary in connection with the Leased Premises, on terms and
conditions reasonably satisfactory to Beneficiary.

           17. Impairment of Collateral. Grantor will faithfully perform each
and every covenant to be performed by Grantor under any lien or encumbrance,
including, without limiting the generality hereof, mortgages, deeds of trust,
leases, declarations or covenants, conditions and/or restrictions and other
agreements which affect the Property, in law or in equity, which Beneficiary
reasonably believes may be prior or superior to or on a parity with the lien or
charge of this Deed of Trust. Grantor shall not, without Beneficiary's prior
written consent, change the general nature of the occupancy of the


                                       14



Property, initiate, acquire or permit any change in any public or private
restrictions (including without limitation a zoning reclassification) limiting
the uses which may be made of the Property, or take or permit any action which
would impair the Collateral or Beneficiary's lien or security interest in the
Collateral. A breach of or a default under any such lien or encumbrance, or a
breach of any requirement of this Section 16 shall constitute an event of
default under this Deed of Trust.

           18. Inspection of Property. Beneficiary is authorized, by itself, its
agents, employees or workmen, to enter at any reasonable time upon any part of
the Property for the purpose of inspecting the same upon reasonable prior notice
(except in the case of an emergency for which no prior notice need be given),
and for the purpose of performing any of the acts it is authorized to perform
under the terms of this Deed of Trust. Grantor agrees to cooperate with
Beneficiary to facilitate such inspections.

           19. Grantor's Defense of Collateral. Grantor shall appear in and
defend any action or proceeding which may affect the Collateral or the rights or
powers of Beneficiary or Trustee, and to pay all costs and expenses, including
cost of evidence of title and attorneys' fees in a reasonable sum, in any action
or proceeding in which Beneficiary and/or Trustee may appear or be made a party,
including, but not limited to, foreclosure or other proceeding commenced by
those claiming a right to any part of the Property under subordinate liens, in
any action to partition or condemn all or part of the Property, whether or not
pursued to final judgment, and in any exercise of the power of sale contained
herein, whether or not the sale is actually consummated.

           20. Beneficiary's Right to Protect Collateral. Beneficiary may
commence, appear in, and defend any action or proceeding which may affect the
Collateral or the rights or powers of Beneficiary or Trustee, and in such event,
Beneficiary shall be allowed and paid all of Beneficiary's costs, charges and
expenses, including cost of evidence of title and attorneys' fees incurred in
such action or proceeding in which Beneficiary may appear. Beneficiary may pay,
purchase, contest or compromise any encumbrance, charge or lien not listed as a
Permitted Exception which in its judgment appears to be prior or superior to the
lien of this Deed of Trust. If Grantor fails to make any payment or do any act
required under the Loan Documents, Beneficiary, without any obligation to do so
and without releasing Grantor from any obligations under the Loan Documents, may
make the payment or cause the act to be performed in such manner and to such
extent as Beneficiary may deem necessary to protect the Collateral. Beneficiary
is authorized to enter upon the Property for such purposes. In exercising any of
these powers Beneficiary may incur such expenses, in its absolute discretion, it
deems necessary, including cost of evidence of title, employ an attorney, and
pay said attorneys' reasonable fees. Grantor hereby agrees to pay immediately
following demand, together with interest from and after ten (10) days following
demand for payment at the default interest rate set forth in the Note Purchase
Agreement until paid in full, all of Beneficiary's costs, charges, expenses and
accounts referred to above in this Section 19, including cost of evidence of
title and reasonable attorneys' fees incurred in such action or proceeding in
which Beneficiary may appear. All costs, charges and expenses so incurred,
together with interest thereon as aforesaid, shall be secured by the lien of
this Deed of Trust.


                                       15



           21. Hazardous Substances. Grantor represents and warrants to
Beneficiary that to the best of Grantor's knowledge after due and diligent
inquiry, no hazardous or toxic waste or substances are being stored on the
Property or any adjacent property except in strict compliance with all
Environmental Laws nor have any such waste or substances been stored or used in,
on, under, over or about the Property or any adjacent property prior to or
during Grantor's ownership, possession or control of the Property. Grantor
agrees to provide written notice to Beneficiary immediately upon Grantor
becoming aware that the Property or any adjacent property is being or has been
contaminated with hazardous or toxic waste or substances. Grantor will not cause
nor permit any activities on the Property which directly or indirectly could
result in the Property or any other property becoming contaminated with
hazardous or toxic waste or substances. For purposes of this Deed of Trust, the
term "hazardous or toxic waste or substances " means any substance or material
defined or designated as hazardous or toxic wastes, hazardous or toxic material,
hazardous, toxic or radioactive substance or other similar term by any
applicable federal, state or local statute, regulation or ordinance now or
hereafter in effect.

           22. Insurance.

                  (a) Grantor shall maintain insurance on the Property with
premiums prepaid providing replacement cost coverage and insuring against loss
by fire and such other risks covered by extended coverage insurance, flood (but
only if the Property is in a federally-designated flood plain), and such other
perils and risks, including loss of rents and business interruption as may be
required by Beneficiary. Grantor shall also maintain commercial general
liability insurance. All insurance shall be with companies satisfactory to
Beneficiary and in such amounts as required by Beneficiary with lender's loss
payable clauses in favor of and in form satisfactory to Beneficiary. At least
thirty (30) days prior to the expiration of the term of any insurance policy,
Grantor shall furnish Beneficiary with written evidence of renewal or issuance
of a satisfactory replacement policy. If requested Grantor shall deliver copies
of all policies to Beneficiary. If Grantor fails to maintain such insurance
satisfactory to Beneficiary, Beneficiary may make the payment on behalf of
Grantor and any sums expended shall be added to principal and bear interest at
the default interest rate set forth in the Note Purchase Agreement. Each policy
of insurance shall provide Beneficiary with no less than forty-five (45) days
prior written notice of any cancellation, expiration, nonrenewal or
modification.

                  (b) In the event of any loss or damage to the Property, all
Insurance Proceeds shall be payable to Beneficiary, and Grantor hereby
authorizes and directs any affected insurance company to make payment of the
Insurance Proceeds directly to Beneficiary. The application or release by
Beneficiary of any Insurance Proceeds shall not cure or waive any default or
notice of default hereunder or invalidate any act done pursuant to such notice.

                  (c) In the event of the foreclosure of this Deed of Trust or
other transfer of the title to the Property in extinguishment, in whole or in
part, of the indebtedness secured hereby, all right, title and interest of
Grantor in and to any insurance policy, or premiums or payments in satisfaction
of claims or any other rights thereunder


                                       16



then in force, shall pass to the purchaser or grantee notwithstanding the amount
of any bid at such foreclosure sale. Nothing contained herein shall prevent
accrual of interest as provided in the Note Purchase Agreement on any portion of
the principal balance due under the Note Purchase Agreement until such time as
the Insurance Proceeds are actually received and applied to reduce the principal
balance outstanding.

           23. Condemnation. Should the Property or any part thereof be taken or
damaged by reason of any public improvement, condemnation proceeding, or
conveyance in lieu thereof, or in any other manner, Beneficiary shall be
entitled to all compensation, awards and other payments or relief therefor, and
shall be entitled, at its option, to commence, appear in and prosecute in its
own name any action or proceeding. Grantor shall have the right, with the prior
written consent of the Beneficiary, to make a compromise or settlement in
connection with such taking or damage. All such compensation, awards, damages,
rights of action and proceeds (the "Condemnation Proceeds") are hereby assigned
to Beneficiary, who shall, after deducting therefrom all its reasonable
expenses, including attorneys' fees, apply or release the Condemnation Proceeds
with the same effect as provided in Section 14 above with respect to disposition
of insurance proceeds; provided, that if such Condemnation Proceeds are to be
utilized for restoration of the Property and there are any excess Condemnation
Proceeds after application thereof to the restoration of the Property,
Beneficiary shall be entitled to apply such excess to the reduction of any
indebtedness outstanding under the Note Purchase Agreement. Grantor agrees to
execute such further assignments of the Condemnation Proceeds as Beneficiary may
require. Nothing contained herein shall prevent the accrual of interest as
provided in the Note Purchase Agreement on any portion of the Condemnation
Proceeds to be applied to the principal balance due under the Note Purchase
Agreement until such Condemnation Proceeds are actually received and applied.

           24. Reserve Account.


                  (a) If Beneficiary so requires, Grantor shall pay to
Beneficiary monthly, together with and in addition to any payments of principal
and/or interest due under the Note Purchase Agreement, a sum, as estimated by
the Beneficiary, equal to the ground rents, if any, the real estate taxes and
assessments next due on the Property and the premiums next due on insurance
policies required under the Loan Documents, less all sums already paid therefor,
divided by the number of months to elapse before two (2) months prior to the
date when the ground rents, real estate taxes, assessments and insurance
premiums will become delinquent. The monthly reserve account payments and any
principal and/or interest payments due shall be paid in a single payment and
applied by Beneficiary in the following order: (i) ground rents, real estate
taxes, assessments and insurance premiums, (ii) expenditures made pursuant to
the Loan Documents and interest thereon, (iii) interest on the obligations of
Borrowers under Note Purchase Agreement, and (iv) principal due on the
obligations of Borrowers under Note Purchase Agreement. Grantor shall promptly
deliver to Beneficiary all bills and notices pertaining to the ground rents,
taxes, assessments and insurance premiums.


                                       17



                  (b) The reserve account is solely for the protection of
Beneficiary. Beneficiary shall have no responsibility except to credit properly
the sums actually received by it. No interest will be paid on the funds in the
reserve account and Beneficiary shall have no obligation to deposit the funds in
an interest-bearing account. Upon assignment of this Deed of Trust by
Beneficiary, any funds in the reserve account shall be turned over to the
assignee and any responsibility of Beneficiary with respect thereto shall
terminate. Each transfer of the Property shall automatically transfer to the
grantee all rights of Grantor to any funds in the reserve account.

                  (c) If the total of the payments to the reserve exceeds the
amount of payments actually made by Beneficiary, plus such amounts as have been
reasonably accumulated in the reserve account toward payments to become due,
such excess may, at Beneficiary's election, be (i) credited by Beneficiary
against sums then due and payable under the Loan Documents or (ii) refunded to
Grantor as its name appears on the records of Beneficiary. If, however, the
reserve account does not have sufficient funds to make the payments when they
become due, Grantor shall pay to Beneficiary the amount necessary to make up the
deficiency within fifteen (15) days after written notice to Grantor. If this
Deed of Trust is foreclosed or if Beneficiary otherwise acquires the Property,
the Beneficiary shall, at the time of commencement of the proceedings or at the
time the Property is otherwise acquired, apply the remaining funds in the
reserve account, less such sums as will become due during the pendency of the
proceedings, against the sums due under the Loan Documents and/or to make
payments required under the Loan Documents.

           25. Repayment of Beneficiary's Expenditures. Grantor shall pay within
ten (10) days after written notice from Beneficiary all sums expended by
Beneficiary and all costs and expenses incurred by Beneficiary in taking any
actions pursuant to the Loan Documents, including attorneys' fees, accountants'
fees, appraisal and inspection fees, and the costs for title reports. If any
laws or regulations are passed subsequent to the date of this Deed of Trust
which require Beneficiary to incur out-of-pocket expenses in order to maintain,
modify, extend or foreclose this Deed of Trust, or revise the terms of the loan
secured hereby, Grantor shall reimburse Beneficiary for such expenses within ten
(10) days after written notice from Beneficiary. Expenditures by Beneficiary
shall bear interest from the date of such advance or expenditure at the default
interest rate set forth in the Note Purchase Agreement until paid, shall
constitute advances made under this Deed of Trust and shall be secured by and
have the same priority as the lien of this Deed of Trust. If Grantor fails to
pay any such expenditures, costs and expenses and interest thereon, Beneficiary
may, at its option, without foreclosing the lien of this Deed of Trust, commence
an independent action against Grantor for the recovery of the expenditures
and/or advance any undisbursed loan proceeds to pay the expenditures.

           26. Additional Security Documents. Grantor shall within fifteen (15)
days after request by Beneficiary execute and deliver any financing statement,
renewal, affidavit, certificate, continuation statement, or other document as
Beneficiary may request in order to perfect, preserve, continue, extend, or
maintain security interests or liens previously granted and the priority of the
security interests or liens. Grantor shall


                                       18



pay all costs and expenses incurred by Beneficiary in connection with the
preparation, execution, recording, filing, and refiling of any such document.

           27. Conveyance of Property; Further Encumbrance. In the event that
all or any part of or any interest in the Property shall be sold, transferred,
leased (other than space leases without options to purchase), further
encumbered, conveyed, or a contract of sale or other conveyance entered into
with respect thereto, without the prior written consent of Beneficiary, then,
upon the occurrence of any one or more of the foregoing events, and regardless
of whether or not Grantor shall be in default under the Note Purchase Agreement
or this Deed of Trust or any Loan Document, Beneficiary may, at its option,
declare the then outstanding principal balance evidenced by the Note Purchase
Agreement plus accrued interest thereon immediately due and payable or, at its
sole option, it may consent to said conveyance or transfer in writing and may
increase the rate of the loan to the interest rate which Beneficiary would then
commit to make a mortgage loan to a borrower of comparable financial strength
and managerial expertise, and secured by similar security of comparable value
and character, and impose whatever other conditions it shall deem necessary to
compensate it for such increased risk resulting from the breach of the foregoing
covenants. Such increase in interest rate or imposition of additional terms
shall entitle Beneficiary to increase monthly payments under the Notes so that
the increased monthly installments will fully amortize the outstanding balance
of the indebtedness evidenced thereby over the unexpired amortization term of
the Notes. The execution and delivery by the Grantor of any joint venture
agreement, partnership agreement, declaration of trust or option agreement
whereunder any other person or corporation may become entitled, directly or
indirectly, to the possession or enjoyment of the Property, or the income or
other benefits derived or to be derived therefrom shall in each case be deemed
to be a conveyance or assignment of the Grantor's interest in the Property for
the purposes of this section, and shall require the prior written consent of the
Beneficiary.

           28. Release of Parties or Collateral. Without affecting the
obligations of any party under the Loan Documents and without affecting the lien
of this Deed of Trust and Beneficiary's security interest in the Collateral,
Beneficiary and/or Trustee may, without notice (a) release all or any Grantor,
any Borrower and/or any other party now or hereafter liable for any of the
Secured Obligations (including guarantors), (b) release all or any part of the
Collateral, (c) subordinate the lien of this Deed of Trust or Beneficiary's
security interest in the Collateral, (d) take and/or release any other security
for or guarantees of the Secured Obligations, (e) grant an extension of time for
performance of the Secured Obligations, (f) modify, waive, forbear, delay or
fail to enforce any of the Secured Obligations, (g) sell or otherwise realize on
any other security or guaranty prior to, contemporaneously with or subsequent to
a sale of all or any part of the Collateral, (h) make advances pursuant to the
Loan Documents including advances in excess of the amount provided for under the
Note Purchase Agreement, (i) consent to the making of any map or plat of the
Property, and (j) join in the grant of any easement on the Property. Any
subordinate lienholder shall be subject to all such releases, extensions or
modifications without notice to or consent from the subordinate lienholder.
Grantor shall pay any Trustee's, attorneys', title insurance, recording,
inspection or other fees or


                                       19



expenses incurred in connection with release of Collateral, the making of a map,
plat or the grant of an easement.

           29. Default--Remedies. The occurrence of any Event of Default (as
defined in the Note Purchase Agreement) or Grantor's failure to comply with any
term or condition of the Loan Documents, including without limitation, this Deed
of Trust and payments due under the Note Purchase Agreement or other obligations
secured by this Deed of Trust, shall constitute an Event of Default. Upon the
occurrence of an Event of Default Beneficiary may declare all amounts owed under
the Secured Obligations, and all accrued and unpaid interest and other sums in
respect thereof, immediately due and payable after applicable notice as set
forth herein and/or exercise its rights and remedies under the Loan Documents
and applicable law including foreclosure of this Deed of Trust judicially or non
judicially by the Trustee pursuant to the power of sale. In the event of any
such Event of Default and upon written request of Beneficiary, Trustee shall
sell the Property in accordance with the Deed of Trust Act of the state of
Washington (RCW Chapter 61.24 as existing now or hereafter amended) and the
Uniform Commercial Code of the state of Washington, where applicable, at public
auction to the highest bidder. Any person except Trustee may bid at Trustee's
sale. Trustee shall apply the proceeds of the sale as follows: (i) to the
expenses of sale, including a reasonable Trustee's fee and attorneys' fee; (ii)
to all the Secured Obligations (principal and interest) and all other
indebtedness secured by this Deed of Trust or any other instrument, in such
order and amounts as Beneficiary may elect; (iii) the surplus, if any, shall be
distributed in accordance with said Deed of Trust Act. Trustee shall deliver to
the purchaser at the sale its deed, without warranty, which shall convey to the
purchaser the interest in the property which Grantor had or had the power to
convey at the time of its execution of this Deed of Trust and such as it may
have acquired thereafter. Trustee's deed shall recite the facts showing that the
sale was conducted in compliance with all the requirements of the law and of
this Deed of Trust, which recital shall be prima facie evidence of such
compliance and conclusive evidence thereof in favor of bona fide purchasers and
encumbrances for value. The power of sale conferred by this Deed of Trust and by
the Deed of Trust Act of the state of Washington is not an exclusive remedy, and
when not exercised Beneficiary may foreclose this Deed of Trust as a mortgage.

               Trustee is not obligated to notify any party hereto of pending
sale under any other deed of trust or of any action or proceeding in which
Grantor, Trustee or Beneficiary shall be a party, unless such action or
proceeding is brought by Trustee.

               Beneficiary may proceed as to the Collateral which constitutes
personal property in accordance with Beneficiary's rights and remedies in
respect to the Property or sell the Personal Property Collateral separately and
without regard to the remainder of the Property in accordance with Beneficiary's
rights and remedies provided by the Washington Uniform Commercial Code as well
as other rights and remedies available at law or in equity. Beneficiary's
exercise of any of its rights and remedies shall not constitute a waiver or cure
of a default. Beneficiary's failure to enforce any default shall not constitute
a waiver of the default or any subsequent default. In the event of foreclosure,
the cost of the title premium for the trustee sale guarantee (or equivalent
policy) shall be paid for by Grantor. In the event the Loan Documents are
referred to an


                                       20



attorney for enforcement or preservation of Beneficiary's rights or remedies,
whether or not suit is filed or any proceedings are commenced, Grantor shall pay
all Beneficiary's costs and expenses including Trustee's and attorneys' fees
(including attorneys' fees for any appeal, bankruptcy proceeding or any other
proceeding), accountants' fees, appraisal and inspection fees and cost of a
title report.

           30. Cumulative Remedies. To the extent allowed by law, all
Beneficiary's and Trustee's rights and remedies specified in the Loan Documents
are cumulative, not mutually exclusive and not in substitution for any rights or
remedies available in law or equity. In order to obtain performance of Grantor's
obligations under the Loan Documents, without waiving its rights in the
Collateral, Beneficiary may proceed against Grantor or any Borrower or may
proceed against any other security or guaranty for the Secured Obligations, in
such order and manner as Beneficiary may elect. The commencement of proceedings
to enforce a particular remedy shall not preclude the discontinuance of the
proceedings and the commencement of proceedings to enforce a different remedy.

           31. Entry. Beneficiary, in person, by agent or by court appointed
receiver, may enter, take possession of, manage and operate all or any part of
the Property, and may also do any and all other things in connection with those
actions that Beneficiary may in its sole discretion consider necessary and
appropriate to protect the security of this Deed of Trust. Such other things may
include: taking and possessing all of Grantor's or the then owner's books and
records; entering into, enforcing, modifying, or canceling Leases on such terms
and conditions as Beneficiary may consider proper; obtaining and evicting
tenants; fixing or modifying Rents; collecting and receiving any payment of
money owing to Grantor; completing any unfinished construction; and/or
contracting for and making repairs and alterations. Grantor hereby irrevocably
constitutes and appoints Beneficiary as its attorney-in-fact to perform such
acts and execute such documents as Beneficiary in its sole discretion may
consider to be appropriate in connection with taking these measures.

           32. Appointment of Receiver. In the event of a default, Grantor
consents to and Beneficiary shall be entitled, without notice, without bond, and
without regard to the adequacy of the Collateral, to the appointment of a
receiver for the Collateral. The receiver shall have, in addition to all the
rights and powers customarily given to and exercised by a receiver, all the
rights and powers granted to Beneficiary by the Loan Documents. The receiver
shall be entitled to receive a reasonable fee for management of the Property. If
Grantor is an occupant of the Property, Beneficiary has the right to require
Grantor to pay rent at fair market rates and the right to remove Grantor from
Property if Grantor fails to pay rent.

           33. Sale of Property After Default. The Collateral may be sold
separately or as a whole, at the option of Beneficiary following a default. In
the event of a Trustee's sale of all the Collateral, Beneficiary hereby assigns
its security interest in the personal property Collateral to the Trustee.
Beneficiary may also realize on the personal property Collateral in accordance
with the remedies available under the Uniform Commercial Code or at law. In the
event of a Trustee's sale, Grantor, and the holder of any


                                       21



subordinate liens or security interest with actual or constructive notice
hereof, waive any equitable, statutory or other right they may have to require
marshaling of assets in connection with the exercise of any of the remedies
permitted by applicable law or provided herein, or to direct the order in which
any of the Collateral will be sold in the event of any sale under this Deed of
Trust or foreclosure in the inverse order of alienation.

           34. Foreclosure of Lessee's Rights--Subordination. Beneficiary shall
have the right, of its option, to foreclose this Deed of Trust subject to the
rights of any lessees of the Property. Beneficiary's failure to foreclose
against any lessee shall not be asserted as a claim against Beneficiary or as a
defense against any claim by Beneficiary in any action or proceeding.
Beneficiary at any time may subordinate this Deed of Trust to any or all of the
Leases except that Beneficiary shall retain its priority claim to any
condemnation or insurance proceeds.

           35. Repairs During Redemption. In the event of a judicial foreclosure
the purchaser during any redemption period may make such repairs and alterations
to the Property as may be reasonably necessary for the proper operation, care,
preservation, protection and insuring of the Property. Any sums so paid,
together with interest from the date of the expenditure at the rate provided in
the judgment, shall be added to the amount required to be paid for redemption of
the Property.

           36. Reconveyance After Payment. Upon written request of Beneficiary
stating that all obligations secured by this Deed of Trust have been paid,
Trustee shall reconvey, without warranty, the Property then subject to the lien
of this Deed of Trust. The recitals in any reconveyance of any matters of fact
shall be conclusive proof of the truthfulness thereof. The grantee in the
reconveyance may be described as "the person or persons legally entitled
thereto." Grantor shall pay any costs, Trustee's fees and recording fees
incurred in so reconveying the Property.

           37. Nonwaiver of Terms and Conditions. Time is of the essence with
respect to performance of the obligations due under the Loan Documents.
Beneficiary's failure to require prompt enforcement of any required obligation
shall not constitute a waiver of the obligation due or any subsequent required
performance of the obligation. No term or condition of the Loan Documents may be
waived, modified or amended except by a written agreement signed by Grantor and
Beneficiary. Any waiver of any term or condition of the Loan Documents shall
apply only to the time and occasion specified in the waiver and shall not
constitute a waiver of the term or condition at any subsequent time or occasion.

           38. Waivers by Grantor. Without affecting any of Grantor's
obligations under the Loan Documents, Grantor waives the following:

                  (a) Any right to require Beneficiary to proceed against any
specific party liable for sums due under the Loan Documents or to proceed
against or exhaust any specific security for sums due under the Loan Documents.


                                       22



                  (b) Diligence, demand for performance, notice of
nonperformance, presentment, protest and notice of dishonor and notice of new or
additional indebtedness of any Grantor, any Borrower or any other party liable
for sums due under the Loan Documents to Beneficiary.

                  (c) Any defense arising out of Beneficiary entering into
additional financing or other arrangements with any Grantor, any Borrower or any
party liable for sums due under the Loan Documents not relating to the Property
and any action taken by Beneficiary in connection with any such financing or
other arrangements or any pending financing or other arrangements not related to
the Property.

                  (d) Any defense arising out of the absence, impairment, or
loss of any or all rights of recourse, reimbursement, contribution or
subrogation or any other rights or remedies of Beneficiary against any Grantor,
any Borrower or any other party liable for sums due under the Loan Documents or
any Collateral.

                  (e) Any obligation of Beneficiary to see to the proper use and
application of any proceeds advanced pursuant to the Loan Documents.

           39. Right of Subrogation. Beneficiary is subrogated to the rights,
whether legal or equitable, of all beneficiaries, mortgagees, lienholders and
owners directly or indirectly paid off or satisfied in whole or in part by any
proceeds advanced by Beneficiary under the Loan Documents, regardless of whether
these parties assigned or released of record their rights or liens upon payment.

           40. Joint and Several Liability. If there is more than one Grantor of
this Deed of Trust, their obligations shall be joint and several.

           41. Statement of Amount Owing. Grantor upon request by Beneficiary
will furnish a written statement duly acknowledged of the amount due under the
Loan Documents and whether any offsets or defenses exist against the amount due.

           42. Books and Records Financial Statements. Grantor will keep and
maintain at Grantor's address stated above, or such other place as Beneficiary
may approve in writing, books of accounts and records adequate to reflect
correctly the results of the operation of the Property and copies of all written
contracts, leases and other instruments which affect the Property. Such books,
records, contracts, leases and other instruments shall be subject to
examination, inspection and copying at any reasonable time by Beneficiary.
Grantor shall provide to Beneficiary within ninety (90) days after the end of
each of Grantor's fiscal years (or within twenty (20) days of Beneficiary's
written request therefor if Grantor is in default), for each Grantor, each
Borrower and for each guarantor of the Secured Obligations, a complete and
current financial statement and copy of its most recent federal income tax
return, together with a statement of income and expenses of the Property and a
statement of changes in financial position with respect to the Property for the
prior year, each in reasonable detail and certified by Grantor, each Borrower or
guarantor, as the case may be, and if Beneficiary shall require, by an
independent certified public accountant. At the same time, Grantor shall also
furnish a


                                       23



current rent roll for the Property, certified by Grantor, showing the name of
each tenant, the space occupied, the lease expiration date, the monthly rent, a
schedule of gross receipts for each tenant obligated to pay rent based on a
percentage of receipts, the date to which rent has been paid and any deposit
Grantor is holding. Grantor's compliance with these provisions shall not limit
or affect Grantor's obligations to comply with financial, tax and operation
covenants and reporting requirements under any other agreement between Grantor
and Beneficiary whether or not such other agreement is related to the Secured
Obligations.

           43. Appraisals. In the event of a default Beneficiary may obtain a
current appraisal of the Property which is to be paid for by Grantor. Appraisals
may be commissioned by Beneficiary when required by laws and regulations which
govern Beneficiary's lending practices. The cost of all such appraisals will be
home by Grantor.

           44. Maximum Interest Rate. If any payment of interest, fees and/or
charges under the Loan Documents shall exceed the maximum amounts permitted by
any applicable law of the State of Washington, then the payment made or to be
made shall be reduced so that in no event shall any obligor pay or Beneficiary
receive an amount in excess of the maximum amount permitted by any applicable
law. If Beneficiary receives an excess amount, it shall be treated as a
prepayment of principal or shall be returned to the payor, at Beneficiary's
option.

           45. Evasion of Prepayment Fee. If Grantor is in default, whether
Beneficiary has accelerated the maturity of the indebtedness or not, any tender
of payment sufficient to satisfy all sums due under the Loan Documents trade at
any time prior to foreclosure sale shall constitute an evasion of the prepayment
terms of the Note Purchase Agreement, if any, and shall be deemed a voluntary
prepayment. Any such payment, to the extent permitted by law, shall include the
additional payment required under the prepayment fee provision in the Note
Purchase Agreement, if any.

           46. Payment of New Taxes. If any federal, state or local law is
passed subsequent to the date of this Deed of Trust which requires Beneficiary
to pay any tax because of this Deed of Trust or the sums due under the Loan
Documents (excluding income taxes), then Grantor shall pay to Beneficiary on
demand any such taxes if it is lawful for Grantor to pay them, or, in the
alternative Grantor may repay all sums due under the Loan Documents plus any
prepayment fee within thirty (30) days of such demand. If it is not lawful for
Grantor to pay such taxes, then at its option Beneficiary may declare a default
under the Loan Documents.

           47. Insolvency Proceedings. Grantor or any party liable on the
Secured Obligations (including guarantors) shall not make any assignment for the
benefit of creditors and shall not permit the institution of any proceedings
under any federal or state statutes pertaining to bankruptcy, insolvency,
arrangement, dissolution, liquidation or receivership whether or not an order
for relief is entered.


                                       24



           48. Substitution of Trustee. Beneficiary may at any time discharge
the Trustee and appoint a successor Trustee who shall have all of the powers of
the original Trustee.

           49. In-House Counsel Fees. Whenever Grantor is obligated to pay or
reimburse Beneficiary or Trustee for any attorneys' fees, those fees shall
include the allocated costs for services of in-house counsel.

           50. Notices. Any notice given by Grantor, Trustee or Beneficiary
shall be in writing and shall be effective (a) on personal delivery to the party
receiving the notice, or (b) on the third day after deposit in the United States
mail, postage prepaid with return receipt requested, addressed to the party at
the address set forth above, or with respect to the Grantor, to the address at
which Beneficiary customarily or last communicated with Grantor.

           51. Time. Time is of the essence in connection with all obligations
of Grantor herein.

           52. Successors and Assigns. This Deed of Trust applies to, inures to
the benefit of, and binds all parties hereto and their successors and assigns.
The terms "Grantor," "Trustee" and "Beneficiary" include their successors and
assigns.

           53. Controlling Document; Definitions. In the event of a conflict or
inconsistency between the terms and conditions of this Deed of Trust and the
terms and conditions of any other of the Loan Documents (except for any separate
assignment of rents and/or leases and any Note Purchase Agreement which shall
prevail over this Deed of Trust), the terms and conditions of this Deed of Trust
shall prevail. All capitalized terms not otherwise defined herein shall have the
same meaning as in the Note Purchase Agreement.

           54. Invalidity of Terms and Conditions. If any term or condition of
this Deed of Trust is found to be invalid, the invalidity shall not affect any
other term or condition of the Deed of Trust and the Deed of Trust shall be
construed as if not containing the invalid term or condition.

           55. Legislation Affecting Beneficiary's Rights. If enactment or
expiration of applicable laws has the effect of rendering any provision of the
Note Purchase Agreement or this Deed of Trust unenforceable according to its
terms, Beneficiary, at its option, may require immediate payment in full of all
sums secured by this Deed of Trust and may invoke any remedies permitted herein.

           56. Rules of Construction. This Deed of Trust shall be construed so
that, whenever applicable, the use of the singular shall include the plural, the
use of the plural shall include the singular, and the use of any gender shall be
applicable to all genders and shall include corporations, partnerships and
limited partnerships.


                                       25



           57. Section Headlines. The headings to the various sections have been
inserted for convenience of reference only and shall not be used to construe
this Deed of Trust.

           58. Applicable Law. This Deed of Trust shall be governed by and
construed in accordance with the laws of the State of Washington.

           59. Commercial Purposes. The Secured Obligations were incurred
primarily for commercial, investment or business purposes and not for personal,
family or household purposes.

           60. Intentionally Omitted.

           61. Counterpart Notice. This Deed of Trust encumbers real property
situated in Chelan County and Clallam County in the State of Washington. In
order to facilitate recording in each of the two counties at the same time, this
Deed of Trust has been prepared in counterparts, each of which is identical to
this counterpart, except that Exhibit B of this counterpart describe only the
portion of the Mortgaged Property situated in the county in which this
counterpart is recorded. Grantor and Beneficiary intend and agree that the two
counterparts constitute one and the same deed of trust, that the lien thereof
shall attach to all property encumbered thereby on execution and delivery of any
one of the counterparts, and that to the extent permitted by law, foreclosure
thereof may be accomplished in a single judicial or nonjudicial proceeding in
any county in which any of the Mortgaged Property is located.

           62. Washington State Notice. Beneficiary hereby notifies Grantor as
follows: 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.

           63. Prior Mortgages. If this Deed of Trust is subordinate to any
other mortgage(s) or similar security document(s) on all or part of the
Collateral, the following modifications shall apply hereto:

               1.   The following definition is added hereto:

                      "Prior Mortgage" means the mortgage(s) or similar security
               document(s) of all or part of the Collateral, to which this Deed
               of Trust is subordinate, set forth in the title policy insuring
               the lien hereof together with the note(s) secured thereby and all
               other documents securing said note(s).

               2.   The following is added at the end of the Granting Clause:

                      (m) all sums held by or under the control of the holder of
               the Prior Mortgage which were deposited on account of real estate
               taxes, insurance premiums or otherwise.

               3.   The following is added to the end of Section 9:


                                       26



               Grantor further represents that neither Grantor nor any of its
               affiliates (nor any person or entity acting on behalf of any of
               them) is the holder of the Prior Mortgage or any participation or
               other interest therein or is the owner of a legal or equitable
               interest in any such holder.

               4.   The following is added to the end of Section 14:

                      (h) The foregoing provisions of this Section are subject
               to any provision of the Prior Mortgage requiring the application
               of insurance proceeds to restoration or requiring the payment of
               such proceeds to the holder of the Prior Mortgage.

               5.   The following is added to the end of Section 23:

               The foregoing provisions of this Section are subject to any
               provision of the Prior Mortgage requiring the application of
               condemnation proceeds to restoration or requiring the payment of
               such proceeds to the holder of the Prior Mortgage.

           64. Additional Provisions Concerning Prior Mortgages.

                  (a) Grantor shall perform or observe all covenants and
conditions to be performed or observed by the Grantor or grantor under the Prior
Mortgage.

                  (b) Upon notice from Beneficiary, simultaneously with the
making of each payment of principal and interest on the Prior Mortgage, Grantor
shall deliver to Beneficiary a copy of the check in the amount of such payment
delivered to the holder of the Prior Mortgage. Beneficiary shall have the right,
exercisable by notice to Grantor, to require Grantor to make payment of
principal and interest on the Prior Mortgage through Beneficiary and, if
Beneficiary exercises such right, Grantor shall deliver to Beneficiary a check
in the amount of each installment of such principal and interest, payable to the
order of the holder of the Prior Mortgage, not later than three (3) days prior
to the due date thereof and Beneficiary shall promptly forward such check to
said holder.

                  (c) Grantor hereby irrevocably designates Beneficiary its
agent and attorney-in-fact to perform or observe on behalf of Grantor any
covenant or condition which Grantor fails to perform or observe under the Prior
Mortgage within any applicable grace period specified in the Prior Mortgage, and
any advances made by Beneficiary in connection with such performance or
observance shall be repaid by Grantor on demand with interest at the default
interest rate set forth in the Note Purchase Agreement and the amount so
advanced, with interest, shall be secured hereby. Beneficiary shall have the
right, but not the obligation, to so perform or so observe. The performance or
observance of such covenant or condition by Beneficiary shall not prevent
Grantor's failure to so perform or observe from constituting an Event of
Default. In performing or observing any such covenant or condition, Beneficiary
shall have the right to enter upon the Collateral. Upon receipt by Beneficiary
from the holder of the Prior Mortgage of any notice of default under the Prior
Mortgage, Beneficiary may rely thereon and take any


                                       27



action permitted by this Section to remedy such default notwithstanding that the
existence of such default or the nature thereof may be questioned or denied by
Grantor.

                  (d) Grantor shall not enter into any modification, amendment
or supplement to the Prior Mortgage nor acquire, whether directly or indirectly,
any interest whatsoever in the Prior Mortgage.


                                       28



               The undersigned Grantor requests that a copy of any notices,
including but not limited to any Notice of Sale, be mailed to it at the address
herein before set forth.

                             PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington
                             corporation


                             By:       /s/ Donald A. Wright
                                ------------------------------------------------
                                Name: Donald A. Wright
                                Title:   President and Chief Executive Officer


                             CASHMERE MANUFACTURING CO., INC., a Washington
                             corporation


                             By:       /s/ Donald A. Wright
                                ------------------------------------------------
                                Name: Donald A. Wright
                                Title:   Executive Vice President


                             NORTHWEST TECHNICAL INDUSTRIES, INC., a Washington
                             corporation


                             By:       /s/ Donald A. Wright
                                ------------------------------------------------
                                Name:  Donald A. Wright
                                Title:   Executive Vice President





STATE OF WASHINGTON              )
                                 )ss.
COUNTY OF KING                   )

               I certify that I know or have satisfactory evidence that
Donald A. Wright is the person who appeared before me, and said person
acknowledged that he/she signed this instrument, on oath stated that he/she was
authorized to execute the instrument and acknowledged it as the President and
Chief Executive Officer of PACIFIC AEROSPACE & ELECTRONICS, INC. to be the free
and voluntary act of such party for the uses and purposes mentioned in the
instrument.

Dated: March 15, 2002

                                    Notary Public: /s/ Susan R. Benson
                                    Print Name: Susan R. Benson
                                    My commission expires: October 11, 2002

(Use this space for notarial stamp/seal)




STATE OF WASHINGTON              )
                                 )ss.
COUNTY OF KING                   )

               I certify that I know or have satisfactory evidence that
Donald A. Wright is the person who appeared before me, and said person
acknowledged that he/she signed this instrument, on oath stated that he/she was
authorized to execute the instrument and acknowledged it as the Executive Vice
President of CASHMERE MANUFACTURING CO., INC. to be the free and voluntary act
of such party for the uses and purposes mentioned in the instrument.

Dated: March 15, 2002

                                    Notary Public: /s/ Susan R. Benson
                                    Print Name: Susan R. Benson
                                    My commission expires: October 11, 2002

(Use this space for notarial stamp/seal)



STATE OF WASHINGTON              )
                                 )ss.
COUNTY OF KING                   )

               I certify that I know or have satisfactory evidence that
Donald A. Wright is the person who appeared before me, and said person
acknowledged that he/she signed this instrument, on oath stated that he/she was
authorized to execute the instrument and acknowledged it as the Executive Vice
President of NORTHWEST TECHNICAL INDUSTRIES, INC. to be the free and voluntary
act of such party for the uses and purposes mentioned in the instrument.

Dated: March 15, 2002

                                    Notary Public: /s/ Susan R. Benson
                                    Print Name: Susan R. Benson
                                    My commission expires: October 11, 2002

(Use this space for notarial stamp/seal)



                                    EXHIBIT B

                          Legal Description of Property

That portion of the East half of the West half of Section 20, Township 30 North,
Range 2 West, W.M., Clallam County, Washington, described as follows:

Beginning at a portion which is the Northeast corner of the Northwest quarter of
said Section 20; Thence South along the North-South center line of said Section
20 of a distance of 1,403 feet to the TRUE POINT OF BEGINNING of this
description; Thence continuing South along said center line 2,755 feet to the
intersection of the Northerly right of way boundary of the existing road
designated as the DNR P-1200 Road; Thence North 68 degrees 00 minutes West along
said boundary 615 feet; Thence North, parallel to said North-South center line,
2,525 feet; Thence East, parallel to the North East-West center line of said
Section 20, a distance of 577.5 feet, more or less, to the TRUE POINT OF
BEGINNING.





                                    EXHIBIT D

                                     Leases

(1) Lease Agreement, Cashmere Manufacturing, Inc. 1994, dated November 4, 1994,
between Port of Chelan County and Cashmere Manufacturing Co., Inc.

(2) Lease Agreement, Pacific Coast Technologies, Inc. 1993, dated February 1,
1993, between Port of Chelan County and Pacific Coast Technologies, Inc.

(3) Lease Agreement 1999, dated December 30, 1998, between Port of Chelan County
and Pacific Aerospace & Electronics, Inc., as amended by that certain First
Addendum to 1999 Lease, dated November 21, 2001, between Port of Chelan County
and Pacific Aerospace & Electronics, Inc.

(4) Lease Agreement - PA&E IB#9 2000, dated July 13, 2000, between Port of
Chelan County and Pacific Aerospace & Electronics, Inc.

(5) Lease Agreement, dated March 31, 1994, between Erickson Realty, Ltd. and
Electronic Specialty Corporation.

(6) Lease, dated April 3, 1998, between Sea-Land Development Corporation and
Skagit Engineering & Manufacturing, Inc., as amended by that certain Amendment
to Lease, dated June 19, 2000, between Sea-Land Development Corporation and
Skagit Engineering & Manufacturing, Inc., as amended by that certain Amendment
to Lease, dated January 25, 2002, between Sea-Land Development Corporation and
Skagit Engineering & Manufacturing, Inc., as amended by that certain Amendment
to Lease, dated January 31, 2002, Sea-Land Development Corporation and Skagit
Engineering & Manufacturing, Inc.

(7) Lease Agreement, dated June 2, 2000, between 220TH Street, LLC and Skagit
Engineering Manufacturing, Inc. (d/b/a Pacific Aerospace Electronics, Inc. -
Engineering & Fabrication Division).

(8) Lease Agreement, dated August 6, 2001, between Pacific Aerospace &
Electronics, Inc. and North Central Educational Service District, as amended by
that certain Amendment No. 1 to Lease Agreement, dated December 17, 2001,
between Pacific Aerospace & Electronics, Inc. and North Central Educational
Service District.





                                    EXHIBIT E

                                  Encumbrances

1. Property described in Exhibit A, as to Certain Equipment:

        (a) Master Equipment Lease Agreement, dated as of May 27, 1999, between
KeyCorp Leasing, A Division of Key Corporate Capital Inc., as Lessor, and
Pacific Aerospace & Electronics, Inc., as Lessee, as amended by Equipment
Schedule No. 02, dated as of June 14, 1999, between KeyCorp Leasing, A Division
of Key Corporate Capital Inc. and Pacific Aerospace & Electronics, Inc., with a
total cost of $233,443.08.

2. Lease Agreement, Pacific Coast Technologies, Inc. 1993, dated February 1,
1993, between Port of Chelan County and Pacific Coast Technologies, Inc.:

        (a) Commercial Security Agreement between Pacific Aerospace &
Electronics, Inc., as Borrower, Pacific Coast Technologies, Inc., as Grantor,
and KeyBank National Association, as Lender, securing the Promissory Note
between Pacific Aerospace & Electronics, Inc. and KeyBank National Association
in principal amount of $712,085.00, and

        (b) UCC-2 fixture filing between Pacific Coast Technologies, Inc., as
Debtor, and KeyBank National Association, as Secured Party, dated March 18,
1998.

EX-10.5

                                                                    EXHIBIT 10.5

After Recording Return To:
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York 10019
Attention: Val A. Soupios, Esq.



                        DEED OF TRUST, SECURITY AGREEMENT
                       AND FIXTURE FILING WITH ASSIGNMENT
                               OF LEASES AND RENTS



GRANTOR:

1.     PACIFIC AEROSPACE & ELECTRONICS, INC.

2.     CASHMERE MANUFACTURING CO., INC.

3.     NORTHWEST TECHNICAL INDUSTRIES, INC.

GRANTEE:

1.     FIRST UNION NATIONAL BANK, as collateral agent for Holders listed on
       Schedule A to Note Purchase Agreement (Beneficiary)

2.     LAND TITLE COMPANY OF CHELAN -- DOUGLAS COUNTY, INC. (Trustee)

Legal Description:

Abbreviated form: Units 1-4 Confluence Pk Condo (Exhibit A)
                  Portion of East half of West half of Section 20, Township 30
                   North, Range 2 West, Clallam County, Washington (Exhibit B)
                  Lts 6-14, Block 1, Steward's Plat of Mission & ptn lot 16 &
                   Lts 17-18 JF Woodring's Plat of Mission (Exhibit C)
Additional legal on Exhibits A- C of document

Assessor's Property Tax Parcel Account Number(s):
23-20-28-525-010          (Unit 1, Exhibit A)
23-20-28-525-020          (Unit 2, Exhibit A)
23-20-28-525-030          (Unit 3, Exhibit A)
23-20-28-525-040          (Unit 4, Exhibit A)
023020-31000              (Exhibit B)
23-19-04-850-065          (Portion of Exhibit C)
23-19-04-850-065          (Balance of Exhibit C)




Reference number(s) of Related Document(s):


                                       2


                        DEED OF TRUST, SECURITY AGREEMENT
                       AND FIXTURE FILING WITH ASSIGNMENT
                               OF LEASES AND RENTS

              THIS DEED OF TRUST is made this 25th day of March, 2002, between
PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington corporation, CASHMERE
MANUFACTURING CO., INC., a Washington corporation, and NORTHWEST TECHNICAL
INDUSTRIES, INC., a Washington corporation (individually and collectively, as
Grantor), whose address is 430 Olds Station Road, Wenatchee, Washington 98020 to
LAND TITLE COMPANY OF CHELAN - DOUGLAS COUNTY, INC., as Trustee, whose address
is 16 South Mission Street, P.O. Box 1726, Wenatchee, Washington 98807-1726 to
FIRST UNION NATIONAL BANK, as collateral agent for the holders set forth on
Schedule A (each a "Holder" and collectively the "Holders") to that certain Note
Purchase Agreement dated as of March 19, 2002 (the "Note Purchase Agreement")
by and among Pacific Aerospace & Electronics, Inc., a Washington corporation
("Grantor"), Jefferies & Company, Inc. ("Initial Purchaser") and First Union
National Bank, as Collateral Agent ("Agent" or "Beneficiary") whose address is
401 South Tryon Street - Suite 1200, Mail Code NC-1179, Charlotte, North
Carolina 28202.

       1. Granting Clause. Grantor irrevocably grants, bargains, sells and
conveys to Trustee and its successors and assigns in trust, with power of sale
and with right of entry and possession as provided herein, all of Grantor's
estate, right, title, interest, claim and demand, now owned or hereafter
acquired, in and to the following:

              (a) The property in Chelan and Clallam Counties, Washington,
described in Exhibits "A" -- "C" attached hereto and incorporated herein by this
reference (individually and collectively, the "Property" which term shall
include all or any part of the Property, any improvements thereon and all of the
property described in this Section 1).

              (b) All land lying in streets and roads adjoining the Property,
and all access rights and easements pertaining to the Property.

              (c) All the lands, tenements, privileges, reversions, remainders,
irrigation and water rights and stock, oil and gas rights, royalties, minerals
and mineral rights, all development rights and credits, air rights,
hereditaments and appurtenances belonging or in any way pertaining to the
Property.

              (d) All buildings, structures, improvements, fixtures, equipment
and machinery and property now or hereafter attached to or used in connection
with the use, occupancy or operation of the Property including, but not limited
to, heating and incinerating apparatus and equipment, boilers, engines, motors,
generating equipment, telephone and other communication systems, piping and
plumbing fixtures, ranges, cooking apparatus and mechanical kitchen equipment,
refrigerators, cooling, ventilating, sprinkling and vacuum cleaning systems,
fire extinguishing apparatus, gas and electric fixtures, irrigation equipment,
carpeting, underpadding, elevators, escalators, partitions,




mantles, built-in mirrors, window shades, blinds, screens, storm sash, awnings,
furnishings of public spaces, halls and lobbies, and shrubbery and plants. All
property mentioned in this subsection 1(d) shall be deemed part of the realty
and not severable wholly or in part without material injury to the Property.

              (e) All rents, royalties, issues, profits, revenue, income,
recoveries, reimbursements and other benefits of the Property, all existing and
future leases of the Property (including extensions, renewals and subleases),
all agreements for use and occupancy of the Property (all such leases and
agreements whether written or oral, are hereafter referred to as the "Leases"),
and all right, title and interest of Grantor thereunder, including, without
limitation, all guaranties of lessees' performance under the Leases, together
with the immediate and continuing right to collect and receive all of the rents,
income, receipts, revenues, issues, profits and other income of any nature now
or hereafter due (including any income of any nature coming due during any
redemption period) under the Leases or from or arising out of the Property
including minimum rents, additional rents, percentage rents, parking or common
area maintenance contributions, tax and insurance contributions, deficiency
rents, liquidated damages following default in any Lease, all proceeds payable
under any policy of insurance covering loss of rents resulting from
untenantability caused by destruction or damage to the Property, all proceeds
payable as a result of exercise of an option to purchase the Property, all
proceeds derived from the termination or rejection of any Lease in a bankruptcy
or other insolvency proceeding, all security deposits or other deposits for the
performance of any lessee's obligations under the Leases, and all proceeds from
any rights and claims of any kind which Grantor may have against any lessee
under the Leases or any occupants of the Property (all of the above are
hereafter collectively referred to as the "Rents"). This subsection 1(e) is in
addition to other provisions of this Deed of Trust providing for the assignment
of rents and leases to Beneficiary, and is subject to the right, power and
authority given to the Beneficiary in Section 7 hereof to collect and apply the
Rents.

              (f) All of Grantor's rights to further encumber said Property for
debt and all Grantor's rights to enter into any lease agreement which would
create a tenancy that is or may become subordinate in any respect to any
mortgage or deed of trust other than this Deed of Trust.

              (g) All reciprocal easement agreements, declarations, development
agreements, developer's or utility agreements, and any similar such agreements
or declarations now or hereafter affecting the Collateral (as defined below) or
any part thereof.

              (h) All (a) development work product prepared in connection with
the Collateral, including, but not limited to, engineering, drainage, traffic,
soil and other studies and tests; water, sewer, gas, electrical and telephone
approvals, taps and connections; surveys, drawings, plans and specifications;
and subdivision, zoning and platting materials; (b) building and other permits,
rights, licenses and approvals relating to the Collateral; (c) contracts and
agreements (including, without limitation, contracts with architects and
engineers, construction contracts and contracts for the maintenance, management
or leasing of the Collateral), contract rights, logos, trademarks, trade names,


                                       2


copyrights and other general intangibles used or useful in connection with the
ownership, operation or occupancy of the Collateral or any part thereof; (d)
financing commitments (debt or equity) issued to Grantor in respect of the
Collateral and all amounts payable to Grantor thereunder; (e) contracts for the
sale of all or any portion of the Collateral, and all amounts payable by the
purchasers thereunder; (f) operating and other bank accounts, and monies
therein, of Grantor relating to the Collateral, including, without limitation,
any accounts relating to real estate taxes or assessments; (g) interest rate
protection agreements entered into by Grantor in respect of the loan, whether
pursuant to the Note Purchase Agreement or otherwise; and (h) commercial tort
claims related to the Collateral.

              (i) All rights of Grantor under promissory notes, letters of
credit, electronic chattel paper, proceeds from accounts, payment intangibles,
and general intangibles related to the Collateral, as the terms "accounts",
"general intangibles", and "payment intangibles" are defined in the applicable
Uniform Commercial Code Article 9, as the same may be modified or amended from
time to time.

              (j) All other assets of Grantor related in any way to the
Collateral, subject to certain limitations that may be set forth herein.

              (k) All proceeds of the conversion, voluntary or involuntary, of
any of the foregoing into cash or liquidated claims, including, without
limitation, proceeds of insurance and condemnation awards, and all rights of
Grantor to refunds of real estate taxes and assessments.

              (l) All of Grantor's right, title and interest, as lessee, in, to
and under the leases listed on Exhibit D hereto (the "Leased Property"), subject
to Grantor's obtaining any required approvals by Landlord.

              The Property is not used principally or primarily for agricultural
purposes.

       2. Collateral. The following described estate, property and rights of
Grantor are also included as security for the performance of each covenant and
agreement of Grantor contained herein and the payment of all sums of money
secured hereby:

              (a) All furniture, furnishings, appliances, machinery, vehicles,
equipment and all other property of any kind now or hereafter located on the
Property, used or intended to be used on the Property wherever actually located,
or purchased with the proceeds of the Notes (as defined herein), and all rights
of Grantor as lessee of any property described in this Section 2 and subsection
1(d) above.

              (b) All compensation, awards, damages, rights of action and
proceeds (including insurance proceeds and any interest on any of the foregoing)
arising out of or relating to a taking or damaging of the Property by reason of
any public or private improvement, condemnation proceeding (including change of
grade), fire, earthquake or other casualty, injury or decrease in the value of
the Property.


                                       3


              (c) All returned premiums or other payments on any insurance
policies pertaining to the Property and any refunds or rebates of taxes or
assessments on the Property.

              (d) All rights to the payment of money, accounts receivable,
deferred payments, refunds, cost savings, payments and deposits, whether now or
later to be received from third parties (including all utility deposits),
architectural and engineering plans, specifications and drawings, contract
rights, governmental permits and licenses, and agreements and purchase orders
which pertain to or are incidental to the design or construction of any
improvements on the Property, Grantor's rights under any payment, performance,
or other bond in connection with construction of improvements on the Property,
and all construction materials, supplies, and equipment delivered to the
Property or intended to be used in connection with the construction of
improvements on the Property wherever actually located.

              (e) All contracts and agreements pertaining to or affecting the
Property including, but not limited to, management, operating and franchise
agreements, licenses, trade names and trademarks.

              (f) All of Grantor's interest in and to the loan account, the loan
funds, whether disbursed or not, and Grantor's own funds now or later to be held
on deposit as equity funds or for payment of bills relating to the Property.

              (g) All commitments or agreements, now or hereafter in existence,
which will provide Grantor with proceeds to satisfy the Secured Obligations
(defined below) and the right to receive the proceeds due under such commitments
or agreements including refundable deposits and fees.

              (h) All books and records pertaining to any and all of the
property described above, including computerreadable memory and any computer
hardware or software necessary to access and process such memory.

              (i) All additions, accessions, replacements, substitutions,
proceeds and products of the property described in this Section 2 and of any of
the Property which is personal property.

              The Property and all of the property and rights described in
Section 1 and 2 are referred to herein collectively as the "Collateral."

       3. Security Agreement. To the extent that any of the Collateral may be
determined to be personal property, Grantor as debtor hereby grants Holders and
Beneficiary as agent for the Holders as secured party a security interest in all
such personal property or fixtures to secure payment and performance of the
Secured Obligations (defined below). This Deed of Trust constitutes a security
agreement, a financing statement and fixture filing pursuant to the Uniform
Commercial Code with respect to any and all property now or hereafter described
in any Uniform Commercial Code Financing Statement naming Grantor as Debtor and
Beneficiary as Secured Party affecting or related to the use and enjoyment of
the Property. Grantor agrees that it will


                                       4


not terminate or amend any financing statements filed in connection with the
Secured Obligations (as hereinafter defined) without Beneficiary's prior
consent. The remedies for any violation of the covenants, terms and conditions
of the agreements herein contained shall be (a) as prescribed herein, or (b) by
general law, or (c) as to such part of the security which is also reflected in
any such Financing Statement by the specific statutory consequences now or
hereafter enacted and specified in the Uniform Commercial Code, all at
Beneficiary's sole election. Grantor and Beneficiary agree that the filing of
such a Financing Statement in the records normally having to do with personal
property shall never be construed as in anywise derogating from or impairing
this declaration and hereby stated intention of the parties hereto, that
everything used in connection with the production of income from the property
that is the subject of this Deed of Trust and/or adapted for use therein and/or
which is described or reflected in this Deed of Trust is, and at all times and
for all purposes and in all proceedings both legal or equitable shall be,
regarded as part of the real estate irrespective of whether (a) any such item is
physically attached to the improvements, (b) serial numbers are used for the
better identification of certain equipment items capable of being thus
identified in any list filed with the Beneficiary, or (c) any such item is
referred to or reflected in any such Financing Statement so filed at any time.

       4. Financing Statement. This Deed of Trust shall also serve as a
financing statement filed for record in the real estate records as a fixture
filing pursuant to the Uniform Commercial Code. This Deed of Trust may be given
to secure an obligation incurred to refinance an obligation incurred for the
construction of an improvement on the Property, including the acquisition of the
Property.

       5. Obligations Secured. THIS DEED OF TRUST IS FOR THE PURPOSE OF SECURING
the following ("Secured Obligations"):

              (a) Payment of the sum of up to THIRTY-SIX MILLION DOLLARS
($36,000,000) or so much thereof with interest thereon as shall be evidenced by
all notes described in the Note Purchase Agreement or other instruments
evidencing the indebtedness secured by this Deed of Trust including all
renewals, amendments, modifications or extensions thereof and substitutions
therefor.

              (b) Payment of any further sums now or hereafter advanced or
loaned by Beneficiary or Holders (including any assignee of Beneficiary or
Holders) to any Borrower under the Note Purchase Agreement or any of their
successors or assigns, and payment of every other present and future obligation
owing by any Borrower to Beneficiary or Holders (or any such assignee) of any
kind, and all renewals, modifications, and extensions thereof, including any
interest, fees, costs, service charges and expenses connected with such
obligations (this Deed of Trust, the Note Purchase Agreement and all such other
documents, evidencing or securing the loan are hereafter collectively referred
to as the "Loan Documents") together with interest thereon at the rate set forth
in the Note Purchase Agreement unless otherwise specified in the Loan Documents
or agreed to in writing.


                                       5


              (c) Performance of each agreement, term and condition set forth or
incorporated by reference in the Loan Documents, as such may be amended,
including without limitation the Note Purchase Agreement, which are incorporated
herein by reference, or contained herein.

       6. Performance of Obligations. Grantor shall promptly and timely pay all
sums due pursuant to the Loan Documents, strictly comply with all the terms and
conditions of the Loan Documents, and perform each Secured Obligation in
accordance with its terms.

       7. Assignment of Rents and Leases. Grantor hereby absolutely and
irrevocably assigns to Beneficiary all Grantor's interest in the Rents and
Leases whether now due, past due or to become due, and hereby gives to and
confers upon Beneficiary the right, power and authority to collect such Rents
and proceeds, and Grantor, without limiting the generality of the Granting
Clause hereof, specifically hereby presently, absolutely, unconditionally and
irrevocably assigns, transfers and sets over all of the Rents now or hereafter
accruing to Beneficiary. Grantor irrevocably appoints Beneficiary its true and
lawful attorney at the option of Beneficiary at any time to demand, receive and
enforce payment, to give receipts, releases and satisfactions, and to sue,
either in the name of Grantor or in the name of Beneficiary, for all such Rents
and proceeds. It is understood and agreed that neither the foregoing assignment
of Rents and proceeds to Beneficiary nor the exercise by Beneficiary of any of
its rights or remedies under this Deed of Trust shall be deemed to make
Beneficiary a "mortgagee-in-possession" or otherwise responsible or liable in
any manner with respect to the Property or the use, occupancy or enjoyment or
operation of all or any portion thereof, unless and until Beneficiary, in person
or by agent, assumes actual possession thereof; nor shall appointment of a
receiver for the Property by any court at the request of Beneficiary or by
agreement with Grantor or the entering into possession of the Property or any
part thereof by such receiver be deemed to make Beneficiary a
"mortgagee-in-possession" or otherwise responsible or liable in any manner with
respect to the Property or the use, occupancy, enjoyment or operation of all or
any portion thereof. This assignment is intended to be specific, perfected and
choate upon the recording of this Deed of Trust as provided in RCW 7.28.230.
This assignment shall be subject to the terms and conditions of any separate
assignment of leases and/or rents, whenever executed, in favor of Beneficiary
and covering the Property. Grantor warrants that it has made no prior assignment
of the Rents or Leases and will make no subsequent assignment without the prior
written consent of Beneficiary.

              (a) Unless otherwise provided in any separate assignment of leases
and/or rents, and so long as Grantor is not in default under the Loan Documents,
Grantor may collect the Rents as they become due and not more than one (1) month
in advance. Grantor shall use the Rents to pay normal operating expenses for the
Property and sums due and payments required under the Loan Documents. No Rents
shall be collected for a period subsequent to the current one month rental
period and first or last month's rent. Grantor's right to collect the Rents
shall not constitute Beneficiary's consent to the use of cash collateral in any
bankruptcy proceeding.


                                       6


              (b) If Grantor is in default under the Loan Documents, without
notice to Grantor, Beneficiary or its agents, or a court appointed receiver, may
collect the Rents. In doing so, Beneficiary may (i) evict lessees for nonpayment
of rent, (ii) terminate in any lawful manner any tenancy or occupancy, (iii)
lease the Property in the name of the then owner on such terms as it may deem
best and (iv) institute proceedings against any lessee for past due Rents. The
Rents received shall be applied to payment of the costs and expenses of
collecting the Rents, including a reasonable fee to Beneficiary, a receiver or
an agent, operating expenses for the Property and any sums due or payments
required under the Loan Documents, in such order as Beneficiary may determine.
Any excess shall be paid to Grantor, however, Beneficiary may withhold from any
excess a reasonable amount to pay sums anticipated to become due which exceed
the anticipated future Rents. Beneficiary's failure to collect or discontinuing
collection at any time shall not in any manner affect the subsequent enforcement
by Beneficiary of its rights to collect the Rents. Except in the case of a full
reinstatement of the Secured Obligations, the collection of the Rents shall not
cure or waive any default under the Loan Documents. Any Rents paid to
Beneficiary or a receiver shall be credited against the amount due from the
lessees under the Leases. In the event any lessee under the Leases becomes the
subject of any proceeding under the Bankruptcy Code or any other federal, state
or local statute which provides for the possible termination or rejection of the
Leases assigned hereby, Grantor covenants and agrees that in the event any of
the Leases are so rejected, no damages settlement shall be made without the
prior written consent of Beneficiary; any check in payment of damages for
rejection or termination of any such Lease will be made payable both to the
Grantor and Beneficiary; and Grantor hereby assigns any such payment to
Beneficiary and further covenants and agrees that upon request of Beneficiary,
it will duly endorse to the order of Beneficiary any such check, the proceeds of
which will be applied to any portion of the indebtedness secured hereunder in
such manner as Beneficiary may elect.

              (c) Regardless of whether or not Beneficiary, in person or by
agent, takes actual possession of the Property or any part thereof, Beneficiary
is not and shall not be deemed to be:

                     (i) "a mortgagee in possession" for any purpose; or

                     (ii) responsible for performing any of the obligations of
the lessor under any Lease; or

                     (iii) responsible for any waste committed by lessees or any
other parties, any dangerous or defective condition of the Property, or any
negligence in the management, upkeep, repair or control of the Property; or

                     (iv) liable in any manner for the Property or the use,
occupancy, enjoyment or operation of all or any part of it.

              In exercising its rights under this Section Beneficiary shall be
liable only for the proper application of and accounting for the Rents collected
by Beneficiary or its agents.


                                       7


       8. Leases.

              (a) Grantor shall fully comply with all of the terms, conditions
and provisions of the Leases so that the same shall not become in default and to
do all that is needful to preserve all said Leases in force. With respect to any
Lease of the whole or any part of the Property, Grantor shall not, without the
prior written consent of Beneficiary, which consent shall not be unreasonably
withheld, (i) permit assignment or subletting of all or part of the lessee's
rights under the Lease unless the right to assign or sublet is expressly
reserved by the lessee under the Lease, (ii) execute an assignment of the rents
or any part thereof from the Collateral without Beneficiary's prior consent,
(iii) modify or amend any lease so as to shorten the unexpired term thereof or
so as to decrease, waive or compromise in any manner the amount of rents payable
thereunder or materially expand the obligations of the lessor thereunder, (iv)
accept surrender of the Lease or terminate the Lease except in accordance with
the terms of the Lease providing for termination in the event of a default, (v)
accept prepayments of any installments of rents to become due under such leases,
except prepayments in the nature of security for the performance of the lessees
thereunder, (vi) modify, release or terminate any guaranties of any such lease
or (vii) in any other manner impair the value of the Property or the security
hereof. Any proceeds or damages resulting from a lessee's default under any such
Lease, at Beneficiary's option, shall be paid to Beneficiary and applied against
sums owed under the Loan Documents even though such sums may not be due and
payable. Except for non-delinquent real estate taxes and assessments, Grantor
shall not permit any lien to be created against the Property which may be or may
become prior to any Lease. If the Property is partially condemned or suffers a
casualty, Grantor shall promptly repair and restore the Property in order to
comply with the Leases.

              (b) Grantor will not execute any lease of all or a substantial
portion of the Property except for actual occupancy by the lessee thereunder,
and will at all times promptly and faithfully perform, or cause to be performed,
all of the covenants, conditions and agreements contained in all leases of the
Property or portions thereof now or hereafter existing, on the part of the
lessor thereunder to be kept and performed and will at all times do all things
necessary to compel performance by the lessee under each lease of all
obligations, covenants and agreements by such lessee to be performed thereunder.
If any of such leases provide for the giving by the lessee of certificates with
respect to the status of such leases, Grantor shall exercise its right to
request such certificates within five (5) days of any demand therefor by
Beneficiary and shall deliver copies thereof to Beneficiary promptly upon
receipt.

              (c) Each lease of the Property, or of any part thereof, executed
after the date hereof, shall provide that, in the event of the enforcement by
Trustee or Beneficiary of the remedies provided for hereby or by law, the lessee
thereunder will, upon request of any person succeeding to the interest of
Grantor as a result of such enforcement, automatically become the lessee of said
successor in interest, without change in the terms or other provisions of such
lease, provided, however, that said successor in interest shall not be bound by
(i) any payment of rent or additional rent for more than one (1) month in
advance, except prepayments in the nature of security for the performance by
said lessee of its obligations under said lease or (ii) any amendment or


                                       8


modification of the lease made without the consent of Beneficiary or such
successor in interest. Each lease shall also provide that, (x) the lease is
subordinate to this Deed (but shall also provide that Beneficiary, at its
option, may subordinate this Deed to such lease) and (y) upon request by said
successor in interest, such lessee shall execute and deliver an instrument or
instruments confirming such attornment.

              (d) Grantor shall furnish to Beneficiary upon request, but not
more than semi-annually, a certified leasing status report in respect of the
Property and a certified rent roll containing the names of all lessees of the
Property, the terms of their respective leases, the space occupied and the
rentals payable thereunder, together with copies, certified to be true and
complete, of such leases as may be requested by Beneficiary.

              (e) Grantor shall, promptly upon Beneficiary's request, deposit
all tenant security deposits in respect of the Property into an account with
Beneficiary or as designated by Beneficiary, which deposits shall be held and
disbursed to tenants as required under the terms of their respective leases.

       9. Warranty of Title. Grantor warrants that it (i) has good and
marketable title to an indefeasible fee simple estate in the Property, unless
Grantor's present interest in the Property is described in Exhibits A through C
as a leasehold interest, in which case Grantor warrants that it lawfully
possesses and holds a valid leasehold interest in the Property as stated in
Exhibits A through C, (ii) has good and marketable title to the personal
property Collateral, and (iii) holds a valid leasehold interest as tenant under
the leases described in Exhibit D, and that said leases are prior to all liens,
charges and encumbrances on the lessor's interest thereunder, subject, in each
case, to no liens, encumbrances, easements, assessments, security interests,
claims or defects of any kind prior or subordinate to the lien of this Deed of
Trust, except those listed in Beneficiary's title insurance policy, listed on
Exhibit E hereto, or approved by Beneficiary in writing (the "Permitted
Exceptions") and real estate taxes for the current year. Grantor warrants that
the Permitted Exceptions and the real estate taxes are not delinquent or in
default, and that Grantor has the right to convey the Property to Trustee for
the benefit of Beneficiary, and the right to grant a security interest in the
personal property Collateral. Grantor has the full power and authority to
subject the Property to the lien hereof in the manner and form herein done and
intended hereafter to be done. Grantor will preserve such title, and Grantor
will forever warrant and defend title to the Collateral and will defend the
validity and priority of the lien of this Deed of Trust and the security
interest granted herein against any claims or demands.

       10. Prohibited Liens.

              (a) Grantor shall not permit any governmental or statutory liens
(including tax, mechanic's or materialmen's liens) to be filed against the
Property except for real estate taxes and assessments not yet delinquent by
non-payment and liens permitted by the Loan Documents or approved by Beneficiary
in writing. Grantor will pay, from time to time when the same shall become due,
all lawful claims and demands of mechanics, materialmen, laborers, and others
which, if unpaid, might result in, or


                                       9


permit the creation of, a lien on the Property or any part thereof, and in
general will do or cause to be done everything necessary so that the lien and
effect hereof shall be fully preserved, at the cost of Grantor and without
expense to Trustee or Beneficiary.

              (b) Grantor will have the right to contest in good faith by an
appropriate legal or administrative proceeding the validity of any prohibited
lien, encumbrance or charge so long as (i) no default exists under the Loan
Documents, (ii) Grantor first deposits with Beneficiary a bond or other security
satisfactory to Beneficiary in the amount reasonably required by Beneficiary,
but not more than one and one--half (1 1/2) (i.e., 150%) of the amount of the
claim; (iii) Grantor immediately commences its contest of such lien, provided,
however, that within twenty (20) days after the filing of such lien Grantor
discharges said lien of record or records a bond which complies with the
requirements of RCW 60.04.161 eliminating such lien as an encumbrance on the
Property, and continuously pursues the contest in good faith and with due
diligence; (iv) foreclosure of the lien, encumbrance or charge is stayed; and
(v) Grantor pays any judgment rendered for the lien claimant or other third
party within ten (10) days after the entry of the judgment. If the contested
item is a mechanic's or materialmen's lien, Grantor will furnish Beneficiary
with an endorsement to its title insurance policy which insures the priority of
this Deed of Trust over the lien being contested. Grantor will discharge or
elect to contest and post an appropriate bond or other security within twenty
(20) days of written demand by Beneficiary.

       11. Payment of Taxes and Other Encumbrances. Grantor will pay when due:

              (a) All taxes, assessments and other governmental or public
charges affecting the Property, including assessments on appurtenant water
stock, and any accrued interest, cost and/or penalty thereon and upon request by
Beneficiary will submit receipts therefor to Beneficiary promptly following
payment;

              (b) All encumbrances (including any debt secured by deeds of
trust), ground rents, liens and/or charges, with interest, on the Property or
any part thereof which appear to be prior, superior or on a parity hereto, and
all costs and fees related thereto;

              (c) All charges for utilities or services, including, but not
limited to, electricity, gas, sewer and water;

              (d) All costs, fees and expenses of this Deed of Trust, including
cost of evidence of title, Trustee's fees and attorneys' fees in connection with
sale pursuant to this Deed of Trust (whether completed or not) together with
interest from and after ten (10) days following demand for repayment at the
default interest rate set forth in the Note Purchase Agreement until paid in
full.

       12. Maintenance -- No Waste.

              (a) Keep the Property in good condition and repair and not commit
or permit any waste or deterioration of the Property;


                                       10


              (b) Not remove, demolish or substantially alter any portion of the
Property, except as approved in writing by Beneficiary and except such
alterations as may be required by laws, ordinances or regulations of
governmental authorities;

              (c) Comply with all laws, ordinances, rules, regulations and
orders of governmental authorities now or hereafter affecting the Property or
requiring any alterations or improvements to be made thereon, and perform all of
its obligations under any covenant, condition, restriction or agreement of
record affecting the Property;

              (d) Complete promptly and in good and workmanlike manner any
portion of the Property which may be constructed hereafter, and promptly restore
in like manner as obligated in Section 14, any portion of the Property which may
be damaged or destroyed, and pay, when due, all costs incurred and claims for
labor performed and materials furnished therefor;

              (e) Not commit, suffer or permit any act to be done in, upon or to
the Property in violation of any law or ordinance or any covenant, condition or
restriction affecting the Property;

              (f) Do any and all acts which, from the character or use of the
Property, may be reasonably necessary to protect and preserve the security of
Beneficiary, the specific enumerations herein not excluding the general;

              (g) Not permit any construction liens against the Property;

              (h) Not take or permit to be taken any actions that might
invalidate any insurance carried on the Property;

              (i) Maintain in full force and effect all licenses (including but
not limited to any operating licenses or similar matters) required or permitted
in the operation of the improvements on the Property.

       13. Alterations Removal and Demolition. Grantor shall not structurally
alter, remove or demolish any building or improvement on the Property without
Beneficiary's prior written consent. Grantor shall not remove any fixture or
other item of property which is part of the Collateral without Beneficiary's
prior written consent unless the fixture or item of property is replaced by an
article of equal suitability owned by Grantor free and clear of any lien or
security interest.

       14. Restoration.

              (a) After the happening of any casualty to the Property whether or
not required to be insured against under the policies to be provided by Grantor
hereunder, Grantor shall give prompt written notice thereof to Beneficiary
generally describing the nature and cause of such casualty and the extent of the
damage or destruction to the Property.


                                       11


              (b) Grantor hereby assigns to Beneficiary all proceeds of
insurance ("Insurance Proceeds") which Grantor may be entitled to receive. In
the event of any damage to or destruction of the Collateral, then, provided
there is not an Event of Default under the Note Purchase Agreement, the Notes,
the Deed of Trust or any of the Loan Documents (as defined in the Note Purchase
Agreement) and Beneficiary has reasonably determined that its security has not
been impaired, Grantor shall commence and diligently pursue to completion in
accordance with this Section 14 the repair, restoration and rebuilding of any
portion of the Collateral that has been partially damaged or destroyed in full
compliance with all legal requirements and to the same condition, character and
at least equal value and general utility as nearly as possible to that existing
prior to such damage or destruction (the "Restoration"), and Beneficiary shall
hold and disburse the Insurance Proceeds (less the cost, if any, to Beneficiary
of recovering and paying out such proceeds (including, without limitation,
attorneys' fees and expenses, adjuster's fees, and fees incurred in
Beneficiary's performance of its obligations hereunder)) (the "Net Insurance
Proceeds") in the manner hereinafter provided to the Restoration. In the event
that the Collateral is substantially destroyed or Beneficiary has determined
that its security has been impaired, the Beneficiary may, at its option, apply
the Net Insurance Proceeds to the reduction of the Secured Obligations and
secured by this Deed of Trust in such order as Beneficiary may determine and, at
Beneficiary's option and in its sole discretion, Beneficiary, may declare the
Secured Obligations immediately due and payable.

              (c) In the event the Net Insurance Proceeds are to be used for the
Restoration, Grantor shall, prior to disbursement of any Net Insurance Proceeds
for any work in connection with the Restoration (the "Work"), deliver or furnish
to Beneficiary (i) complete plans and specifications for the Work which (A) have
been approved by all governmental authorities whose approval is required, (B)
bear the signed approval of an architect reasonably satisfactory to Beneficiary
(the "Architect") and (C) are accompanied by Architect's signed estimate of the
total estimated cost of the Restoration. Such plans and specifications shall be
subject to Beneficiary's approval, which approval shall not be unreasonably
withheld or delayed (the "Approved Plans and Specifications"); (ii) the amount
of money which, as determined by Beneficiary, will be sufficient when added to
the Net Insurance Proceeds, if any, to pay the entire cost of the Restoration
(all money as held by Beneficiary is referred to herein as the "Restoration
Funds"); (iii) copies of all permits and approvals required by law in connection
with the commencement and conduct of the Restoration; and (iv) a contract for
construction executed by Grantor and a contractor satisfactory to Beneficiary
(the "Contractor") in form, scope and substance satisfactory to Beneficiary
(including the customary retention) for performance of the Work.

              (d) After commencing the Work, Grantor shall perform or cause
Contractor to perform the Work diligently and in good faith in accordance with
the Approved Plans and Specifications approved by Beneficiary. So long as
Grantor is not in default under any of the Loan Documents, Beneficiary shall
disburse the Restoration Funds in increments to Grantor or as Grantor may
direct, from time to time as the Work progresses, to pay (or reimburse Grantor
for) the costs of the Restoration, but subject to the following conditions, any
of which Beneficiary may waive in its sole discretion:


                                       12


                     (i) Beneficiary shall make such payments only upon not less
than ten (10) days' prior written notice from Grantor to Beneficiary and
Grantor's delivery to Beneficiary of (A) Grantor's written request for payment
(a "Request for Payment") accompanied by a certificate by Architect in form,
scope and substance satisfactory to Beneficiary which states that all of the
Work completed to that date has been done in compliance with the Approved Plans
and Specifications and in accordance with all provisions of law, that the amount
requested has been paid or is then due and payable and is properly a part of the
cost of the Restoration and that when added to all sums, if any, previously paid
out by Beneficiary, the requested amount does not exceed the value of the Work
done to the date of such certificate; (B) evidence satisfactory to Beneficiary
that there are no construction or similar liens for labor or material supplied
in connection with the Work to date or that any such liens have been adequately
provided for to Beneficiary's satisfaction; and (C) evidence satisfactory to
Beneficiary that the balance of the Restoration Funds remaining after making the
payments shall be sufficient to pay the balance of the cost of the Restoration
not completed to date (giving in such reasonable detail as Beneficiary may
require an estimate of the cost of such completion). Each Request for Payment
shall be accompanied by waivers of liens satisfactory to Beneficiary covering
that part of the Work previously paid for, if any, and by a search prepared by a
title company or by other evidence satisfactory to Beneficiary that no
construction liens or other liens or instruments for the retention of title in
respect of any part of the Work have been filed against the Property and not
discharged of record and that no encumbrance exists on or affecting the Property
other than encumbrances, if any, which are set forth in the title policy issued
to Beneficiary insuring the lien of this Deed of Trust; and

                     (ii) Any Request for Payment after the Restoration has been
completed shall be accompanied by a copy of any certificate or certificates
required by law to render occupancy of the Property legal.

              (e) Upon Beneficiary's receipt of the certificate of occupancy for
the Property and other customary evidence requested by Beneficiary that the
Restoration has been completed and the costs thereof paid in full, and
satisfactory evidence that no mechanic's or similar liens for labor or material
supplied in connection with the Restoration are outstanding against the Property
and Beneficiary's disbursement under the final Request for Payment, and provided
that Grantor is not then in default under any of the Loan Documents (as defined
in the Note Purchase Agreement), Beneficiary shall pay any remaining Restoration
Funds then held by Beneficiary to Grantor; provided, however, nothing contained
herein shall prevent Beneficiary from applying at any time the whole or any part
of the Restoration Funds to the curing of any Event of Default under the Loan
Documents.

              (f) If (i) within sixty (60) days after the occurrence of any
damage or destruction to the Property requiring Restoration, Grantor fails to
submit to Beneficiary and receive Beneficiary's approval of plans and
specifications or fails to deposit with Beneficiary the additional amount
necessary to accomplish the Restoration as provided in Section 14, or (ii) after
such plans and specifications are approved by all such governmental authorities
and Beneficiary, Grantor fails to commence promptly or


                                       13


diligently continue to completion the Restoration, or (iii) Grantor becomes
delinquent in payment to mechanics, materialmen or others for the costs incurred
in connection with the Restoration, then, in addition to all of the rights
herein set forth, Beneficiary may apply the Restoration Funds then or thereafter
held by Beneficiary to reduce the unpaid indebtedness secured hereby in such
order as Beneficiary may determine, and at Beneficiary's option and in its sole
discretion, Beneficiary may declare the Secured Obligations immediately due and
payable.

              (g) In the event that Beneficiary applies all or any portion of
the Restoration Funds to reduce the unpaid indebtedness secured hereby as
provided in this Section 14, after payment in full of all sums secured hereby,
any remaining Restoration Funds shall be paid to Grantor.

       15. Compliance with Laws. Grantor shall comply with all laws, ordinances,
regulations, covenants, conditions, and restrictions affecting the Property,
including, without limitation, all applicable requirements of the Fair Housing
Act of 1968 (as amended) and the Americans With Disabilities Act of 1990 (as the
same may be amended from time to time), and shall not commit or permit any act
upon or concerning the Property in violation of any such laws, ordinances,
regulations, covenants, conditions, and restrictions. Grantor agrees to protect,
defend, indemnify and hold Beneficiary harmless from and against all liability
threatened against or suffered by Beneficiary by reason of a breach by Grantor
of the foregoing representations, warranties, covenants and agreements. The
foregoing indemnity shall include the cost of all alterations to the Property
(including architectural, engineering, legal and accounting costs), all fines,
fees and penalties, and all legal and other expenses (including attorneys' fees)
incurred in connection with the Property being in violation of any such laws,
ordinances, regulations, covenants, conditions and restrictions, and for the
cost of collection of the sums due under the indemnity. In the event that
Beneficiary or its designee shall become the owner of or acquire an interest in
or rights to the Property by foreclosure or deed in lieu of foreclosure of this
Deed of Trust or by other means, the foregoing indemnification obligation shall
survive such foreclosure or deed in lieu of foreclosure or other acquisition of
the Property.

       16. Leased Premises. Grantor shall undertake, and shall use its
commercially reasonable efforts, to obtain, within sixty (60) days of the date
hereof, (a) any and all required approvals by, and consents of, all landlords
with respect to the assignment of leases to Beneficiary pursuant to Section 1(l)
hereof, and (b) any and all subordination and non-disturbance agreements
required by Beneficiary in connection with the Leased Premises, on terms and
conditions reasonably satisfactory to Beneficiary.

       17. Impairment of Collateral. Grantor will faithfully perform each and
every covenant to be performed by Grantor under any lien or encumbrance,
including, without limiting the generality hereof, mortgages, deeds of trust,
leases, declarations or covenants, conditions and/or restrictions and other
agreements which affect the Property, in law or in equity, which Beneficiary
reasonably believes may be prior or superior to or on a parity with the lien or
charge of this Deed of Trust. Grantor shall not, without Beneficiary's prior
written consent, change the general nature of the occupancy of the


                                       14


Property, initiate, acquire or permit any change in any public or private
restrictions (including without limitation a zoning reclassification) limiting
the uses which may be made of the Property, or take or permit any action which
would impair the Collateral or Beneficiary's lien or security interest in the
Collateral. A breach of or a default under any such lien or encumbrance, or a
breach of any requirement of this Section 16 shall constitute an event of
default under this Deed of Trust.

       18. Inspection of Property. Beneficiary is authorized, by itself, its
agents, employees or workmen, to enter at any reasonable time upon any part of
the Property for the purpose of inspecting the same upon reasonable prior notice
(except in the case of an emergency for which no prior notice need be given),
and for the purpose of performing any of the acts it is authorized to perform
under the terms of this Deed of Trust. Grantor agrees to cooperate with
Beneficiary to facilitate such inspections.

       19. Grantor's Defense of Collateral. Grantor shall appear in and defend
any action or proceeding which may affect the Collateral or the rights or powers
of Beneficiary or Trustee, and to pay all costs and expenses, including cost of
evidence of title and attorneys' fees in a reasonable sum, in any action or
proceeding in which Beneficiary and/or Trustee may appear or be made a party,
including, but not limited to, foreclosure or other proceeding commenced by
those claiming a right to any part of the Property under subordinate liens, in
any action to partition or condemn all or part of the Property, whether or not
pursued to final judgment, and in any exercise of the power of sale contained
herein, whether or not the sale is actually consummated.

       20. Beneficiary's Right to Protect Collateral. Beneficiary may commence,
appear in, and defend any action or proceeding which may affect the Collateral
or the rights or powers of Beneficiary or Trustee, and in such event,
Beneficiary shall be allowed and paid all of Beneficiary's costs, charges and
expenses, including cost of evidence of title and attorneys' fees incurred in
such action or proceeding in which Beneficiary may appear. Beneficiary may pay,
purchase, contest or compromise any encumbrance, charge or lien not listed as a
Permitted Exception which in its judgment appears to be prior or superior to the
lien of this Deed of Trust. If Grantor fails to make any payment or do any act
required under the Loan Documents, Beneficiary, without any obligation to do so
and without releasing Grantor from any obligations under the Loan Documents, may
make the payment or cause the act to be performed in such manner and to such
extent as Beneficiary may deem necessary to protect the Collateral. Beneficiary
is authorized to enter upon the Property for such purposes. In exercising any of
these powers Beneficiary may incur such expenses, in its absolute discretion, it
deems necessary, including cost of evidence of title, employ an attorney, and
pay said attorneys' reasonable fees. Grantor hereby agrees to pay immediately
following demand, together with interest from and after ten (10) days following
demand for payment at the default interest rate set forth in the Note Purchase
Agreement until paid in full, all of Beneficiary's costs, charges, expenses and
accounts referred to above in this Section 19, including cost of evidence of
title and reasonable attorneys' fees incurred in such action or proceeding in
which Beneficiary may appear. All costs, charges and expenses so incurred,
together with interest thereon as aforesaid, shall be secured by the lien of
this Deed of Trust.


                                       15


       21. Hazardous Substances. Grantor represents and warrants to Beneficiary
that to the best of Grantor's knowledge after due and diligent inquiry, no
hazardous or toxic waste or substances are being stored on the Property or any
adjacent property except in strict compliance with all Environmental Laws nor
have any such waste or substances been stored or used in, on, under, over or
about the Property or any adjacent property prior to or during Grantor's
ownership, possession or control of the Property. Grantor agrees to provide
written notice to Beneficiary immediately upon Grantor becoming aware that the
Property or any adjacent property is being or has been contaminated with
hazardous or toxic waste or substances. Grantor will not cause nor permit any
activities on the Property which directly or indirectly could result in the
Property or any other property becoming contaminated with hazardous or toxic
waste or substances. For purposes of this Deed of Trust, the term "hazardous or
toxic waste or substances" means any substance or material defined or designated
as hazardous or toxic wastes, hazardous or toxic material, hazardous, toxic or
radioactive substance or other similar term by any applicable federal, state or
local statute, regulation or ordinance now or hereafter in effect.

       22. Insurance.

              (a) Grantor shall maintain insurance on the Property with premiums
prepaid providing replacement cost coverage and insuring against loss by fire
and such other risks covered by extended coverage insurance, flood (but only if
the Property is in a federally-designated flood plain), and such other perils
and risks, including loss of rents and business interruption as may be required
by Beneficiary. Grantor shall also maintain commercial general liability
insurance. All insurance shall be with companies satisfactory to Beneficiary and
in such amounts as required by Beneficiary with lender's loss payable clauses in
favor of and in form satisfactory to Beneficiary. At least thirty (30) days
prior to the expiration of the term of any insurance policy, Grantor shall
furnish Beneficiary with written evidence of renewal or issuance of a
satisfactory replacement policy. If requested Grantor shall deliver copies of
all policies to Beneficiary. If Grantor fails to maintain such insurance
satisfactory to Beneficiary, Beneficiary may make the payment on behalf of
Grantor and any sums expended shall be added to principal and bear interest at
the default interest rate set forth in the Note Purchase Agreement. Each policy
of insurance shall provide Beneficiary with no less than forty-five (45) days
prior written notice of any cancellation, expiration, nonrenewal or
modification.

              (b) In the event of any loss or damage to the Property, all
Insurance Proceeds shall be payable to Beneficiary, and Grantor hereby
authorizes and directs any affected insurance company to make payment of the
Insurance Proceeds directly to Beneficiary. The application or release by
Beneficiary of any Insurance Proceeds shall not cure or waive any default or
notice of default hereunder or invalidate any act done pursuant to such notice.

              (c) In the event of the foreclosure of this Deed of Trust or other
transfer of the title to the Property in extinguishment, in whole or in part, of
the indebtedness secured hereby, all right, title and interest of Grantor in and
to any insurance policy, or premiums or payments in satisfaction of claims or
any other rights thereunder


                                       16


then in force, shall pass to the purchaser or grantee notwithstanding the amount
of any bid at such foreclosure sale. Nothing contained herein shall prevent
accrual of interest as provided in the Note Purchase Agreement on any portion of
the principal balance due under the Note Purchase Agreement until such time as
the Insurance Proceeds are actually received and applied to reduce the principal
balance outstanding.

       23. Condemnation. Should the Property or any part thereof be taken or
damaged by reason of any public improvement, condemnation proceeding, or
conveyance in lieu thereof, or in any other manner, Beneficiary shall be
entitled to all compensation, awards and other payments or relief therefor, and
shall be entitled, at its option, to commence, appear in and prosecute in its
own name any action or proceeding. Grantor shall have the right, with the prior
written consent of the Beneficiary, to make a compromise or settlement in
connection with such taking or damage. All such compensation, awards, damages,
rights of action and proceeds (the "Condemnation Proceeds") are hereby assigned
to Beneficiary, who shall, after deducting therefrom all its reasonable
expenses, including attorneys' fees, apply or release the Condemnation Proceeds
with the same effect as provided in Section 14 above with respect to disposition
of insurance proceeds; provided, that if such Condemnation Proceeds are to be
utilized for restoration of the Property and there are any excess Condemnation
Proceeds after application thereof to the restoration of the Property,
Beneficiary shall be entitled to apply such excess to the reduction of any
indebtedness outstanding under the Note Purchase Agreement. Grantor agrees to
execute such further assignments of the Condemnation Proceeds as Beneficiary may
require. Nothing contained herein shall prevent the accrual of interest as
provided in the Note Purchase Agreement on any portion of the Condemnation
Proceeds to be applied to the principal balance due under the Note Purchase
Agreement until such Condemnation Proceeds are actually received and applied.

       24. Reserve Account.

              (a) If Beneficiary so requires, Grantor shall pay to Beneficiary
monthly, together with and in addition to any payments of principal and/or
interest due under the Note Purchase Agreement, a sum, as estimated by the
Beneficiary, equal to the ground rents, if any, the real estate taxes and
assessments next due on the Property and the premiums next due on insurance
policies required under the Loan Documents, less all sums already paid therefor,
divided by the number of months to elapse before two (2) months prior to the
date when the ground rents, real estate taxes, assessments and insurance
premiums will become delinquent. The monthly reserve account payments and any
principal and/or interest payments due shall be paid in a single payment and
applied by Beneficiary in the following order: (i) ground rents, real estate
taxes, assessments and insurance premiums, (ii) expenditures made pursuant to
the Loan Documents and interest thereon, (iii) interest on the obligations of
Borrowers under Note Purchase Agreement, and (iv) principal due on the
obligations of Borrowers under Note Purchase Agreement. Grantor shall promptly
deliver to Beneficiary all bills and notices pertaining to the ground rents,
taxes, assessments and insurance premiums.


                                       17


              (b) The reserve account is solely for the protection of
Beneficiary. Beneficiary shall have no responsibility except to credit properly
the sums actually received by it. No interest will be paid on the funds in the
reserve account and Beneficiary shall have no obligation to deposit the funds in
an interest-bearing account. Upon assignment of this Deed of Trust by
Beneficiary, any funds in the reserve account shall be turned over to the
assignee and any responsibility of Beneficiary with respect thereto shall
terminate. Each transfer of the Property shall automatically transfer to the
grantee all rights of Grantor to any funds in the reserve account.

              (c) If the total of the payments to the reserve exceeds the amount
of payments actually made by Beneficiary, plus such amounts as have been
reasonably accumulated in the reserve account toward payments to become due,
such excess may, at Beneficiary's election, be (i) credited by Beneficiary
against sums then due and payable under the Loan Documents or (ii) refunded to
Grantor as its name appears on the records of Beneficiary. If, however, the
reserve account does not have sufficient funds to make the payments when they
become due, Grantor shall pay to Beneficiary the amount necessary to make up the
deficiency within fifteen (15) days after written notice to Grantor. If this
Deed of Trust is foreclosed or if Beneficiary otherwise acquires the Property,
the Beneficiary shall, at the time of commencement of the proceedings or at the
time the Property is otherwise acquired, apply the remaining funds in the
reserve account, less such sums as will become due during the pendency of the
proceedings, against the sums due under the Loan Documents and/or to make
payments required under the Loan Documents.

       25. Repayment of Beneficiary's Expenditures. Grantor shall pay within ten
(10) days after written notice from Beneficiary all sums expended by Beneficiary
and all costs and expenses incurred by Beneficiary in taking any actions
pursuant to the Loan Documents, including attorneys' fees, accountants' fees,
appraisal and inspection fees, and the costs for title reports. If any laws or
regulations are passed subsequent to the date of this Deed of Trust which
require Beneficiary to incur out-of-pocket expenses in order to maintain,
modify, extend or foreclose this Deed of Trust, or revise the terms of the loan
secured hereby, Grantor shall reimburse Beneficiary for such expenses within ten
(10) days after written notice from Beneficiary. Expenditures by Beneficiary
shall bear interest from the date of such advance or expenditure at the default
interest rate set forth in the Note Purchase Agreement until paid, shall
constitute advances made under this Deed of Trust and shall be secured by and
have the same priority as the lien of this Deed of Trust. If Grantor fails to
pay any such expenditures, costs and expenses and interest thereon, Beneficiary
may, at its option, without foreclosing the lien of this Deed of Trust, commence
an independent action against Grantor for the recovery of the expenditures
and/or advance any undisbursed loan proceeds to pay the expenditures.

       26. Additional Security Documents. Grantor shall within fifteen (15) days
after request by Beneficiary execute and deliver any financing statement,
renewal, affidavit, certificate, continuation statement, or other document as
Beneficiary may request in order to perfect, preserve, continue, extend, or
maintain security interests or liens previously granted and the priority of the
security interests or liens. Grantor shall


                                       18


pay all costs and expenses incurred by Beneficiary in connection with the
preparation, execution, recording, filing, and refiling of any such document.

       27. Conveyance of Property; Further Encumbrance. In the event that all or
any part of or any interest in the Property shall be sold, transferred, leased
(other than space leases without options to purchase), further encumbered,
conveyed, or a contract of sale or other conveyance entered into with respect
thereto, without the prior written consent of Beneficiary, then, upon the
occurrence of any one or more of the foregoing events, and regardless of whether
or not Grantor shall be in default under the Note Purchase Agreement or this
Deed of Trust or any Loan Document, Beneficiary may, at its option, declare the
then outstanding principal balance evidenced by the Note Purchase Agreement plus
accrued interest thereon immediately due and payable or, at its sole option, it
may consent to said conveyance or transfer in writing and may increase the rate
of the loan to the interest rate which Beneficiary would then commit to make a
mortgage loan to a borrower of comparable financial strength and managerial
expertise, and secured by similar security of comparable value and character,
and impose whatever other conditions it shall deem necessary to compensate it
for such increased risk resulting from the breach of the foregoing covenants.
Such increase in interest rate or imposition of additional terms shall entitle
Beneficiary to increase monthly payments under the Notes so that the increased
monthly installments will fully amortize the outstanding balance of the
indebtedness evidenced thereby over the unexpired amortization term of the
Notes. The execution and delivery by the Grantor of any joint venture agreement,
partnership agreement, declaration of trust or option agreement whereunder any
other person or corporation may become entitled, directly or indirectly, to the
possession or enjoyment of the Property, or the income or other benefits derived
or to be derived therefrom shall in each case be deemed to be a conveyance or
assignment of the Grantor's interest in the Property for the purposes of this
section, and shall require the prior written consent of the Beneficiary.

       28. Release of Parties or Collateral. Without affecting the obligations
of any party under the Loan Documents and without affecting the lien of this
Deed of Trust and Beneficiary's security interest in the Collateral, Beneficiary
and/or Trustee may, without notice (a) release all or any Grantor, any Borrower
and/or any other party now or hereafter liable for any of the Secured
Obligations (including guarantors), (b) release all or any part of the
Collateral, (c) subordinate the lien of this Deed of Trust or Beneficiary's
security interest in the Collateral, (d) take and/or release any other security
for or guarantees of the Secured Obligations, (e) grant an extension of time for
performance of the Secured Obligations, (f) modify, waive, forbear, delay or
fail to enforce any of the Secured Obligations, (g) sell or otherwise realize on
any other security or guaranty prior to, contemporaneously with or subsequent to
a sale of all or any part of the Collateral, (h) make advances pursuant to the
Loan Documents including advances in excess of the amount provided for under the
Note Purchase Agreement, (i) consent to the making of any map or plat of the
Property, and (j) join in the grant of any easement on the Property. Any
subordinate lienholder shall be subject to all such releases, extensions or
modifications without notice to or consent from the subordinate lienholder.
Grantor shall pay any Trustee's, attorneys', title insurance, recording,
inspection or other fees or


                                       19


expenses incurred in connection with release of Collateral, the making of a map,
plat or the grant of an easement.

       29. Default -- Remedies. The occurrence of any Event of Default (as
defined in the Note Purchase Agreement) or Grantor's failure to comply with any
term or condition of the Loan Documents, including without limitation, this Deed
of Trust and payments due under the Note Purchase Agreement or other obligations
secured by this Deed of Trust, shall constitute an Event of Default. Upon the
occurrence of an Event of Default Beneficiary may declare all amounts owed under
the Secured Obligations, and all accrued and unpaid interest and other sums in
respect thereof, immediately due and payable after applicable notice as set
forth herein and/or exercise its rights and remedies under the Loan Documents
and applicable law including foreclosure of this Deed of Trust judicially or non
judicially by the Trustee pursuant to the power of sale. In the event of any
such Event of Default and upon written request of Beneficiary, Trustee shall
sell the Property in accordance with the Deed of Trust Act of the state of
Washington (RCW Chapter 61.24 as existing now or hereafter amended) and the
Uniform Commercial Code of the state of Washington, where applicable, at public
auction to the highest bidder. Any person except Trustee may bid at Trustee's
sale. Trustee shall apply the proceeds of the sale as follows: (i) to the
expenses of sale, including a reasonable Trustee's fee and attorneys' fee; (ii)
to all the Secured Obligations (principal and interest) and all other
indebtedness secured by this Deed of Trust or any other instrument, in such
order and amounts as Beneficiary may elect; (iii) the surplus, if any, shall be
distributed in accordance with said Deed of Trust Act. Trustee shall deliver to
the purchaser at the sale its deed, without warranty, which shall convey to the
purchaser the interest in the property which Grantor had or had the power to
convey at the time of its execution of this Deed of Trust and such as it may
have acquired thereafter. Trustee's deed shall recite the facts showing that the
sale was conducted in compliance with all the requirements of the law and of
this Deed of Trust, which recital shall be prima facie evidence of such
compliance and conclusive evidence thereof in favor of bona fide purchasers and
encumbrances for value. The power of sale conferred by this Deed of Trust and by
the Deed of Trust Act of the state of Washington is not an exclusive remedy, and
when not exercised Beneficiary may foreclose this Deed of Trust as a mortgage.

              Trustee is not obligated to notify any party hereto of pending
sale under any other deed of trust or of any action or proceeding in which
Grantor, Trustee or Beneficiary shall be a party, unless such action or
proceeding is brought by Trustee.

              Beneficiary may proceed as to the Collateral which constitutes
personal property in accordance with Beneficiary's rights and remedies in
respect to the Property or sell the Personal Property Collateral separately and
without regard to the remainder of the Property in accordance with Beneficiary's
rights and remedies provided by the Washington Uniform Commercial Code as well
as other rights and remedies available at law or in equity. Beneficiary's
exercise of any of its rights and remedies shall not constitute a waiver or cure
of a default. Beneficiary's failure to enforce any default shall not constitute
a waiver of the default or any subsequent default. In the event of foreclosure,
the cost of the title premium for the trustee sale guarantee (or equivalent
policy) shall be paid for by Grantor. In the event the Loan Documents are
referred to an


                                       20


attorney for enforcement or preservation of Beneficiary's rights or remedies,
whether or not suit is filed or any proceedings are commenced, Grantor shall pay
all Beneficiary's costs and expenses including Trustee's and attorneys' fees
(including attorneys' fees for any appeal, bankruptcy proceeding or any other
proceeding), accountants' fees, appraisal and inspection fees and cost of a
title report.

       30. Cumulative Remedies. To the extent allowed by law, all Beneficiary's
and Trustee's rights and remedies specified in the Loan Documents are
cumulative, not mutually exclusive and not in substitution for any rights or
remedies available in law or equity. In order to obtain performance of Grantor's
obligations under the Loan Documents, without waiving its rights in the
Collateral, Beneficiary may proceed against Grantor or any Borrower or may
proceed against any other security or guaranty for the Secured Obligations, in
such order and manner as Beneficiary may elect. The commencement of proceedings
to enforce a particular remedy shall not preclude the discontinuance of the
proceedings and the commencement of proceedings to enforce a different remedy.

       31. Entry. Beneficiary, in person, by agent or by court appointed
receiver, may enter, take possession of, manage and operate all or any part of
the Property, and may also do any and all other things in connection with those
actions that Beneficiary may in its sole discretion consider necessary and
appropriate to protect the security of this Deed of Trust. Such other things may
include: taking and possessing all of Grantor's or the then owner's books and
records; entering into, enforcing, modifying, or canceling Leases on such terms
and conditions as Beneficiary may consider proper; obtaining and evicting
tenants; fixing or modifying Rents; collecting and receiving any payment of
money owing to Grantor; completing any unfinished construction; and/or
contracting for and making repairs and alterations. Grantor hereby irrevocably
constitutes and appoints Beneficiary as its attorney-in-fact to perform such
acts and execute such documents as Beneficiary in its sole discretion may
consider to be appropriate in connection with taking these measures.

       32. Appointment of Receiver. In the event of a default, Grantor consents
to and Beneficiary shall be entitled, without notice, without bond, and without
regard to the adequacy of the Collateral, to the appointment of a receiver for
the Collateral. The receiver shall have, in addition to all the rights and
powers customarily given to and exercised by a receiver, all the rights and
powers granted to Beneficiary by the Loan Documents. The receiver shall be
entitled to receive a reasonable fee for management of the Property. If Grantor
is an occupant of the Property, Beneficiary has the right to require Grantor to
pay rent at fair market rates and the right to remove Grantor from Property if
Grantor fails to pay rent.

       33. Sale of Property After Default. The Collateral may be sold separately
or as a whole, at the option of Beneficiary following a default. In the event of
a Trustee's sale of all the Collateral, Beneficiary hereby assigns its security
interest in the personal property Collateral to the Trustee. Beneficiary may
also realize on the personal property Collateral in accordance with the remedies
available under the Uniform Commercial Code or at law. In the event of a
Trustee's sale, Grantor, and the holder of any


                                       21


subordinate liens or security interest with actual or constructive notice
hereof, waive any equitable, statutory or other right they may have to require
marshaling of assets in connection with the exercise of any of the remedies
permitted by applicable law or provided herein, or to direct the order in which
any of the Collateral will be sold in the event of any sale under this Deed of
Trust or foreclosure in the inverse order of alienation.

       34. Foreclosure of Lessee's Rights--Subordination. Beneficiary shall have
the right, of its option, to foreclose this Deed of Trust subject to the rights
of any lessees of the Property. Beneficiary's failure to foreclose against any
lessee shall not be asserted as a claim against Beneficiary or as a defense
against any claim by Beneficiary in any action or proceeding. Beneficiary at any
time may subordinate this Deed of Trust to any or all of the Leases except that
Beneficiary shall retain its priority claim to any condemnation or insurance
proceeds.

       35. Repairs During Redemption. In the event of a judicial foreclosure the
purchaser during any redemption period may make such repairs and alterations to
the Property as may be reasonably necessary for the proper operation, care,
preservation, protection and insuring of the Property. Any sums so paid,
together with interest from the date of the expenditure at the rate provided in
the judgment, shall be added to the amount required to be paid for redemption of
the Property.

       36. Reconveyance After Payment. Upon written request of Beneficiary
stating that all obligations secured by this Deed of Trust have been paid,
Trustee shall reconvey, without warranty, the Property then subject to the lien
of this Deed of Trust. The recitals in any reconveyance of any matters of fact
shall be conclusive proof of the truthfulness thereof. The grantee in the
reconveyance may be described as "the person or persons legally entitled
thereto." Grantor shall pay any costs, Trustee's fees and recording fees
incurred in so reconveying the Property.

       37. Nonwaiver of Terms and Conditions. Time is of the essence with
respect to performance of the obligations due under the Loan Documents.
Beneficiary's failure to require prompt enforcement of any required obligation
shall not constitute a waiver of the obligation due or any subsequent required
performance of the obligation. No term or condition of the Loan Documents may be
waived, modified or amended except by a written agreement signed by Grantor and
Beneficiary. Any waiver of any term or condition of the Loan Documents shall
apply only to the time and occasion specified in the waiver and shall not
constitute a waiver of the term or condition at any subsequent time or occasion.

       38. Waivers by Grantor. Without affecting any of Grantor's obligations
under the Loan Documents, Grantor waives the following:

              (a) Any right to require Beneficiary to proceed against any
specific party liable for sums due under the Loan Documents or to proceed
against or exhaust any specific security for sums due under the Loan Documents.


                                       22


              (b) Diligence, demand for performance, notice of nonperformance,
presentment, protest and notice of dishonor and notice of new or additional
indebtedness of any Grantor, any Borrower or any other party liable for sums due
under the Loan Documents to Beneficiary.

              (c) Any defense arising out of Beneficiary entering into
additional financing or other arrangements with any Grantor, any Borrower or any
party liable for sums due under the Loan Documents not relating to the Property
and any action taken by Beneficiary in connection with any such financing or
other arrangements or any pending financing or other arrangements not related to
the Property.

              (d) Any defense arising out of the absence, impairment, or loss of
any or all rights of recourse, reimbursement, contribution or subrogation or any
other rights or remedies of Beneficiary against any Grantor, any Borrower or any
other party liable for sums due under the Loan Documents or any Collateral.

              (e) Any obligation of Beneficiary to see to the proper use and
application of any proceeds advanced pursuant to the Loan Documents.

       39. Right of Subrogation. Beneficiary is subrogated to the rights,
whether legal or equitable, of all beneficiaries, mortgagees, lienholders and
owners directly or indirectly paid off or satisfied in whole or in part by any
proceeds advanced by Beneficiary under the Loan Documents, regardless of whether
these parties assigned or released of record their rights or liens upon payment.

       40. Joint and Several Liability. If there is more than one Grantor of
this Deed of Trust, their obligations shall be joint and several.

       41. Statement of Amount Owing. Grantor upon request by Beneficiary will
furnish a written statement duly acknowledged of the amount due under the Loan
Documents and whether any offsets or defenses exist against the amount due.

       42. Books and Records Financial Statements. Grantor will keep and
maintain at Grantor's address stated above, or such other place as Beneficiary
may approve in writing, books of accounts and records adequate to reflect
correctly the results of the operation of the Property and copies of all written
contracts, leases and other instruments which affect the Property. Such books,
records, contracts, leases and other instruments shall be subject to
examination, inspection and copying at any reasonable time by Beneficiary.
Grantor shall provide to Beneficiary within ninety (90) days after the end of
each of Grantor's fiscal years (or within twenty (20) days of Beneficiary's
written request therefor if Grantor is in default), for each Grantor, each
Borrower and for each guarantor of the Secured Obligations, a complete and
current financial statement and copy of its most recent federal income tax
return, together with a statement of income and expenses of the Property and a
statement of changes in financial position with respect to the Property for the
prior year, each in reasonable detail and certified by Grantor, each Borrower or
guarantor, as the case may be, and if Beneficiary shall require, by an
independent certified public accountant. At the same time, Grantor shall also
furnish a


                                       23


current rent roll for the Property, certified by Grantor, showing the name of
each tenant, the space occupied, the lease expiration date, the monthly rent, a
schedule of gross receipts for each tenant obligated to pay rent based on a
percentage of receipts, the date to which rent has been paid and any deposit
Grantor is holding. Grantor's compliance with these provisions shall not limit
or affect Grantor's obligations to comply with financial, tax and operation
covenants and reporting requirements under any other agreement between Grantor
and Beneficiary whether or not such other agreement is related to the Secured
Obligations.

       43. Appraisals. In the event of a default Beneficiary may obtain a
current appraisal of the Property which is to be paid for by Grantor. Appraisals
may be commissioned by Beneficiary when required by laws and regulations which
govern Beneficiary's lending practices. The cost of all such appraisals will be
home by Grantor.

       44. Maximum Interest Rate. If any payment of interest, fees and/or
charges under the Loan Documents shall exceed the maximum amounts permitted by
any applicable law of the State of Washington, then the payment made or to be
made shall be reduced so that in no event shall any obligor pay or Beneficiary
receive an amount in excess of the maximum amount permitted by any applicable
law. If Beneficiary receives an excess amount, it shall be treated as a
prepayment of principal or shall be returned to the payor, at Beneficiary's
option.

       45. Evasion of Prepayment Fee. If Grantor is in default, whether
Beneficiary has accelerated the maturity of the indebtedness or not, any tender
of payment sufficient to satisfy all sums due under the Loan Documents trade at
any time prior to foreclosure sale shall constitute an evasion of the prepayment
terms of the Note Purchase Agreement, if any, and shall be deemed a voluntary
prepayment. Any such payment, to the extent permitted by law, shall include the
additional payment required under the prepayment fee provision in the Note
Purchase Agreement, if any.

       46. Payment of New Taxes. If any federal, state or local law is passed
subsequent to the date of this Deed of Trust which requires Beneficiary to pay
any tax because of this Deed of Trust or the sums due under the Loan Documents
(excluding income taxes), then Grantor shall pay to Beneficiary on demand any
such taxes if it is lawful for Grantor to pay them, or, in the alternative
Grantor may repay all sums due under the Loan Documents plus any prepayment fee
within thirty (30) days of such demand. If it is not lawful for Grantor to pay
such taxes, then at its option Beneficiary may declare a default under the Loan
Documents.

       47. Insolvency Proceedings. Grantor or any party liable on the Secured
Obligations (including guarantors) shall not make any assignment for the benefit
of creditors and shall not permit the institution of any proceedings under any
federal or state statutes pertaining to bankruptcy, insolvency, arrangement,
dissolution, liquidation or receivership whether or not an order for relief is
entered.


                                       24


       48. Substitution of Trustee. Beneficiary may at any time discharge the
Trustee and appoint a successor Trustee who shall have all of the powers of the
original Trustee.

       49. In-House Counsel Fees. Whenever Grantor is obligated to pay or
reimburse Beneficiary or Trustee for any attorneys' fees, those fees shall
include the allocated costs for services of in-house counsel.

       50. Notices. Any notice given by Grantor, Trustee or Beneficiary shall be
in writing and shall be effective (a) on personal delivery to the party
receiving the notice, or (b) on the third day after deposit in the United States
mail, postage prepaid with return receipt requested, addressed to the party at
the address set forth above, or with respect to the Grantor, to the address at
which Beneficiary customarily or last communicated with Grantor.

       51. Time. Time is of the essence in connection with all obligations of
Grantor herein.

       52. Successors and Assigns. This Deed of Trust applies to, inures to the
benefit of, and binds all parties hereto and their successors and assigns. The
terms "Grantor," "Trustee" and "Beneficiary" include their successors and
assigns.

       53. Controlling Document; Definitions. In the event of a conflict or
inconsistency between the terms and conditions of this Deed of Trust and the
terms and conditions of any other of the Loan Documents (except for any separate
assignment of rents and/or leases and any Note Purchase Agreement which shall
prevail over this Deed of Trust), the terms and conditions of this Deed of Trust
shall prevail. All capitalized terms not otherwise defined herein shall have the
same meaning as in the Note Purchase Agreement.

       54. Invalidity of Terms and Conditions. If any term or condition of this
Deed of Trust is found to be invalid, the invalidity shall not affect any other
term or condition of the Deed of Trust and the Deed of Trust shall be construed
as if not containing the invalid term or condition.

       55. Legislation Affecting Beneficiary's Rights. If enactment or
expiration of applicable laws has the effect of rendering any provision of the
Note Purchase Agreement or this Deed of Trust unenforceable according to its
terms, Beneficiary, at its option, may require immediate payment in full of all
sums secured by this Deed of Trust and may invoke any remedies permitted herein.

       56. Rules of Construction. This Deed of Trust shall be construed so that,
whenever applicable, the use of the singular shall include the plural, the use
of the plural shall include the singular, and the use of any gender shall be
applicable to all genders and shall include corporations, partnerships and
limited partnerships.


                                       25


       57. Section Headlines. The headings to the various sections have been
inserted for convenience of reference only and shall not be used to construe
this Deed of Trust.

       58. Applicable Law. This Deed of Trust shall be governed by and construed
in accordance with the laws of the State of Washington.

       59. Commercial Purposes. The Secured Obligations were incurred primarily
for commercial, investment or business purposes and not for personal, family or
household purposes.

       60. Partial Reconveyance. Upon Beneficiary's receipt from Grantor of
copies of all executed and acknowledged transfer documents, conveying that
portion of the Property described in Exhibit C ("Exhibit C Property") to Herman
L. Jones, Beneficiary shall execute and deliver a partial reconveyance of this
Deed of Trust with respect to that Exhibit C Property contemporaneously with the
transfer of said Exhibit C Property by Section 4.1 of the Settlement Agreement,
dated as of February 28, 2002, by and between Pacific Aerospace & Electronics,
Inc. and Herman L. Jones., provided, however, that such obligation to reconvey
said Exhibit C Property shall expire on June 1, 2002 and, thereafter,
Beneficiary shall have no obligation to deliver such partial reconveyance of
said Exhibit C Property.

       61. Counterpart Notice. This Deed of Trust encumbers real property
situated in Chelan County and Clallam County in the State of Washington. In
order to facilitate recording in each of the two counties at the same time, this
Deed of Trust has been prepared in counterparts, each of which is identical to
this counterpart, except that Exhibits A and C of this counterpart describe only
the portion of the Mortgaged Property situated in the county in which this
counterpart is recorded. Grantor and Beneficiary intend and agree that the two
counterparts constitute one and the same deed of trust, that the lien thereof
shall attach to all property encumbered thereby on execution and delivery of any
one of the counterparts, and that to the extent permitted by law, foreclosure
thereof may be accomplished in a single judicial or nonjudicial proceeding in
any county in which any of the Mortgaged Property is located.

       62. Washington State Notice. Beneficiary hereby notifies Grantor as
follows: 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.

       63. Prior Mortgages. If this Deed of Trust is subordinate to any other
mortgage(s) or similar security document(s) on all or part of the Collateral,
the following modifications shall apply hereto:

              1. The following definition is added hereto:

                     "Prior Mortgage" means the mortgage(s) or similar security
              document(s) of all or part of the Collateral, to which this Deed
              of Trust is


                                       26


              subordinate, set forth in the title policy insuring the lien
              hereof together with the note(s) secured thereby and all other
              documents securing said note(s).

              2. The following is added at the end of the Granting Clause:

                     (m) all sums held by or under the control of the holder of
              the Prior Mortgage which were deposited on account of real estate
              taxes, insurance premiums or otherwise.

              3. The following is added to the end of Section 9:

              Grantor further represents that neither Grantor nor any of its
              affiliates (nor any person or entity acting on behalf of any of
              them) is the holder of the Prior Mortgage or any participation or
              other interest therein or is the owner of a legal or equitable
              interest in any such holder.

              4. The following is added to the end of Section 14:

                     (h) The foregoing provisions of this Section are subject to
              any provision of the Prior Mortgage requiring the application of
              insurance proceeds to restoration or requiring the payment of such
              proceeds to the holder of the Prior Mortgage.

              5. The following is added to the end of Section 23:

              The foregoing provisions of this Section are subject to any
              provision of the Prior Mortgage requiring the application of
              condemnation proceeds to restoration or requiring the payment of
              such proceeds to the holder of the Prior Mortgage.

       64. Additional Provisions Concerning Prior Mortgages.

              (a) Grantor shall perform or observe all covenants and conditions
to be performed or observed by the Grantor or grantor under the Prior Mortgage.

              (b) Upon notice from Beneficiary, simultaneously with the making
of each payment of principal and interest on the Prior Mortgage, Grantor shall
deliver to Beneficiary a copy of the check in the amount of such payment
delivered to the holder of the Prior Mortgage. Beneficiary shall have the right,
exercisable by notice to Grantor, to require Grantor to make payment of
principal and interest on the Prior Mortgage through Beneficiary and, if
Beneficiary exercises such right, Grantor shall deliver to Beneficiary a check
in the amount of each installment of such principal and interest, payable to the
order of the holder of the Prior Mortgage, not later than three (3) days prior
to the due date thereof and Beneficiary shall promptly forward such check to
said holder.

              (c) Grantor hereby irrevocably designates Beneficiary its agent
and attorney-in-fact to perform or observe on behalf of Grantor any covenant or
condition which Grantor fails to perform or observe under the Prior Mortgage
within any applicable


                                       27


grace period specified in the Prior Mortgage, and any advances made by
Beneficiary in connection with such performance or observance shall be repaid by
Grantor on demand with interest at the default interest rate set forth in the
Note Purchase Agreement and the amount so advanced, with interest, shall be
secured hereby. Beneficiary shall have the right, but not the obligation, to so
perform or so observe. The performance or observance of such covenant or
condition by Beneficiary shall not prevent Grantor's failure to so perform or
observe from constituting an Event of Default. In performing or observing any
such covenant or condition, Beneficiary shall have the right to enter upon the
Collateral. Upon receipt by Beneficiary from the holder of the Prior Mortgage of
any notice of default under the Prior Mortgage, Beneficiary may rely thereon and
take any action permitted by this Section to remedy such default notwithstanding
that the existence of such default or the nature thereof may be questioned or
denied by Grantor.

              (d) Grantor shall not enter into any modification, amendment or
supplement to the Prior Mortgage nor acquire, whether directly or indirectly,
any interest whatsoever in the Prior Mortgage.


                                       28


              The undersigned Grantor requests that a copy of any notices,
including but not limited to any Notice of Sale, be mailed to it at the address
herein before set forth.

                                        PACIFIC AEROSPACE & ELECTRONICS, INC.,
                                        a Washington corporation


                                        By:     /s/ Donald A. Wright
                                           -------------------------------------
                                           Name: Donald A. Wright
                                           Title: President and Chief Executive
                                                  Officer


                                        CASHMERE MANUFACTURING CO., INC.,
                                        a Washington corporation


                                        By:     /s/ Donald A. Wright
                                           -------------------------------------
                                           Name: Donald A. Wright
                                           Title: Executive Vice President


                                        NORTHWEST TECHNICAL INDUSTRIES, INC.,
                                        a Washington corporation


                                        By:     /s/ Donald A. Wright
                                           -------------------------------------
                                           Name: Donald A. Wright
                                           Title: Executive Vice President




STATE OF WASHINGTON       )
                          )ss.
COUNTY OF KING            )

              I certify that I know or have satisfactory evidence that
Donald A. Wright is the person who appeared before me, and said person
acknowledged that he/she signed this instrument, on oath stated that he/she was
authorized to execute the instrument and acknowledged it as the President and
Chief Executive Officer of PACIFIC AEROSPACE & ELECTRONICS, INC. to be the free
and voluntary act of such party for the uses and purposes mentioned in the
instrument.

Dated: March 15, 2002

                              Notary Public: /s/ Susan R. Benson
                              Print Name: Susan R. Benson
                              My commission expires: October 11, 2002

(Use this space for notarial stamp/seal)



STATE OF WASHINGTON       )
                          )ss.
COUNTY OF KING            )

              I certify that I know or have satisfactory evidence that
Donald A. Wright is the person who appeared before me, and said person
acknowledged that he/she signed this instrument, on oath stated that he/she was
authorized to execute the instrument and acknowledged it as the Executive Vice
President of CASHMERE MANUFACTURING CO., INC. to be the free and voluntary act
of such party for the uses and purposes mentioned in the instrument.

Dated: March 15, 2002

                              Notary Public: /s/ Susan R. Benson
                              Print Name: Susan R. Benson
                              My commission expires: October 11, 2002

(Use this space for notarial stamp/seal)


STATE OF WASHINGTON       )
                          )ss.
COUNTY OF KING            )

              I certify that I know or have satisfactory evidence that
Donald A. Wright is the person who appeared before me, and said person
acknowledged that he/she signed this instrument, on oath stated that he/she was
authorized to execute the instrument and acknowledged it as the Executive Vice
President of NORTHWEST TECHNICAL INDUSTRIES, INC. to be the free and voluntary
act of such party for the uses and purposes mentioned in the instrument.

Dated: March 15, 2002

                              Notary Public: /s/ Susan R. Benson
                              Print Name: Susan R. Benson
                              My commission expires: October 11, 2002

(Use this space for notarial stamp/seal)


                                    EXHIBIT A

                          Legal Description of Project

PARCEL "A"

Units 1, 2, 3 and 4, Confluence Park Condominium, Chelan County, Washington,
according to the plat thereof recorded November 6, 1998 under Auditor's No.
2040202, TOGETHER WITH limited common elements and garage spaces.




                                    EXHIBIT C

                          Legal Description of Property

Lots 6, 7, 8, 9, 10, 11, 12, 13 and 14, Block 1, Steward's Plat of Mission (now
Cashmere), according to the plat thereof recorded in Book 1 of Plats, Page 19,
records of Chelan County, and Lots 17 and 18 and that portion of Lot 16,
hereinafter described, Block 1, J.F. Woodring's Plat of Mission (now Cashmere)
according to the plat thereof recorded in Book 1 of Plats, Page 18, records of
said county, said portion of Lot 16, described as follows:

Beginning at the Northeast corner of said Lot 16; thence Westerly along the
Northerly line thereof 29.25 feet to the Northwest corner of a building lying
Easterly and the Northeast corner of a building lying Westerly and from said
building corner the Northwest corner of said Lot 16 bears Westerly 0.75 feet;
thence Southerly along the coincident line between said buildings, the Easterly
and Westerly faces of which are the same or coincident line between said
buildings, 104.67 feet to the Southwest corner and the Southeast corner of said
buildings; thence continue along the extension of said coincident line Southerly
15.39 feet to a point of intersection with the Southerly line of said Lot 16
from which the Southwest corner of said Lot 16 bears Westerly 0.56 feet; thence
from said point of intersection Easterly along the Southerly line of said Lot
16, 29.44 feet to the Southeast corner thereof; thence Northerly 120.05 feet to
the Northeast corner thereof and the True Point of Beginning.




                                    EXHIBIT D

                                     Leases

(1) Lease Agreement, Cashmere Manufacturing, Inc. 1994, dated November 4, 1994,
between Port of Chelan County and Cashmere Manufacturing Co., Inc.

(2) Lease Agreement, Pacific Coast Technologies, Inc. 1993, dated February 1,
1993, between Port of Chelan County and Pacific Coast Technologies, Inc.

(3) Lease Agreement 1999, dated December 30, 1998, between Port of Chelan County
and Pacific Aerospace & Electronics, Inc., as amended by that certain First
Addendum to 1999 Lease, dated November 21, 2001, between Port of Chelan County
and Pacific Aerospace & Electronics, Inc.

(4) Lease Agreement -- PA&E IB#9 2000, dated July 13, 2000, between Port of
Chelan County and Pacific Aerospace & Electronics, Inc.

(5) Lease Agreement, dated March 31, 1994, between Erickson Realty, Ltd. and
Electronic Specialty Corporation.

(6) Lease, dated April 3, 1998, between Sea-Land Development Corporation and
Skagit Engineering & Manufacturing, Inc., as amended by that certain Amendment
to Lease, dated June 19, 2000, between Sea-Land Development Corporation and
Skagit Engineering & Manufacturing, Inc., as amended by that certain Amendment
to Lease, dated January 25, 2002, between Sea-Land Development Corporation and
Skagit Engineering & Manufacturing, Inc., as amended by that certain Amendment
to Lease, dated January 31, 2002, Sea-Land Development Corporation and Skagit
Engineering & Manufacturing, Inc.

(7) Lease Agreement, dated June 2, 2000, between 220TH Street, LLC and Skagit
Engineering Manufacturing, Inc. (d/b/a Pacific Aerospace Electronics, Inc. -
Engineering & Fabrication Division).

(8) Lease Agreement, dated August 6, 2001, between Pacific Aerospace &
Electronics, Inc. and North Central Educational Service District, as amended by
that certain Amendment No. 1 to Lease Agreement, dated December 17, 2001,
between Pacific Aerospace & Electronics, Inc. and North Central Educational
Service District.




                                    EXHIBIT E

                                  Encumbrances

1. Property described in Exhibit A, as to Certain Equipment:

       (a) Master Equipment Lease Agreement, dated as of May 27, 1999, between
KeyCorp Leasing, A Division of Key Corporate Capital Inc., as Lessor, and
Pacific Aerospace & Electronics, Inc., as Lessee, as amended by Equipment
Schedule No. 02, dated as of June 14, 1999, between KeyCorp Leasing, A Division
of Key Corporate Capital Inc. and Pacific Aerospace & Electronics, Inc., with a
total cost of $233,443.08.

2. Lease Agreement, Pacific Coast Technologies, Inc. 1993, dated February 1,
1993, between Port of Chelan County and Pacific Coast Technologies, Inc.:

       (a) Commercial Security Agreement between Pacific Aerospace &
Electronics, Inc., as Borrower, Pacific Coast Technologies, Inc., as Grantor,
and KeyBank National Association, as Lender, securing the Promissory Note
between Pacific Aerospace & Electronics, Inc. and KeyBank National Association
in principal amount of $712,085.00, and

       (b) UCC-2 fixture filing between Pacific Coast Technologies, Inc., as
Debtor, and KeyBank National Association, as Secured Party, dated March 18,
1998.

EX-10.6

                                                                    EXHIBIT 10.6

                              EMPLOYMENT AGREEMENT

      THIS EMPLOYMENT AGREEMENT (the "Agreement") is made by and between PACIFIC
AEROSPACE & ELECTRONICS, INC., a Washington corporation having its principal
place of business at 430 Olds Station Road, Wenatchee, Washington (the
"Company"), and DONALD A. WRIGHT, a resident of Washington (the "Executive").

                                    RECITALS

      1. The Company desires to continue the employment of the Executive, who is
presently the President and Chief Executive Officer and a shareholder and
director of the Company, and the Executive is willing to continue his employment
with the Company in accordance with the terms hereinafter set forth;

      2. The Board of Directors of the Company (the "Board") and the
Compensation Committee of the Board, by appropriate resolutions, have authorized
the employment of the Executive as provided for in this Agreement; and

      3. The parties desire to declare the employment agreement entered into
between the Company and the Executive, as of June 1, 1997, as amended (the
"Initial Employment Agreement"), null and void and to enter into this
superseding Agreement.

                                    AGREEMENT

      The Company and the Executive agree as follows:

                                    ARTICLE 1
                               EMPLOYMENT; DUTIES

      1.1 Employment. The Company hereby employs the Executive as the President
and Chief Executive Officer of the Company, and the Executive accepts such
employment, upon the terms and conditions set forth in this Agreement.

      1.2 Duties. The duties to be performed by the Executive under this
Agreement are as specified in the Company's Bylaws and as may be reasonably
prescribed from time to time by the Board.

      1.3 Hours. During the Term (as defined below), excluding any periods of
vacation, sick leave or other time off to which the Executive is entitled, and
without limiting the Executive's ability to participate in unrelated business or
other activities on his personal time, the Executive agrees to devote his full
attention and working time to the business and affairs of the Company and, to
the extent necessary to discharge his duties hereunder, to use his best efforts
to perform faithfully and efficiently such duties.




                                    ARTICLE 2
                                TERM OF AGREEMENT

      The term of this Agreement shall commence upon the consummation of an
agreement by and among the Company, GSCP Recovery, Inc., Alliance Capital
Management L.P., M.W. Post Advisory Group L.L.C. and William E. Simon & Sons
Special Situation Partners II, L.P., resulting in the exchange of certain senior
subordinated notes (the "Exchange") and end on the third anniversary of such
date, or on such date as this Agreement may be earlier terminated pursuant to
Article 6 (the "Term"); provided, however, that if the Exchange does not occur
prior to June 1, 2002, this Agreement shall be null and void, and the Initial
Employment Agreement shall continue in full force and effect according to its
terms; and provided, further, that the covenants set forth in Article 5 shall
survive termination of this Agreement according to their terms.

                                    ARTICLE 3
                                  COMPENSATION

      3.1 Base Salary. For services rendered by the Executive under this
Agreement, the Company agrees to pay to the Executive, and the Executive agrees
to accept, an initial annual base salary of $265,000, and for each year of the
Term thereafter the Executive shall be entitled to an increase of five percent
(5%) in his annual base salary (the initial base salary and any subsequent base
salaries being referred to as the "Base Salary"). The Company shall pay the
Executive's Base Salary in installments not less frequently than monthly, less
all amounts required by law to be withheld, deducted or collected, in accordance
with the Company's normal payroll policies for other executive officers, as such
policies may be changed from time to time.

      3.2 Stock Options.

            3.2.1 Upon Consummation of Exchange Agreement. Immediately upon the
occurrence of the Exchange all previously granted options to purchase shares of
common stock of the Company shall be cancelled, and the Executive shall be
entitled to receive new options to purchase shares of common stock of the
Company ("Exchange Options"), pursuant to the Pacific Aerospace & Electronics,
Inc. 2002 Stock Option Plan (the "Stock Option Plan") and an option agreement
between the Executive and the Company.

            3.2.2 Discretionary Grants. In addition to any Exchange Options
granted pursuant to Section 3.2.1, the Executive may be granted stock options
from time to time at the sole discretion of the Board, or a committee of the
Board.

                                    ARTICLE 4
                                 OTHER BENEFITS

      4.1 Savings and Retirement Plan. The Executive shall be entitled to
participate in all savings and retirement plans or programs generally applicable
to other executive officers of the Company.


                                     - 2 -


      4.2 Welfare Benefits. The Executive and qualified dependents shall be
eligible for participation in, and shall be eligible to receive all benefits
under, welfare benefit plans, practices, policies, and programs maintained by
the Company generally for the benefit of other executive officers of the
Company. These may, but will not necessarily, include medical, prescription,
dental, optical, disability, severance, individual, dependent and group life,
accidental death, and travel accident insurance plans and programs.

      4.3 Fringe Benefits. The Executive shall be entitled to fringe benefits
generally applicable to other executive officers of the Company.

      4.4 Expenses. The Executive shall be entitled to receive prompt
reimbursement for all reasonable business related expenses incurred by the
Executive upon the Company's receipt of accountings of such expenses in
accordance with practices, policies, and procedures generally applicable to
other executive officers of the Company.

      4.5 Vacation. The Executive shall be entitled to four (4) weeks of paid
vacation time annually in accordance with the plans, policies, and programs
generally applicable to other executive officers of the Company.

      4.6 Automobile. The Executive shall have the use of an automobile of a
make, size and model reasonably satisfactory to the Executive and to the
Company. The Company shall pay all acquisition or rental costs for that
automobile, as well as costs of operation, maintenance, and insurance. The
Executive shall be responsible for all personal income taxes, if any, that may
be determined to be due by any federal, state or local taxation authority.

                                    ARTICLE 5
                                 DUTY OF LOYALTY

      5.1 Protected Information.

            5.1.1 Access to Protected Information. The Company has advised the
Executive, and the Executive has acknowledged, that it is the policy of the
Company to maintain as secret and confidential all Protected Information (as
defined below) and that Protected Information has been and will be developed at
substantial cost and effort to the Company. The Executive acknowledges that he
will have access to Protected Information with respect to the Company, which
information is a valuable, special, and unique asset of the Company's business
and operations, and that disclosure of such Protected Information would cause
irreparable damage to the Company.

            5.1.2 Covenant. At all times during the Executive's employment and
after the termination thereof, regardless of the reason for such termination,
the Executive shall not, directly or indirectly, divulge, furnish or make
accessible to any person, firm, corporation, association or other entity, or use
in any manner, any Protected Information, or cause any Protected Information to
enter the public domain, except as may be required in the regular course of the
Executive's employment by the Company.

            5.1.3 Employee-Created Protected Information. The Executive agrees
to promptly disclose to the Company all Protected Information developed in whole
or in part by the Executive


                                     - 3 -


during his employment with the Company which relates to the Company's business.
Such Protected Information is, and shall remain, the exclusive property of the
Company. All writings created during the Executive's employment with the Company
(excluding writings unrelated to the Company's business) are considered to be
"works-for-hire" which were created for the benefit of the Company, and the
Company shall own all rights in such writings. Washington law requires the
following notice to be given to the Executive:

            This Agreement does not require the Executive to assign to the
            Company any invention by the Executive for which no equipment,
            supplies, facility or trade secret information of the Company was
            used and which was developed entirely on the Executive's own time
            unless (i) the invention related directly to the Company's business
            or to the Company's actual or demonstrably anticipated research or
            development, or (ii) the development results from any work performed
            by the Executive for the Company.

            5.1.4 Return of Confidential Records. All forms of information
containing or relating in any way to Protected Information and all physical
property made or compiled by the Executive during his employment with the
Company shall be the Company's exclusive property. All such information and any
copies thereof and all physical property of the Company shall be held by the
Executive in trust solely for the benefit of the Company and shall be delivered
to the Company upon termination of the Executive's employment or at any other
time upon the Company's request.

            5.1.5 Protected Information. For the purposes of this Agreement,
"Protected Information" means trade secrets, confidential and proprietary
business information of the Company, any information of the Company other than
information which has entered the public domain (unless the Executive wrongfully
caused such information to enter the public domain) and all valuable and unique
information and techniques acquired, developed or used by the Company relating
to its business, operations, employees, customers and suppliers, which give the
Company a competitive advantage over those who do not know the information and
techniques and which are protected by the Company from unauthorized disclosure,
including but not limited to, customer lists (including potential customers),
sources of supply, processes, patented or proprietary technologies, plans,
materials, pricing information, internal memoranda, marketing plans, internal
policies, and products and services which may be developed from time to time by
the Company and its agents or employees.

      5.2 Non-Competition.

            5.2.1Covenant. The Executive agrees that during his employment with
the Company and for a period of twenty-four (24) months after the termination of
his employment, regardless of the reason for such termination, he will not,
directly or indirectly, in any capacity, (a) engage or participate in, or become
employed by or render advisory or consulting or other services in connection
with, any Prohibited Business, as defined below, or (b) make any financial
investment, whether in the form of equity or debt, or own any interest, directly
or indirectly, in any Prohibited Business.


                                     - 4 -


            5.2.2 Exception. Nothing in this Section 5.2 shall prohibit the
Executive from (a) owning any shares in a publicly traded mutual fund,
regardless of the amount, or (b) owning a two percent (2%) or less interest in
any private company or two percent (2%) or less of the outstanding equity
securities of any entity whose equity securities are listed on a national
securities exchange or publicly traded in any over-the-counter market.

            5.2.3 Prohibited Business. For purposes of this Agreement,
"Prohibited Business" means any business entity that is engaged in activities or
produces products that are directly or indirectly competitive with those of the
Company anywhere in the United States and which has contact, or seeks to
establish contact (including without limitation by making or soliciting sales or
submitting bids), with any business or governmental entity in the United States
that is, at any time, a customer of the Company, for the purpose of engaging in
any such competitive activity.

      5.3 Non-Interference with Employment Relationships. The Executive agrees
that during his employment with the Company and for a period of twenty-four (24)
months after the termination of his employment, regardless of the reason for
such termination, he will not directly or indirectly (a) solicit, induce, or
encourage any employee, consultant, independent contractor or other service
provider of the Company to leave his or her employment with the Company or to
cease providing services to the Company, (b) interfere with any employment or
service provider relationship between the Company and any of its employees, or
(c) hire or encourage or assist any other person to hire any person who was an
employee, consultant, independent contractor or other service provider of the
Company within the previous three (3) months.

      5.4 Disclosure of Business Opportunities. The Executive agrees to promptly
and fully disclose to the Company, and not to divert to his own use or benefit
or the use or benefit of others, any business opportunities involving any
existing or prospective line of business, supplier, product or activity of the
Company or any business opportunities that otherwise should be afforded to the
Company.

      5.5 Survival of Undertakings and Injunctive Relief.

            5.5.1 Survival. The provisions of this Article 5 shall survive the
Term of this Agreement and the termination of the Executive's employment,
irrespective of the reasons therefor. In the event of any violation of this
Article 5, the Executive further agrees that the time periods set forth in such
Article shall be extended by the period of such violation.

            5.5.2 Reasonableness. The Executive acknowledges and agrees that the
restrictions imposed upon him by this Article 5 are reasonable in scope,
duration and geography and are designed to protect the Protected Information and
the continued success of the Company without unduly restricting the Executive's
future employment by others.

            5.5.3 Injunctive Relief and Other Remedies. The Executive
acknowledges and agrees to the following:

                  (a)   In view of the Protected Information which the Executive
                        has or will acquire or has or will have access to, and
                        in view of the necessity of


                                     - 5 -


                        the restrictions contained in this Article 5, any
                        violation of any provision of this Article 5 will cause
                        irreparable injury to the Company with respect to the
                        resulting disruption in its operations. By reason of the
                        foregoing, the Executive consents and agrees that if the
                        Executive violates any of the provisions of this Article
                        5, the Company shall be entitled, in addition to any
                        other remedies that it may have, including money
                        damages, to an injunction to be issued by a court of
                        competent jurisdiction, restraining the Executive from
                        committing or continuing any violation of such sections
                        of this Agreement.

                  (b)   The laws and public policies of the various states of
                        the United States may differ as to the validity and
                        enforceability of covenants set forth in this Agreement.
                        It is the intention of the parties that the provisions
                        of this Agreement be enforced to the fullest extent
                        permissible under the laws and policies of each
                        jurisdiction in which enforcement may be sought, and
                        that the unenforceability of any provisions, or parts
                        thereof, of this Agreement in one jurisdiction shall not
                        render unenforceable or impair the remainder of the
                        provisions, or parts thereof, of this Agreement in any
                        other jurisdiction. Accordingly, if any provision, or
                        part thereof, of this Agreement is determined to be
                        invalid or unenforceable, such invalidity or
                        unenforceability shall be deemed to apply only in the
                        particular jurisdiction in which such determination is
                        made and not with respect to any other jurisdiction.
                        Further, any such provision or part thereof found to be
                        invalid or unenforceable in a particular jurisdiction
                        shall be modified to give the fullest effect to the
                        intent of the parties' intention as is enforceable and
                        valid under such laws and policies.

      5.6 References to the Company. All references to the Company in this
Article 5 shall be deemed to include any subsidiary, parent, successor in
interest, or other affiliate of the Company.

                                    ARTICLE 6
                            TERMINATION OF EMPLOYMENT

      6.1 Termination by Mutual Agreement. The Executive's employment may be
terminated at any time during the Term by mutual agreement of the parties, or as
otherwise provided in this Article 6.


                                     - 6 -


      6.2 Termination Due to Death or Disability.

            6.2.1 The Executive's employment shall be terminated immediately in
the event of his death or Disability (as defined below).

            6.2.2 In the event of a termination due to the Executive's death or
Disability, the Executive or his estate, as the case may be, shall be entitled,
in lieu of any other compensation whatsoever, to:

                  (a)   payment of the Base Salary through the date of his death
                        or Disability;

                  (b)   any annual bonus awarded and payable but not yet paid;

                  (c)   reimbursement of expenses incurred but not paid prior to
                        such termination of employment; and

                  (d)   such rights to other benefits as may be provided in
                        applicable plans and programs of the Company, including,
                        without limitation, applicable employee benefit plans
                        and programs, according to the terms and provisions of
                        such plans and programs.

            6.2.3 In addition to the foregoing, if the Executive dies prior to
the end of the Term, the Company shall pay to the beneficiary designated in
writing by the Executive (the "Beneficiary") or, if no such Beneficiary is
designated, to the Executive's estate, an amount equal to the lesser of (a) the
Base Salary that would have been paid through the end of the Term, and (b)
twelve (12) months of the Base Salary, which shall be payable in a lump sum.

            6.2.4 For purposes of this Agreement, "Disability" means a physical
or mental incapacity that prevents the Executive from performing the essential
functions of his position with the Company for a period of ninety (90) days as
determined:

                  (a)   in accordance with any long-term disability plan
                        provided by the Company of which the Executive is a
                        participant, and

                  (b)   by the following procedure (in the event that the
                        Executive is not a participant in any long-term
                        disability plan): the Executive agrees to submit to
                        medical examinations by a licensed healthcare
                        professional selected by the Company, in its sole
                        discretion, to determine whether a Disability exists. In
                        addition, the Executive may submit to the Company
                        documentation of a Disability, or lack thereof, from a
                        licensed healthcare professional of his choice.
                        Following a determination of a Disability or lack of
                        Disability by the Company's or the Executive's licensed
                        healthcare professional, the other party may submit
                        subsequent documentation relating to the existence of a
                        Disability from a licensed healthcare professional
                        selected by such other Party. In the event that the
                        medical opinions of such licensed


                                     - 7 -


                        healthcare professionals conflict, such licensed
                        healthcare professionals shall appoint a third licensed
                        healthcare professional to examine the Executive, and
                        the opinion of such third licensed healthcare
                        professional shall be dispositive.

      6.3 Termination for Cause.

            6.3.1 The Company may terminate the Executive's employment without
notice at any time for Cause (as defined below).

            6.3.2 Upon any termination for Cause, the Executive shall not be
entitled to payment of any compensation other than his Base Salary and benefits
accrued under this Agreement up to the date of such termination.

            6.3.3 For purposes of this Agreement, "Cause" shall mean:

                  (a)   continued neglect, after notice thereof and failure to
                        remedy within thirty (30) days, or willful misconduct by
                        the Executive with respect to his duties and obligations
                        under this Agreement;

                  (b)   unauthorized expenditure of the Company's funds;

                  (c)   unethical business practices in connection with the
                        Company's business;

                  (d)   any material breach by the Executive of any term or
                        provision of this Agreement;

                  (e)   any act or action of the Executive involving
                        embezzlement or dishonesty related to the Company or the
                        Company's business or misappropriation of the Company's
                        assets,

                  (f)   abuse of alcohol or prescription drugs or use of any
                        unlawful drugs; or

                  (g)   conviction of any felony.

      6.4 Termination without Cause.

            6.4.1 The Company may terminate the Executive's employment without
notice at any time without Cause.

            6.4.2 In the event of any such termination, the Executive shall be
entitled to receive from the Company, in lieu of any other payments and
benefits:

                  (a)   payment of the Base Salary through the date of
                        termination;


                                     - 8 -


                  (b)   an amount equal to twenty-four (24) months of his Base
                        Salary then in effect if his employment is terminated
                        without Cause on or before December 31, 2002, and in an
                        amount equal to twelve (12) months of his Base Salary
                        then in effect if his employment is terminated without
                        Cause after December 31, 2002, payable in each instance
                        in accordance with the normal payroll practices of the
                        Company for other executive officers, including
                        deductions, withholdings, and collections as required by
                        law;

                  (c)   continued participation for twelve (12) months after
                        termination in all employee health and medical benefit
                        plans and programs in which the Executive and his
                        eligible dependents were participants immediately prior
                        to termination, if such continued participation is
                        permitted under the general terms and provisions of such
                        plans and programs; provided, however, that if such
                        participation is not permitted, the Company shall
                        provide the Executive with the economic equivalent of
                        such coverage; and provided further that if the
                        Executive becomes eligible to participate in any other
                        health and medical benefit plan or program which confers
                        provides similar benefits, the Executive and his
                        eligible dependents shall cease to receive benefits
                        under this subparagraph in respect of the Company's plan
                        or program; and

                  (d)   such rights to other benefits as may be provided in
                        applicable plans and programs of the Company, including,
                        without limitation, applicable employee benefit plans
                        and programs, according to the terms and provisions of
                        such plans and programs.

      6.5 Termination for Good Reason.

            6.5.1 The Executive may terminate his employment upon thirty (30)
days written notice for Good Reason.

            6.5.2 In the event of a termination for Good Reason, the Executive
shall be entitled to receive from the Company, in lieu of any other payments and
benefits, the payments and benefits to which he would have been entitled as if
his employment was terminated without Cause on such date of termination.

            6.5.3 For purposes of this Agreement, "Good Reason" means a demotion
in title or office of the Executive such that he does not serve as President and
Chief Executive Officer of the Company, which was not a result of his death,
Disability or termination for Cause.

      6.6 No Mitigation. The Executive shall not be required to mitigate the
amount of any payment provided for in Sections 6.4.2(b) or 6.5 by seeking other
employment or otherwise, nor shall the amount of any payment provided for in
Sections 6.4.2(b) or 6.5 be reduced by any compensation earned by the Executive
as a result of his employment by another entity or person, self-employment or
otherwise. If the Executive's employment is terminated pursuant to Sections 6.4
or 6.5, the time


                                     - 9 -


periods stated in Sections 5.2 and 5.3 shall be changed to equal the periods
during which he is receiving payments pursuant to Sections 6.4.2(b) or 6.5.

      6.7 Conditions to Payment. No payments provided for in Sections 6.4.2(b)
or 6.5 shall be payable to the Executive unless and until the Executive signs a
general release of claims and waiver of rights arising out of his employment
with the Company or the termination of such employment in a form reasonably
satisfactory to both parties.

                                    ARTICLE 7
                                  MISCELLANEOUS

      7.1 Assignment, Successors. The Company may freely assign its rights and
obligations under this Agreement to a successor of the Company's business
without the prior written consent of the Executive. This Agreement shall be
binding upon and inure to the benefit of the Executive and the Executive's
estate and the Company and any assignee of or successor to the Company.

      7.2 Nonalienation of Benefits. Benefits payable under this Agreement shall
not be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, charge, garnishment, execution or levy of any
kind, either voluntary or involuntary, prior to actually being received by the
Executive, and any such attempt to dispose of any right to benefits payable
hereunder shall be void.

      7.3 Severability. If any part of this Agreement is declared by any court
or governmental authority to be unlawful or invalid, such unlawfulness or
invalidity shall not serve to invalidate any portion of this Agreement not
declared to be unlawful or invalid. Any section or part of a section so declared
to be unlawful or invalid shall, if possible, be construed in a manner which
will give effect to the terms of such section or part of a section to the
fullest extent possible while remaining lawful and valid.

      7.4 Amendment and Waiver. This Agreement shall not be altered, amended or
modified except by written instrument executed by the Company and the Executive.
A waiver of any term, covenant, agreement or condition contained in this
Agreement shall not be deemed a waiver of any other term, covenant, agreement or
condition, and any waiver of any other term, covenant, agreement or condition,
and any waiver of any default in any such term, covenant, agreement or condition
shall not be deemed a waiver of any later default thereof or of any other term,
covenant, agreement or condition.

      7.5 Notices. All notices and other communications hereunder shall be in
writing and either hand delivered or delivered by overnight courier or first
class registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:

           If to the Company:        PACIFIC AEROSPACE & ELECTRONICS, INC.
                                     430 Olds Station Road
                                     Wenatchee, WA 98801
                                     Attn: President


                                     - 10 -


           If to the Executive:      Donald A. Wright
                                     430 Olds Station Road, 4th Floor
                                     Wenatchee, WA 98801

Any party may from time to time designate a new address by notice given in
accordance with this section. Notice and communications shall be effective when
actually received by the addressee.

      7.6 Applicable Law. The provisions of this Agreement shall be interpreted
and construed in accordance with the laws of the State of Washington, without
regard to its choice of law principles.

      7.7 Effect on Other Agreements. This Agreement supersedes all prior
agreements, promises, and representations regarding employment by the Company
and severance or other payments contingent upon termination of employment,
including, without limitation, any severance plan generally applicable to other
executive officers of the Company.

      7.8 Counterpart Originals. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.

      7.9 Entire Agreement. This Agreement forms the entire agreement between
the parties hereto with respect to any severance payment and with respect to the
subject matter contained in this Agreement. All prior agreements concerning the
subject matter hereof, including, without limitation, the Initial Employment
Agreement, shall be null and void and superseded by this Agreement.

      7.10 Acknowledgment. The Executive represents and acknowledges the
following:

                  (a)   he has carefully read this Agreement in its entirety;

                  (b)   he understands the terms and conditions contained
                        herein;

                  (c)   he has had the opportunity to review this Agreement with
                        legal counsel of his own choosing and has not relied on
                        any statements made by the Company or its legal counsel
                        as to the meaning of any term or condition contained
                        herein or in deciding whether to enter into this
                        Agreement; and

                  (d)   he is entering into this Agreement knowingly and
                        voluntarily.


                                     - 11 -


      Executed as of the date first written above.

                                   PACIFIC AEROSPACE & ELECTRONICS, INC.

                                   By: /s/ Charles A. Miracle
                                      ------------------------------------------
                                      Charles A. Miracle
                                      Vice President and Chief Financial Officer
                                      Date: March 19, 2002
                                           -------------------------------------


                                   THE EXECUTIVE:


                                   By: /s/ Donald A. Wright
                                      ------------------------------------------
                                      Donald A. Wright
                                      Date: March 19, 2002
                                           -------------------------------------


                                     - 12 -

EX-10.7

                                                                    EXHIBIT 10.7



                      PACIFIC AEROSPACE & ELECTRONICS, INC.
                              430 Olds Station Road
                           Wenatchee, Washington 98801
                    5.0% Senior Secured Notes due May 1, 2007


                                                      Dated as of March 19, 2002


Jefferies & Company, Inc.
11100 Santa Monica Boulevard, 10th Floor
Los Angeles, California 90025


Ladies and Gentlemen:


               Pacific Aerospace & Electronics, Inc., a Washington corporation
(the "Company"), hereby agrees with the Initial Purchaser (as defined herein)
and First Union National Bank, a national banking association, as Collateral
Agent (in such capacity, the "Collateral Agent"), as follows:

SECTION 1.       AUTHORIZATION OF NOTES


               The Company will authorize the issuance and sale of $36,000,000
aggregate principal amount of its 5.0% Senior Secured Notes due May 1, 2007 (the
"Notes", such term to include any Notes issued in substitution therefor or
replacement thereof pursuant to Section 13.3). The Notes shall be substantially
in the form of Exhibit A, with such changes therefrom, if any, as may be
approved by the Holders and the Company. Certain capitalized terms used in this
Note Purchase Agreement (as amended, restated or supplemented from time to time,
this "Agreement") are defined in Section 12.

SECTION 2.       SALE AND PURCHASE OF NOTES; PAYMENTS ON THE NOTES

               2.1 Sale and Purchase of the Notes.

               Subject to the terms and conditions of this Agreement, the
Company will issue and sell to Jefferies & Company, Inc. (the "Initial
Purchaser"), and the Initial Purchaser will purchase from the Company, at the
Closing provided for in Section 3, Notes in the principal amount of $36,000,000
(the "Principal Amount"), at a purchase price equal to the Original Issue Price
less the Initial Discount. From and after the Closing provided for in Section 3,
the Company will use the proceeds of the sale of the Notes solely as provided in
Section 5.20.

               2.2 Payments of Principal.

               The Company shall repay the entire unpaid principal amount of the
Notes, together with accrued and unpaid interest thereon, on May 1, 2007 (the
"Maturity Date").

               2.3 Interest on the Notes.

               (a) The outstanding Principal Amount of the Notes shall bear
interest at an annual rate equal to 5.0%, payable semi-annually in arrears in
cash on each May 1 and November 1 commencing on May 1, 2002; provided, however,
that during the occurrence and




                                      -1-


continuance of an Event of Default, the Notes shall bear interest, payable on
demand, at a rate per annum equal at all times to 8.0% per annum. All
computations of interest shall be made on the basis of a year of 360 days, for
the actual number of days (including the first day but excluding the last day)
occurring in the period for which such interest is payable.

               (b) On or prior to April 27, 2007, the Company shall pay to the
Holders an amount equal to all amounts constituting accrued but unpaid interest
on the Notes for federal income tax purposes as of such date, including, without
limitation, all original issue discount.

               2.4 Payments Free of Taxes.

               Any and all payments by the Company under or in respect of the
Notes (including by any repayment or repurchase of the Notes in accordance with
the terms hereof) shall be made free and clear of and without deduction for any
and all present or future Taxes and all liabilities with respect thereto,
excluding Taxes measured by a Holder's net income and franchise taxes imposed on
it by the jurisdiction under the laws of which such Holder is organized or is
required to be qualified to do business or any political subdivision of either
of the foregoing. If the Company shall be required by law to deduct any Taxes
from or in respect of any sum payable under or in respect of the Notes
(including by the repayment or repurchase thereof), (i) the sum payable shall be
increased as may be necessary so that after making all required deductions
(including, without limitation, deductions applicable to additional sums payable
under this Section 2.4), such Holder receives an amount equal to the sum it
would have received had no such deductions been made, (ii) the Company shall
make such deductions and (iii) the Company shall pay the full amount deducted to
the relevant taxing authority or other Governmental Authority in accordance with
applicable law.

SECTION 3.       CLOSING


               The sale of the Notes to the Initial Purchaser shall take place
at the offices of Milbank, Tweed, Hadley & McCloy, 1 Chase Manhattan Plaza, New
York, New York 10005-1413 at 11:00 a.m., New York City time, at a closing (the
"Closing") on March 19, 2002, or such later date as may be agreed upon by the
Company and the Initial Purchaser (such date, the "Closing Date"). At the
Closing, the Company will deliver to the Initial Purchaser Notes in the
principal amount of the Principal Amount, in the form of a single Note (or such
greater number of Notes as the Initial Purchaser may request; provided that each
such Note shall be in a denomination of at least $1,000,000 or integral
multiples of $100,000), each dated the Closing Date and registered in the
Initial Purchaser's name (or in the name of its nominee or another Holder),
against payment of the purchase price therefor on the Closing Date by transfer
of immediately available funds to the Company, or as otherwise directed by the
Company in writing (at least two (2) days prior to the Closing Date). If at the
Closing the Company shall fail to tender such Notes to the Initial Purchaser as
provided above in this Section 3 or if any of the conditions specified in
Section 4 shall not have been fulfilled to the Initial Purchaser's satisfaction,
the Initial Purchaser shall, at its election, be relieved of all further
obligations under this Agreement, without thereby waiving any other rights it
may have by reason of such failure or such nonfulfillment.




                                      -2-


SECTION 4.       CONDITIONS TO CLOSING


               The Initial Purchaser's obligation to purchase and pay for the
Notes to be sold to it at the Closing is subject to the fulfillment to its
satisfaction, prior to or at the Closing, of the following conditions:

               4.1 Representations and Warranties.

               The representations and warranties of the Company and each of its
Subsidiaries contained in this Agreement, the other Operative Agreements, and
those other agreements otherwise made in writing by or on behalf of the Company
or any of its Subsidiaries in connection with the transactions contemplated by
this Agreement, shall be true and correct when made and at the time of the
Closing, except for any representation and warranty that is expressly stated to
relate to a specific date, in which case such representation and warranty shall
be true and correct as of such earlier date.

               4.2 Performance; No Default.

               The Company and each of its Subsidiaries shall have performed and
complied with all agreements and conditions contained in this Agreement and each
other Operative Agreement required to be performed or complied with by it prior
to or at the Closing, and at the time of the Closing no Default or Event of
Default under this Agreement or default by any party under any Operative
Agreement shall have occurred and be continuing.

               4.3 Compliance Certificates.

               The Initial Purchaser shall have received an Officer's
Certificate of the Company, dated the Closing Date and satisfactory in substance
and form to it, certifying that (i) the conditions specified in Sections 4.1 and
4.2 have been fulfilled and (ii) no Material Adverse Effect has occurred
subsequent to November 30, 2001 other than (A) the Company's failure to pay (1)
interest on the Old Notes and (2) amounts due under the DDJ Loan Agreement and
(B) the breach by the Company and its Subsidiaries of certain covenants under
the Old Notes Indenture, the DDJ Loan Agreement and the KeyBank Promissory
Notes.

               4.4 Opinions of Counsel.

               The Initial Purchaser shall have received favorable opinions from
(a) Milbank, Tweed, Hadley and McCloy LLP, New York counsel for the Company and
each of its Subsidiaries, substantially in the form of Exhibit B-1 and (b) Davis
Wright Tremaine LLP, Washington counsel for the Company and each of its
Subsidiaries, substantially in the form of Exhibit B-2, and in each case
covering such other matters as the Initial Purchaser may reasonably request,
each addressed to the Initial Purchaser, dated the Closing Date and otherwise
reasonably satisfactory in substance and form to the Initial Purchaser. The
Company and each of its Subsidiaries hereby direct their counsel referred to in
clauses (a) and (b) above to deliver to the Initial Purchaser such opinions and
letters to be delivered by it and authorize the Initial Purchaser to rely
thereon.




                                      -3-


               4.5 Legal Investment.

               On the Closing Date the Initial Purchaser's purchase of Notes
shall be permitted by the laws and regulations of each jurisdiction to which the
Initial Purchaser's investments are subject. If requested by the Initial
Purchaser by prior written request to the Company, the Initial Purchaser shall
have received, at least five (5) Business Days prior to the Closing, an
Officers' Certificate of the Company or any of its Subsidiaries, as the case may
be, certifying as to such matters of fact as the Initial Purchaser may
reasonably specify to enable it to determine whether such purchase is so
permitted.

               4.6 Operative Agreements.

               Each of the Operative Agreements shall be in full force and
effect, and shall constitute the legal, valid and binding and enforceable
obligations of the respective parties thereto, except as such enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium and
similar laws of general application relating to or affecting the rights and
remedies of creditors and by general equitable principles, regardless of whether
such enforceability is considered in a proceeding in equity or law. No default
or accrued right of termination on the part of any of the parties to the
Operative Agreements (other than the Initial Purchaser) shall exist thereunder
as of the Closing Date, and the Initial Purchaser shall have received a fully
executed original, or a true and complete copy, of each such document (other
than the Notes).

               4.7 Use of Proceeds.

               At the time of the Closing, the Company shall have used the net
proceeds of the sale of the Notes to the Initial Purchaser, solely in accordance
with Section 5.20.

               4.8 Proceedings and Documents.

               All proceedings in connection with the transactions contemplated
by this Agreement and the Operative Agreements and all documents and instruments
incident to such transactions shall be reasonably satisfactory to the Initial
Purchaser and its special counsel, and the Initial Purchaser and its special
counsel shall have received all such counterpart originals or certified or other
copies of such documents as the Initial Purchaser or such special counsel may
reasonably request.

               4.9 Rating.

               Prior to the Closing, the Notes shall have received an estimated
rating of at least B3/B- from Moody's and S&P, which rating shall remain in
effect as of the Closing.

               4.10 Insurance.

               Insurance complying with the provisions of Section 8.4 hereof
shall be in full force and effect.




                                      -4-


               4.11 CUSIP Number.

               The Company shall have obtained for the Notes a CUSIP Number
issued by Standard & Poor's CUSIP Service Bureau (in cooperation with the
Securities Valuation Office of the National Association of Insurance
Commissioners).

               4.12 Exchange.

               The "Closing" (as defined in the Exchange Agreement) shall have
occurred, and the Initial Purchaser shall have received an executed copy of the
Exchange Agreement and each of the other documents executed and delivered in
connection therewith, each of which shall be in full force and effect.

               4.13 Release of Liens; Financing Statements.

               (a) The Initial Purchaser shall have received evidence reasonably
satisfactory to it that upon payment by the Company of the outstanding amounts
under the DDJ Loan Agreement with the proceeds of the Notes sold on the Closing
Date, (i) the notes representing such indebtedness shall be cancelled, (ii) all
obligations of the Company and its Subsidiaries and any of their respective
Affiliates under such DDJ Loan Agreement and notes and any loan or other
agreement related thereto shall be fully satisfied, and (iii) any and all Liens
under such DDJ Loan Agreement shall be completely and irrevocably released.

               (b) The Initial Purchaser shall have received duly completed and
executed Deeds of Trust and all relevant Uniform Commercial Code financing
statements (Form UCC-1) for all jurisdictions as may be necessary or, in the
reasonable opinion of the Initial Purchaser, desirable to perfect the Lien
created by the Collateral Documents, and the Company shall have taken all other
actions required or reasonably requested by the Initial Purchaser in respect of
the creation and perfection of the Liens created pursuant to the Collateral
Documents (including, without limitation, the delivery of all security
certificates).

               4.14 Corporate Documents.

               The Initial Purchaser shall have received a copy of the
Certificate of Incorporation or other comparable organizational document of the
Company and each of its Subsidiaries, certified as of a recent date by the
Secretary of State of the state of incorporation (or other applicable
Governmental Authority) of the Company and each such Subsidiary, together with
certificates of such official attesting to the good standing (or its equivalent)
of the Company and each such Subsidiary.

               4.15 Secretary's Certificates.

               The Initial Purchaser shall have received copies of (i) the
Company's and each of its Subsidiaries' Certificate of Incorporation and By-Laws
(or other organizational documents), (ii) the resolutions of the Board of
Directors (or other comparable governing body) of the Company and of each
Subsidiary party to an Operative Agreement approving each Operative Agreement to
which it is a party, and (iii) all documents evidencing other necessary
corporate action and required governmental and third party approvals, licenses
and consents with respect to each Operative Agreement and the transactions
contemplated thereby, certified by the Secretary




                                      -5-

of the Company and each such Subsidiary, as the case may be, as being true and
correct and in full force and effect as of the Closing Date.

               4.16 Offering Circular.

               The Initial Purchaser shall have received a final copy of the
Offering Circular prepared in connection with the offer and sale of the Notes,
dated as of the Closing Date, in a form reasonably satisfactory to the Initial
Purchaser and the Company.

SECTION 5.       REPRESENTATIONS AND WARRANTIES OF THE COMPANY


               The Company represents and warrants to the Holders that as of the
date hereof and the Closing (before and after giving effect to the transactions
contemplated hereby):

               5.1 Corporate Existence; Qualification; Power; Licenses and
Permits.

               The Company and each of its Subsidiaries (i) is a corporation
duly incorporated and validly existing under the laws of the jurisdiction of its
incorporation and (ii) is duly qualified and is authorized to do business in
every jurisdiction in which the failure to be so qualified could reasonably be
expected to have a Material Adverse Effect. The Company and each of its
Subsidiaries has (i) all corporate power and authority required to own its
properties and assets and to carry on its business as now conducted and (ii) all
licenses, authorizations, consents, approvals, franchises, leases, permits,
certificates, qualifications, easements, rights of way and other rights required
to carry on its business as now conducted except where the failure to have such
licenses, authorizations, consents, approvals, franchises, leases, permits,
certificates, qualifications, easements, rights of way and other rights could
not reasonably be expected to have a Material Adverse Effect. None of the
Company nor any of its Subsidiaries is in violation of the terms of any such
license, authorization, consent, approval, franchise, lease, permit,
certificate, qualification, easement, right of way or other right in any such
case which would have a Material Adverse Effect.

               5.2 Corporate and Governmental Authorization; Contravention.

               The execution, delivery and performance by the Company and each
of its Subsidiaries of this Agreement and each Operative Agreement to which it
is a party and the consummation by the Company and each such Subsidiary of the
transactions contemplated hereby and thereby, (i) are within the Company's and
each such Subsidiary's corporate powers, (ii) have been duly authorized by all
necessary corporate action, (iii) except as provided herein or in the Operative
Agreements, require no action by or in respect of, or filing with, any
Governmental Authority, other than the filing of a Form D with the Securities
and Exchange Commission and the "blue sky" filings in all applicable states in
connection with this Agreement and the transactions contemplated hereby, (iv) do
not contravene, or constitute a default under, any provision of any applicable
law, statute, ordinance, regulation, rule, order or other governmental
restriction or of the Articles of Incorporation or By-Laws or other
organizational documents of the Company or any of its Subsidiaries, (v) do not
contravene, or constitute a default under, any agreement, judgment, injunction,
order, decree, indenture, contract, lease, instrument or other commitment to
which the Company or any of its Subsidiaries is a party or by which the Company
or any of its Subsidiaries or any of their respective assets are bound which
could reasonably be expected to have a Material Adverse Effect, and (vi) will
not result in the




                                      -6-

creation or imposition of any Lien upon any asset of the Company or any of its
Subsidiaries under any existing indenture, mortgage, deed of trust, loan or
credit agreement or other agreement or instrument to which the Company or any of
its Subsidiaries is a party or by which the or any of their assets may be bound
or affected (except as contemplated herein).

               5.3 Binding Effect.

               This Agreement and each of the other Operative Agreements has
been duly executed and delivered by the Company and each of its Subsidiaries to
which it is a party and is a legal, valid and binding agreement of the Company
and each such Subsidiary, and is or will be enforceable against the Company and
each such Subsidiary in accordance with their terms except as the enforceability
thereof may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium or similar laws affecting creditors' rights generally
and general principles of equity, and except to the extent that the
indemnification provisions of Section 15 hereof may be limited by federal and/or
state securities laws and public policy considerations.

               5.4 Information.

               The Company has furnished to the Holders as of the date of this
Agreement the following financial statements (the "Financials") of the Company:
(i) except as described on Schedule 5.4, consolidated balance sheets as of, and
consolidated statements of earnings, changes in consolidated shareholders'
equity and changes in consolidated cash flow for the fiscal year ended May 31,
2001 audited by independent certified public accountants, and (ii) unaudited
consolidated balance sheets as of the end of the most recent fiscal quarter
ending prior to the Closing and the related unaudited consolidated statements of
earnings, changes in shareholders' equity and changes in consolidated cash flow
for the three months then ended. The Financials fairly present the consolidated
financial condition of the Company and its Subsidiaries at the dates thereof and
the results of operations for the periods indicated (subject, in the case of
unaudited financial statements, to normal year-end adjustments), and such
financial statements have been prepared in conformity with GAAP consistently
applied throughout the periods involved (except for omission of notes to the
unaudited Financials).

               5.5 Litigation and Judgments.

               Except as set forth on Schedule 5.5, there is no (i) injunction,
stay, decree, judgment, writ or order issued and outstanding by any court or
arbitrator or any Governmental Authority or official against the Company or any
of its Subsidiaries or (ii) action, suit, proceeding, litigation, contested
claim, investigation or arbitration pending, or threatened, against or affecting
the Company or any of its Subsidiaries, in each case, which could reasonably be
expected to have a Material Adverse Effect, or which in any manner impairs the
validity of this Agreement or any other Operative Agreement.

               5.6 Compliance with ERISA.

None of the Company, any of its Subsidiaries nor any ERISA Affiliate maintains
or contributes to any Benefit Plan or Multiemployer Plan except for the Benefit
Plans and Multiemployer Plans set forth on Schedule 5.6. Each Plan is maintained
and is funded in all material respects in accordance with its terms and in
compliance with all provisions of ERISA and the Code applicable thereto, and the
Company and each of its Subsidiaries and each ERISA




                                      -7-


Affiliate has fulfilled in all material respects its obligations related to the
minimum funding standards of ERISA and the Code for each Plan, is in compliance
in all material respects with the currently applicable provisions of ERISA and
of the Code relating to the qualification with respect to each Plan intended to
be so qualified and has not incurred any material liability (other than routine
liability for premiums) under Title IV of ERISA. No Termination Event has
occurred which has resulted in liability which either has not been satisfied or
is not reflected on the Company's financial statements, nor has any other event
occurred that is likely to result in a Termination Event which could reasonably
be expected to have a Material Adverse Effect. No event or events have occurred
in connection with which the Company or any of its Subsidiaries, any ERISA
Affiliate, or any Plan, directly or indirectly, is likely to be subject to any
liability under ERISA, the Code or any other law, regulation or governmental
order or under any agreement, instrument, statute, rule of law or regulation
pursuant to or under which any such entity has agreed to indemnify or is
required to indemnify any person against liability incurred under, or for a
violation or failure to satisfy the requirements of, any such statute,
regulation or order which could reasonably be expected to have a Material
Adverse Effect. The Company has made available to the Holders true, correct and
complete copies of the following documents: each Plan and all amendments
thereto, all written interpretations thereof and written descriptions thereof
that have been distributed to employees or former employees of the Company and
each of its Subsidiaries or the ERISA Affiliates, the most recent determination
letter issued by the Internal Revenue Service with respect to each Plan, for the
three most recent plan years, Annual Reports on Form 5500 Series required to be
filed with any Governmental Authority for each Plan, all actuarial reports
prepared for the last three plan years for each Benefit Plan, a listing of all
Multiemployer Plans, with the aggregate amount of the most recent annual
contributions required to be made by the Company or any of its Subsidiaries or
any ERISA Affiliate to each such plan and copies of the collective bargaining
agreements requiring such contributions, any information that has been provided
to the Company or any of its Subsidiaries or any ERISA Affiliate regarding
withdrawal liability under any Multiemployer Plan. None of the Company or any of
its Subsidiaries has made, or has any obligation to make, annual payments to
former employees of the Company or any of its Subsidiaries or any ERISA
Affiliate under any Retiree Health Plan.

               5.7 Taxes.

               (a) Except as set forth on Schedule 5.7(a), the Company and each
of its Subsidiaries has timely filed (inclusive of any permitted extensions)
with the appropriate taxing authorities all Tax Returns (including, without
limitation, information returns and other material information) in respect of
Taxes required to be filed through the date hereof. The information filed on
such Tax Returns is complete and accurate in all material respects. To the
Company's knowledge and to each of its Subsidiaries' knowledge, all material
deductions taken by the Company and each such Subsidiary as reflected in such
Tax Returns have been taken in accordance with applicable laws and regulations.

               (b) All Taxes, in respect of periods beginning prior to the date
hereof, have been timely paid when due, except where the same are being
contested in good faith by appropriate proceedings and appropriate reserves
therefor have been established and maintained in accordance with GAAP for the
accrual thereof as reflected on the audited consolidated financial statements
for the Company's fiscal year ended May 31, 2000, and, to the extent such




                                      -8-


reserves are maintained for periods after May 31, 2000, consistent with the
Company's past practice.

               (c) (i) No material deficiencies for Taxes have been claimed,
proposed or assessed by any taxing or other governmental authority against the
Company or any of its Subsidiaries other than such deficiencies of which the
Holders have been notified in writing and which are being contested in good
faith by appropriate proceedings, and appropriate reserves therefor have been
established and maintained as reflected on the audited consolidated financial
statements for the Company's fiscal year ended May 31, 2001 and in accordance
with GAAP, and, to the extent such reserves are maintained for periods after May
31, 2001, consistent with the Company's and each of its Subsidiaries' past
practice and (ii) no tax liens have been filed against any of the Collateral.
There are no pending or threatened audits, investigations or claims for or
relating to any material liability in respect of Taxes, and there are no matters
under discussion with any governmental authorities with respect to Taxes which
are likely to result in a material additional liability for Taxes. For all years
up to and including the fiscal year ended May 31, 1998, either the period during
which any assessments may be made by the Internal Revenue Service have expired
without waiver or extension or the federal income Tax Returns of the Company and
each of its Subsidiaries has been audited by the Internal Revenue Service and
such audits have been closed.

               (d) Neither the Company nor any of its Subsidiaries has incurred,
or will incur any material tax liability in connection with (i) the Exchange,
(ii) the other transactions contemplated by the Exchange Agreement or (iii) the
transactions contemplated by this Agreement.

               5.8 Subsidiaries.

               The Subsidiaries of the Company as of the date of this Agreement
are those listed on Schedule 5.8 attached hereto. The Company is the record and
beneficial owner, either directly or indirectly, of all of the shares of Capital
Stock of each of its Subsidiaries listed on such schedule as being owned by the
Company, and there are no proxies, irrevocable or otherwise, with respect to
such shares. No Capital Stock of any of the Company's Subsidiaries are or may
become required to be issued by reason of any options, warrants, scripts, rights
to subscribe to, calls or commitments of any character whatsoever relating to,
or securities or rights convertible into or exchangeable for, shares of Capital
Stock of any such Subsidiary, and there are no contracts, commitments,
understandings or arrangements by which any such Subsidiary is or may become
bound to issue additional shares of its Capital Stock or Stock Equivalents. All
of such respective shares so owned (whether directly or indirectly) by the
Company are owned by it free and clear of any Liens, and all such shares are
validly issued, fully paid and non-assessable.

               5.9 Not Investment Companies.

None of the Company or any of its Subsidiaries is (i) an "investment company" or
a company "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended, (ii) a "holding company" or a
"subsidiary company" of a "holding company," or an "affiliate" of a "holding
company" or of a "subsidiary company" of a "holding company," within the meaning
of the Public Utility Holding Company Act of 1935, as amended, or (iii) subject
to any other law which purports to regulate or restrict its ability to




                                      -9-


borrow money or to consummate the transactions contemplated by this Agreement or
any other Operative Agreement or to perform its obligations hereunder or
thereunder.

               5.10 No Conflicting Requirements.

               Except as set forth on Schedule 5.10, none of the Company nor any
of its Subsidiaries has violated or is in default under any term or provision of
any charter, by-law, mortgage, indenture, agreement, instrument, statute, rule,
regulation, judgment, decree, order, writ, injunction, contract, lease or other
commitment to which any of them is a party or by which any of them is bound such
that such violations or defaults in the aggregate could reasonably be expected
to have a Material Adverse Effect. None of the Company nor any of its
Subsidiaries know of any dispute regarding any indenture, contract, lease,
agreement, instrument or other commitment which would individually, or when
aggregated with other such disputes, be reasonably likely to have a Material
Adverse Effect.

               5.11 Debt.

               Schedule 5.11 attached hereto sets forth as of January 31, 2002
all of the Debt of the Company and each of its Subsidiaries and a pro forma
schedule of such Debt as of January 31, 2002, assuming the application of the
proceeds of the Notes in accordance with this Agreement. After application of
the proceeds of the Notes as set forth herein, the Company and each of its
Subsidiaries will have no Debt that is senior, pari passu or subordinated in
right of payment to their Obligations under the Notes or under this Agreement,
except for Debt permitted pursuant to Section 9.1 of this Agreement.

               5.12 Title to Properties and Assets.

               (a) Except for (i) Liens permitted pursuant to Section 9.4 hereof
and (ii) such imperfections of title that represent imperfections of title or
easements of record, if any, which do not materially detract from the value or
interfere with the use of the properties subject thereto or affected thereby, or
otherwise materially impair business operations, the Company and each of its
Subsidiaries has (a) good and marketable fee simple title to the Owned Real
Property material to their respective businesses and the Owned Real Property on
which a Lien has been granted to the Collateral Agent for the benefit of the
Holders, (b) valid leasehold interests in all of its Leased Real Property
material to their businesses, and (c) good and marketable title to all of the
other material property and assets owned by the Company and each of its
Subsidiaries at any time (including, without limitation, all of their Accounts
and Inventory). Schedule 5.12(a) attached hereto sets forth the Owned Real
Property and the Leased Real Property held by the Company and each of its
Subsidiaries. The Company and each of its Subsidiaries enjoy peaceful and
undisturbed possession of all their material Real Estate and there is no pending
or threatened condemnation proceeding relating to any Real Estate which could
reasonably be expected to have a Material Adverse Effect. No default exists
under any Lease which could reasonably be expected to have a Material Adverse
Effect. All of the Structures and other tangible assets owned, leased or used by
the Company and each of its Subsidiaries in the conduct of their respective
businesses are (a) insured as required by the terms of this Agreement and the
other Operative Agreements, (b) sufficient for the operation of the businesses
of the Company and each such Subsidiary as presently conducted and (c) in
conformity with all applicable laws, ordinances, orders, regulations and other
requirements (including applicable zoning, environmental, motor vehicle safety,
occupational safety and health laws and regulations)




                                      -10-


relating thereto, except where the failure to conform could not reasonably be
expected to have a Material Adverse Effect.

               (b) The Company and each of its Subsidiaries possess adequate
assets, licenses, patents, patent applications, copyrights, service marks,
trademarks, trademark applications and tradenames to continue to conduct its
business as presently conducted. Schedule 5.12(b) attached hereto sets forth as
of the date of this Agreement (i) all of the federal, state and foreign
registrations of the registered trademarks of the Company and each of its
Subsidiaries and all pending applications for any such registrations and (ii)
all of the patents of the Company and each of its Subsidiaries and all pending
applications therefor (collectively, together with all service marks and other
marks and all applications therefor, tradenames and other trade rights of the
Company and each of its Subsidiaries, the "Proprietary Rights"). The Company and
each of its Subsidiaries are the owners of each of the trademarks and patents
listed on Schedule 5.12(b) as indicated on such Schedule and except as set forth
on such Schedule and, except pursuant to licenses granted in the ordinary course
of business, no other Person has the right to exploit such patents or use any of
such marks in commerce either in the identical form or in such near resemblance
thereto as may be likely to cause confusion or to cause mistake or to deceive.
As of the date of this Agreement each of the trademarks listed on Schedule
5.12(b) is a valid and subsisting federally registered trademark of the Company
or one or more of its Subsidiaries having the registration number and issue date
set forth on Schedule 5.12(b), and each of the patents listed on Schedule
5.12(b) is a valid and subsisting patent of the Company or its Subsidiaries
having the patent number and issue date set forth on Schedule 5.12(b). Except as
disclosed on Schedule 5.12(b), no Person has a right to receive any material
royalty or similar payment from the Company or any of its Subsidiaries in
respect of any such registered Propriety Rights. None of the Company nor any of
its Subsidiaries has granted any material license, except such licenses as were
granted in the ordinary course of the Company's and each such Subsidiary's
businesses, or sold or otherwise transferred any interest in any of the
Proprietary Rights to any other Person. None of the Company nor any of its
Subsidiaries is aware that the use of any of the material Proprietary Rights by
the Company or any of its Subsidiaries is infringing upon or otherwise violating
the rights of any third party in or to such Proprietary Rights which violation
or infringement could reasonably be expected to result in a material liability
to the Company or any of its Subsidiaries, as the case may be, and no proceeding
has been instituted against or notice received by the Company or any of its
Subsidiaries that are presently outstanding alleging that the use of any of the
material Proprietary Rights infringes upon or otherwise violates the rights of
any third party in or to any of the material Proprietary Rights which, if
successful, could reasonably be expected to materially adversely affect the fair
market value of any such material Proprietary Rights or the rights granted
therein to the Collateral Agent for the benefit of the Holders, including,
without limitation, the validity, priority or perfection of the security
interest granted therein to the Collateral Agent for the benefit of the Holders
under the Collateral Documents or the remedies therein or in this Agreement. All
of the material Proprietary Rights of the Company and each of its Subsidiaries
are valid and enforceable rights of the Company and each such Subsidiary and
will not cease to be valid and in full force and effect by reason of the
execution and delivery of this Agreement or the other Operative Agreements or
the consummation of the transactions contemplated hereby or thereby.

               (c) As of the Closing Date, the Capital Stock of each Subsidiary
(including, without limitation, each Foreign Subsidiary) has been pledged to the
Collateral Agent for the




                                      -11-


benefit of the Holders in accordance with the terms of the Pledge Agreement. The
owners of all such Capital Stock are parties as pledgors under the Pledge
Agreement, and each such pledgor has delivered the stock certificates
representing the Capital Stock owned by each such pledgor in accordance with the
Pledge Agreement.

               5.13 Compliance with Law.

               None of the Company nor any of its Subsidiaries has violated or
failed to comply with any statute, law, ordinance, regulation, rule or order of
any foreign, federal, state or local government or any other governmental
department or agency or any self regulatory organization, or any judgment,
decree or order of any court, applicable to its business or operations or
properties except where the aggregate of all such violations or failures to
comply would not have a Material Adverse Effect. The conduct of the businesses
of Company and each of its Subsidiaries is in conformity with all securities,
commodities, energy, public utility, zoning, building code, health, OSHA and
environmental requirements and all other foreign, federal, state and local
governmental and regulatory requirements and requirements of any self regulatory
organizations, except where the aggregate of all such non-conformities could not
reasonably be expected to have a Material Adverse Effect. None of Company nor
any of its Subsidiaries has received any notice to the effect that, or otherwise
been advised that, they are not in compliance with, and none of the Company nor
any of its Subsidiaries has any reason to anticipate that any presently existing
circumstances are likely to result in the violation of, any such statute, law,
ordinance, regulation, rule, judgment, decree or order which failure or
violation could reasonably be expected to have a Material Adverse Effect.

               5.14 Compliance with Environmental Laws.

               (a) The Company and each of its Subsidiaries has complied with
and is currently in compliance with all applicable Environmental Laws, except
where noncompliance could not reasonably be expected to have a Material Adverse
Effect.

               (b) No Hazardous Substances are generated, processed, discharged,
stored, treated, disposed of, or managed at any facility owned, leased or
operated by the Company or any of its Subsidiaries or, at the request or behest
of the Company or any of its Subsidiaries, at any other site, so as to require a
license, permit or authorization of any type from any governmental authority,
other than licenses, permits and authorizations which have been obtained and are
in full force and effect or where the failure to obtain such a license, permit
or authorization could not reasonably be expected to have a Material Adverse
Effect. No governmental or private actions to enforce environmental or pollution
control laws or arising under any Environmental Law are pending against the
Company or any of its Subsidiaries or against or with respect to any facility
owned, operated or leased by the Company or any of its Subsidiaries. None of the
Company nor any of its Subsidiaries has received from any Person any complaint,
notice of violation, alleged violation, investigation or advisory action or of
potential liability or of potential responsibility regarding environmental
protection matters or permit compliance or under any Environmental Law, and none
of the Company nor any of its Subsidiaries has any contingent liability of which
the Company or any such Subsidiary has knowledge under any Environmental Law or
in connection with any Release or threatened Release of any Hazardous Substance,
nor has the Company or any of its Subsidiaries received from any Person any
notice, letter or other indication of potential liability arising from the
Release or threatened Release of any Hazardous Substance. There are no
circumstances or




                                      -12-


conditions (including, without limitation, any Release or threatened Release of
any Hazardous Substance) that could reasonably be expected to result in any
claims, liability, investigation or cost pursuant to any Environmental Law
against or relating to the Company, any of its Subsidiaries or any facility
owned, leased or operated by the Company or any of its Subsidiaries, except
where the existence of such circumstance or condition could not reasonably be
expected to have a Material Adverse Effect.

               (c) Other than any pending workers' compensation claims which
individually and in the aggregate are not material to the Company or any of its
Subsidiaries, no action, suit or proceeding brought by any employee of the
Company or any of its Subsidiaries or any other person involving (i) a claim for
damages in excess of $100,000 or (ii) claims for damages under $100,000 and
which in the aggregate could reasonably be expected to have a Material Adverse
Effect, in each case based on alleged damage to health or property caused by any
Hazardous Substance, is pending before any court or arbitrator or any
governmental body, agency or official.

               5.15 Security Interests and Liens; Inventory and Equipment.

               After the application of the proceeds of the sale of the Notes as
set forth herein, there will be no Liens in favor of third parties with respect
to any of the Collateral, including, without limitation, with respect to the
Inventory, wherever located, other than Liens permitted pursuant to Section 9.4
hereof. Upon the proper filing of financing statements and the proper
recordation of other applicable documents with the appropriate filing or
recordation offices in each of the necessary jurisdictions (all of which the
Company undertakes to do or cause to be done), the security interests granted
pursuant to the Collateral Documents constitute and shall at all times
constitute a valid and enforceable first priority perfected Lien on such
Collateral, subject only to Liens permitted pursuant to Section 9.4 hereof. The
Company and each of its Subsidiaries are or will be at the time additional
Collateral is acquired by them, the absolute owners of the Collateral with full
right to pledge, sell, consign, transfer and create a Lien therein, free and
clear of any and all Liens in favor of third parties, except for Liens permitted
pursuant to Section 9.4 hereof. Except as set forth on Schedule 5.15, no
consents, filings or recordings are required in order to perfect the security
interests created by the Collateral Documents.

               5.16 Labor Relations.

               None of the Company nor any of its Subsidiaries is engaged in any
material unfair labor practices which could reasonably be expected to result in
a material liability to the Company or any of its Subsidiaries, materially
increase the costs of operations or materially decrease the revenue generated
from the Company's or any of its Subsidiaries' operations or which could
otherwise reasonably be expected to have a Material Adverse Effect. There is (i)
no unfair labor practice complaint pending against the Company or any of its
Subsidiaries or, to the best knowledge of the Company and any of its
Subsidiaries, threatened against, before the National Labor Relations Board, and
no material grievance or significant arbitration proceeding arising out of or
under collective bargaining agreements is so pending against the Company or any
of its Subsidiaries or, threatened against them, (ii) no strike, labor dispute,
slowdown or stoppage pending against the Company or any of its Subsidiaries
threatened against it which, in the case of the items described in the preceding
clauses (i) and (ii) could reasonably be expected to result in a material
liability to the Company or any of its Subsidiaries, materially increase the
costs of the Company's or any of its Subsidiaries' operations or materially
decrease the revenue




                                      -13-


generated from the Company's or any of its Subsidiaries' operations or which
could otherwise reasonably be expected to have a Material Adverse Effect, and
(iii) no union representation question with respect to the employees of the
Company or any of its Subsidiaries and, to the knowledge of the Company and each
of its Subsidiaries, no union organizing activities which representation
question or organizing activity could reasonably be expected to have a Material
Adverse Effect. There are no controversies pending or threatened between the
Company or any of its Subsidiaries and any of their respective employees, other
than (i) employee grievances and other controversies arising in the ordinary
course of business which could not, in the aggregate, be reasonably expected to
have a Material Adverse Effect and (ii) employee grievances and other
controversies arising outside the ordinary course of business of which the
Holders have received written notice and could not reasonably be expected to
have a Material Adverse Effect.

               5.17 UCC Filing Information.

               As of the date of this Agreement the jurisdiction of
incorporation of the Company and each of its Subsidiaries is as set forth on
Schedule 5.17, which jurisdiction is the place where the Company and such
Subsidiary is "located" for the purposes of Section 9-301 of the UCC. Schedule
5.17 is a true, correct and complete list as of the date of this Agreement of
the address of all offices where records and books of account each the Company
and each of its Subsidiaries is kept. None of the receipts received by the
Company or any of its Subsidiaries from any warehouseman, filler, processor or
packer states that the goods covered thereby are to be delivered to bearer or to
the order of a named person or to a named person and such named person's
assignees.

               5.18 Solvency.

               The fair saleable value of the Company's and each of its
Subsidiaries' assets exceeds all probable liabilities, including those to be
incurred pursuant to this Agreement. The Company and each of its Subsidiaries,
taken as a whole (i) do not have unreasonably small capital in relation to the
business in which they are or propose to be engaged and (ii) have not incurred,
and do not believe that they will incur after giving effect to the transactions
contemplated by this Agreement, debts beyond their ability to pay such debts as
they become due.

               5.19 Fictitious Business Names.

               Except as set forth on Schedule 5.19, none of the Company nor any
of its Subsidiaries has conducted any material amount of business on or after
August 1, 1993 under any corporate or fictitious name other than the corporate
name shown on the Company's and each such Subsidiary's respective organizational
documents.

               5.20 Use of Proceeds.

               The proceeds of the Notes will be used solely (i) to repay on the
Closing Date in full all Debt of the borrowers outstanding under the DDJ Loan
Agreement, (ii) to repay certain fees and expenses owed by the Company in
connection with (A) this Agreement and the transactions contemplated hereby and
(B) the Company's recapitalization pursuant to the Exchange and (iii) for
general corporate purposes.




                                      -14-


               5.21 Margin Stock.

               Neither the Company nor any of its Subsidiaries owns any "margin
stock" within the meaning of Regulation U of the Board of Governors of the
Federal Reserve System, or any regulations, interpretations or rulings
thereunder, nor is the Company or any of its Subsidiaries engaged principally or
as one of its important activities in extending credit which is used for the
purpose of purchasing or carrying margin stock.

               5.22 Affiliate Transactions.

               Except as set forth on Schedule 5.22 hereto, none of the Company
nor any of its Subsidiaries is a party to or bound by any agreement or
arrangement (whether oral or written) to which any Affiliate of the Company or
any Subsidiary is a party.

               5.23 Accuracy and Completeness of Information.

               All factual information heretofore, contemporaneously or
hereafter furnished by or on behalf of the Company and each of its Subsidiaries
in writing to the Holders or the Auditors for purposes of or in connection with
this Agreement or any other Operative Agreement, including all information
contained in the Offering Circular, or any transaction contemplated hereby or
thereby is or will be (in the case of factual information provided after the
Closing) true and accurate in all material respects on the date as of which such
information is dated or certified and not incomplete by omitting to state any
material fact necessary to make such information not misleading at such time.
There is no fact now known to any officer of the Company or any of its
Subsidiaries which has, or would have, a Material Adverse Effect, which fact has
not been set forth herein, in the Financials, or some certificate, opinion or
other written statement made or furnished by the Company or any of its
Subsidiaries to the Holders.

               5.24 Capital Stock.

               There are presently issued by the Company and each of its
Subsidiaries and outstanding the shares of Capital Stock indicated on Schedule
5.24. All of the issued and outstanding Capital Stock of each Subsidiary of the
Company listed is owned of record and beneficially by the entity set forth on
such Schedule. The Company and each of its Subsidiaries has received at least
the consideration for which such Capital Stock was authorized to be issued and
have otherwise complied in all material respects with all legal requirements
relating to the authorization and issuance of shares of Capital Stock and all
such shares are validly issued, fully paid and non-assessable. The Company and
each of its Subsidiaries has no other Capital Stock of any class outstanding
other than as set forth on Schedule 5.24 hereto. Except as set forth on Schedule
5.24, none of the Company or any of its Subsidiaries has outstanding any Stock
Equivalents or any other equity interest nor does the Company or any of its
Subsidiaries have outstanding any rights to subscribe for or to purchase, or any
options for the purchase of, or any agreement providing for the issuance
(contingent or otherwise) of, or any calls, commitments or claims of any
character relating to, its Capital Stock or other obligations or commitments of
any kind whatsoever to issue, sell or otherwise dispose of, any shares of or
other equity interest in the Company or any of its Subsidiaries. Except as
contemplated by the Operative Agreements, none of the Company or any of its
Subsidiaries is subject to any obligation (contingent or otherwise) to
repurchase or otherwise acquire or retire any of its Capital Stock. There are no
voting trusts or




                                      -15-


other agreement or understandings to which the Company or any of its
Subsidiaries is a party with respect to the voting of its Capital Stock.

               5.25 Private Offering by the Company.

               Neither the Company nor any Person acting on its behalf has (i)
engaged, in connection with the issuance and sale of the Notes, in any "general
solicitation" or "general advertising" within the meaning of such terms used in
Rule 502 promulgated pursuant to the Securities Act or (ii) offered the Notes or
any similar securities for sale to, or solicited any offer to buy any of the
same from, or otherwise approached or negotiated in respect thereof with, any
Person other than the Holders, which have been offered the Notes at a private
sale for investment. Neither the Company nor anyone acting on its behalf has
taken, or will take, any action that would subject the issuance or sale of the
Notes to the registration requirements of Section 5 of the Securities Act, any
state securities or "Blue Sky" laws or any other similar any law, treaty, rule
or regulation of any jurisdiction.

SECTION 6.       INITIAL PURCHASER'S REPRESENTATIONS

               6.1 Initial Purchaser's Representations.

        The Initial Purchaser represents and warrants to, and agrees with, the
Company that:

                      (i) It is a "qualified institutional buyer" ("QIB") within
        the meaning of Rule 144A under the Securities Act with such knowledge
        and experience in financial and business matters as is necessary in
        order to evaluate the merits and risks of an investment in the Notes.

                      (ii) It is not acquiring the Notes with a view to any
        distribution thereof or with any present intention of offering or
        selling any of the Notes in a transaction that would violate the
        Securities Act or the securities laws of any State of the United States
        or any other applicable jurisdiction. In connection with any Exempt
        Resales, it will solicit offers to buy the Notes only from, and will
        offer and sell the Notes only to (A) persons reasonably believed by the
        Initial Purchaser to be QIBs or (B) persons reasonably believed by the
        Initial Purchaser to be accredited investors (within the meaning of Rule
        501 under the Securities Act) (each such person, an "Eligible
        Purchaser").

                      (iii) It agrees that no form of general solicitation or
        general advertising has been or will be used by the Initial Purchaser or
        any of its representatives in connection with the offer and sale of any
        of the Notes.

SECTION 7.       PREPAYMENT OF NOTES

               7.1 Required Prepayments of the Notes.

               (a) Upon the receipt by the Company or any of its Subsidiaries of
Net Cash Proceeds from any Asset Disposition, the Company shall prepay the
outstanding Accreted Principal Amount of the Notes, together with accrued and
unpaid interest thereon, at a premium equal to the then applicable Premium
Amount, in an amount equal to such Net Cash Proceeds.




                                      -16-


               (b) Upon the receipt by the Company or any of its Subsidiaries of
net proceeds from any sale or issuance of their respective Capital Stock or
Stock Equivalents, the Company shall prepay the outstanding Accreted Principal
Amount of the Notes, together with accrued and unpaid interest thereon, at a
premium equal to the then applicable Premium Amount, in an amount equal to such
net proceeds.

               (c) Upon the receipt by the Company or any of its Subsidiaries of
any proceeds of insurance maintained pursuant to Section 8.4(b), the Company
shall prepay the outstanding Accreted Principal Amount of the Notes, together
with accrued and unpaid interest thereon, at a premium equal to the then
applicable Premium Amount, in an amount equal to such proceeds to the extent
such proceeds are not applied pursuant to Section 8.4(b).

               7.2 Optional Prepayments of the Notes.

               Upon notice as provided in Section 7.4, the Company may prepay,
in whole or in part, at any time or from time to time, the outstanding Accreted
Principal Amount of the Notes at the prices (expressed as percentages of the
Accreted Principal Amount of the Notes on the date of such prepayment)
corresponding to the relevant period set forth in the table below (the "Premium
Amount"), plus accrued and unpaid interest thereon to the applicable prepayment
date.



                             Premium to Accreted
        Period                Principal Amount
- ------------------------   ------------------------
                        
Closing Date -
November 30, 2002                  104.0%

December 1, 2002 -
November 30, 2003                  103.0%

December 1, 2003 -
November 30, 2004                  102.0%

December 1, 2004 -
Maturity Date                      100.0%


               7.3 Offers to Purchase Notes upon Certain Events.

               (a) Change of Control Offer. The Company shall, within ninety
(90) days after any Change of Control, give written notice of such Change of
Control to the Holders. Such notice shall contain and constitute an offer (a
"Change of Control Offer") to all Holders to repurchase, within 30 days after
the date of such notice, all or, at the option of any Holder, any part (equal to
$1,000,000 or an integral multiple thereof) of the outstanding Accreted
Principal Amount of Notes held by such Holder. The offer price in any Change of
Control Offer will be equal to the outstanding Accreted Principal Amount of the
Notes, together with accrued and unpaid interest to the date of repurchase, at a
premium equal to the then applicable Premium Amount, and will be payable in cash
(the "Change of Control Payment") on the Proposed Repurchase Date.




                                      -17-


               (b) Excess Cash Flow Offer. As soon as practicable after the end
of each fiscal year of the Company, and in any event no later than August 31 of
each year, the Company shall make an offer to all Holders to purchase the
maximum outstanding Accreted Principal Amount of Notes that may be purchased
with 100% of the Excess Cash Flow of the Company for the immediately preceding
fiscal year (each such offer, an "Excess Cash Flow Offer"). The offer price in
any Excess Cash Flow Offer will be equal to the Accreted Principal Amount of the
Notes, together with accrued and unpaid interest to the date of repurchase, at a
premium equal to the then applicable Premium Amount, and will be payable in cash
(the "Excess Cash Flow Payment"). If the aggregate Accreted Principal Amount of
Notes tendered into such Excess Cash Flow Offer exceeds the amount of Excess
Cash Proceeds, the Notes shall be purchased on a pro rata basis, based upon the
respective share of the outstanding Notes held by the Holders thereof.

               (c) Procedures for Offers and Purchases.

                      (i) The offer to repurchase the Notes contemplated by this
        Section 7.3 shall be an offer to repurchase, in accordance with and
        subject to this Section 7.3, each Note held by the Holders on the
        Business Day specified in such offer (the "Proposed Repurchase Date").

                      (ii) Each Holder may accept the Offer to repurchase the
        Notes made pursuant to this Section 7.3 by causing a notice of such
        acceptance to be delivered to the Company at least five (5) days prior
        to the Proposed Repurchase Date. A failure by any Holder to respond to
        an Offer to repurchase the Notes made pursuant to this Section 7.3 shall
        be deemed to constitute a rejection of such Offer by such Holder.

                      (iii) On each Proposed Repurchase Date, the Company shall
        (i) accept for payment all Notes or portions thereof validly tendered
        and not properly withdrawn pursuant to an Offer and (ii) pay to the
        tendering Holders (by wire transfer of immediately available funds to an
        account designated by such Holder) an amount equal to the Offer Payment
        in respect of all Notes or portions thereof so validly tendered and not
        properly withdrawn. The Company shall promptly mail to each Holder,
        which has so validly tendered and not properly withdrawn a Note, a new
        Note equal in principal amount to any unpurchased portion of the Notes
        surrendered, if any, provided that each such new Note will be in a
        principal amount of $1,000,000 or an integral multiple thereof.

                      (iv) Each Offer to repurchase the Notes pursuant to this
        Section 7.3 shall be accompanied by a certificate, executed by a senior
        financial officer of the Company and dated the date of such Offer,
        specifying: (i) the Proposed Repurchase Date; (ii) that such Offer is
        made pursuant to this Section 7.3; (iii) the Accreted Principal Amount
        of each Note offered to be repurchased; (iv) the applicable Premium
        Amount on each Note in connection with such prepayment (calculated as of
        the date of such Proposed Repurchase Date); (v) the interest that would
        be due on each Note offered to be repurchased, accrued to the Proposed
        Repurchase Date; (vi) that the conditions of this Section 7.3 have been
        fulfilled; (vii) with respect to a Change in Control Offer, in
        reasonable detail, the nature and date of the Change of Control; and
        (viii) that a failure to respond to such notice shall be deemed a
        rejection of such Offer to repurchase the Notes.




                                      -18-


               7.4 Notice of Prepayments; Officers' Certificate.

               The Company will give each Holder irrevocable written notice of
each prepayment under Section 7.2 not less than ten (10) days and not more than
thirty (30) days prior to the Business Day fixed for such prepayment, in each
case specifying such prepayment date, the aggregate Accreted Principal Amount of
the Notes, the Accreted Principal Amount of each Note held by such Holder to be
prepaid, and the applicable Premium Amount to be paid in connection with such
prepayment (calculated as of the date of such prepayment). Notice of prepayment
having been given as aforesaid the aggregate Accreted Principal Amount, together
with accrued and unpaid interest until the proposed date of prepayment, at a
premium equal to the then applicable Premium Amount, shall become due and
payable on such prepayment date. The Company shall, on or before the Business
Day next succeeding the date on which the Company sends such written notice,
give telephonic notice (immediately followed by written notice sent by facsimile
transmission) of the items set forth in the first sentence of this paragraph and
the prepayment date to each Holder at the telephone and facsimile numbers
specified in Section 19 hereof. Each Holder shall receive, on the Business Day
immediately preceding the date scheduled for any such prepayment, an Officers'
Certificate setting forth and certifying the calculations of the amounts to be
prepaid to such Holder on the prepayment date.

               7.5 Allocation of Partial Prepayments.

               Upon any partial prepayment of the Notes pursuant to Section 7.1
or 7.2, the principal amount so prepaid shall be allocated (as nearly as
practicable) to all Notes at the time outstanding in proportion to the
respective outstanding Accreted Principal Amounts thereof not theretofore
prepaid, with adjustments, to the extent practicable, to compensate for any
prior prepayments not made exactly in such proportion.

               7.6 Maturity; Surrender, etc.

               In the case of each prepayment, the Accreted Principal Amount of
each Note to be prepaid shall mature and become due and payable on the date
fixed for such prepayment. Payment of the total Accreted Principal Amount at a
premium equal to the then applicable Premium Amount shall be deemed payment of
the total principal amount then outstanding. From and after such date, unless
the Company shall fail to pay such Accreted Principal Amount at a premium equal
to the then applicable Premium Amount, as aforesaid, interest on such Accreted
Principal Amount shall cease to accrue. Any Note paid, prepaid or repurchased in
full shall, after such payment, prepayment or repurchase in full, be surrendered
to the Company and canceled and shall not be reissued, and no Note shall be
issued in lieu of any such paid or prepaid principal amount of any Note.

               7.7 Acquisition of Notes.

               The Company shall not and shall not permit any of its
Subsidiaries to, prepay or otherwise retire in whole or in part prior to their
stated final maturity (other than by prepayment or repurchase pursuant to
Section 7.1, 7.2, or 7.3 or upon acceleration of such final maturity pursuant to
Section 10.2), or purchase or otherwise acquire, directly or indirectly, Notes
held by the Holders, except, in the case of such purchase or acquisition,
pursuant to an offer to purchase made pro rata to all Holders on the same terms
and conditions. Any Notes prepaid in full or otherwise retired or purchased or
otherwise acquired by the Company or any of its Subsidiaries




                                      -19-


shall not be deemed to be outstanding for any purpose under this Agreement or
any other Operative Agreement, shall be canceled and shall not be reissued. Any
Notes prepaid or otherwise purchased or otherwise acquired by any Affiliate of
the Company shall not be deemed outstanding for the purpose of any vote of the
holders of the Notes (including, without limitation, the calculation of any
percentage of principal amount of the Notes outstanding with respect to any such
vote) pursuant to this Agreement or any other Operative Agreement but shall be
deemed outstanding with respect to the calculation of any future payment of
principal, premium and interest on the Notes.

SECTION 8.       AFFIRMATIVE COVENANTS OF THE COMPANY


               In order to induce the Holders to enter into this Agreement and
to purchase the Notes as contemplated hereby, as long as any of the Obligations
remain outstanding, the Company covenants and agrees that:

               8.1 Financial Statements.

               The Company will deliver to the Holders:

               (a) as soon as available and in any event within ninety (90) days
after the end of each fiscal year of the Company, consolidated and consolidating
balance sheets of the Company and its Subsidiaries as of the end of such fiscal
year and the related consolidated and consolidating statements of earnings,
changes in consolidated shareholders equity and changes in consolidated cash
flow for such fiscal year, setting forth in the case of each consolidated
financial statement in comparative form the figures for the previous fiscal
year, including the previous fiscal year budget (if such budget was prepared);
all (except for the consolidating statements) accompanied by (A) a certificate
of the Auditors stating that (1) in the course of the regular audit of the
business of the Company and its Subsidiaries, which audit was conducted by such
Auditors in accordance with generally accepted auditing standards, such
accounting firm has obtained no knowledge that a Default or Event of Default has
occurred and is continuing, or, if in the opinion of such Auditors, a Default or
Event of Default has occurred and is continuing, a statement as to the nature
thereof and (2) such financial statements present fairly in all material
respects the financial position of the Company and its Subsidiaries and the
results of its operations and cash flows for such fiscal year in conformity with
GAAP and otherwise reported on in a manner acceptable to the Securities and
Exchange Commission and (B) a schedule in form reasonably satisfactory to the
Holders of the computations used by such accountants in determining, as of the
end of such fiscal year, the Company's compliance with all financial covenants
contained herein;

               (b) as soon as available and in any event within forty-five (45)
days after the end of each of the first three quarters of each fiscal year of
the Company, consolidated and consolidating balance sheets of the Company and
its Subsidiaries as of the end of such quarter and the related consolidated and
consolidating statements of earnings, changes in consolidated shareholders
equity and changes in consolidated cash flow for such quarter and for the
portion of the Company's fiscal year ended at the end of such quarter, setting
forth in the case of each consolidated financial statement in comparative form
the figures for the corresponding quarter and the corresponding portion of the
Company's previous fiscal year, including the previous fiscal year budget (if
such budget was prepared), all certified (subject to normal year-end




                                      -20-


adjustments) as to fairness of presentation, GAAP and consistency by the chief
financial officer or the chief accounting officer of the Company; and

               (c) as soon as available and in any event within thirty (30) days
after the end of each of the first two months of each fiscal quarter (forty-five
(45) days in the case of the last month of each fiscal year of the Company),
statements of earnings and consolidated and consolidating balance sheets of the
Company and its Subsidiaries as of the end of such month, and related changes in
consolidated cash flow for such month and for the portion of the Company's
fiscal year ended at the end of such month, all certified (subject to normal
year-end adjustments) as to fairness of presentation, GAAP and consistency by
the chief financial officer or chief accounting officer of the Company.

               8.2 Reporting Requirements.

               The Company shall furnish to the Holders:

               (a) promptly upon the filing thereof, copies of all registration
statements (other than the exhibits thereto unless the securities covered
thereby are held or distributed by the Company, other than any registration
statement on Form S-3 to the extent that it relates to a secondary offering, and
other than any registration statement on Form S-8 or its equivalent) and reports
on Form 10-K, 10-Q and 8-K (or their equivalents) which the Company or any of
its Subsidiaries shall have filed with the Securities and Exchange Commission,
and promptly upon the mailing thereof to the shareholders of the Company and
each of its Subsidiaries generally, copies of all financial statements, reports
and proxy statements so mailed;

               (b) no later than forty-five (45) days after the end of each of
the first three quarters of each fiscal year and no later than ninety (90) days
after the end of each fiscal year, (A) a certificate of the chief financial
officer or chief accounting officer of the Company setting forth in reasonable
detail any calculations required to establish whether the Company was in
compliance with the requirements of Sections 8.16 and 9.6 hereof as of the end
of such quarter or year, as the case may be, and (B) a compliance certificate in
the form of Exhibit C attached hereto (the "Compliance Certificate").

               (c) as soon as available and in any event no later than sixty
(60) days after the last day of each fiscal year of the Company, copies of
annual budgets and other similar materials prepared by or for the Company and
each of its Subsidiaries, which budgets and other information shall be presented
on a monthly basis for the then current fiscal year and on an annual basis for
each subsequent fiscal year; and

               (d) within three Business Days of any executive officer of the
Company obtaining knowledge of any Default or Event of Default, a certificate of
the chief financial officer or the chief accounting officer of the Company
setting forth the details thereof and the action which is being taken or
proposed to be taken with respect thereto;

               (e) within three Business Days after the Company's or any of its
Subsidiaries' knowledge thereof, notice, in reasonable detail, of any material
change relating to the type, quality or quantity of any material portion of the
Collateral, or any event which could have a material adverse effect on the value
of the Collateral or any event affecting the validity or




                                      -21-


priority of the security interests granted to the Collateral Agent for the
benefit of the Holders in the Collateral;

               (f) within three Business Days of the chief executive officer,
chief financial officer, chief accounting officer, controller or other senior
financial officer of the Company or any of its Subsidiaries obtaining knowledge
of any Material Adverse Effect, a certificate of the chief financial officer or
accounting officer of the Company setting forth details thereof and the action
which is being taken or proposed to be taken with respect thereto;

               (g) promptly following, and in no event more than five Business
Days of any executive officer of the Company or any of its Subsidiaries
obtaining knowledge of (i) any litigation or proceeding affecting the Company or
any of its Subsidiaries in which the amount involved is $250,000 or more and is
not covered by insurance or in which injunctive or similar relief is sought, or
(ii) any order, judgment or decree in excess of $250,000 which shall have been
entered against the Company or any of its Subsidiaries or any of their
respective properties or assets, the Company will deliver a certificate of the
chief financial officer or accounting officer setting forth details thereof and
the action which is being taken or proposed to be taken with respect thereto;

               (h) prompt notice of any notification of a violation of any law
or regulation received by the Company or any of its Subsidiaries from any local,
state, federal or foreign Governmental Authority which violation could
reasonably be expected to have a Material Adverse Effect; and

               (i) from time to time such additional information or analyses
regarding the financial position or business of the Company or any of its
Subsidiaries as the Holders may reasonably request.

               8.3 Payment of Obligations.

               The Company shall pay and discharge, and shall cause each of its
Subsidiaries to pay and discharge, at or before maturity, all of its material
obligations and liabilities, including, without limitation, Tax liabilities,
except where the same may be contested in good faith by appropriate proceedings,
and will maintain, in accordance with GAAP, appropriate reserves for the accrual
of any of the same.

               8.4 Maintenance of Property; Insurance.

               (a) The Company shall keep, and shall cause each of its
Subsidiaries to keep, all material property useful and necessary in its
businesses in good working order and condition (ordinary wear and tear, casualty
and condemnation excepted) and not commit or suffer any material waste with
respect to any of its material properties.

               (b) The Company shall maintain, and shall cause each of its
Subsidiaries to maintain, public liability insurance, third party property
damage and replacement cost insurance on the Collateral under such policies of
insurance, and the Company and each such Subsidiary agrees to maintain insurance
on their material assets in such amounts and covering such risks as is customary
for similarly situated corporations. Such insurance may include levels of self
insurance comparable to those in place on the date of this Agreement or as shall
be customary for




                                      -22-


corporations similarly situated in the industry. All policies covering the
Collateral are to name the Holders as additional insureds and loss payees in
case of loss, as the Holders' interests may appear, and are to contain such
other provisions as the Holders may reasonably require to fully protect the
Holders' interest in the Collateral and to any payments to be made under such
policies. Certificates of all insurance policies are to be delivered to the
Holders (with true copies of such policies to be made available to the Holders)
on or within five (5) Business Days prior to the Closing, and such policies
shall have all premiums with respect thereto currently paid and contain loss
payable endorsements in the Holders' favor, and shall provide for not less than
ten (10) days' prior written notice to the Holders, of the exercise of any right
of cancellation. In the event the Company or any of its Subsidiaries fails to
respond in a timely and appropriate manner (as determined by the Holders in the
Holders' reasonable discretion) with respect to collecting under any insurance
policies required to be maintained under this Section 8.4, the Holders shall
have the right, in the name of the Company or any such Subsidiary, to file
claims under such insurance policies, to receive and give acquaintance for any
payments that may be payable thereunder, and to execute any and all
endorsements, receipts, releases, assignments, reassignments or other documents
that may be necessary to effect the collection, compromise or settlement of any
claims under any such insurance policies. The Company and each of its
Subsidiaries shall provide written notice to the Holders of the occurrence of
any of the following events within five (5) Business Days after the occurrence
of any such event: any material asset or property owned or used by the Company
or any such Subsidiary (i) is damaged or destroyed, or suffers any other loss,
or (ii) is, or the Company or any of its Subsidiaries receives notice of the
institution of any proceeding pursuant to which any such asset or property could
reasonably be expected to be, condemned, confiscated or otherwise taken, in
whole or in part, or the use thereof is otherwise diminished so as to render
impracticable or unreasonable the use of such asset or property for the purposes
to which such asset or property were used immediately prior to such
condemnation, confiscation or taking, by exercise of the powers of condemnation
or eminent domain or otherwise, and in either case the amount of the damage,
destruction, loss or diminution in value is in excess of $250,000 (collectively,
a "Casualty Loss"). The Company and each of its Subsidiaries shall diligently
file and prosecute its claim or claims for any award or payment in connection
with a Casualty Loss. In the event of a Casualty Loss with respect to any of the
Collateral, if directed by the Collateral Agent, the Company and each of its
Subsidiaries shall pay to the Collateral Agent for payment to the Holders in
accordance with the Collateral Documents, promptly upon receipt thereof, any and
all insurance proceeds and payments received by the Company or such Subsidiary
on account of damage, destruction, loss, condemnation or eminent domain
proceedings (excluding, however, business interruption insurance and the
proceeds thereof). So long as no Default or Event of Default shall have occurred
and be continuing, the Company and each of its Subsidiaries may use such
proceeds and payments to repair, replace or rebuild the asset or property or
portion thereof that was the subject of the Casualty Loss. After the occurrence
and during the continuance of any Default or Event of Default the Holders may,
at the Holders' election in the Holders' sole discretion either (a) apply
ratably the proceeds realized from Casualty Losses to payment of accrued and
unpaid interest or outstanding principal under the Notes or (b) direct the
insurance company to pay such proceeds to the Holders to be used to repair,
replace or rebuild the asset or property or portion thereof that was the subject
of the Casualty Loss. After the occurrence and during the continuance of an
Event of Default, (i) no settlement on account of any such Casualty Loss shall
be made without the Holders' written consent and (ii) the Holders may
participate in any such proceedings and the Company and each of its Subsidiaries
shall deliver to the Holders such documents as may be requested by the Holders
to permit such participation and shall consult




                                      -23-


with the Holders, the Holders' attorneys and agents in the making and
prosecution of such claim or claims.

               8.5 Compliance with Laws.

               The Company shall comply, and shall cause each of its
Subsidiaries to comply, with all acts, regulations, orders, directions and
ordinances of any legislative, administrative or judicial body or official,
applicable to the Collateral or any part thereof, or to the operation of their
respective business (including, without limitation, ERISA and the rules and
regulations thereunder) except where the failure to so comply could not
reasonably be expected to have a Material Adverse Effect.

               8.6 Inspection of Property, Books and Records; Change of Name,
Principal Place of Business, Location of Collateral, Etc.

               The Company shall keep, and shall cause each of its Subsidiaries
to keep, proper books of record and account in which full, true and correct
entries in conformity with GAAP shall be made of all dealings and transactions
in relation to their respective businesses and activities; the Company and each
of its Subsidiaries shall make no significant change in their accounting
practices except as permitted or required by GAAP. The Company shall permit the
Holders to enter upon the premises of the Company and each of its Subsidiaries
at any time and from time to time, during normal business hours and upon
reasonable prior notice, and at any time during normal business hours and
without notice on and after the occurrence and during the continuance of an
Event of Default, for the purpose of (i) inspecting the Collateral, (ii)
inspecting and/or copying (at Company's expense) any and all records pertaining
thereto, and (iii) discussing the affairs, finances, business operations,
properties and financial and other conditions of the Company and each Subsidiary
with any officers, employees and directors of the Company or any such Subsidiary
or with the Auditors. The Holders shall have the right to (A) discuss the
affairs, finances, business operations, properties and conditions of the Company
and each Subsidiary with management and make suggestions to the Company's and
each Subsidiary's management and management will discuss such proposals or
suggestions made by the Holders within a reasonable period after such
submission, (B) tour the Company's and each Subsidiary's business premises and
other properties, (C) receive financial statements, operating reports, budgets
or other financial reports, (D) request information at reasonable times and
intervals concerning the general status of the Company's and each Subsidiary's
financial condition and operations. The Company shall, and shall cause each of
its Subsidiaries to, afford the Holders ten (10) Business Days' prior written
notice of (a) any new or additional location of any Collateral at which location
Collateral having an aggregate value in excess of $250,000 will be located, (b)
any change in the jurisdiction of incorporation of the Company or any of its
Subsidiaries from the jurisdictions specified in Schedule 5.17, and (c) any
change in any corporate name and, in each such case, the Company and each such
Subsidiary further agree to execute in advance of such addition or change and
cause to be filed and/or delivered to the Holders or the Holders' counsel any
financing statements or other documents required by the Holders to maintain
their perfected first priority Lien on the Collateral.

               8.7 Compliance with Operative Agreements.

               The Company shall comply, and shall cause each of its
Subsidiaries to comply, with the terms of each of the Operative Agreements to
which it is a party.




                                      -24-


               8.8 Corporate Existence.

               Except as otherwise permitted pursuant to Section 9.5 and except
for the liquidation or dissolution of the Company's inactive Subsidiaries set
forth on Schedule 9.5, the Company shall, and shall cause each of its
Subsidiaries to, (i) maintain its corporate existence, maintain in full force
and effect all material licenses, bonds, franchise, leases, qualifications to do
business, Proprietary Rights, contracts and other rights necessary for the
conduct of its business, (ii) continue in, and limit their operations to, the
same general lines of business as that presently conducted by it and reasonable
extensions thereof and (iii) comply with all applicable laws and regulations of
any federal, state or local governmental authority, except in each case where
noncompliance with such laws and regulations would not, in the aggregate, have a
Material Adverse Effect.

               8.9 ERISA.

               (a) The Company shall deliver to the Holders, at the Company's
expense, the following information at the times specified below:

                      (i) within twenty (20) Business Days after the Company or
        any ERISA Affiliate has actual knowledge that a Termination Event has
        occurred which could reasonably be expected to result in a liability to
        the Company or any of its Subsidiaries of $300,000 or more, a written
        statement of the chief financial officer describing such Termination
        Event and the action, if any, which the Company or such ERISA Affiliate
        or any other entities have taken, are taking or propose to take with
        respect thereto, and when actually known, any action taken or threatened
        by the Internal Revenue Service, DOL or PBGC with respect thereto;

                      (ii) within sixty (60) Business Days after the Company or
        any ERISA Affiliate has actual knowledge that a prohibited transaction
        (as defined in Sections 406 of ERISA and 4975 of the Code) has occurred
        which could reasonably be expected to result in a liability to the
        Company or any such ERISA Affiliate of $300,000 or more, a statement of
        the chief financial officer describing such transaction and the action
        which the Company or any such ERISA Affiliate or other such entities
        have taken, are taking or propose to take with respect thereto;

                      (iii) at any time that the Holders may reasonably request,
        copies of each annual report (form 5500 series), including Schedule B
        thereto, filed with respect to each Benefit Plan;

                      (iv) at any time that the Holders may reasonably request,
        copies of each actuarial report for any Benefit Plan or Multiemployer
        Plan and each annual report for any Multiemployer Plan;

                      (v) within three (3) Business Days after the filing
        thereof with the Internal Revenue Service, a copy of each funding waiver
        request filed with respect to any Benefit Plan with respect to any
        funding of $300,000 or more and all communications received by the
        Company or any of its Subsidiaries or any ERISA Affiliate with respect
        to such request;




                                      -25-


                      (vi) within twenty (20) Business Days upon the occurrence
        thereof, notification of any increase in the benefits of any existing
        Plan or the establishment of any new Benefit Plan or the commencement of
        contributions to any Benefit Plan to which the Company or any ERISA
        Affiliate was not previously contributing, in either case, which could
        reasonably be expected to result in an increase in the annual
        contributions necessary to satisfy the minimum funding requirements of
        ERISA or the terms of such Benefit Plan to the Company or any such ERISA
        Affiliate of $300,000 or more;

                      (vii) within three (3) Business Days after receipt by the
        Company or any ERISA Affiliate of the PBGC's intention to terminate a
        Benefit Plan or to have a trustee appointed to administer a Benefit
        Plan, in either case which could reasonably be expected to result in a
        liability to the Company or any such ERISA Affiliate of $300,000 or
        more, copies of each such notice;

                      (viii) if and when any ERISA Affiliate (i) gives or is
        required to give notice to the PBGC of any Reportable Event with respect
        to any Benefit Plan which could reasonably be expected to constitute
        grounds for a termination of such Benefit Plan under Title IV of ERISA,
        or knows that the plan administrator of any Benefit Plan has given or is
        required to give notice of any such Reportable Event, a copy of the
        notice of such Reportable Event given or required to be given to the
        PBGC; or (ii) receives notice of complete or partial withdrawal
        liability under Title IV of ERISA, a copy of such notice;

                      (ix) within ten (10) Business Days after receipt by the
        Company or any ERISA Affiliate of any unfavorable determination letter
        from the Internal Revenue Service regarding the qualification of a
        Benefit Plan under Section 401(a) of the Code which could reasonably be
        expected to result in a liability to the Company or any such ERISA
        Affiliate of $300,000 or more, copies of each such letter;

                      (x) within ten (10) Business Days after receipt by the
        Company or any ERISA Affiliate of a notice regarding the imposition of
        withdrawal liability of $300,000 or more under Section 4203, 4204 or
        4205 of ERISA, copies of each such notice;

                      (xi) within ten (10) Business Days after the Company or
        any ERISA Affiliate fails to make a required installment or any other
        required payment of $300,000 or more under Section 412 of the Code on or
        before the due date for such installment or payment, a notification of
        such failure; and

                      (xii) within ten (10) Business Days after the Company or
        any ERISA Affiliate has actual knowledge that (a) a Multiemployer Plan
        has been terminated, (b) the administrator or plan sponsor of a
        Multiemployer Plan intends to terminate a Multiemployer Plan, or (c) the
        PBGC has instituted or will institute proceedings under Section 4042 of
        ERISA to terminate a Multiemployer Plan, in any such case, which could
        reasonably be expected to result in a liability to the Company or any
        such ERISA Affiliate of $300,000 or more, a written statement setting
        forth any such event or information.

               (b) The Company shall, and shall cause each of its Subsidiaries
to, establish, maintain and operate all Plans to comply with the applicable
provisions of ERISA, the Code, and




                                      -26-


all other applicable laws, other than to the extent that the Company and each
such Subsidiary are in good faith contesting by appropriate proceedings the
validity or application of any such provision or law, except to the extent
failure to so comply could not reasonably be expected to result in the Company
or any such Subsidiary incurring a liability, individually or in the aggregate
equal to or in excess of $300,000.

               8.10 Environmental Matters.

               (a) The Company shall, and shall cause each of its Subsidiaries
to, use commercially reasonable efforts to conduct its businesses so as to
comply with all Environmental Laws in all jurisdictions in which it is or may at
any time be doing business, except to the extent that the Company and each such
Subsidiary is contesting, in good faith by appropriate legal proceedings, any
such Environmental Law or interpretation thereof or application thereof and
except where the failure to so comply could not reasonably be expected to have a
Material Adverse Effect; provided, further, that the Company and each such
Subsidiary shall comply with the order of any court or other Governmental
Authority or applicable jurisdiction relating to such Environmental Laws unless
the Company or any such Subsidiary shall currently be prosecuting an appeal or
proceedings for review and shall have secured a stay of enforcement or execution
or other arrangement postponing enforcement or execution pending such appeal or
proceedings for review. If the Company or any of its Subsidiaries shall (a)
receive written notice that any material violation of any Environmental Law may
have been committed or is about to be committed by the Company or any such
Subsidiary, (b) receive written notice that any administrative or judicial
complaint or order has been filed or is about to be filed against the Company or
any such Subsidiary under any Environmental Law or alleging material violations
of any Environmental Law or requiring the Company or any such Subsidiary to take
any action in connection with the Release or threatened Release of Hazardous
Substances or (c) receive any written notice from a Governmental Authority or
private party alleging that the Company or any such Subsidiary may be liable
under any Environmental Law or in connection with any Release or threatened
Release of a Hazardous Substance, the Company and each such Subsidiary shall
provide the Holders with a copy of such notice within thirty (30) days after the
receipt thereof by the Company or such Subsidiary, as the case may be. The
Company and each of its Subsidiaries shall promptly take all actions necessary
to prevent the imposition of any Liens on any of their properties arising out of
or related to any environmental matters.

               (b) In the event that any investigation, site monitoring,
containment, cleanup, response, removal, restoration or other remedial work of
any kind or nature (the "Remedial Work") with respect to any Real Estate owned,
operated or leased by the Company or any of its Subsidiaries is required to be
performed by the Company or such Subsidiary under any applicable local, state or
federal law or regulation, any judicial order, or by any governmental or
non-governmental entity or Person because of, or in connection with, the current
or future presence, suspected presence, Release or threatened Release of a
Hazardous Substance, the Company or such Subsidiary, as the case may be, shall
within thirty (30) days after written demand for performance thereof by the
Holders (or such shorter period of time as may be required under any applicable
law, regulation, order or agreement), commence during and after such 30-day
period diligently prosecute to completion, all such Remedial Work unless the
requirement to perform such Remedial Work is being contested in good faith by
the Company or such Subsidiary.




                                      -27-


               8.11 Collateral Records.

               The Company shall, and shall cause each of its Subsidiaries to,
promptly execute and deliver to the Holders, from time to time, solely for the
Holders' convenience in maintaining a record of the Collateral, such written
statements and schedules as the Holders may reasonably require, designating,
identifying or describing the Collateral pledged to the Holders. If the Company
or any of its Subsidiaries fail, however, to promptly give the Holders such
statements or schedules, such failure shall not affect, diminish, modify or
otherwise limit the Holders' security interests in the Collateral. In addition,
upon any Holder's reasonable request, the Company and each of its Subsidiaries
will make available to such Holder copies of agreements with, or purchase orders
from, the customers of the Company and each such Subsidiary, and copies of
invoices to customers, proof of shipment or delivery and such other
documentation and information relating to said Collateral as such Holder may
reasonably require. Failure to provide the Holders with any of the foregoing
shall in no way affect, diminish, modify or otherwise limit the security
interests granted herein. The Company and each of its Subsidiaries hereby
authorizes the Holders to regard its printed name or rubber stamp signature on
assignment schedules or invoices as the equivalent of a manual signature by such
Person's authorized officers or agents.

               8.12 Security Interests.

               (a) The Company shall defend, and shall cause each of its
Subsidiaries to defend, the Collateral against all claims and demands of all
Persons at any time claiming the same or any interest therein. The Company shall
comply, and shall cause each of its Subsidiaries to comply, with the
requirements of all state and federal laws in order to grant to the Collateral
Agent for the benefit of the Holders valid and perfected security interests in
the Collateral, subject only to Liens permitted pursuant to Section 9.4 hereof,
and except to the extent such Lien is in cash held by the Company or any such
Subsidiary as petty cash or till cash in the ordinary course of their businesses
consistent with past practices shall not remain perfected. Without limiting the
generality of the foregoing, upon the Closing, the Company shall, and shall
cause each of its Subsidiaries to, at its own expense, execute, acknowledge and
deliver, or cause the execution, acknowledgment and delivery of, and thereafter
register, file or record, or cause to be registered, filed or recorded, in all
necessary and appropriate governmental offices, all documents or instruments as
may be necessary or desirable for the perfection and priority of the Liens on
the Collateral covered by the Collateral Documents, and thereafter, the Company
shall, and shall cause each of its Subsidiaries to, promptly, upon the
reasonable request of the Holders, at the Company's expense, execute,
acknowledge and deliver, or cause the execution, acknowledgment and delivery of,
and thereafter register, file or record, or cause to be registered, filed or
recorded, in an appropriate governmental office, any document or instrument
supplemental to or confirmatory of the Collateral Documents or otherwise
reasonably deemed by the Holders necessary or desirable for the continued
validity, perfection and priority of the Liens on the Collateral covered thereby
to the extent required by the immediately preceding sentence.

               (b) The Collateral Agent and each of the Holders is hereby
authorized by the Company for itself and on behalf of each of its Subsidiaries
to file any financing statements covering the Collateral whether or not the
Company's or any of its Subsidiaries' signatures appear thereon. The Company
shall do, and shall cause each of its Subsidiaries to do, whatever the
Collateral Agent or any of the Holders may reasonably request, from time to
time, by way of filing notices of Liens, financing statements, fixture filings
and amendments, renewals and




                                      -28-


continuations thereof; cooperating with the Holders' custodians; keeping stock
records; using commercially reasonable efforts to obtain waivers from landlords
and mortgagees and from warehousemen, fillers, processors and packers and their
respective landlords and mortgagees; paying claims, which might if unpaid,
become a Lien on the Collateral; and performing such further acts as the Holders
may reasonably require in order to effect the purposes of this Agreement and the
Operative Agreements. Any and all reasonable fees, costs and expenses, of
whatever kind and nature (including any Taxes, reasonable attorneys' fees or
costs for insurance of any kind), which the Collateral Agent or the Holders may
incur with respect to the Collateral or the Obligations under the Operative
Agreements, (i) in filing public notices, (ii) in preparing or filing documents,
(iii) making title examinations or rendering opinions, (iv) in protecting,
maintaining, or preserving the Collateral or its interest therein, (v) in
enforcing or foreclosing the Liens hereunder, whether through judicial
procedures or otherwise or (vi) in defending or prosecuting any actions or
proceedings arising out of or relating to its transactions with the Company or
any of its Subsidiaries under this Agreement or any other Operative Agreements,
shall be borne and paid by the Company. If same are not promptly paid by the
Company, the Holders may pay the same on the Company's behalf, and the amount
thereof shall be an Obligation secured under the Operative Agreements and due to
the Holders on demand.

               (c) The Company shall deliver, and shall cause each of its
Subsidiaries to deliver, to the Collateral Agent title insurance policies, in a
form reasonably satisfactory to the Holders, with respect to the Deeds of Trust
delivered hereunder at the Closing.

               8.13 Taxes.

               The Company shall pay, and shall cause each of its Subsidiaries
to pay, when due, all Taxes levied or assessed against the Company and each such
Subsidiary or any of the Collateral; provided, however, that, unless such Taxes
have become a federal tax Lien or ERISA Lien on any of the assets of such
Person, no such Tax need be paid if the same is being contested, in good faith,
by appropriate proceedings promptly instituted and diligently conducted and if
an adequate reserve or other appropriate provision shall have been made therefor
as reflected on the audited financial statements for the relevant fiscal year in
accordance with GAAP, and, to the extent such reserves shall be taken
thereafter, consistent with the Company's and each such Subsidiary's past
practices.

               8.14 Accounts.

               (a) The Company shall, and shall cause each of its Subsidiaries
to, cause to be mailed, by the respective payors thereof, directly into the post
office lockbox opened in accordance with the terms of the Lockbox Agreement or
if the Company or any of its Subsidiaries opens a post office lockbox and
lockbox account with another commercial bank or financial institution in
accordance with subsection (c) of this Section, such post office lockbox (each
such lockbox, a "Lockbox"), all revenues, receipts and other amounts which the
Company or any of its Subsidiaries is entitled to receive from any source
whatsoever (including, without limitation, all payments received in respect of
its Contractual Obligations and all dividends and other distributions paid to
the Company or any of its Subsidiaries by any of the Company's Subsidiaries).
The Company shall open and maintain a lockbox account in accordance with the
terms of the Lockbox Agreement (such account and the lockbox account opened with
another commercial bank or financial institution in accordance with subsection
(c) of this Section, a




                                      -29-


"Lockbox Account"). The Company and its Subsidiaries shall maintain no more than
two Lockboxes and two Lockbox Accounts at any one time.


               (b) The Company, for itself and on behalf of its Subsidiaries,
the Collateral Agent and KeyBank shall execute the Lockbox Agreement stating,
among other things, that (i) the Lockbox Account is deemed to be a "deposit
account" as such term is defined in Article 9 of the UCC and (ii) KeyBank agrees
that it will comply with the instructions directing disposition of the funds in
the Lockbox Account originated by the Collateral Agent without further consent
by the Company or any of its Subsidiaries.

               (c) The Company or any of its Subsidiaries may, upon 30 days'
notice to the Collateral Agent, open another Lockbox and Lockbox Account with
another commercial bank or financial institution into which all of the items
described in clause (a) of this Section that are not mailed to any other Lockbox
shall be mailed. If the Company or any of its Subsidiaries elects to open a new
Lockbox and Lockbox Account with another commercial bank or financial
institution, the Company or such Subsidiary and the Collateral Agent shall
execute a security agreement, substantially in the form of the Security
Agreement or such form as the Collateral Agent may, in its reasonable
discretion, approve, and the Company or such Subsidiary, the Collateral Agent
and the commercial bank or financial institution maintaining such Lockbox
Account shall execute an agreement, in form and substance as the Collateral
Agent may, in its reasonable discretion, approve, stating that (i) such Lockbox
Account is deemed to be a "deposit account" as such term is defined in Article 9
of the UCC and (ii) such commercial bank or financial institution will comply
with the instructions directing disposition of the funds in the Lockbox Account
originated by the Collateral Agent without further consent by the Company or
such Subsidiary.

               (d) So long as no Event of Default has occurred or is continuing
or would result therefrom, the Company may transfer funds from any of the
Lockbox Accounts to any other account maintained by the Company or any of its
Subsidiaries or for any other purpose.

               8.15 Proprietary Rights.

               The Company shall do, and shall cause each of its Subsidiaries to
do, all things reasonably necessary to preserve and keep in full force and
effect all Proprietary Rights, except to the extent any such Proprietary Rights
is no longer in use or is of immaterial value and except as set forth on
Schedule 8.15 hereto.

               8.16 Minimum EBITDA.

               The Company shall maintain at the end of each fiscal quarter
consolidated EBITDA of not less than the amount set forth below for such fiscal
quarter; provided that consolidated EBITDA shall be determined in each case on
the last date of each fiscal quarter on the basis of the rolling four fiscal
quarters ending on the date of determination:



               For each Period Ending On:               Minimum EBITDA
               -------------------------                --------------
                                                     
               May 31, 2002                               $ 4,000,000
               August 31, 2002                              4,000,000
               November 30, 2002                            4,000,000





                                      -30-


                                             
               February 28, 2003                                6,000,000
               May 31, 2003                                     7,000,000
               August 31, 2003                                  8,000,000
               November 30, 2003                                9,000,000
               February 29, 2004                               10,000,000
               May 31, 2004                                    10,500,000
               August 31, 2004                                 11,000,000
               November 30, 2004                               11,500,000
               February 28, 2005                               12,000,000

               

; and for each period ending on each fiscal quarter thereafter, $13,000,000.

               8.17 Repayment of Certain Debt.

               Simultaneously upon the receipt of the proceeds from the issuance
and sale of the Notes hereunder, the Company shall use a portion of such
proceeds to repay or cause to be repaid in full the outstanding Debt of the
borrowers under the DDJ Loan Agreement.

               8.18 Collateral Agent Fees.

               The Company shall pay to the Collateral Agent, for its own
account, the collateral agency fee payable in the amount and at the times set
forth in the Collateral Agent Fee Agreement, dated as of March 19, 2002, entered
into by the Company and the Collateral Agent.

SECTION 9.       NEGATIVE COVENANTS OF THE COMPANY


               In order to induce the Holders to enter into this Agreement and
to purchase the Notes as contemplated hereby, as long as any of the Obligations
remain outstanding, the Company covenants and agrees that:

               9.1 Debt and Guarantees.

               The Company shall not create, incur, assume or permit to be
outstanding, and shall not permit any Subsidiary to create, incur, assume or
permit to be outstanding, any Debt other than:

               (a) Debt incurred pursuant to this Agreement;

               (b) Debt outstanding on the Closing Date and identified on
Schedule 5.11;

               (c) Debt incurred under the New Notes;

               (d) Refinancing of Debt with respect to Debt that was incurred on
or prior to the Closing Date (other than the Debt incurred hereunder or under
the Notes); provided, however, that (i) the principal amount of the Debt
refinanced (plus the amount of fees, costs, and expenses incurred and the amount
of any premium, penalties, breaking costs and other similar amounts required to
be paid, in connection with such refinancing pursuant to the terms of the
instrument governing the Debt being refinanced) shall (i) not be greater than
the amount of the Debt being refinanced, (ii) not extend the maturity date of
the Debt being refinanced, (iii) have a




                                      -31-


Weighted Average Life to Maturity equal to or greater than the Weighted Average
Life to Maturity of the Debt being refinanced, (iv) rank no more senior than the
Debt being refinanced, and (v) contain terms and conditions at least as
favorable to the Company as the terms and conditions of the Debt being
refinanced;

               (e) Debt secured by Liens permitted by Sections 9.4(d) and
9.4(e); and

               (f) Intercompany Debt owed to the Company or its Subsidiaries
(other than the Foreign Subsidiaries).

The Company shall not, and shall not permit any of its Subsidiaries to,
refinance, amend, restructure, reconstitute, replace or otherwise alter any
tenor, covenant, condition or provision of any instrument evidencing any Debt
outstanding on the Closing Date without the prior written consent of the Holders
(which consent shall not be unreasonably withheld or delayed); provided that the
Company and its Subsidiaries may refinance such Debt as permitted pursuant to
Section 9.1(d) above without such consent.

               9.2 Restricted Payments.

               The Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, (i) declare or pay any dividend or make
any distribution on its Capital Stock or Stock Equivalents to the holders of its
Capital Stock or Stock Equivalents other than (A) dividends or distributions
payable in its Capital Stock or dividends or distributions (or series of
dividends of distributions) made by any of the Subsidiaries of the Company to
the Company or any other Subsidiary of the Company or (B) non-cash dividends or
distributions payable on the Series C Convertible Preferred Stock issued by the
Company in connection with the Exchange or (ii) redeem, repurchase or otherwise
acquire or retire for value any such Capital Stock or Stock Equivalents (except
shares acquired upon the conversion thereof into other shares of Capital Stock
or rights to acquire such Capital Stock, odd lot shares, and except for the
repurchase or acquisition of such Capital Stock held by directors, officers or
employees of the Company or any of its Subsidiaries upon death, disability,
retirement or termination of employment not to exceed $100,000 in the aggregate
in any fiscal year) or rights to acquire such Capital Stock or Stock
Equivalents, or (iii) directly or indirectly redeem, repurchase, defease or
otherwise acquire or retire for value, prior to any scheduled or mandatory
maturity, scheduled or mandatory repayment or scheduled sinking fund payment
(after giving effect to the exercise of any and all unconditional (other than as
to the giving of notice) options to extend the maturity), Debt of the Company or
any of its Subsidiaries (other than Notes pursuant to this Agreement or as set
forth in the Section 5.20 (Use of Proceeds) of this Agreement).

               9.3 Investments.

               The Company shall not make or acquire, or permit any of its
Subsidiaries to make or acquire, any Investment in any Person other than:

               (a) Investments by the Company or any of its Subsidiaries (other
than Foreign Subsidiaries) in any Subsidiary (other than Foreign Subsidiaries);

               (b) Permitted Investments;




                                      -32-


               (c) Investments consisting of purchase money notes received in
connection with the sale or disposition of any asset, provided that such sale or
disposition was made in accordance with the terms of this Agreement; and

               (d) Investments in Foreign Subsidiaries which Investments are
existing on the Closing Date and disclosed on Schedule 9.3.

               9.4 Negative Pledge.

               The Company shall not, and shall not permit any of its
Subsidiaries to, create, assume or suffer to exist any Lien on any asset now
owned or hereafter acquired by it except:

               (a) Liens existing on the Closing Date and listed in Schedule 9.4
hereto;

               (b) any Lien arising pursuant to any order of attachment,
distrain or similar legal process arising in connection with court proceedings
so long as the execution or other enforcement thereof is effectively stayed and
the claims secured thereby are being contested in good faith by appropriate
proceedings and adequate reserves in accordance with GAAP have been set aside;

               (c) Liens created by and existing under the Operative Agreements;

               (d) Purchase money Liens or purchase money security interests
upon or in any property acquired or held by the Company or any such Subsidiary
of the Company in the ordinary course of business to secure the purchase price
of such property or to secure Debt incurred solely for the purpose of financing
the acquisition of such property, and Liens existing on such property at the
time of its acquisition (other than any such Lien created in contemplation of
such acquisition); provided, however, that the aggregate principal amount of the
Debt secured by the Liens referred to in this clause (d) and in clause (e) below
shall not exceed $5,000,000 in the aggregate at any time outstanding;

               (e) Liens to secure Capitalized Lease Obligations; provided,
however, that: (i) any such Lien is created solely for the purpose of securing
Debt representing, or incurred to finance, refinance or refund, the cost
(including, without limitation, the cost of construction) of the property
subject thereto, (ii) the principal amount of the Debt secured by such Lien does
not exceed 100% of such cost, and (iii) such Lien does not extend to or cover
any other property other than such item of property and any improvements on such
item and (iv) the aggregate principal amount of Debt secured by the Liens
referred to in this clause (e) and in clause (d) above shall not exceed
$5,000,000 in the aggregate at any time outstanding;

               (f) any Permitted Liens; and

               (g) any extension, renewal or substitution of or for any of the
foregoing Liens described in clauses (a) and (f) above or this clause (g);
provided in each case that (i) the Debt or other obligation or liability secured
by the applicable Lien shall not exceed the Debt or other obligation or
liability existing immediately prior to such extension, renewal, or substitution
and (ii) the Lien securing such Debt or other obligation or liability shall be
limited to the property which, immediately prior to such extension, renewal or
substitution, secured such Debt or other obligation or liability, and
improvements on or additions to such property.




                                      -33-


               9.5 Consolidations, Mergers and Sales of Assets.

               (a) The Company shall not complete (or agree to complete), and
shall not permit any Subsidiary to complete (or agree to complete), an Asset
Disposition unless (i) prior to such Asset Disposition, the Company or such
Subsidiary, as the case may be, has received the written consent of the Required
Holders and (ii) the Company or such Subsidiary, as the case may be, applies the
Net Cash Proceeds from such Asset Disposition in accordance with Section 7.1(a)
of this Agreement. Notwithstanding the foregoing and in addition to the
liquidation and dissolution of the Company's inactive Subsidiaries set forth on
Schedule 9.5 permitted by Section 8.8, the Company and its Subsidiaries may
complete an Asset Disposition with respect to its inactive Subsidiaries set
forth on Schedule 9.5 without the consent of the Required Holders; provided that
the Company or such Subsidiary, as the case may be, apply the Net Cash Proceeds
from such Asset Disposition in accordance with Section 7.1(a) of this Agreement.

               (b) The Company shall, and shall cause each of its Subsidiaries
to: (a) conduct, its business in the ordinary course and consistent with past
practice; (b) use, and cause each of its Subsidiaries to use, its reasonable
efforts, in the ordinary course and consistent with past practice, to (i)
preserve its business and the goodwill and business of the customers, suppliers
and others having business relations with the Company or any of its
Subsidiaries, and (ii) keep available the services and goodwill of its present
employees; and (c) shall continue to operate, and shall cause each of its
Subsidiaries to continue to operate, only in the same general types of
businesses as now conducted thereby and reasonable extensions thereof.

               (c) The Company shall not merge or consolidate, and shall not
permit any Subsidiary to merge or consolidate, with or into any other Person.

               9.6 Capital Expenditures.

               Consolidated Capital Expenditures shall not, for each of the
periods ending on the dates set forth below, exceed:



                                                             Consolidated
                                                               Capital
               For each Fiscal Year Ending On:               Expenditures
               -------------------------------               ------------
                                                          
               May 31, 2002                                   $3,000,000
               May 31, 2003                                    3,500,000
               May 31, 2004                                    4,000,000
               Thereafter                                      4,500,000


; provided, however, that to the extent the actual Consolidated Capital
Expenditures in any period are less than the maximum permitted amount of
Consolidated Capital Expenditures set forth above for such period (such
difference shall hereinafter be referred to as the "Unused Capital
Expenditures"), the Company and each of its Subsidiaries may make additional
Consolidated Capital Expenditures in the immediately succeeding period (the
"Immediately Succeeding Period") equal to the sum of: (i) the Unused Capital
Expenditures and (ii) the maximum permitted amount of Consolidated Capital
Expenditures for the Immediately Succeeding Period.




                                      -34-


               9.7 Transactions with Affiliates.

               The Company shall not, and shall not permit any of its
Subsidiaries to, enter into or suffer to exist any contract, agreement,
arrangement or transaction with any Affiliate (an "Affiliate Transaction"), or
any series of related Affiliate Transactions, (other than Exempted Affiliate
Transactions), (i) unless the Company reasonably and in good faith determines
that the terms of such Affiliate Transaction are fair and reasonable to the
Company, and no less favorable to the Company than could have been obtained in
an arm's length transaction with a non-Affiliate, and (ii) if involving
consideration to either party in excess of $1,000,000, unless such Affiliate
Transaction(s) is evidenced by an Officers' Certificate addressed and delivered
to the Holders certifying that such Affiliate Transaction (or Transactions) has
been approved by a majority of the members of the Board of Directors that are
disinterested in such transaction and (iii) if involving consideration to either
party in excess of $5,000,000, unless in addition the Company, prior to the
consummation thereof, obtains a written favorable opinion as to the fairness of
such transaction to the Company from a financial point of view from an
independent investment banking firm of national reputation or, if pertaining to
a matter for which such investment banking firms do not customarily render such
opinions, an appraisal or valuation firm of national reputation. Notwithstanding
the foregoing, the Company and its Subsidiaries shall be permitted to enter into
transactions with Affiliates pursuant to agreements or other documents entered
into simultaneously herewith on the Closing Date, including without limitation,
the agreements and other documents relating to the New Notes and the issuance of
the Company's Series C Preferred Stock and those existing Affiliate transactions
set forth on Schedule 5.22 hereof.

               9.8 Restrictions on Foreign Subsidiary Support.

               The Company shall not permit to exist, and shall not permit any
of its Subsidiaries to permit to exist, any transfers by the Company or any of
its Subsidiaries of goods of any kind, loans, capital contributions or any other
financial support to any Foreign Subsidiary.

               9.9 Environmental Matters.

               The Company shall not, and shall not permit any of its
Subsidiaries to, use, generate, manufacture, produce, store, Release, discharge
or dispose of, on, under or about any real property owned, operated or leased by
the Company or any such Subsidiary or transport to or from any such property,
any Hazardous Substance, or (to the extent within the Company's or any such
Subsidiary's control) permit any other Person to do so except in the ordinary
course and in compliance with applicable law, and where such non-compliances
could not reasonably be expected to have a Material Adverse Effect.

               9.10 Amendments to Certificates of Incorporation and By-Laws.

The Company shall not alter or modify, and shall not permit any of its
Subsidiaries to alter or modify, its Articles of Incorporation or Certificate of
Incorporation or By-Laws or other organizational documents in any manner which
could reasonably be expected to have a Material Adverse Effect; provided that
the Company may amend its Certificate of Incorporation to increase the number of
its authorized shares of common stock as contemplated by the Exchange and the
Company may liquidate or dissolve its inactive Subsidiaries set forth on
Schedule 9.5. The Company shall not change, and shall not permit any of its
Subsidiaries to




                                      -35-


change, its corporate name, mailing address, or principal place of business or
jurisdiction of incorporation, unless it shall have complied with the
requirements of Section 8.12 hereof.

               9.11 ERISA.

               The Company shall not, and shall not permit any of its
Subsidiaries to, do any of the following if such action could reasonably be
expected to result in the Company or any such Subsidiary incurring a liability,
individually or in the aggregate equal to or in excess of $300,000:

               (a) Engage, or permit any ERISA Affiliate to engage, in any
prohibited transaction which is reasonably likely to result in a civil penalty
or excise tax described in Sections 502(i) of ERISA or 4975 of the Code for
which a statutory or class exemption is not available or a private exemption has
not been previously obtained from the DOL;

               (b) permit to exist with respect to any Benefit Plan any
accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of
the Code), whether or not waived;

               (c) fail, or permit any ERISA Affiliate to fail, to pay timely
required contributions or annual installments due with respect to any Benefit
Plan;

               (d) terminate, or permit any ERISA Affiliate to terminate, any
Benefit Plan;

               (e) fail, or permit any ERISA Affiliate to fail, to make any
required contribution or payment to any Multiemployer Plan;


               (f) fail, or permit any ERISA Affiliate to fail, to pay any
required installment or any other payment required under Section 412 of the Code
on or before the due date for such installment or other payment;

               (g) amend, or permit any ERISA Affiliate to amend, a Benefit Plan
resulting in an increase in current liability for the plan year such that the
Company or any of its Subsidiaries or any ERISA Affiliate is required to provide
security to such Benefit Plan under Section 401(a)(29) of the Code;

               (h) withdraw, or permit any ERISA Affiliate to withdraw, from any
Multiemployer Plan; or

               (i) permit any Termination Event to occur.

               9.12 No Additional Bank Accounts.

               The Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, open, maintain or otherwise have any
checking, savings or other accounts at any bank or other financial institution,
or any other account where money is or may be deposited or maintained with any
Person, other than the accounts set forth on Schedule 9.12, except to the extent
permitted hereunder.




                                      -36-


               9.13 No Additional Subsidiaries.

               The Company shall not, and shall not permit any Subsidiary to,
directly or indirectly, incorporate, form or acquire any new Subsidiaries or
purchase or otherwise acquire all or substantially all of the assets of any
Person.

SECTION 10.      EVENTS OF DEFAULT; ACCELERATION

               10.1 Events of Default.

               The occurrence of any of the following events shall constitute an
"Event of Default" hereunder:

               (a) failure of the Company to pay any principal or Offer Payment,
if any, on any Note when due, whether at stated maturity or at a date fixed for
payment, prepayment, by an acceptance of an Offer, by acceleration or otherwise;
or

               (b) failure of the Company to pay any other Obligation when due,
whether at stated maturity, or at a date fixed for payment, prepayment, by an
acceptance of an Offer by acceleration or otherwise and such failure shall
continue for a period of five (5) days; or

               (c) (i) failure of the Company to perform, comply with or observe
any term, covenant or agreement applicable to it contained in Section 9; or (ii)
failure of the Company or any of its Subsidiaries to perform, comply with or
observe any other term, covenant or agreement applicable to it in this Agreement
(other than a provision covered by subparagraph (i) above) or in any other
Operative Agreement and the failure shall continue unremedied for five (5)
Business Days after the delivery by the Holders of written notice to the Company
of such failure; or

               (d) any representation or warranty made or deemed made by the
Company or any of its Subsidiaries in this Agreement, the other Operative
Agreements or any other agreement, document, instrument or in any certificate
furnished to the Holders pursuant to the terms of any thereof shall prove to
have been false or misleading as of the time made or furnished in any material
respect; or

               (e) (i) the Company or any of its Subsidiaries shall commence any
case, proceeding or other action (A) under any existing or future law of any
jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, seeking to have an order for relief entered
with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or
seeking reorganization, arrangement, adjustment, winding-up, liquidation,
dissolution, composition or other relief with respect to it or its debts, or (B)
seeking appointment of a receiver, trustee, custodian or other similar official
for it or for all or any substantial part of its assets, or the Company or any
of its Subsidiaries shall make a general assignment for the benefit of
creditors; or (ii) there shall be commenced against the Company or any of its
Subsidiaries any case, proceeding or other action of a nature referred to in
clause (i) above which (A) results in the entry of an order for relief or any
such adjudication or appointment or (B) remains undismissed, undischarged or
unbonded for sixty (60) days after the entry thereof; or (iii) there shall be
commenced against the Company or any of its Subsidiaries any case, proceeding or
other action seeking issuance of a warrant of attachment, execution, distrain or
similar process




                                      -37-


against all or any substantial part of its assets which results in the entry of
an order for any such relief which shall not have been vacated, discharged, or
stayed or bonded pending appeal for sixty (60) days; or

               (f) the Company or any of its Subsidiaries shall (i) default in
any payment of principal of or interest on any Debt or in the payment of any
Guarantee the aggregate principal amount of the series of Debt under which such
Debt is issued and the aggregate principal amount of the obligation guaranteed
by such Guarantee equals or exceeds $200,000; or (ii) default in the observance
or performance of any other agreement or condition relating to any such Debt or
Guarantee or contained in any instrument or agreement evidencing, securing or
relating thereto, or any other event shall occur or condition exist, the effect
of which default or other event or condition is to cause, or to permit the
holder or holders of such Debt or beneficiary or beneficiaries of such Guarantee
(or a trustee or agent on behalf of such holder or holders or beneficiary or
beneficiaries) to cause, with the giving of notice if required, such Debt to
become due prior to its stated maturity or such Guarantee to become due prior to
its stated maturity or such Guarantee to become payable; or

               (g) any covenant, agreement or obligation of any party contained
in or evidenced by any Operative Agreement shall cease to be enforceable in
accordance with its terms, or the Company or any of its Subsidiaries shall deny
or disaffirm its obligations under any Operative Agreement, or any Operative
Agreement shall be cancelled, terminated, revoked or rescinded without the
Holders' express prior written consent; or

               (h) any of the other Operative Agreements shall cease for any
reason to be in full force and effect (other than in accordance with the terms
hereof or thereof) or any action or proceeding shall have been commenced by any
Person seeking to cancel, revoke, rescind or disaffirm the obligations of any
party to any Operative Agreement; or

               (i) any court or other governmental authority shall issue a final
judgment, order, decree or ruling for the payment of money (a "Judgment"), and
such Judgment is in an amount (determined after an allowance for the application
of any insurance proceeds to such Judgment) in excess of $200,000 and
enforcement proceedings shall have been commenced upon any such Judgment or any
such Judgment shall remain unpaid after a period of ten (10) consecutive days
during which a stay of such enforcement of any such Judgment, including, without
limitation, by reason of a pending appeal or otherwise, shall not be in effect;
or

               (j) any security interest or Lien purported to be created by any
of the Collateral Documents shall cease to be valid and (to the extent required
by the Collateral Documents) perfected or the Company or any of its Subsidiaries
shall so have asserted, except that the failure of any security interest or Lien
purported to be created by the Collateral Documents to be valid and perfected
shall not in itself constitute a default hereunder if the value of the
Collateral purported to be covered thereby is, in the aggregate, not in excess
of $200,000; or

               (k) the holders of all or any of the New Notes shall accelerate
the maturity of all or any the New Notes or any of the New Notes shall be
prepaid, redeemed or repurchased in whole or part.




                                      -38-


               10.2 Acceleration.

               Upon the occurrence of an Event of Default which has not been
cured within the applicable cure period, if any, or waived by the Required
Holders, by delivery of written notice to Company, the Required Holders may take
any or all of the following actions: declare all or any part of the Obligations
hereunder to be immediately due and payable (except with respect to any Event of
Default set forth in Section 10.1(e) hereof, in which case all such Obligations
shall automatically become immediately due and payable without the necessity of
any notice or other demand) without presentment, demand, protest or any other
action or obligation of the Required Holders.

               If at any time after acceleration of the Obligations hereunder,
the Company or any of its Subsidiaries shall pay all arrears of interest and all
payments on account of principal of such Notes which shall have become due
otherwise than by acceleration (with interest on principal and, to the extent
permitted by law, on overdue interest, at the rates specified in this Agreement)
and any Default and all Events of Default (other than nonpayment of principal of
and accrued interest on such Notes and other Obligations hereunder due and
payable solely by virtue of acceleration) shall be remedied or waived, then by
written notice to Company, the Required Holders may elect, in the Required
Holders' sole discretion, to rescind and annul the acceleration and its
consequences; but such action shall not affect any subsequent Default or Event
of Default or impair any right or remedy consequent thereon. The provisions of
the preceding sentence are not intended to benefit the Company or any of its
Subsidiaries and do not give the Company or any of its Subsidiaries the right to
require the Holders to rescind or annul any acceleration hereunder, even if the
conditions set forth herein are met.

SECTION 11.      COLLATERAL AGENT

               11.1 Appointment of Collateral Agent; Powers and Immunities.

               (a) Subject to Section 11.8 hereof, each Holder in its capacity
as such hereby irrevocably appoints and authorizes the Collateral Agent to act
as its agent hereunder, under the Collateral Documents and under all other
Operative Agreements to which the Collateral Agent is a party, with such powers
as are expressly delegated to the Collateral Agent by the terms of this
Agreement, the Collateral Documents and such other Operative Agreements,
together with such other powers as are reasonably incidental thereto.

               (b) The Collateral Agent (which term, when used in this sentence,
the next two sentences of this Section 11.1 and in Sections 11.5 and 11.7 hereof
shall include reference to its Affiliates and to its own and its Affiliates'
officers, directors, employees and agents) shall not have any duties or
responsibilities except those expressly set forth in this Agreement, the
Collateral Documents or any other Operative Agreement to which the Collateral
Agent is a party, or be a trustee for or have any fiduciary obligation to any
Holder, and no implied covenants, functions, responsibilities, duties,
obligations or liabilities shall be read into this Agreement, the Collateral
Documents or any other Operative Agreement or otherwise exist against the
Collateral Agent. Notwithstanding anything to the contrary contained herein, the
Collateral Agent shall not be required to take any action which is contrary to
this Agreement, any Collateral Document or any other Operative Agreement to
which the Collateral Agent is a party or applicable law. The Collateral Agent
shall not be responsible for any action taken or omitted to be taken by it
hereunder, under any Collateral Document or under any other Operative Agreement
to which the




                                      -39-


Collateral Agent is a party or in connection herewith or therewith, except for
its own gross negligence or willful misconduct. In no event shall the Collateral
Agent be liable for indirect, punitive, special or consequential damage or loss
(including but not limited to lost profits) whatsoever, even if the Collateral
Agent has been informed of the likelihood of such loss or damage and regardless
of the form of action. Except as otherwise provided under this Agreement or as
expressly provided in the Collateral Documents or the other Operative Agreements
to which the Collateral Agent is a party, the Collateral Agent shall take such
action with respect to the Collateral Documents and the other Operative
Agreements to which it is a party as it shall be directed by the Required
Holders, it being understood, however, that all such Collateral Documents shall
continue at all times to secure, on the terms and conditions set forth therein,
the Obligations.

               (c) In connection with performing its duties under this
Agreement, any Collateral Document or any other Operative Agreement to which it
is a party, the Collateral Agent may employ agents, counsel and
attorneys-in-fact and shall not be responsible for the negligence or misconduct
of any such agents, counsel or attorneys-in-fact selected by it in good faith
and may consult with and rely on the advise of its agents, counsel,
attorneys-in-fact and advisors. Any such agent may do all acts and things and
exercise all discretion which it is authorized or permitted to do or exercise
for and on behalf and in the name of the Collateral Agent. In the event the
Collateral Agent shall assign any of its rights or obligations to an agent
pursuant to this Section 11.1(c), such agent shall be subject to, and shall have
the benefits of, the provisions of this Agreement insofar as they apply to the
Collateral Agent.

               11.2 Reliance by Collateral Agent.

               The Collateral Agent shall be entitled to rely, and shall be
fully protected in relying, upon any writing, resolution, notice, consent,
certificate, affidavit, letter, telegram, facsimile, telex or telephone message,
statement or other document or conversation reasonably believed by it to be
genuine and correct and to have been signed, sent or made by the proper Person
or Persons, and upon advice and statements of any Holder, legal counsel
(including counsel to the Company and its Subsidiaries, and including the
Collateral Agent's own in-house counsel), independent accountants and other
experts selected by the Collateral Agent. The Collateral Agent shall be fully
justified in failing or refusing to take any action under this Agreement, the
Collateral Documents or any other Operative Agreement unless it shall first
receive such advice or concurrence of the Holders as it deems appropriate. The
Collateral Agent shall in all cases be fully protected in acting, or in
refraining from acting, under this Agreement, the Collateral Documents or any
other Operative Agreement in accordance with a request or consent of the
Required Holders (except where the consent of all of the Holders is required per
Section 11.9, and in any such event, the Collateral Agent shall be fully
protected as provided in this sentence when acting or refraining from acting in
accordance with the instructions of all of the Holders) and such request and any
action taken or failure to act pursuant thereto shall be binding upon all the
Holders.

               11.3 Default Events.

               (a) The Collateral Agent shall not be deemed to have knowledge or
notice of the occurrence of an Event of Default unless the Collateral Agent has
received written notice from a Holder or the Company referring to this
Agreement, describing such Event of Default and stating that such notice is a
"Notice of an Event of Default". In the event that the Collateral




                                      -40-


Agent receives a notice from a Holder, the Company or any other Person of the
occurrence of an Event of Default, the Collateral Agent shall give notice
thereof to the Holders; provided, however, that the Collateral Agent shall not
incur any liability to any Holder on account of any failure to provide such
notice, except for its own gross negligence or willful misconduct. The
Collateral Agent shall take such action with respect to such Event of Default as
so directed by the Required Holders pursuant to this Agreement; provided that,
unless and until the Collateral Agent shall have received such directions and,
if it so requests, an indemnification from the Holders satisfactory to the
Collateral Agent, the Collateral Agent may (but shall not be obligated to) take
such action, or refrain from taking any action, with respect to such Event of
Default as it shall deem advisable in the best interest of the Holders.

               (b) If the Collateral Agent does not receive any amount due it
from the Company hereunder or under any Collateral Document or other Operative
Agreement, the Collateral Agent may notify the Holders, and the Holders shall
notify the Company that failure to pay such amount shall constitute a Event of
Default.

               11.4 Rights as a Secured Party.

               With respect to its Notes, if any, the Collateral Agent shall
have the same rights and powers hereunder as any Holder and may exercise the
same as though it was not acting as the Collateral Agent. All defined terms
contained herein that would include a Person notwithstanding that such Person is
acting in the capacity of the Collateral Agent shall, unless the context
otherwise indicates, include such Person in its individual capacity. The Person
acting in the capacity of the Collateral Agent and its Affiliates may (without
having to account therefor to any Holder) make loans to, issue letters of credit
for the account of, accept deposits from, extend credit (on a secured or
unsecured basis) to, acquire equity interests in and generally engage in any
kind of banking, trust, financial, advisory, underwriting or other business with
the Company or any of its Affiliates, as if it was not acting as the Collateral
Agent.

               11.5 Indemnification.

               The Collateral Agent shall be fully justified in refusing to take
or to continue to take any action hereunder, under any Collateral Document or
under any other Operative Agreement to which the Collateral Agent is a party
unless it shall first be indemnified to its satisfaction by the Holders against
any and all liability and expense which may be incurred by it by reason of
taking or continuing to take any such action.

               11.6 Documents.

               The Collateral Agent will forward to each Holder, promptly after
the Collateral Agent's receipt thereof (and will use commercially reasonable
efforts to forward within five (5) Business Days of such receipt), a copy of
each document furnished to the Collateral Agent by any Holder or the Company
under the Collateral Documents. The Collateral Agent will forward to each
Holder, promptly upon such Holder's request therefor, a copy of any other
document furnished to the Collateral Agent under the Collateral Documents or any
other Operative Agreement to which the Collateral Agent is a party.




                                      -41-


               11.7 Non-Reliance on Collateral Agent and Other Secured Parties.

               Each Holder acknowledges that the Collateral Agent has not made
any representation or warranty to it on or prior to the date hereof. Each Holder
represents that it has, independently and without reliance on the Collateral
Agent or any other Holder, and based on such documents and information as it has
deemed appropriate, made its own appraisal of the financial condition and
affairs of the Company and its Subsidiaries and decision to enter into this
Agreement and the other Operative Agreements to which it is a party and agrees
that it will, independently and without reliance upon the Collateral Agent or
any other Holder, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own appraisals and decisions in
taking or not taking action under this Agreement and the other Operative
Agreements to which it is a party. Neither the Collateral Agent nor any Holder
nor any of their respective Affiliates shall be responsible to any other Holder
for any recitals, statements, representations or warranties made by the Company
or any of its Subsidiaries contained in this Agreement or any Operative
Agreement or in any certificate or other document referred to or provided for
in, or received by any Holder under, this Agreement or any other Operative
Agreement, for the value, validity, effectiveness, genuineness, enforceability
or sufficiency of this Agreement or any other Operative Agreement or any other
document referred to or provided for herein or therein or for any failure by the
Company to perform its obligations hereunder or thereunder. Neither the
Collateral Agent nor any Holder shall be required to monitor or otherwise inform
itself as to the performance or observance by the Company or any of its
Subsidiaries under this Agreement or any other document referred to or provided
for herein or to make inquiry of, or to inspect the properties or books of, the
Company or any of its Subsidiaries. Except for notices, reports and other
documents and information expressly required to be furnished to the Holders by
the Collateral Agent hereunder and under the Collateral Documents, the
Collateral Agent shall not have any duty or responsibility to provide any Holder
with any credit or other information concerning the Company or any of its
Subsidiaries, or any of their respective Affiliates, which may come into the
possession of the Collateral Agent or any of its Affiliates.

               11.8 Resignation or Removal of Collateral Agent.

               (a) Subject to the appointment and acceptance of a successor
Collateral Agent as provided in this Section 11.8, the Collateral Agent may
resign at any time as Collateral Agent under this Agreement and any Collateral
Document and any other Operative Agreement to which it is a party by giving 30
days' written notice thereof to the Holders and the Company, and the Collateral
Agent may be removed at any time with or without cause by the vote of the
Required Holders. Upon any such resignation or removal, the Required Holders
shall have the right to appoint a successor Collateral Agent. If no successor
Collateral Agent shall have been appointed by the Required Holders and shall
have accepted such appointment prior to the scheduled effective date of the
resignation or removal of the Collateral Agent, then the retiring Collateral
Agent may, on behalf of the Holders appoint a successor Collateral Agent, which
shall be a Holder acceptable to the Required Holders or a bank or trust company
reasonably acceptable to the Required Holders. If no successor Collateral Agent
shall have been appointed by the Required Holders and shall have accepted such
appointment prior to the scheduled effective date of the resignation of the
Collateral Agent, then the Collateral Agent may petition any court of competent
jurisdiction for the appointment of a successor Collateral Agent. Such court may
thereupon, after such notice, if any, as it may deem proper and as it may
prescribe, appoint a




                                      -42-


successor Collateral Agent, and such determination shall be binding upon all the
parties hereto and shall not be appealable. The Holders agree to pay or
reimburse the Collateral Agent for all fees, charges and expenses, including
attorneys' fees, relating to or incurred by the Collateral Agent in connection
with any such court proceedings.

               (b) Upon the acceptance of any appointment as Collateral Agent
hereunder by a successor Collateral Agent, (i) such successor Collateral Agent
shall thereupon succeed to and become vested with all the rights, powers,
privileges and duties of the retiring Collateral Agent, and the retiring
Collateral Agent shall be discharged from its duties and obligations hereunder
and (ii) the retiring Collateral Agent shall promptly transfer all Collateral
within its possession or control to the possession or control of the successor
Collateral Agent and shall execute and deliver such notices, instructions and
assignments as the Required Holders shall instruct based on their conclusion
that such notices, instructions and assignments are necessary or desirable to
transfer the rights of the Collateral Agent with respect to the Collateral to
the successor Collateral Agent. After any retiring Collateral Agent's
resignation or removal hereunder as Collateral Agent, the provisions of this
Section 11 shall continue in effect for its benefit in respect of any actions
taken or omitted to be taken by it while it was acting as Collateral Agent.
Notwithstanding anything in this Agreement to the contrary, the Collateral Agent
shall not be required in any event or under any circumstance, including its
resignation or removal, to provide (nor be deemed to have provided) to any
successor Collateral Agent any indemnity (or similar obligation) of any kind
whatsoever.

               11.9 Authorization.

               The Collateral Agent is hereby authorized by the Holders to
execute, deliver and perform each of the Collateral Documents and other
Operative Agreements to which the Collateral Agent is or is intended to be a
party, and each Holder agrees to be bound by all of the agreements of the
Collateral Agent contained in, and all of the other terms and conditions of, the
Collateral Documents and other Operative Agreements to which the Collateral
Agent is a party. Without receiving prior written consent from the Required
Holders, the Collateral Agent will not consent to any modification, supplement
or waiver under any of the Collateral Documents or under any other Operative
Agreement to which the Collateral Agent is a party, provided that without the
prior written consent of each Holder, the Collateral Agent shall not (a) release
any Collateral or otherwise terminate any Lien under any Collateral Document,
(b) consent to any modification of this Section 11.9 or of the definition of the
terms "Obligations", "Required Holders" or "Holders" or (c) consent to any Lien
under any Collateral Document securing obligations other than the Obligations.
For the avoidance of doubt, nothing in this Section 11.9 or elsewhere in this
Agreement or in any Collateral Document or other Operative Agreement shall limit
the obligations of the Company or any of its Subsidiaries under any Operative
Agreement, including, without limitation, any obligation of the Company to
obtain any consent or approval of one or more Holders required to be obtained by
the Company prior to any amendment of, modification or supplement to or waiver
under any Operative Agreement, and the Collateral Agent shall not consent to any
amendment of, modification or supplement to or waiver under any Operative
Agreement unless and until the Company shall have first obtained all such
required consents and approvals.




                                      -43-


SECTION 12.      DEFINITIONS

               12.1 Defined Terms.

               As used herein the following terms have the following respective
meanings:

               "Account" or "Accounts" means all of the Company's or any of its
Subsidiaries' accounts, whether now existing or existing in the future,
including, without limitation, all (i) accounts receivable (whether or not
specifically listed on schedules furnished to the Holders), including, without
limitation, all accounts created by or arising from all of the Company's or any
of its Subsidiaries' sales of goods or rendition of services made under the
Company's or any of its Subsidiaries' trade names or styles, or through the
Company's or any of its Subsidiaries' divisions; (ii) unpaid or unexercised
seller's rights (including any right of rescission, replevin, reclamation and
stopping in transit) relating to the foregoing or arising therefrom; (iii)
rights to any goods represented by any of the foregoing, including returned or
repossessed goods; (iv) reserves and credit balances held by the Company or any
of its Subsidiaries with respect to any such accounts receivable or account
debtors; (v) guarantees or collateral for any of the foregoing; (vi) insurance
policies; or (vii) rights relating to any of the foregoing.

               "Accreted Principal Amount" of any Note, at any date, shall equal
the (i) the Original Issue Price of such Note plus (ii) the accrued amortization
of the Original Issue Discount attributable ratably on a daily basis, using a
daily level yield, to the period from and including the Closing Date to (but
excluding) the Maturity Date.

               "Affiliate" or "Affiliates" means with respect to any Person, (i)
any Subsidiary of such Person and any other Person which, directly or
indirectly, controls, is controlled by or is under common control with such
Person and (ii) each director, officer or general partner of such Person. For
purposes of the Agreement, control of a Person means the power, direct or
indirect, (a) to vote 20% or more of the outstanding stock or other ownership
interests having ordinary voting power for the election of directors of such
Person or (b) to direct or cause the direction of the management and policies of
such Person whether by contract or otherwise.

               "Affiliate Transaction" has the meaning specified in Section 9.7.

               "Agreement" has the meaning specified in Section 1.

               "Asset Disposition" means any sale or other disposition, or
series of sales or other dispositions (including, without limitation, by merger
or consolidation, and whether by operation of law or otherwise), made on or
after the Closing Date by the Company or any of its Subsidiaries to any Person
of (a) all or substantially all of the outstanding Capital Stock of any of its
Subsidiaries, (b) all or substantially all of its assets or the assets of any
division of the Company or any of its Subsidiaries, or (c) any other asset or
assets which, when taken together with all sales or other dispositions of assets
not covered by the foregoing clauses (a) and (b) yield proceeds or involve
assets having a fair market value in excess of $150,000 in any twelve-month
period; provided, however, that (i) any sale or disposition by the Company or
any of its Subsidiaries of Inventory in the ordinary course of business, and
(ii) any sale or disposition of the Company or any of its Subsidiaries of
assets, not in the ordinary course of business in instances where the proceeds
of such dispositions do not exceed $50,000 for any individual




                                      -44-


transaction or $150,000 in the aggregate following the Closing shall not
constitute an Asset Disposition for purposes of this Agreement.

               "Auditors" means a nationally-recognized firm of independent
public accountants selected by the Company and satisfactory to the Holders in
the Holders' reasonable discretion.

               "Benefit Plan" means a defined benefit plan as defined in Section
3(35) of ERISA (other than a Multiemployer Plan) that is subject to Title IV of
ERISA and in respect of which the Company or any of its Subsidiaries or any
ERISA Affiliate is, or within the immediately preceding six (6) years was, an
"employer" as defined in Section 3(5) of ERISA.

               "Business Day" means any day other than a Saturday, Sunday or any
other day on which commercial banks are required by law or authorized to close
in New York, New York.

               "Capital Lease" means, as to any Person, any lease of property,
real or personal, by such Person as lessee which would be capitalized on the
balance sheet of such Person prepared in conformity with GAAP.

               "Capital Lease Obligation" means, as to any Person, the
capitalized amount of all obligations of such Person or any of its Subsidiaries
under Capitalized Leases, as determined on a consolidated basis in accordance
with GAAP.

               "Capital Stock" means shares of capital stock, beneficial,
partnership or limited liability company interests, participations or other
equivalents (regardless of how designated) of or in a corporation, partnership,
limited liability company or equivalent entity, whether voting or non-voting,
and includes, without limitation, common stock and preferred stock.

               "Cash Equivalent" means (a) securities with maturities of one
year or less from the date of acquisition issued or fully guaranteed or insured
by the United States government or any agency thereof, (b) certificates of
deposit, eurodollar time deposits, overnight bank deposits and bankers'
acceptances of any financial institution having maturities of one year or less
from the date of acquisition, (c) commercial paper of an issuer rated at least
"A-1" by S&P or "P-1" by Moody's, or carrying an equivalent rating by a
nationally recognized rating agency if both of S&P and Moody's cease publishing
ratings of investments, and (d) mutual funds investing solely in investments of
the type described in the foregoing clauses (a) through (c).

               "Casualty Loss" shall have the meaning specified in Section
8.4(b).

               "Change of Control" means any transaction or series of
transactions in which any of the following occurs: (a) any "person" or "group"
(as such terms are used for purposes of Sections 13(d) and 14(d) of the Exchange
Act, whether or not applicable) (other than any of the Excluded Persons) becomes
following the date of the first issuance of the New Notes (the "Issue Date") the
"beneficial owner," directly or indirectly, of more than 50% of the issued and
outstanding Capital Stock entitled to vote in the election of directors,
managers, or trustees, as applicable, of the Company or any Subsidiary Guarantor
or the surviving entity or entities (if other than the Company or any Subsidiary
Guarantor); or (b) individuals who immediately following the Issue Date after
giving effect to the transactions contemplated by Section 6.6 of the Exchange
Agreement constituted the Board of Directors of the Company or any Subsidiary
Guarantor (together with any new directors whose election by such Board of
Directors or whose




                                      -45-


nomination for election by the shareholders of the Company or any Subsidiary
Guarantor, as applicable, was approved by a vote of at least a majority of the
directors of the Company or any Subsidiary Guarantor then still in office who
were either directors at the Issue Date or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors of the Company or any Subsidiary Guarantor
then in office. Notwithstanding the foregoing to the contrary, a "Change of
Control" shall expressly exclude the Exchange and subsequent conversion of the
Company's Series C Preferred Stock into common stock.

               "Change of Control Offer" has the meaning specified in Section
7.3(a).

               "Change of Control Payment" has the meaning specified in Section
7.3(a).

               "Closing" has the meaning specified in Section 3.

               "Closing Date" has the meaning specified in Section 3.

               "Code" means the Internal Revenue Code of 1986, as amended from
time to time, and the rules and regulations promulgated thereunder from time to
time, and any successor statute.

               "Collateral" means any and all assets and rights and interests in
or to property and proceeds thereof, whether now owned or hereafter acquired by
the Company or any of its Subsidiaries, upon which a Lien is granted under any
of the Collateral Documents.

               "Collateral Agent" has the meaning specified in the Introduction.

               "Collateral Documents" means the Security Agreement, each of the
Deeds of Trust, the Pledge Agreement, the Lockbox Agreement and any other
document or instrument executed and delivered by a Person granting a Lien on any
of its property to secure payment of the Obligations.

               "Company" has the meaning specified in the Introduction.

               "Company Indemnified Person" has the meaning specified in Section
15(c).

               "Compliance Certificate" shall have the meaning specified in
Section 8.2(b).

               "Confidential Information" has the meaning specified in Section
25.

               "Consolidated Capital Expenditures" means, for any period, the
additions to property, plant and equipment and other capital expenditures of the
Company and each of its Subsidiaries for such period, as the same are (or, in
accordance with GAAP, would be) set forth in the consolidated statement of cash
flows of the Company and its Subsidiaries for such period.

               "Consolidated Net Income" means, for any period, the consolidated
net income (or loss) of the Company and its Subsidiaries for such period,
excluding (i) gains or losses from dispositions of assets, (ii) any
extraordinary items, and (iii) other non-recurring items not related to
operations, in the case of (i), (ii) and (iii), as determined in accordance with
GAAP.




                                      -46-


               "Contractual Obligation" of any Person means any obligation,
agreement, undertaking or similar provision of any security issued by such
Person or of any agreement, undertaking, contract, lease, indenture, mortgage,
deed of trust or other instrument (excluding an Operative Agreement) to which
such Person is a party or by which it or any of its property is bound or to
which any of its properties is subject.

               "DDJ Loan Agreement" means the Loan Agreement dated as of March
1, 2001, as amended, between the Company and Aeromet America, Inc., Balo
Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc.,
Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific
Coast Technologies, Inc., Seismic Safety Products, Inc., Skagit Engineering &
Manufacturing Inc., and PA&E International, Inc., as borrowers, and Pacific A&E
Limited, Pacific Aerospace & Electronics (UK) Limited and Aeromet International
PLC, as foreign subsidiaries, each of the lenders set forth on Schedule I
thereto, as lenders and DDJ Capital Management, LLC, as agent for the lenders.

               "Debt" means of any Person at any date, without duplication, (a)
all obligations of such Person for borrowed money, (b) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (c)
all obligations of such Person to pay the deferred purchase price of property or
services, (d) all obligations of such Person under Capital Leases, (e) all
contingent or non-contingent obligations of such Person to reimburse any Person
in respect of amounts paid or payable (currently or in the future, on a
contingent or non-contingent basis) under a letter of credit or similar
instrument, (f) all Debt of others secured by a Lien on any asset of such
Person, and (g) all Debt of others Guaranteed by such Person.

               "Deeds of Trust" means the mortgages or the deed of trust,
security agreement and fixture filings, deeds to secured debt, assignment or
rent or other similar instruments or documents, as the case may be,
substantially in the form of Exhibit E.

               "Default" means an event, condition or default which with the
giving of notice, the passage of time or both would be an Event of Default.

               "DOL" means the United States Department of Labor and any
successor department or agency.

               "Dollar" and sign "$" means lawful money of the United States of
America.

               "EBITDA" means, with respect to any period, Consolidated Net
Income for such period before payment or provision of taxes measured by income
plus, without duplication, all interest charges (to the extent deducted in
computing Consolidated Net Income), all fees payable in connection with this
Agreement and the Exchange Agreement, amortization and depreciation expense
(including any amortization and depreciation associated with "fresh start
accounting") and other gains or losses arising from extraordinary items or from
any other non-recurring item that reduces Consolidated Net Income for such
period, in each case determined on a consolidated basis for the Company and its
Subsidiaries in accordance with GAAP or as agreed to by the Holders.

               "Eligible Purchaser" has the meaning specified in Section
6.1(ii).




                                      -47-


               "Environmental Law" means any federal, state or local law,
statute, ordinance, regulation, rule, order, decree, judgment, ordinance,
permit, license, registration, approval or requirement or authorization of any
government or governmental department or agency or court pertaining to health,
industrial hygiene, or environmental or natural resources.

               "ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and any successor statute thereto and all
final or temporary regulations promulgated thereunder, and all published,
generally applicable rulings entitled to precedential effect.

               "ERISA Affiliate" means any (i) corporation which is or was at
any time during the immediately preceding six years a member of the same
controlled group of corporations (within the meaning of Section 414(b) of the
Code) as the Company or any of its Subsidiaries; (ii) partnership or other trade
or business (whether or not incorporated) at any time during the immediately
preceding six years under common control (within the meaning of Section 414(c)
of the Code) with the Company or any of its Subsidiaries; and (iii) member of
the same affiliated service group (within the meaning of Section 414(m) of the
Code) as the Company or any of its Subsidiaries, any corporation described in
clause (i) above, or any partnership or trade or business described in clause
(ii) above.

               "Event of Default" or "Events of Default" shall have the meaning
provided for in Section 10.1 of this Agreement.

               "Excess Cash Flow" means for the Company for any period, 50% of
EBITDA for such Period minus the sum of (without duplication ) (i) optional,
mandatory and scheduled cash principal payments of the Notes during such period
and optional, mandatory and scheduled cash principal payments on other Debt made
by the Company or any of its Subsidiaries during such period to the extent such
other Debt is permitted herein and such payments are permitted herein to be
made, (ii) scheduled payments made by the Company or any of its Subsidiaries on
Capital Lease Obligations to the extent such Capital Lease Obligations are
permitted herein, (iii) Non-Financed Capital Expenditures made by the Borrower
or any of its Subsidiaries during such period to the extent permitted herein,
(iv) all cash interest expenses of the Company and its Subsidiaries for such
period and (v) all cash tax expenses of the Company and its Subsidiaries for
such period.

               "Excess Cash Flow Offer" shall have the meaning specified in
Section 7.3(b).

               "Excess Cash Flow Payment" shall have the meaning specified in
Section 7.3(b).

               "Exchange" shall have the meaning specified in the Exchange
Agreement.

               "Exchange Act" means the Securities Exchange Act of 1934, as
amended.

               "Exchange Agreement" means the Exchange Agreement, dated as of
March 19, 2002, among the Company, certain of its Subsidiaries and the holders
of the Old Notes.

               "Excluded Persons" means any officer or director of the Company,
the other Persons listed on Exhibit I hereto, any Persons related to such
Persons by kinship or marriage,




                                      -48-


and any trust, corporation, partnership or other entity which is beneficially
owned 80% or more by any such Persons.

               "Exempt Resale" means the sales or offers to sell some or all of
the Notes purchased by the Initial Purchaser pursuant to Rule 144A of the
Securities Act.

               "Exempted Affiliate Transactions" means (a) customary employee
compensation arrangements approved by a majority of independent (as to such
transactions) members of the Board of Directors of the Company, (b) dividends
permitted pursuant to Section 9.2 hereof and payable, in form and amount, on a
pro rata basis to all holders of common stock of the Company and (c)
transactions solely between the Company and any of its wholly owned Subsidiaries
or solely among wholly owned Subsidiaries of the Company.

               "Financials" has the meaning specified in Section 5.4.

               "Foreign Subsidiary" means any Subsidiary of a Person not
incorporated in or having material assets or operations in the United States.

               "GAAP" means generally accepted accounting principles in the
United States of America, as in effect from time to time and with respect to the
Foreign Subsidiaries, accounting principles used in the United Kingdom as in
effect from time to time.

               "Governmental Authority" means any nation or government, any
state or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.

               "Guarantee" by any Person means any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Debt or other
obligation of any other Person and, without limiting the generality of the
foregoing, any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Debt or other obligation (whether arising by virtue of
partnership arrangements, by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain financial statement
conditions or otherwise) or (ii) entered into for the purpose of assuring in any
other manner the obligee of such Debt or other obligation of the payment thereof
or to protect such obligee against loss in respect thereof (in whole or in
part), provided that the term Guarantee shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.

               "Hazardous Substance" means those substances included within the
definitions of "hazardous substances", "hazardous materials", "toxic
substances", or "solid waste" under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et
seq., the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Sections
6901 et seq. and the Hazardous Materials Transportation Act, 49 U.S.C. Sections
1801 et seq., and in the regulations promulgated pursuant to said laws, and such
other substances, materials and wastes which are or become regulated, restricted
or addressed by or under any Environmental Law.

               "Holder" means the Initial Purchaser and each other Person which
acquires or becomes the owner of a Note.




                                      -49-


               "Immediately Succeeding Period" shall have the meaning specified
in Section 9.6.

               "Indemnified Party" has the meaning specified in Section 15(b).

               "Initial Discount" means the greater of 0.25% of the Original
Issue Price and $55,000.

               "Initial Purchaser" has the meaning specified in Section 2.1.

               "Institutional Investor" means (a) any original purchaser of a
Note, (b) any holder of a Note holding $1,000,000 or more of the aggregate
principal amount of the Notes then outstanding, and (c) any bank, trust company,
savings and loan association or other financial institution, any pension plan,
any investment company, any insurance company, any broker or dealer, or any
other similar financial institution or entity, regardless of legal form.

               "Internal Revenue Service" means the Internal Revenue Service and
any successor agency.

               "Inventory" means all of the Company's and each of its
Subsidiaries' inventory as defined by GAAP, including without limitation: (i)
all raw materials, work in process, parts, components, assemblies, supplies and
materials used or consumed in the Company's or any of its Subsidiaries'
businesses; (ii) all goods, wares and merchandise, finished or unfinished, held
for sale or lease or leased or furnished or to be furnished under contracts of
service; and (iii) all goods returned or repossessed by the Company or any of
its Subsidiaries net of any reserves required by GAAP.

               "Investment" means any investment in any Person, whether by means
of share purchase, capital contribution, loan, advance, time deposit or
otherwise.

               "Judgment" shall have the meaning set forth in Section 10.1(i).

               "KeyBank" means KeyBank National Association.

               "KeyBank Promissory Notes" means, collectively, that certain
Promissory Note, dated as of September 30, 1998, made by the Company in favor of
KeyBank in the aggregate principal amount of $1,200,000 and that certain
Promissory Note, dated as of March 18, 1998, made by the Company in favor of
KeyBank in the aggregate principal amount of $712,086.

               "Leased Real Property" means all of the real property leased by
the Company and each of its Subsidiaries at any time, including, without
limitation, all of the material real property leased by the Company and each of
its Subsidiaries as of the date of this Agreement as set forth on Schedule
5.12(a) hereto.

               "Leases" shall mean the leases with respect to the Leased Real
Property.

               "Lien" means, with respect to any asset, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind in respect of such
asset. For the purposes of the Agreement, the Company and each of its
Subsidiaries shall be deemed to own subject to a Lien any asset which it has
acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, Capital Lease or other title retention agreement
relating to such asset.




                                      -50-


               "Lockbox" has the meaning specified in Section 8.14(a).

               "Lockbox Account" has the meaning specified in Section 8.14(a).

               "Lockbox Agreement" means the 3rd Party Lockbox Agreement
executed by the Company, the Collateral Agent and KeyBank in favor of the
Holders in the form attached to this Agreement as Exhibit D.

               "Material Adverse Effect" means a material adverse effect on (a)
the business, operations, property, condition (financial or otherwise) or
prospects (financial or otherwise) of the Company and its Subsidiaries, taken as
a whole, (b) the ability of the Company or any of its Subsidiaries to perform
its obligations under this Agreement or any other Operative Agreement to which
it is a party, (c) the validity or enforceability of this Agreement or any other
Operative Agreement or of the rights or remedies of the holder of any Notes, or
(d) the perfection or priority of the Liens granted pursuant to the Collateral
Documents.

               "Maturity Date" has the meaning specified in Section 2.2.

               "Moody's" means Moody's Investors Service, Inc.

               "Multiemployer Plan" means a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA and (i) which is, or within the immediately
preceding six (6) years was, contributed to by the Company or any of its
Subsidiaries or any ERISA Affiliate or (ii) with respect to which the Company or
any of its Subsidiaries or any ERISA Affiliate may incur any liability.

               "Net Cash Proceeds" means, with respect to any Asset Disposition,
the aggregate amount of cash received by the Company and each of its
Subsidiaries (including cash payments received in respect of deferred payment
pursuant to any note or installment receivable or otherwise and state or federal
income tax refunds attributable to such sale or disposition, but in each case
only as and when received and any amount eliminated from any reserve referred to
in clause (b) below, but only as and when eliminated) in respect of such Asset
Disposition net of (a) all fees, commissions, expenses and taxes incurred in
connection with such sale or disposition, (b) deduction of appropriate amounts,
in an amount determined by the Company and agreed to by the Required Holders, in
their sole judgment exercised reasonably, to be provided by the Company or any
of its Subsidiaries as a reserve, in conformity with GAAP, against any
liabilities retained by the Company or any or its Subsidiaries associated with
such assets after such Asset Disposition, including, without limitation, any
indemnification associated with such Asset Disposition, and (c) proceeds that
are reinvested in similar capital assets of any of the Company's wholly owned
Subsidiaries within 180 days of the date of such Asset Disposition or receipt of
cash payment therefor (if later); provided that the Company has certified to the
Holders promptly, and in any event within 30 days after the date of such Asset
Disposition or receipt of such proceeds (if later), that such proceeds are to be
reinvested. For purposes of this definition, (i) if taxes or other expenses
payable in connection with the sale or disposition of any asset are not known as
of the date of such sale or disposition, then such fees, commissions, expenses
or taxes shall be estimated by the Company or its Subsidiaries, as the case may
be, in good faith, and agreed to by the Required Holders, in their sole judgment
exercised reasonably, and such estimated amounts shall be deducted therefrom,
and (ii) Net Cash Proceeds shall be deemed to include, without limitation, any
award of compensation for any asset or property or




                                      -51-


group thereof taken by condemnation or eminent domain and insurance proceeds for
the loss of or damage to any asset or property if such award or proceeds equals
or exceeds $250,000 (per occurrence) and within 180 days after the receipt
thereof replacement or repair of such asset or property has not commenced or
reasonable steps have not been taken to commence such replacement or repair,
except that in the event that at any time such replacement or repair is
abandoned or is otherwise discontinued or is not diligently pursued, the
remaining award or proceeds, as the case may be, shall constitute Net Cash
Proceeds at such time.

               "New Notes" means the Company's 10% Senior Subordinated
Pay-in-Kind Notes due 2007, together with any additional notes that may be
issued to the holders thereof as payment for accrued interest on such notes.

               "New Notes Indenture" has the meaning specified in the Exchange
Agreement.

               "Non-Financed Capital Expenditures" shall mean any and all
expenditures (net of any trade-ins, rebates or discounts) in respect of the
purchase, lease or other acquisition of fixed or capital assets for which there
is no specific funding through a loan, capital lease or other financing that
directly finances such assets.

               "Notes" has the meaning specified in Section 1.

               "Obligations" means the Notes and all other advances, debts,
liabilities, obligations, covenants and duties owing by the Company to the
Collateral Agent, any Holder, any Affiliate of any of them or any Indemnified
Party, of every type and description, present or future, whether or not
evidenced by any note, guaranty or other instrument, arising under this
Agreement or under any other Operative Agreement, whether or not for the payment
of money, whether arising by reason of an extension of credit, loan, guaranty,
indemnification, foreign exchange transaction or interest rate contract or in
any other manner, whether direct or indirect (including, without limitation,
those acquired by assignment), absolute or contingent, due or to become due, now
existing or hereafter arising and however acquired. The term "Obligations"
includes, without limitation, all interest, charges, expenses, fees, reasonable
attorneys' fees and disbursements and any other sum chargeable to the Company
under this Agreement or any other Operative Agreement.

               "Offer" means an Excess Cash Flow Offer or a Change of Control
Offer, as applicable.

               "Offer Payment" means an Excess Cash Flow Payment or a Change of
Control Payment, as applicable.

               "Offering Circular" means the Offering Circular, dated as of the
Closing Date, prepared by the Company and provided to the Initial Purchaser, and
any amendment or supplement thereto.

               "Officers' Certificate" means, as to any corporation, a
certificate executed on its behalf by the Chairman of the board of directors (if
an officer) or its President or one of its Vice Presidents and its Treasurer, or
Controller, or one of its Assistant Treasurers or Assistant Controllers, and, as
to any partnership, a certificate executed on behalf of such partnership by its




                                      -52-


managing general partner in a manner which would qualify such certificate as an
Officers' Certificate of such managing general partner hereunder.

               "Old Notes" has the meaning specified in the Exchange Agreement.

               "Old Notes Indenture" means that certain Indenture, dated as of
July 30, 1998, by any among the Company, the Guarantors (as defined therein) and
the Bank of New York (as successor to IBJ Schroeder Bank & Trust Company), as
Trustee.

               "Operative Agreements" means this Agreement, the Notes, the
Subsidiary Guaranty, and the Collateral Documents, in each case, as the same may
be modified, amended, extended, restated or supplemented from time to time.

               "Original Issue Discount" means $14,000,000.

               "Original Issue Price" means, for any Note, and amount equal to
the product of the face amount of such Note on the Closing Date and 61.11%.

               "OSHA" means the Occupational Safety and Health Act, as amended
from time to time, and any successor statute thereto and all final or temporary
regulations promulgated thereunder, and all published, generally applicable
rulings entitled to precedential effect.

               "Owned Real Property" means the real property owned by the
Company and each of its Subsidiaries at any time, including, without limitation,
all of the material real property owned by the Company and each of its
Subsidiaries as of the date of the Agreement as set forth on Schedule 5.12(a).

               "PBGC" means the Pension Benefit Guaranty Corporation referred to
and defined in ERISA or any successor thereto.

               "Permitted Investments" means (i) Cash Equivalents, (ii)
interest-bearing demand or time deposits (including certificates of deposit)
which are insured by the Federal Deposit Insurance Corporation ("FDIC") or a
similar federal insurance program; (iii) securities distributed in connection
with the confirmation of a plan of reorganization following the bankruptcy of
any Person indebted to the distributee at the time such bankruptcy is filed and
(iv) such other investments as the Holders may approve in the Holders' sole
discretion.

               "Permitted Liens" means, without duplication:

               (a) Liens for taxes, assessments, governmental charges or levies
        not yet due or which are being contested in good faith and by
        appropriate proceedings if adequate reserves with respect thereto are
        maintained on the books of the Company and each of its Subsidiaries, as
        the case may be, in accordance with GAAP;

               (b) statutory Liens of landlords and carriers', or other
        warehousemen's, mechanics', materialmen's, repairmen's or other like
        Liens arising in the ordinary course of business which are not overdue
        for a period of more than sixty (60) days or which are being contested
        in good faith and by appropriate proceedings in a manner which is not
        reasonably likely to jeopardize or diminish the Holders' interest in any
        of the Collateral




                                      -53-


        subject to the other Operative Agreements or materially interfere with
        the ordinary conduct of the businesses of the Company and each of its
        Subsidiaries;


               (c) pledges or deposits and Liens (other than any Lien imposed by
        ERISA) under bonds required in connection with workers compensation,
        unemployment insurance and other social security legislation;

               (d) Liens (other than any Lien imposed by ERISA or by
        Environmental Laws) incurred on deposits to secure the performance of
        tenders, bids, leases, statutory obligations, surety and appeal bonds,
        performance and return-of-money bonds and other obligations of alike
        nature incurred in the ordinary course of business;

               (e) easements, rights-of-way, restrictions and other similar
        encumbrances incurred in the ordinary course of business which do not in
        the aggregate materially detract from the value of the property subject
        thereto or interfere, in any material manner, with the ordinary conduct
        of the business of the Company or any of its Subsidiaries; and

               (f) Liens affecting assets existing at the time such assets are
        acquired provided that such Liens are not created in contemplation of
        such acquisition.

               "Person" means any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated organization, association, corporation,
limited liability company, institution, entity, party or government (including
any division, agency or department thereof), and, as applicable, the successors,
heirs and assigns of each.

               "Plan" means any "employee benefit plan" as defined in Section
3(3) of ERISA, maintained or contributed to by the Company or any of its
Subsidiaries or with respect to which the Company or any of its Subsidiaries may
incur liability.

               "Pledge Agreement" means the Stock Pledge Agreement executed by
the Company and certain of its Subsidiaries in favor of the Collateral Agent for
the benefit of the Holders, in the form attached to the Agreement as Exhibit F.

               "Premium Amount" has the meaning specified in Section 7.2.

               "Principal Amount" has the meaning specified in Section 2.1.

               "Proposed Repurchase Date" has the meaning specified in Section
7.3(c).

               "Proprietary Rights" has the meaning specified in Section
5.12(b).

               "QIB" has the meaning specified in Section 6.1.

               "Real Estate" means, collectively, the Owned Real Property and
the Leased Real Property.

               "Release" means any release, pumping, pouring, emptying,
injecting, escaping, leaching, migrating, dumping, seepage, spill, leak, flow,
discharge, disposal or emission.

               "Remedial Work" shall have the meaning specified in Section
8.10(b).




                                      -54-


               "Reportable Event" means any of the events described in Section
4043 of ERISA and the regulations thereunder.

               "Required Holders" means the holders of more than 50% in
principal amount of the Notes at the time outstanding (exclusive of Notes then
owned by the Company or any of its Affiliates other than GSC Partners CDO Fund,
Limited or any of GSC Partners CDO Fund, Limited's Affiliates).

               "Retiree Health Plan" means an "employee welfare benefit plan"
within the meaning of Section 3(1) of ERISA that provides health care benefits
to persons after termination of employment, other than as required by Section
601 of ERISA.

               "S&P" means Standard and Poor's Ratings Services, a division of
McGraw-Hill, Inc.

               "Scheduled Closing Date" has the meaning specified in Section
15(f).

               "Securities Act" means the Securities Act of 1933, as amended.

               "Security Agreement" means the Security Agreement between the
Collateral Agent and the Company and certain of its Subsidiaries, in the form
attached to the Agreement as Exhibit G.

               "Stock Equivalent" means all securities convertible into or
exchangeable for Capital Stock and all warrants, options or other rights to
purchase or subscribe for any Capital Stock, whether or not presently
convertible, exchangeable or exercisable.

               "Structures" means all plants, offices, manufacturing facilities,
warehouses, administration buildings and related facilities of the Company and
each of its Subsidiaries located at the Real Property.

               "Subsidiary" means, with respect to any Person, a corporation,
partnership or other entity of which shares of stock or other ownership
interests having ordinary voting power (other than stock or such other ownership
interests having such power only by reason of the happening of a contingency) to
elect a majority of the board of directors or other persons performing similar
functions are at the time, directly or indirectly through one or more
intermediaries, or both, owned or controlled, by such Person. Unless otherwise
expressly indicated to the contrary herein, all references to a "Subsidiary" or
to "Subsidiaries" in this Agreement shall refer to any direct or indirect
Subsidiary or Subsidiaries of the Company and each Subsidiary Guarantor and
shall include the Foreign Subsidiaries.

               "Subsidiary Guaranty" means each of the Subsidiary Guaranties of
the Subsidiary Guarantors in the form specified in Exhibit H.

               "Subsidiary Guarantor" means Aeromet America, Inc., Balo
Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc.,
Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific
Coast Technologies, Inc., PA&E International, Inc., Seismic Safety Products,
Inc., Skagit Engineering & Manufacturing, Inc. and any other Subsidiaries of the
Company that executes a Subsidiary Guaranty guaranteeing the Notes.




                                      -55-


               "Tax" or "Taxes" shall mean any and all federal, state, local and
foreign taxes, assessments and other governmental charges, duties, impositions,
levies and liabilities, including, without limitation, taxes based upon or
measured by gross receipts, income, profits, sales, use and occupation, and
value added, ad valorem, transfer, gains, franchise, withholding, payroll,
recapture, employment, excise, unemployment, insurance, social security,
business license, occupation, business organization, stamp, environmental and
property taxes, together with all interest, penalties and additions imposed with
respect to such amounts. For purposes of this Agreement, "Taxes" also includes
any obligations under any agreements or arrangements with any Person with
respect to the liability for, or sharing of, Taxes (including pursuant to Treas.
Reg. Section 1.1502-6 or comparable provisions of state, local or foreign Tax
law) and including any liability for Taxes as a transferee or successor, by
contract or otherwise.

               "Tax Return" means any report, return, election, notice,
estimate, declaration, information statement and other forms and documents
(including, without limitation, all schedules, exhibits and other attachments
thereto) related to and filed or required to be filed with a taxing authority in
connection with any Taxes (including, without limitation, estimated Taxes)

               "Termination Event" means (i) a Reportable Event with respect to
any Benefit Plan or Multiemployer Plan which is likely to constitute grounds for
termination of such Benefit Plan or Multiemployer Plan; (ii) the withdrawal
(within the meaning of Section 4063 of ERISA) of the Company or any of its
Subsidiaries or any ERISA Affiliate from a Benefit Plan during a plan year in
which such entity was a "substantial employer" as defined in Section 4001(a)(2)
of ERISA; (iii) the providing of notice of intent to terminate a Benefit Plan in
a distress termination described in Section 4041(c) of ERISA; (iv) the
institution by the PBGC of proceedings to terminate a Benefit Plan or
Multiemployer Plan; (v) any event or condition (a) described in Section 4042(a)
of ERISA and which could reasonably be expected to constitute grounds under
Section 4042 of ERISA for the termination of, or the appointment of a trustee to
administer, any Benefit Plan or Multiemployer Plan, or (b) described in Section
4041A(a) of ERISA and that could reasonably be expected to result in termination
of a Multiemployer Plan pursuant to Section 4041A of ERISA; or (vi) the partial
or complete withdrawal within the meaning of Sections 4203 and 4205 of ERISA, of
the Company or any of its Subsidiaries or any ERISA Affiliate from a
Multiemployer Plan.

               "Unused Capital Expenditures" shall have the meaning specified in
Section 9.6.

               "Weighted Average Life to Maturity" means, when applied to any
Debt at any date, the number of years obtained by dividing (a) the sum of the
products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required scheduled payment
of principal including payment at final maturity in respect thereof, and (ii)
the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (b) the then outstanding
aggregate principal amount of such Debt.

               12.2 Terms Generally.

               The definitions of terms herein shall apply equally to the
singular and plural forms of the terms defined. Whenever the context may
require, any pronoun shall include the corresponding masculine, feminine and
neuter forms. The words "include", "includes" and "including" shall be deemed to
be followed by the phrase "without limitation". The word "will"




                                      -56-


shall be construed to have the same meaning and effect as the word "shall".
Unless the context requires otherwise (a) any definition of or reference to any
agreement, instrument or other document herein shall be construed as referring
to such agreement, instrument or other document as from time to time amended,
restated, supplemented or otherwise modified (subject to any restrictions on
such amendments, restatements, supplements or modifications set forth herein),
(b) any reference herein to any Person shall be construed to include such
Person's successors and permitted assigns, (c) the words "herein", "hereof" and
"hereunder", and words of similar import, shall be construed to refer to this
Agreement in its entirety and not to any particular provision hereof, (d) all
references herein or in any other Operative Agreement to Articles, Sections,
Exhibits and Schedules shall be construed to refer to Articles and Sections of,
and Exhibits and Schedules to, this Agreement or such other Operative Agreement,
as applicable, (e) the words "asset" and "property" shall be construed to have
the same meaning and effect and to refer to any and all tangible and intangible
assets and properties, including cash, securities, accounts and contract rights,
(f) any reference to time herein shall be to New York City time; and (g) any
reference to a law includes any amendment, supplement, or modification thereto
and any rules and regulations issued thereunder or any law enacted in
substitution or replacement therefor.

SECTION 13.      REGISTRATION, TRANSFER AND SUBSTITUTION OF NOTES

               13.1 Note Register; Ownership of Notes.

               Any Notes issued in substantially the form of Exhibit A are in
"registered form". The Company will keep at its principal office a register in
which the Company will provide for the registration of Notes in registered form
and the registration of transfers of Notes in registered form. The Company may
treat the Person in whose name any Note is registered on such register as the
owner thereof for the purpose of receiving payment of the principal of and the
Premium Amount, if any, and interest on such Note and for all other purposes,
whether or not such Note shall be overdue, and the Company shall not be affected
by any notice to the contrary. All references in this Agreement or in a Note to
a "Holder" of any Note shall mean the Person in whose name such Note is at the
time registered on such register.

               13.2 Transfer and Exchange of Notes.

               Upon surrender of any Note for registration of transfer or for
exchange to the Company at its principal office (and in the case of a surrender
for registration of transfer, duly endorsed or accompanied by a written
instrument of transfer duly executed by the registered Holder or its attorney
duly authorized in writing and accompanied by the address for notices of each
transferee of such Note or part thereof), the Company at its expense will
execute and deliver in exchange therefor a new Note or Notes in denominations of
at least $1,000,000 (except one Note may be issued in a lesser principal amount
if the unpaid principal amount of the surrendered Note is not evenly divisible
by, or is less than, $1,000,000), as requested by the holder or transferee,
which aggregate the unpaid principal amount of such surrendered Note. Each such
new Note shall be in registered form. Each such Note shall be dated so that
there will be no loss of interest on such surrendered Note and otherwise of like
tenor, and shall be registered in the name or names of such Person as such
Holder or transferee may request. The Company may require payment of a sum
sufficient to cover any stamp tax or governmental charge imposed in respect of
any such transfer of Notes. Any Note in lieu of which any such




                                      -57-


new Note has been executed and delivered shall not be deemed to be an
outstanding Note for any purpose of this Agreement.

               13.3 Replacement of Notes.

               Upon receipt of evidence reasonably satisfactory to the Company
of the loss, theft, destruction or mutilation of any Note and, in the case of
any such loss, theft or destruction of any Note, upon delivery of an indemnity
bond in such reasonable amount as the Company may determine (or, in the case of
any Note held by a Holder or another Institutional Investor or such Holder's or
Institutional Investor's nominee, of an unsecured indemnity agreement from such
Holders or such Institutional Investor), or, in the case of any such mutilation,
upon the surrender of such Note for cancellation to the Company at its principal
office, the Company at its expense will execute and deliver, in lieu thereof, a
new Note in the unpaid principal amount of such lost, stolen, destroyed or
mutilated Note, dated so that there will be no loss of interest on such Note and
otherwise of like tenor. Any Note in lieu of which any such new Note has been so
executed and delivered by the Company shall not be deemed to be an outstanding
Note for any purpose of this Agreement.

               13.4 Notes Held by Company, Etc. Deemed Not Outstanding.

               For the purposes of determining whether the Holders of the Notes
of the requisite principal amount at the time outstanding have taken any action
authorized by this Agreement or any Operative Agreement with respect to the
giving of consents or approvals or with respect to the acceleration upon an
Event of Default, any Notes directly or indirectly owned by the Company or any
of its Subsidiaries shall be disregarded and deemed not to be outstanding.

SECTION 14.      PAYMENTS ON NOTES


               14.1 Place of Payment.

               Payments of principal, Premium Amount or premium, if any, and
interest becoming due and payable on the Notes shall be made to the Holders at
their respective addresses referred to in Section 19 by 2:00 p.m. (New York City
time) on the date when due, in Dollars, in immediately available funds without
set-off or counterclaim, unless such Holder, by written notice to the Company,
shall designate another address as such place of payment, in which case such
address shall thereafter be such place of payment.

               14.2 Home Office Payment.

               So long as any Holder or its nominee shall be the holder of any
Note, and notwithstanding anything contained in Section 14.1 or in such Note to
the contrary, the Company will pay all sums becoming due on such Note for
principal and Premium Amount, if any, and interest no later than 2:00 p.m. (New
York City time) and by the method and at the address specified in Section 19, or
by such other reasonable method or at such other address as such Holder shall
have from time to time specified to the Company in writing for such purpose,
without the presentation or surrender of such Note or the making of any notation
thereon, except that any Note paid or prepaid in full shall, after such payment
or prepayment in full, be surrendered to the Company at its principal office or
at the place of payment maintained by the Company pursuant to Section 14.1 for
cancellation. Prior to any sale or other disposition of any




                                      -58-


Note held by a Holder or its nominee, such Holder will, at its election, either
endorse thereon the amount of principal paid thereon and the last date to which
interest has been paid thereon or surrender such Note to the Company in exchange
for a new Note or Notes pursuant to Section 13.2. The Company will afford the
benefits of this Section 14.2 to any Institutional Investor which is the direct
or indirect transferee of any Note purchased by a Holder under this Agreement
and which has made the same agreement relating to such Note as such Holder has
made in this Section 14.2.

SECTION 15.      EXPENSES, INDEMNIFICATION, ETC.

               (a) Whether or not the transactions contemplated hereby shall be
consummated, the Company will pay all reasonable expenses in connection with
such transactions and in connection with any amendments or waivers (whether or
not the same become effective) under or in respect of this Agreement or the
other Operative Agreements, including, without limitation: (i) the cost and
expenses of preparing and reproducing this Agreement and the other Operative
Agreements, of furnishing all opinions by counsel for the Company or its
Subsidiaries (including any opinions requested by the Holders' special counsel,
Mayer, Brown, Rowe & Maw and Dewey Ballantine LLP, as to any legal matter
arising hereunder) and all certificates on behalf of the Company or any of its
Subsidiaries, and of the Company's or any of its Subsidiaries' performance of
and compliance with all agreements and conditions contained herein on its part
to be performed or complied with; (ii) the cost of delivering to each Holder's
principal office, insured to such Holder's reasonable satisfaction, the Notes
issued in exchange for the Notes sold to such Holder hereunder and any Notes
delivered to such Holder upon any substitution thereof pursuant to this
Agreement and of a Holder's delivery of any Notes, insured to such Holder's
reasonable satisfaction, upon any such substitution; (iii) the reasonable fees,
expenses and disbursements of the Holders' special counsel, Mayer, Brown, Rowe &
Maw and Dewey Ballantine LLP (or such other counsel as may be selected by the
Holders) and the Holders' local counsel in connection with such transactions and
any such amendments or waivers; (iv) the costs and expenses, including
reasonable attorneys' fees, incurred by the Collateral Agent and the Holders or
any subsequent Holder of a Note in enforcing or defending any rights under this
Agreement or any other Operative Agreement or in responding to any subpoena or
other legal process in connection with (A) this Agreement, (B) any Operative
Agreement, (C) the Notes, or (D) the transactions contemplated hereby; and (v)
the reasonable out-of-pocket expenses incurred by the Collateral Agent and the
Holders in connection with such transactions and any such amendments or waivers;
provided that the Company shall be required to pay the cost and expenses of only
one firm (and any local counsel) retained by the Holders in connection with any
waivers or amendments. The Company also will pay, and will save each Holder
harmless from, all claims in respect of the fees, if any, of brokers and finders
(unless engaged by the Holders) and any and all liabilities with respect to any
Taxes (including interest and penalties) (other than income taxes) which may be
payable in respect of the execution and delivery hereof, the issuance of the
Notes hereunder, any payment of principal, interest, Premium Amount, if any,
arising under the Notes and any amendment or waiver under or in respect hereof
or of the Notes.

               (b) The Company will protect, indemnify and save harmless the
Collateral Agent, Initial Purchaser and each Person who controls the Initial
Purchaser within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act, and each present, future and former Holder of any Note and
their respective officers, directors, trustees, employees,




                                      -59-


agents and representatives (individually, an "Indemnified Party" and
collectively, the "Indemnified Parties") from and against all losses,
liabilities, obligations, claims, damages, penalties, causes of action, costs
and expenses (including, without limitation, reasonable attorneys' fees and
expenses) imposed upon or incurred by or asserted against any Indemnified Party
by reason of (i) any failure on the part of the Company or any of its
Subsidiaries to perform or comply with any of the terms of this Agreement or any
other Operative Agreement, (ii) any negligence or tortious act on the part of
the Company or any of its Subsidiaries or any of their respective agents,
contractors, sublessees, licensees or invitees, (iii) any untrue statement or
alleged untrue statement of any material fact contained in the Offering
Circular, (iv) the omission or alleged omission to state in the Offering
Circular, a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, (v) any breach by the Company or any of its Subsidiaries of
their respective representations, warranties and agreements set forth herein,
(vi) the execution or delivery of any of the Operative Agreements or any
agreement or instrument contemplated thereby or any of the transactions
contemplated thereby or (vii) any investigation, litigation or other proceeding
(whether or not any Indemnified Party is a party thereto) related to the
entering into and or performance of any Operative Agreement or the consummation
of any transactions contemplated by any of the Operative Agreements, including
the reasonable fees and disbursements of counsel incurred in connection with any
such investigation, litigation or proceeding; provided that nothing contained
herein shall be deemed to require the Company to indemnify the Indemnified
Parties for their respective gross negligence, bad faith or willful misconduct,
or for their breach of their respective obligations under this Agreement or the
other Operative Agreements. This indemnity agreement will be in addition to any
liability that the Company may otherwise have to the Indemnified Parties.
Notwithstanding, anything in this Section 15(b) to the contrary, the Company
shall not be liable in any such case for any indemnification to the extent (but
only to the extent) that any such loss, liability, obligation, claim, damage,
penalty, cause of action, cost or expense arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in the Offering Circular in reliance upon and in conformity with written
information furnished to the Company by the Initial Purchaser, about the Initial
Purchaser, expressly for use therein.

               (c) The Initial Purchaser will indemnify and hold harmless the
Company, its officers, directors, employees, agents, representatives, and each
Person who controls the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act (each, a "Company Indemnified
Person") against any losses, liabilities, obligations, claims, damages,
penalties, causes of action, costs or expenses to which any Company Indemnified
Party may become subject, under the Securities Act or otherwise, insofar as such
losses, liabilities, obligations, claims, damages, penalties, causes of action,
costs or expenses (or actions in respect thereof) arise out of or are based upon
an untrue statement or alleged untrue statement of a material fact contained in
the Offering Circular, or arise out of or are based upon the omission or alleged
omission to state therein a material fact necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in the Offering Circular in reliance upon and in conformity
with written information furnished to the Company by the Initial Purchaser,
about the Initial Purchaser, expressly for use therein; and will reimburse any
Company Indemnified Party for any legal or other expenses reasonably incurred by
any Company Indemnified Party in connection with investigating or defending any
such action or claim as such expenses are incurred.




                                      -60-


               (d) Promptly after receipt by an Indemnified Party of notice of
the commencement of any action (including governmental action), such Indemnified
Party will, if a claim in respect thereof is to be made against the Company
under this Section 15, deliver to the Company a written notice of the
commencement thereof. The Company may, and upon the request of such Indemnified
Party will, at the Company's expense resist and defend such action, suit or
proceeding or cause the same to be resisted and defended by counsel for the
insurer of the liability or by counsel designated by the Company and reasonably
satisfactory to the Indemnified Party, as the case may be; provided that any
Indemnified Party shall be entitled to participate in any such action, suit or
proceeding with counsel of its own choice but at its own expense; and provided,
further, that if any Indemnified Party reasonably determines that a conflict of
interest exists with respect to the representation by such counsel of such
Indemnified Party, the Company shall pay the reasonable fees and expenses of
counsel selected by such Indemnified Party. In any event, if the Company fails
to assume the defense within a reasonable time after any such request, the
Indemnified Party may assume such defense or other indemnification obligation
and the reasonable fees and expenses of its attorney will be paid by the
Company. The failure to deliver written notice to the Company within a
reasonable time of the commencement of any such action, if materially
prejudicial to its ability to defend such action, shall relieve the Company of
any liability to the Indemnified Party under this Section 15(b), but the
omission to so deliver written notice to the Company will not relieve it of any
liability that it may have to any Indemnified Party otherwise than under this
Section 15. The obligations of the Company under this Section 15 shall survive
any termination or satisfaction of this Agreement. Any amounts payable to any
Indemnified Party under this Section 15 which are not paid within fifteen (15)
days after written demand therefor by any Indemnified Party shall bear interest
at a rate per annum equal to the rate of interest stated on the face of the
Notes plus 3.0% from the date of such demand. In the event that the Company
shall be required to pay any indemnity under this Section 15, the Company shall
pay the Indemnified Party an amount which, after deduction of all Taxes required
to be paid by such Indemnified Party in respect of the receipt or accrual
thereof (but not for any taxes payable with respect to amounts received for the
payment of income taxes), shall be equal to the amount of such indemnity.

               (e) The Company shall not, without the prior written consent of
an Indemnified Party (which consent shall not be unreasonably withheld or
delayed), effect any settlement or compromise of any pending or threatened
proceeding in respect of which an Indemnified Party is a party, or indemnity is
sought hereunder by such Indemnified Party, unless such settlement (A) includes
an unconditional written release of such Indemnified Party, in form and
substance reasonably satisfactory to such Indemnified Party, from all liability
on claims that are the subject matter of such proceeding and (B) does not
include any statement as to an admission of fault, culpability or failure to act
by or on behalf of the Indemnified Party.

               (f) In circumstances in which the indemnity agreement provided
for in the preceding paragraphs of this Section 15 is unavailable to, or
insufficient to hold harmless, an Indemnified Party in respect of any loss,
liability, obligation, claim, damage, penalty, cause of action, cost or expense
(or actions in respect thereof), the Company, in order to provide for just and
equitable contributions, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such loss, liability, obligation, claim,
damage, penalty, cause of action, cost or expense (or actions in respect
thereof) in such proportion as is appropriate to reflect (i) the relative
benefits received by the Company on the one hand and the Indemnified Party on
the other from the offering of the Notes or (ii) if the allocation provided by
the foregoing clause (i) is




                                      -61-


not permitted by applicable law, not only such relative benefits but also the
relative fault of the Company on the one hand and the Indemnified Party on the
other in connection with the statements or omissions or alleged statements or
omissions that resulted in such loss, liability, obligation, claim, damage,
penalty, cause of action, cost or expense (or actions in respect thereof). The
relative benefits received by the Company on the one hand and the Initial
Purchaser on the other shall be deemed to be in the same proportion as the total
proceeds from the offering of the Notes (before deducting expenses) received by
the Company bear to the total discounts and commissions received by the Initial
Purchaser. The relative fault of the parties shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand, or the Initial
Purchaser on the other, the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission or
alleged statement or omissions, and any other equitable considerations
appropriate in the circumstances.

               (g) The Company and the Initial Purchaser agree that it would not
be equitable if the amount of such contribution determined pursuant to the
immediately preceding paragraph (f) were determined by pro rata or per capita
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the first sentence of the
immediately preceding paragraph (f). Notwithstanding any other provision of this
Section 15, the Initial Purchaser shall not be obligated to make contributions
hereunder that in the aggregate exceed the total discounts, commissions and
other compensation received by such Initial Purchaser under this Agreement, less
the aggregate amount of any damages that such Initial Purchaser has otherwise
been required to pay by reason of the untrue or alleged untrue statements or the
omissions or alleged omissions to state a material fact. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of the immediately
preceding paragraph (f), each person, if any, who controls the Initial Purchaser
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act shall have the same rights to contribution as the Initial
Purchaser, and each director of the Company, each officer of the Company and
each person, if any, who controls the Company within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act, shall have the same
rights to contribution as the Company.

               (h) In connection with the Closing, the Company is requesting
that the Initial Purchaser make available for funding an amount equal to the
Original Issue Price less the Initial Discount. If, for any reason, on the date
scheduled by the Company as the date for the Closing (such date, the "Scheduled
Closing Date"), the Initial Purchaser shall at the Company's request have made
such amount available, and (i) the closing conditions are not satisfied by 11:00
a.m. on such scheduled date, (ii) the Company did not, by 11:00 a.m. on such
scheduled date reschedule such Closing for a subsequent date, and (iii) the
Closing in fact does not occur on such scheduled date, the Company shall return
to the Initial Purchaser, promptly but in any event no later than the Business
Day following the Scheduled Closing Date, the amount so funded by the Initial
Purchaser, unless otherwise directed by the Initial Purchaser. The Company will
protect, indemnify and hold the Initial Purchaser harmless from and against any
and all losses resulting from its failure or inability to invest on the
Scheduled Closing Date, and if directed by the Initial Purchaser to hold such
funds, for each subsequent day that the Closing does not occur, the purchase
price of the Notes to be purchased by it, for the period commencing on the




                                      -62-


Scheduled Closing Date and ending on the date the purchase price is returned to
the Initial Purchaser, at a rate of interest equal to the rate of interest on
the Notes.

SECTION 16.      SURVIVAL OF REPRESENTATIONS AND WARRANTIES


               All representations and warranties, covenants, indemnities and
expense reimbursement provisions contained in this Agreement and each of the
other Operative Agreements, or made in writing by or on behalf of the Company or
any of its Subsidiaries in connection with the transactions contemplated by this
Agreement or the other Operative Agreements, shall survive the execution and
delivery of this Agreement and the other Operative Agreements, any
investigation, or statement as to the results thereof, at any time made by the
Holders or on the Holders' behalf, the purchase of the Notes by the Holders
under this Agreement and any disposition or payment of the Notes and any
termination of this Agreement.

SECTION 17.      AMENDMENTS AND WAIVERS

               Any term of this Agreement or of the Notes may be amended and the
observance of any term of this Agreement or of the Notes may be waived (either
generally or in a particular instance and either retroactively or prospectively)
only with the written consent of the Company and the Required Holders; provided
that, without the prior written consent of the holders of all the Notes at the
time outstanding, no such amendment or waiver shall (a) change the maturity or
the principal amount of, or change the rate of interest or the time of payment
of interest on, or change the amount or the time of payment of any principal or
Premium Amount on any prepayment of, any Note, (b) reduce the percentage of the
principal amount of the Notes the Holders of which are required to consent to
any such amendment or waiver or change the rights of the Holders of a Note with
respect thereto, (c) change the percentage of the principal amount of the Notes
the Holders of which may declare the Notes to be due and payable as provided in
Section 10.2 or change the rights of the Holders of a Note with respect thereto,
(d) change the percentage of the principal amount of the Notes the Holders of
which may rescind and annul any such declaration as provided in Section 10.2,
(e) release any of the Collateral except as shall otherwise be provided herein,
(f) change any of the terms or provisions of the Subsidiary Guaranties or (g)
modify the provisions of this Section 17. Any amendment or waiver effected in
accordance with this Section 17 shall be binding upon each Holder of any Note at
the time outstanding, each future Holder of any Note and the Company. No
amendment, waiver or consent shall, unless in writing and signed by the
Collateral Agent in addition to the Holders required above to take such action,
affect the rights or duties of the Collateral Agent under this Agreement or the
other Operative Agreements.

SECTION 18.      TERMINATION

               The Initial Purchaser may terminate this Agreement at any time
prior to the Closing Date by written notice to the Company if any of the
following has occurred:

               (a) since the date of the Offering Circular, any Material Adverse
Effect or development involving or reasonably expected to result in a
prospective Material Adverse Effect that could, in the Initial Purchaser's
judgment, be expected to (i) make it impracticable or inadvisable to proceed
with the offering or delivery of the Notes on the terms and in the manner
contemplated hereby, or (ii) materially impair the investment quality of any of
the Notes;




                                      -63-


               (b) the failure of the Company to satisfy the conditions
contained in Section 4 hereof on or prior to the Closing Date;

               (c) any outbreak or escalation of hostilities or other national
or international calamity or crisis, including acts of terrorism, or material
adverse change or disruption in economic conditions in, or in the financial
markets of, the United States or elsewhere (it being understood that any such
change or disruption shall be relative to such conditions and markets as in
effect on the date hereof), if the effect of such outbreak, escalation,
calamity, crisis or material adverse change in the economic conditions in, or in
the financial markets of, the United States or elsewhere could be reasonably
expected to make it, in the Initial Purchaser's judgment, impracticable or
inadvisable to market or proceed with the offering or delivery of the Notes on
the terms and in the manner contemplated hereby or to enforce contracts for the
sale of any of the Notes; or

               (d) the enactment, publication, decree or other promulgation
after the date hereof of any law that in the Initial Purchaser's counsel's
opinion materially and adversely affects, or could be reasonably expected to
materially and adversely affect, the properties, business, prospects,
operations, earnings, assets, liabilities or condition (financial or otherwise)
of the Company and its Subsidiaries, taken as a whole.

SECTION 19.      NOTICES, ETC.

               Except as otherwise provided in this Agreement, notices and other
communications under this Agreement shall be in writing and shall be delivered
by hand, by express courier service or by registered or certified mail, return
receipt requested, postage prepaid, addressed,

               (a) if to the Initial Purchaser, at 11100 Santa Monica Boulevard,
10th Floor, Los Angeles, California 90025, Attention: Jerry M. Gluck, Esq.,
Telephone No.: (310) 575-5200, Facsimile No.: (301) 575-5299, or at such other
address as the Initial Purchaser shall have specified to the Company and the
Collateral Agent in writing, with a copy to Mayer, Brown, Rowe & Maw, 1675
Broadway, New York, New York 10019-5820, Attention: Ronald S. Brody, Esq.,
Telephone No.: (212) 506-2500, Facsimile No.: (212) 262-1910,


               (b) if to any other Holder of any Note, to such Holder at such
address as such other Holder shall have specified to the Company and the
Collateral Agent in writing,

if to the Collateral Agent, at, 401 South Tryon Street - Suite 1200, Mail Code
NC-1179, Charlotte, North Carolina 28202, Attention: Greta Barthell, Trust
Administration, Telephone No.: (704) 374-6995, Facsimile No.: (704) 715-6995, or
at such other address as the Collateral Agent shall have specified to the
Company in writing, or

               (c) if to the Company, at the address specified at the beginning
of this Agreement to the attention of the President or the Chief Financial
Officer, Telephone No.: (509) 667-9600, Facsimile No.: (509) 667-9696, or at
such other address as the Company shall have specified to the Collateral Agent
in writing

or at such other address, or to the attention of such other officer, as the
Company shall have furnished to the Holders in writing. All notices and other
communications provided for under this Section 19 will be deemed given and
effective only when actually received.




                                      -64-


SECTION 20.      REPRODUCTION OF DOCUMENTS

               This Agreement, each other Operative Agreement and all documents
relating thereto, including, without limitation, (a) consents, waivers and
notifications which may hereafter be executed, (b) documents received by the
Holders at the Closing (except the Notes themselves), and (c) financial
statements, certificates and other information previously or hereafter furnished
to the Holders, may be reproduced by the Holders by any photographic,
photostatic, microfilm, microcard, miniature photographic or other similar
process and the Holders may destroy any original document so reproduced. The
Company agrees and stipulates that, to the extent permitted by applicable law,
any such reproduction shall be admissible in evidence as the original itself in
any judicial or administrative proceeding (whether or not the original is in
existence and whether or not such reproduction was made by the Holders in the
regular course of business) and any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence. This
Section 20 shall not prohibit the Company, the Collateral Agent or any Holder
from contesting any such reproduction to the same extent that it could contest
the original, or from introducing evidence to demonstrate the inaccuracy of any
such reproduction.

SECTION 21.      MISCELLANEOUS

               This Agreement shall be binding upon and inure to the benefit of
and be enforceable by the respective successors and assigns of the parties
hereto, whether so expressed or not, and, in particular, shall inure to the
benefit of and be enforceable by any Holder or Holders at the time of the Notes
or any part thereof. This Agreement embodies the entire agreement and
understanding among the Holders, the Collateral Agent and the Company and
supersedes all prior agreements and understandings, either oral or written,
relating to the subject matter hereof. The headings in this Agreement are for
purposes of reference only and shall not limit or otherwise affect the meaning
hereof. This Agreement may be executed in any number of counterparts, each of
which shall be an original, but all of which together shall constitute one
instrument.

SECTION 22.     SUBMISSION TO JURISDICTION

               For the purpose of assuring that any Holder of Notes may enforce
its rights under this Agreement, the Notes and the other Operative Agreements,
the Company for itself and its successors and assigns, hereby, to the fullest
extent permitted by applicable law, irrevocably (a) agrees that any legal or
equitable action, suit or proceeding brought against it arising out of or
relating to this Agreement or any other Operative Agreement, or any transaction
contemplated hereby or the subject matter of any of the foregoing or for
recognition or enforcement of any judgment rendered in any such action, suit or
proceeding may be instituted in any state or federal court sitting in the
Borough of Manhattan in the State of New York, (b) waives any objection which it
may now or hereafter have to the laying of venue of any such action, suit or
proceeding brought in any such court, and hereby further irrevocably and
unconditionally waives and agrees not to plead or claim that any such action,
suit or proceeding brought in any such court has been brought in an inconvenient
forum, or any right to require the proceeding to be conducted in any other
jurisdiction by reason of its present or future domicile, (c) irrevocably
submits itself to the non-exclusive jurisdiction of any state or federal court
of competent jurisdiction sitting in the Borough of Manhattan in the State of
New York for purposes of any such action, suit or proceeding, and (d)
irrevocably waives any immunity from jurisdiction to which it might




                                      -65-


otherwise be entitled in any such action, suit or proceeding which may be
instituted in any state or federal court sitting in the Borough of Manhattan in
the State of New York, and irrevocably waives any immunity from, or objection
to, the maintaining of an action against it to enforce any judgment for money
obtained in any such action, suit or proceeding and any immunity from execution.

SECTION 23.      WAIVER OF JURY TRIAL

               EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY WAIVES
THE RIGHT TO TRIAL BY JURY IN ANY LEGAL OR EQUITABLE ACTION, SUIT OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE NOTES OR ANY OTHER OPERATIVE
AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY OR THEREBY OR THE SUBJECT
MATTER OF ANY OF THE FOREGOING.

SECTION 24.      GOVERNING LAW

               THIS AGREEMENT HAS BEEN EXECUTED AND DELIVERED IN THE CITY OF NEW
YORK, STATE OF NEW YORK, UNITED STATES OF AMERICA. THIS AGREEMENT AND (UNLESS
OTHERWISE EXPRESSLY PROVIDED) ALL AMENDMENTS AND SUPPLEMENTS TO, AND ALL
CONSENTS AND WAIVERS PURSUANT TO, THIS AGREEMENT SHALL IN ALL RESPECTS BE
GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE, WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF (OTHER
THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW).

SECTION 25.      CONFIDENTIAL INFORMATION

               For the purposes of this Section 25, "Confidential Information"
means materials, documents and other information delivered to the Holders by or
on behalf of the Company or any of its Subsidiaries in connection with the
transactions contemplated by or otherwise pursuant to this Agreement, whether
before or after the Closing, that is proprietary in nature and that was, prior
to the Closing, clearly marked or orally represented, and after the Closing, is
clearly marked or labeled or otherwise adequately identified when received by
the Holders as being confidential information of the Company or such Subsidiary;
provided that such term does not include information that (a) was publicly known
or otherwise known to the Holders prior to the time of such disclosure, (b)
subsequently becomes publicly known through no act or omission by the Holders or
any person acting on the Holders' behalf or any other Person breaching any
obligation of confidentiality or fiduciary duty to the Company, (c) otherwise
becomes known to the Holders other than through disclosure by the Company or any
of its Subsidiaries or any other Person breaching any obligation of
confidentiality or fiduciary duty to the Company or (d) constitutes financial
statements delivered to the Holders hereunder that are otherwise publicly
available. The Holders will maintain the confidentiality of such Confidential
Information in accordance with procedures adopted by the Holders in good faith
to protect confidential information of third parties delivered to the Holders;
provided that the Holders may deliver or disclose Confidential Information to
(i) the Holders' directors, trustees, officers, employees, agents, attorneys and
affiliates (to the extent such disclosure reasonably relates to the




                                      -66-


administration of the investment represented by the Holders' Notes), (ii) the
Holders' financial advisors and other professional advisors who agree in writing
prior to its receipt of the Confidential Information to be bound by the
provisions of this Section 25, (iii) any other Holder of any Note, (iv) any
Institutional Investor to which the Holders sell or offer to sell such Note or
any part thereof or any participation therein (if such Person has agreed in
writing prior to its receipt of such Confidential Information to be bound by the
provisions of this Section 25), (v) any Person from which the Holders offer to
purchase any security of the Company (if such Person has agreed in writing prior
to its receipt of such Confidential Information to be bound by the provisions of
this Section 25), (vi) any federal or state regulatory authority having
jurisdiction over the Holders, (vii) the National Association of Insurance
Commissioners or any similar organization, or any nationally recognized rating
agency that requires access to information about the Holders' investment
portfolio or (viii) any other Person to which such delivery or disclosure may be
necessary or appropriate and who agrees in writing to be bound by the provisions
of this Section 25 (w) to effect compliance with any law, rule, regulation or
order applicable to the Holders, (x) in response to any subpoena or other legal
process; provided, however, that the Holders shall cooperate with the Company or
any of its Subsidiaries if the Company or any such Subsidiary seeks to have such
information requested pursuant to such subpoena or other legal process subject
to a protective order, (y) in connection with any litigation to which the
Holders are a party or (z) if an Event of Default has occurred and is
continuing, to the extent the Holders may reasonably determine such delivery and
disclosure to be necessary or appropriate in the enforcement or for the
protection of the rights and remedies under the Holders' Notes and this
Agreement. Each Holder of a Note, by its acceptance of a Note, will be deemed to
have agreed to be bound by and to be entitled to the benefits of this Section 25
as though it were a party to this Agreement. On reasonable request by the
Company in connection with the delivery to any Holder of a Note of information
required to be delivered to such Holder under this Agreement or requested by
such Holder (other than a Holder that is a party to this Agreement or its
nominee), such Holder will enter into an agreement with the Company embodying
the provisions of this Section 25.



                            [SIGNATURE PAGE FOLLOWS]




                                      -67-


               If you are in agreement with the foregoing, please sign the
accompanying counterpart of this Agreement and return the same to the
undersigned, whereupon this Agreement shall become a binding agreement among the
Holders, the Collateral Agent and the undersigned.



                                    Very truly yours,

                                    THE COMPANY:

                                    PACIFIC AEROSPACE & ELECTRONICS, INC.


                                    By: /s/ Donald A. Wright
                                        -------------------------------------
                                    Name: Donald A. Wright
                                    Title: Chief Executive Officer and President

The foregoing Agreement is hereby accepted and agreed to as of he date first
above written.

THE INITIAL PURCHASER:

JEFFERIES & COMPANY, INC.


By: /s/ Thane W. Carlston
    -------------------------------------
Name:   Thane W. Carlston
Title:  Managing Director


THE COLLATERAL AGENT:

FIRST UNION NATIONAL BANK, as Collateral Agent


By: /s/ Paul Thompson
    -------------------------------------
Name:   Paul Thompson
Title:  Vice President


                                      S-1


                               TABLE OF CONTENTS





                                                                                          PAGE
                                                                                          ----
                                                                                       
SECTION 1.      AUTHORIZATION OF NOTES.......................................................1

SECTION 2.      SALE AND PURCHASE OF NOTES; PAYMENTS ON THE NOTES............................1

    2.1    Sale and Purchase of the Notes....................................................1
    2.2    Payments of Principal.............................................................1
    2.3    Interest on the Notes.............................................................1
    2.4    Payments Free of Taxes............................................................2

SECTION 3.      CLOSING......................................................................2

SECTION 4.      CONDITIONS TO CLOSING........................................................3

    4.1    Representations and Warranties....................................................3
    4.2    Performance; No Default...........................................................3
    4.3    Compliance Certificates...........................................................3
    4.4    Opinions of Counsel...............................................................3
    4.5    Legal Investment..................................................................4
    4.6    Operative Agreements..............................................................4
    4.7    Use of Proceeds...................................................................4
    4.8    Proceedings and Documents.........................................................4
    4.9    Rating............................................................................4
    4.10   Insurance.........................................................................4
    4.11   CUSIP Number......................................................................5
    4.12   Exchange..........................................................................5
    4.13   Release of Liens; Financing Statements............................................5
    4.14   Corporate Documents...............................................................5
    4.15   Secretary's Certificates..........................................................5
    4.16   Offering Circular.................................................................6

SECTION 5.      REPRESENTATIONS AND WARRANTIES OF THE COMPANY................................6

    5.1    Corporate Existence; Qualification; Power; Licenses and Permits...................6
    5.2    Corporate and Governmental Authorization; Contravention...........................6
    5.3    Binding Effect....................................................................7





                                       i


                               TABLE OF CONTENTS
                                  (Continued)





                                                                                          PAGE
                                                                                          ----
                                                                                       
    5.4    Information.......................................................................7
    5.5    Litigation and Judgments..........................................................7
    5.6    Compliance with ERISA.............................................................7
    5.7    Taxes.............................................................................8
    5.8    Subsidiaries......................................................................9
    5.9    Not Investment Companies..........................................................9
    5.10   No Conflicting Requirements......................................................10
    5.11   Debt.............................................................................10
    5.12   Title to Properties and Assets...................................................10
    5.13   Compliance with Law..............................................................12
    5.14   Compliance with Environmental Laws...............................................12
    5.15   Security Interests and Liens; Inventory and Equipment............................13
    5.16   Labor Relations..................................................................13
    5.17   UCC Filing Information...........................................................14
    5.18   Solvency.........................................................................14
    5.19   Fictitious Business Names........................................................14
    5.20   Use of Proceeds..................................................................14
    5.21   Margin Stock.....................................................................15
    5.22   Affiliate Transactions...........................................................15
    5.23   Accuracy and Completeness of Information.........................................15
    5.24   Capital Stock....................................................................15
    5.25   Private Offering by the Company..................................................16

SECTION 6.      INITIAL PURCHASER'S REPRESENTATIONS.........................................16

    6.1    Initial Purchaser's Representations..............................................16

SECTION 7.      PREPAYMENT OF NOTES.........................................................16

    7.1    Required Prepayments of the Notes................................................16
    7.2    Optional Prepayments of the Notes................................................17
    7.3    Offers to Purchase Notes upon Certain Events.....................................17





                                       ii



                               TABLE OF CONTENTS
                                  (Continued)





                                                                                          PAGE
                                                                                          ----
                                                                                       
    7.4    Notice of Prepayments; Officers' Certificate.....................................19
    7.5    Allocation of Partial Prepayments................................................19
    7.6    Maturity; Surrender, etc.........................................................19
    7.7    Acquisition of Notes.............................................................19

SECTION 8.      AFFIRMATIVE COVENANTS OF THE COMPANY........................................20

    8.1    Financial Statements.............................................................20
    8.2    Reporting Requirements...........................................................21
    8.3    Payment of Obligations...........................................................22
    8.4    Maintenance of Property; Insurance...............................................22
    8.5    Compliance with Laws.............................................................24
    8.6    Inspection of Property, Books and Records; Change of Name, Principal Place
           of Business, Location of Collateral, Etc.........................................24
    8.7    Compliance with Operative Agreements.............................................24
    8.8    Corporate Existence..............................................................25
    8.9    ERISA............................................................................25
    8.10   Environmental Matters............................................................27
    8.11   Collateral Records...............................................................28
    8.12   Security Interests...............................................................28
    8.13   Taxes............................................................................29
    8.14   Accounts.........................................................................29
    8.15   Proprietary Rights...............................................................30
    8.16   Minimum EBITDA...................................................................30
    8.17   Repayment of Certain Debt........................................................31
    8.18   Collateral Agent Fees............................................................31

SECTION 9.      NEGATIVE COVENANTS OF THE COMPANY...........................................31

    9.1    Debt and Guarantees..............................................................31
    9.2    Restricted Payments..............................................................32
    9.3    Investments......................................................................32





                                      iii



                               TABLE OF CONTENTS
                                  (Continued)





                                                                                          PAGE
                                                                                          ----
                                                                                       
    9.4    Negative Pledge..................................................................33
    9.5    Consolidations, Mergers and Sales of Assets......................................34
    9.6    Capital Expenditures.............................................................34
    9.7    Transactions with Affiliates.....................................................35
    9.8    Restrictions on Foreign Subsidiary Support.......................................35
    9.9    Environmental Matters............................................................35
    9.10   Amendments to Certificates of Incorporation and By-Laws..........................35
    9.11   ERISA............................................................................36
    9.12   No Additional Bank Accounts......................................................36
    9.13   No Additional Subsidiaries.......................................................37

SECTION 10.     EVENTS OF DEFAULT; ACCELERATION.............................................37

    10.1   Events of Default................................................................37
    10.2   Acceleration.....................................................................39

SECTION 11.     COLLATERAL AGENT............................................................39

    11.1   Appointment of Collateral Agent; Powers and Immunities...........................39
    11.2   Reliance by Collateral Agent.....................................................40
    11.3   Default Events...................................................................40
    11.4   Rights as a Secured Party........................................................41
    11.5   Indemnification..................................................................41
    11.6   Documents........................................................................41
    11.7   Non-Reliance on Collateral Agent and Other Secured Parties.......................42
    11.8   Resignation or Removal of Collateral Agent.......................................42
    11.9   Authorization....................................................................43

SECTION 12.     DEFINITIONS.................................................................44

    12.1   Defined Terms....................................................................44
    12.2   Terms Generally..................................................................56

SECTION 13.     REGISTRATION, TRANSFER AND SUBSTITUTION OF NOTES............................57





                                       iv




                               TABLE OF CONTENTS
                                  (Continued)





                                                                                          PAGE
                                                                                          ----
                                                                                       
    13.1   Note Register; Ownership of Notes................................................57
    13.2   Transfer and Exchange of Notes...................................................57
    13.3   Replacement of Notes.............................................................58
    13.4   Notes Held by Company, Etc. Deemed Not Outstanding...............................58

SECTION 14.     PAYMENTS ON NOTES...........................................................58

    14.1   Place of Payment.................................................................58
    14.2   Home Office Payment..............................................................58

SECTION 15.     EXPENSES, INDEMNIFICATION, ETC..............................................59

SECTION 16.     SURVIVAL OF REPRESENTATIONS AND WARRANTIES..................................63

SECTION 17.     AMENDMENTS AND WAIVERS......................................................63

SECTION 18.     TERMINATION.................................................................63

SECTION 19.     NOTICES, ETC................................................................64

SECTION 20.     REPRODUCTION OF DOCUMENTS...................................................65

SECTION 21.     MISCELLANEOUS...............................................................65

SECTION 22.     SUBMISSION TO JURISDICTION..................................................65

SECTION 23.     WAIVER OF JURY TRIAL........................................................66

SECTION 24.     GOVERNING LAW...............................................................66

SECTION 25.     CONFIDENTIAL INFORMATION....................................................66





                                       v




                     
Schedule 5.4      --    Information
Schedule 5.5      --    Litigation and Judgments
Schedule 5.6      --    ERISA
Schedule 5.7(a)   --    Tax Returns
Schedule 5.8      --    Subsidiaries
Schedule 5.10     --    Defaults
Schedule 5.11     --    Debt
Schedule 5.12(a)  --    Real Estate
Schedule 5.12(b)  --    Proprietary Rights
Schedule 5.15     --    Consents
Schedule 5.17     --    UCC Filing Information
Schedule 5.19     --    Fictitious Business Names
Schedule 5.22     --    Affiliate Transactions
Schedule 5.24     --    Capital Stock
Schedule 8.15     --    Excluded Proprietary Rights
Schedule 9.3      --    Investments in Foreign Subsidiaries
Schedule 9.4      --    Liens
Schedule 9.5      --    Inactive Subsidiaries
Schedule 9.12     --    Bank Accounts


Exhibit A         --    Form of Note
Exhibit B-1       --    Form of Opinion of New York Counsel
Exhibit B-2       --    Form of Opinion of Washington Counsel
Exhibit C         --    Form of Compliance Certificate
Exhibit D         --    Form of Lockbox Agreement
Exhibit E         --    Form of Deed of Trust, Security Agreement and Fixture Filing
Exhibit F         --    Form of Pledge Agreement
Exhibit G         --    Form of Security Agreement
Exhibit H         --    Form of Subsidiary Guaranty
Exhibit I         --    List of Excluded Persons




                                      -1-


                      PACIFIC AEROSPACE & ELECTRONICS, INC.



                               DISCLOSURE SCHEDULE

                                       TO

                             NOTE PURCHASE AGREEMENT

                           DATED AS OF MARCH 19, 2002


        This Disclosure Schedule is furnished by Pacific Aerospace &
Electronics, Inc., a Washington corporation ("PA&E," "PACIFIC AEROSPACE" or the
"COMPANY") on behalf of itself and each of its Subsidiaries, as of the date
hereof pursuant to and as part of the Note Purchase Agreement dated as of March
19, 2002 (the "AGREEMENT"), by and between the Company, the initial purchaser
identified therein (the "Initial Purchaser") and First Union National Bank, a
national banking association, as Collateral Agent for the Holders (as defined
therein). Unless otherwise provided herein, the defined terms in this Disclosure
Schedule have the same meaning as under the Agreement. All attachments hereto
are incorporated into this Disclosure Schedule.

        Headings have been provided for the sections of this Disclosure Schedule
for convenience of reference only and shall to no extent have the effect of
amending or changing any express description of the sections set forth in the
Agreement.

        This Disclosure Schedule relates to certain matters concerning the
disclosures required and transactions contemplated by the Agreement. This
Disclosure Schedule is qualified in its entirety by reference to specific
provisions of the Agreement, and is not intended to constitute, and shall not be
construed as an admission that such information is material except to the extent
required by the Agreement.

        Copies of all agreements, contracts and documents referenced in this
Disclosure Schedule have been made available for inspection by the Holders.



                                  SCHEDULE 5.4

                                   INFORMATION


In KPMG's report on the Company's consolidated financial statements for the
fiscal year ended May 31, 2001, KPMG's opinion was a disclaimer of opinion.



                                  SCHEDULE 5.5

                            LITIGATION AND JUDGMENTS

LITIGATION

        The Company has the three following litigation matters outstanding:

               1. BONKOWSKI V. PACIFIC AEROSPACE & ELECTRONICS, INC., CHELAN
COUNTY (WA) SUPERIOR COURT CAUSE NO. 00-2-00523-1

               Date filed: June 2000

               Location: Wenatchee, WA

               Nature of dispute: A former employee whose position was
eliminated in 1999 has asserted claims for, among other things, unlawful
termination and age discrimination. This matter is in the discovery stage, and
trial is currently scheduled on June 17, 2002. The Company took Bonkowski's
deposition on January 15 and 16, 2002, and is in the process of preparing a
summary judgment motion.

               Amount at issue: Unknown

               Settlement: The Company has made a settlement offer of $10,000,
which was rejected. The plaintiff also agreed to mediate and then changed his
mind.

               2. BOTHELL, D/B/A ATLAS TECHNOLOGIES V. HITACHI ZOSEN CORP.,
NORTHWEST TECHNICAL INDUSTRIES, INC., AND K. SHIMOTSUMA ASSOCIATES, INC.,
JEFFERSON COUNTY (WA) SUPERIOR COURT CAUSE NO. 99-2-00230-9

               Date filed: August 1999

               Location: Port Angeles, WA

               Nature of dispute: Northwest Technical Industries, Inc. ("NTI"),
a wholly owned subsidiary of the Company, was sued on a 1994/1995 contract under
which NTI bonded metals for vacuum flanges produced by Atlas for Hitachi prior
to the Company's acquisition of NTI. Hitachi did not accept or pay for all of
the flanges. Atlas claims that, if it is proved that the flanges were defective,
NTI must have provided Atlas with defective materials and that NTI violated
provisions of a confidentiality agreement. NTI produced discovery materials for
plaintiff's counsel in approximately November 1999, which plaintiff's counsel
has yet to pick up. A trial date was set recently for Fall 2002 after the Court
threatened to dismiss the case for lack of activity, but the plaintiff's counsel
has not yet followed up regarding discovery.

               Amount at issue: Unknown

               Settlement: N/A



        3. SUPERIOR FORGE, INC. V. PACIFIC AEROSPACE & ELECTRONICS, INC.,
SUPERIOR COURT OF THE STATE OF CALIFORNIA, COUNTY OF ORANGE, CENTRAL JUSTICE
CENTER, CASE NO. 02CC02864

               Served on PA&E February 19, 2002

               Collection claim for $51,631.04



                                  SCHEDULE 5.6

                              COMPLIANCE WITH ERISA

The Company maintains the following Plans:

Mutual of Omaha Medical, Dental & Vision Insurance

ADP 401(k) Retirement Plan

Conover Flexible Benefits Plan




                                 SCHEDULE 5.7(a)

                                   TAX RETURNS


        The Company is in the process of discussions with the Inland Revenue
service in the United Kingdom regarding the amount of taxes owing in the United
Kingdom. The main issue concerns the interest on the loan of Sterling Pounds
23,700,000 from the Company to Pacific A&E (UK) Limited.

        The Company has not filed U.S. federal income tax returns for the years
ending May 31, 2000 and May 31, 2001. Both returns are currently being completed
by KPMG; and it is anticipated that no tax or penalties will be due with respect
to either of these returns.





                                  SCHEDULE 5.8

                                  SUBSIDIARIES




Subsidiary                                       100% Parent                    Shares Outstanding
- ----------                                       -----------                    ------------------
                                                                          
Aeromet America, Inc.                               PA&E                               100,000
Balo Precision Parts, Inc.                          PA&E                               100,000
Cashmere Manufacturing Co., Inc.                    PA&E                                 1,000
Ceramic Devices, Inc.                               PA&E                                 1,000
Electronic Specialty Corporation                    PA&E                               100,000
Northwest Technical Industries, Inc.                PA&E                               100,000
Pacific Coast Technologies, Inc.                    PA&E                            10,714,726
Seismic Safety Products, Inc.                       PA&E                               100,000
Skagit Engineering & Manufacturing, Inc.            PA&E                                   100
PA&E International, Inc.                            PA&E                               100,000
Pacific A & E Limited                               PA&E International, Inc.                 1
Pacific Aerospace & Electronics (UK)
Limited                                             Pacific A&E Ltd.                         1
Aeromet International PLC                           Pacific Aerospace &
                                                    Electronics (UK) Limited         1,000,000
PA&E Engineering, Inc.                              PA&E                               100,000


Aeromet International PLC also has several wholly-owned dormant U.K.
subsidiaries. They are:



Subsidiary                                          100% Parent                     Shares O/S
- ----------                                          -----------                     ----------
                                                                              
Frank Ford (Aircraft Components)
Limited                                             Aeromet International PLC            1,000
Kent Aerospace Limited                              Aeromet International PLC              100
TKR Aerospace Limited                               Aeromet International PLC           13,520
TKR Group Limited                                   Aeromet International PLC           30,000
TKR International Limited                           Aeromet International PLC        9,272,000
  (two classes of stock)                                                             6,600,000
Truflo Gas Turbines Limited                         Aeromet International PLC          250,000




                                  SCHEDULE 5.10

                                    DEFAULTS

The Company failed to make a semi-annual interest payment of approximately $3.6
million as required under the terms of its 11 1/4% Senior Subordinated Notes
(the "Subordinated Notes") that was due on August 1, 2001, and the Company also
failed to make that payment within the 30-day grace period that expired on
August 31, 2001. The Company also failed to make a payment of interest that was
due on the Subordinated Notes on February 1, 2002 and did not make such payment
during the 30-day grace period provided therein. The Subordinated Notes will be
exchanged for the New Notes on the Closing Date.

In addition, the Company did not make a quarterly interest payment of
approximately $618,000 that was due on its existing senior secured loan (the
"Senior Debt") on September 30, 2001, or before the expiration of the 5-day
grace period. The Company has entered into a forbearance agreement with the
holders of the Senior Debt to waive payment defaults and certain other defaults
on the Senior Debt. This agreement expired on December 31, 2001. Additionally,
the Company failed to repay the Senior Debt on December 31, 2001, its maturity
date. The Senior Debt will be repaid in full on the Closing Date with a portion
of the proceeds of the Notes issued and sold under this Agreement.

The Company has been notified by KeyBank National Association ("KeyBank") that
it is not in compliance with certain covenants of loans that are secured by the
Company's headquarters building and certain fixtures and improvements on what is
known as "Building #7". KeyBank has agreed pursuant to a forbearance letter
dated March 15, 2002, to forbear from exercising its remedies under the KeyBank
Promissory Notes until May 31, 2003. Such forbearance is conditioned upon there
being no loan or lease payment delinquency or defaults after April 1, 2002.



                                  SCHEDULE 5.11

                                      DEBT

             PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
                           ACTUAL DETAIL DEBT LISTING
                             AS OF JANUARY 31, 2002




        Creditor                                                      Balance
        --------                                                    ------------
                                                                 
PACIFIC AEROSPACE:
  Term Debt:
   KeyBank                                                          $  1,111,090
   Ford Credit                                                            19,707
   Ford Credit                                                            29,078
   Ford Credit                                                            15,634
   Ford Credit                                                            24,878
   Ford Credit                                                            12,411
   Ford Credit                                                            18,731
   DDJ                                                                13,731,446
   Senior Subordinated Notes                                          63,700,000

CASHMERE MANUFACTURING:
  Term Debt:
   KeyBank                                                               121,959
   Ford Credit                                                            25,447
   Ellison Machinery Company                                              54,197
   Ellison Machinery Company                                              43,549
   Ellison Machinery Company                                              42,112
   Ellison Machinery Company                                              42,112
   Ellison Machinery Company                                              47,327
   Ellison Machinery Company                                              47,327
   Ellison Machinery Company                                              11,189
   Ellison Machinery Company                                             337,525
   Ellison Machinery Company                                             198,995

  Capital Leases:
   GE Capital                                                             41,980
   GE Capital                                                             41,980

   NEC                                                                    83,999
   Amada Leasing Corp.                                                    34,078

PACIFIC COAST TECHNOLOGIES:
  Term Debt:
   KeyBank                                                          $    487,839
  Capital Leases:
   GE Capital                                                             35,256
   GE Capital                                                             35,744
   GE Capital                                                             41,196
                                                                    ============






        Creditor                                                      Balance
        --------                                                    ------------
                                                                 
   GE Capital                                                             98,759
   CIT Group                                                              70,397
   CIT Group                                                              98,444

PACIFIC A&E LIMITED:
  Term Debt:
   PA&E International, Inc.                                           38,908,000

PACIFIC AEROSPACE & ELECTRONICS (UK) LIMITED:
  Term Debt:
   Pacific A&E Limited                                                29,481,000

AEROMET INTERNATIONAL:
  Capital Lease:
   Lloyds Bowmaker                                                       476,000
                                                                    ------------

   Total term debt and capital leases                               $149,569,386
                                                                    ============





                                 PRO FORMA DEBT*

                      Pacific Aerospace & Electronics, Inc.
                              ProForma Debt Listing
                            (AS OF JANUARY 31, 2002)




          Creditor                                                    Balance
          -------                                                   ------------
                                                                 
PACIFIC AEROSPACE:
 Term Debt:
  KeyBank                                                           $  1,111,090
  Ford Credit                                                             19,707
  Ford Credit                                                             29,078
  Ford Credit                                                             15,634
  Ford Credit                                                             24,878
  Ford Credit                                                             12,411
  Ford Credit                                                             18,731
  Herman Jones Note**                                                    750,000
  DDJ                                                                         --
  Old Notes                                                            1,000,000
  New Notes                                                           15,000,000
  Notes                                                               22,000,000

CASHMERE MANUFACTURING:
 Term Debt:
  KeyBank                                                                121,959
  Ford Credit                                                             25,447
  Ellison Machinery Company                                               54,197
  Ellison Machinery Company                                               43,549
  Ellison Machinery Company                                               42,112
  Ellison Machinery Company                                               42,112
  Ellison Machinery Company                                               47,327
  Ellison Machinery Company                                               47,327
  Ellison Machinery Company                                               11,189
  Ellison Machinery Company                                              337,525
  Ellison Machinery Company                                              198,995
 Capital Leases:
  GE Capital                                                              41,980
  GE Capital                                                              41,980
  NEC                                                                     83,999
  Amada Leasing Corp.                                                     34,078



- --------

* This pro forma Schedule has been prepared as if the Debt incurred by the
issuance of the Notes had been incurred as of the date hereof and the existing
Debt under the DDJ Loan Agreement has been repaid in full.

** This promissory note will be issued pursuant to a Settlement Agreement
between the Company and Herman L. Jones dated February 28, 2002 (the Settlement
Agreement"). Although this obligation was not outstanding as of January 31,
2002, we have included it in this table. The amount of this promissory note
could increase by $200,000 if the Company fails to transfer its Cashmere, WA
warehouse to Mr. Jones pursuant to the Settlement Agreement by June 1, 2002.






          Creditor                                                    Balance
          -------                                                   ------------
                                                                 
PACIFIC COAST TECHNOLOGIES:
 Term Debt:
  KeyBank                                                           $    487,839
 Capital Leases:
  GE Capital                                                              35,256
  GE Capital                                                              35,744
  GE Capital                                                              41,196
  GE Capital                                                              98,759
  Jules and Associates                                                    70,397
  CIT Group                                                               98,444

PACIFIC A & E LIMITED:
 Term Debt:
  PA&E International, Inc.                                            38,908,000

PACIFIC AEROSPACE & ELECTRONICS (UK) LIMITED:
 Term Debt:
  Pacific A & E Limited                                               29,481,000

AEROMET INTERNATIONAL:
 Capital Lease:
                                                                    ------------
 Lloyds Bowmaker                                                         476,000
                                                                    ------------
 Total term debt and capital leases                                 $110,887,940
                                                                    ============




                                SCHEDULE 5.12(a)

                         REAL PROPERTY OWNED AND LEASED

OWNED REAL PROPERTY (U.S.):



    Owner                               Location                              Use
    -----                               --------                              ---
                                                                        
1.  PA&E                                430 Olds Station Road                 PA&E headquarters
                                        Wenatchee, WA 98801

2.  Cashmere                            209 Mission Street                    Warehouse
    Manufacturing Co., Inc.             Cashmere, WA 98815

3.  Northwest Technical                 2249 Diamond Point Road               Bonded Metals Div.
    Industries, Inc.                    Sequim, WA 98382                      operations


LEASED REAL PROPERTY (U.S.):



                                                                            Date
           Lessee and Address                       Lessor                 Leased                Use
           ------------------                       ------                 ------                ---
                                                                                 
1.  Cashmere Manufacturing Co., Inc.            Port of Chelan             9/1/95         Mach. Div. Operations
    432 Olds Station Rd.
    Wenatchee, WA 98801

2.  Pacific Coast Technologies, Inc.            Port of Chelan             8/1/93         Electr. Group Operations
    434 Olds Station Rd.
    Wenatchee, WA 98801

3.  PA&E                                        Port of Chelan             1/1/99         Mach. Div. Operations
    200 Olds Station Rd.
    Wenatchee, WA 98801

4.  PA&E                                        Port of Chelan             6/13/00        Mach. Div. Operations
    2605 Chester Kimm Road
    Wenatchee, WA 98801

5.  Electronic Specialty Corporation            Erickson Realty, Ltd.      3/31/94        Display Div.
    14511 NE 13th Ave.                                                                    Operations (not in
    Vancouver, WA 98685                                                                   use)

6.  Skagit Engineering & Manufacturing, Inc.    Sea-Land Development       7/1/98         Eng. & Fab. Div.
    500 Metcalf Street                                                                    Operations (not in
    Sedro-Woolley, WA 98284                                                               use. Partially terminated)






                                                                            Date
           Lessee and Address                       Lessor                 Leased                Use
           ------------------                       ------                 ------                ---
                                                                                 
7.  Skagit Engineering & Manufacturing, Inc.    220th Street LLC           11/1/00        Eng. & Fab. Office
    6808 220th St. SW                                                                     (subleased to Nova-Tech,
    Suite 200                                                                             Inc. pursuant to a sublease
    Mountlake Terrace, WA 98043                                                           agreement dated as of
                                                                                          12/21/01)


RIGHTS OF OTHERS WITH RESPECT TO REAL PROPERTY (EXCLUDING LIENS):




                                                                                          Agreement
           Description                       Lessee                   Lessor                Date
           -----------                       ------                   ------                ----
                                                                                 
1.  Option to Purchase condo             Donald A. Wright        PA&E                      1/29/99
    Unit 4
    430 Olds Station Road
    Wenatchee, WA  98801

2.  Co-Location Agreement                Northwest               PA&E                      8/1/00
    (use of roof space)                  Telephone, Inc.
    430 Olds Station Road
    Wenatchee, WA  98801

3.  Right of First Refusal               Northwest Explosive     Northwest Technical       4/30/97
    2249 Diamond Point Road              Bonding, Inc.           Industries, Inc.
    Sequim, WA  98382

4.  Sublease of #7 above                 Nova-Tech, Inc.         Skagit Engineering &      12/21/01
    6808 220th SW                                                Manufacturing, Inc.
    Mountlake Terrace, WA

5.  Remote blasting site                 Northwest Technical     Rayonier, Inc.            3/15/00
    (site has no address)                Industries, Inc.

6.  Sublease of second floor and part    North Central           PA&E                      8/6/01
    of first floor of headquarters       Educational Service
    building                             District
    430 Olds Station Road
    Wenatchee, WA 98801





                                SCHEDULE 5.12(b)

                             PATENTS AND TRADEMARKS

                        PACIFIC COAST TECHNOLOGIES, INC.
                               PATENT STATUS CHART




- -------------------------------------------------------------------------------------------------------------
   APPLICANT/
    PATENTEE/        ATTORNEY
    ASSIGNEE          DOCKET                                           FILING         PATENT        ISSUE
     COUNTRY           NO.          INVENTORS        SERIAL NO.         DATE            NO.         DATE
- -------------------------------------------------------------------------------------------------------------
                                                                                
    PCT, Inc.        42474/5     James C. Kyle                        07.16.81       4,507,522     03.26.85
       USA           Kyle 12
- -------------------------------------------------------------------------------------------------------------
    PCT, Inc.        42474/5     James C. Kyle                        05.02.84       4,512,791     04.23.85
       USA           Kyle 13
- -------------------------------------------------------------------------------------------------------------
    PCT, Inc.        42474/5     James C. Kyle                        05.02.84       4,514,207     04.30.85
       USA           Kyle 14
- -------------------------------------------------------------------------------------------------------------
    PCT, Inc.        42474/5     James C. Kyle                        10.08.82       4,514,590     04.30.85
       USA           Kyle 15
- -------------------------------------------------------------------------------------------------------------
    PCT, Inc.        42474/5     James C. Kyle                        11.04.82       4,518,820     05.21.85
       USA           Kyle 16
- -------------------------------------------------------------------------------------------------------------
    PCT, Inc.        42474/5     James C. Kyle                        05.02.84       4,593,758     06.10.86
       USA           Kyle 17
- -------------------------------------------------------------------------------------------------------------
    PCT, Inc.        42474/5     James C. Kyle                        12.04.84       4,654,752     03.31.87
       USA           Kyle 18
- -------------------------------------------------------------------------------------------------------------
    PCT, Inc.        42474/5     James C. Kyle                        06.29.84       4,657,337     04.14.87
       USA           Kyle 19
- -------------------------------------------------------------------------------------------------------------
  PCT, Inc.(1)       42474/5     James C. Kyle                        10.20.83       4,925,607     5.15.90
       USA           Kyle 20
- -------------------------------------------------------------------------------------------------------------




- -------------------------------------------------------------------------------------------------------------------
   APPLICANT/
    PATENTEE/
    ASSIGNEE         EXPIRATION                                                                   MAINTENANCE
     COUNTRY            DATE                        TITLE                         STATUS          FEE DUE DATES
- -------------------------------------------------------------------------------------------------------------------
                                                                                     
    PCT, Inc.         03.26.02      TERMINAL ASSEMBLY                      IN FORCE              No further fees
       USA                                                                                       due
- -------------------------------------------------------------------------------------------------------------------
    PCT, Inc.         04.23.02      HERMETICALLY SEALED INSULATING         IN FORCE              No further fees
       USA                          ASSEMBLY                                                     due
- -------------------------------------------------------------------------------------------------------------------
    PCT, Inc.         04.30.02      METHOD FOR MAKING TERMINAL ASSEMBLY    IN FORCE              No further fees
       USA                          FOR HEART PACEMAKER                                          due
- -------------------------------------------------------------------------------------------------------------------
    PCT, Inc.         10.08.02      ELECTRICAL TERMINAL ASSEMBLY           IN FORCE              No further fees
       USA                                                                                       due
- -------------------------------------------------------------------------------------------------------------------
    PCT, Inc.         11.04.02      TERMINAL ASSEMBLY FOR HEART PACEMAKER  IN FORCE              No further fees
       USA                                                                                       due
- -------------------------------------------------------------------------------------------------------------------
    PCT, Inc.         06.10.03      HERMETICALLY SEALED INSULATING         IN FORCE              No further fees
       USA                          ASSEMBLY                                                     due
- -------------------------------------------------------------------------------------------------------------------
    PCT, Inc.         12.04.04      TERMINAL ASSEMBLY AND METHOD OF        IN FORCE              No further fees
       USA                          MAKING TERMINAL ASSEMBLY                                     due
- -------------------------------------------------------------------------------------------------------------------
    PCT, Inc.         06.29.04      ELECTRICAL CONNECTOR & METHOD OF       IN FORCE              No further fees
       USA                          PRODUCING ELECTRICAL CONNECTOR                               due
- -------------------------------------------------------------------------------------------------------------------
  PCT, Inc.(1)        05.15.07      ELECTRICAL INSULATING MATERIAL         IN FORCE              Release of Sec'y
       USA                          FORMED FROM AT LEAST ONE FLUX AND A                          Int. sent to
                                    CRYSTALLINE STUFFING MATERIAL                                Kyle for
                                                                                                 signature
                                                                                                 01.02. Sec'y
                                                                                                 Int. not yet
                                                                                                 released; need
                                                                                                 to correct fee
                                                                                                 payment.
- -------------------------------------------------------------------------------------------------------------------


- --------

(1) Assignment to PCT, Inc. included security interest to Kyle. Obligation to
Kyle has been satisfied. Requested and have not yet received the executed
release of the security interest.






- -------------------------------------------------------------------------------------------------------------
   APPLICANT/
    PATENTEE/        ATTORNEY
    ASSIGNEE          DOCKET                                           FILING         PATENT        ISSUE
     COUNTRY           NO.          INVENTORS        SERIAL NO.         DATE            NO.         DATE
- -------------------------------------------------------------------------------------------------------------
                                                                                
- -------------------------------------------------------------------------------------------------------------

    PCT, Inc.        42474/5     James C. Kyle                        09.20.82       4,935,583     06.19.90
       USA           Kyle 21
- -------------------------------------------------------------------------------------------------------------
    PCT, Inc.        42474/6     Edward A. Taylor                     01.07.92       5,298,683     03.29.94
       USA           Taylor 1
- -------------------------------------------------------------------------------------------------------------
    PCT, Inc.        42474/7     Edward A. Taylor                     06.02.94       5,433,260     07.18.95
       USA           Taylor 2

- -------------------------------------------------------------------------------------------------------------
    PCT, Inc.        42474/7     Edward A. Taylor                     06.19.95       5,675,122     10.07.97
       USA           Taylor 3
- -------------------------------------------------------------------------------------------------------------
    PCT, Inc.       42474/19c1   Edward              09/006,696       01.14.98       5,986,208     11.16.99
       USA           Taylor 5    A.Taylor;
                                 Marshall Neal
                                 Hulbert
- -------------------------------------------------------------------------------------------------------------
    PCT, Inc.       42474/801    Brian Lasater       09/076,230        5.12.98       6,221,513     04.24.01
       USA          Lasater 1





- -------------------------------------------------------------------------------------------------------------
    PCT, Inc.       42474/801    Brian Lasater      99 921 874.6      Priority
     EUROPE            PCT                                          Date 05.11.99
                    Lasater 1                                       PCT/US99/10313
                    PCT Int'l                                         Published
                                                                     11.18.99 as
                                                                    WO 99/58332.


- -------------------------------------------------------------------------------------------------------------
    PCT, Inc.      42474/80      Brian Lasater       09/235,223       01.22.99       6,232,004     05.15.01
       USA         2a Lasater
                       4
- -------------------------------------------------------------------------------------------------------------





- -------------------------------------------------------------------------------------------------------------------
   APPLICANT/
    PATENTEE/
    ASSIGNEE         EXPIRATION                                                                   MAINTENANCE
     COUNTRY            DATE                        TITLE                         STATUS          FEE DUE DATES
- -------------------------------------------------------------------------------------------------------------------
                                                                                     
    PCT, Inc.          06.19.07      INSULATED CONDUCTOR WITH               IN FORCE              No further fees
       USA                           CERAMIC-CONNECTED ELEMENTS                                   due
- -------------------------------------------------------------------------------------------------------------------
    PCT, Inc.          01.07.12      DISSIMILAR METAL CONNECTORS            IN FORCE              09.29.05
       USA
- -------------------------------------------------------------------------------------------------------------------
    PCT, Inc.          07.27.12      SEALABLE ELECTRONIC PACKAGES &         IN FORCE              01.18.03,
       USA                           METHODS OF PRODUCING & SEALING SUCH                          01.18.07
                                     PACKAGES
- -------------------------------------------------------------------------------------------------------------------
    PCT, Inc.          07.27.12      SEALABLE ELECTRONIC PACKAGES           IN FORCE              04.07.05
       USA                                                                                        04.07.09
- -------------------------------------------------------------------------------------------------------------------
    PCT, Inc.          03.19.16      WAVEGUIDE WINDOW ASSEMBLY AND          IN FORCE              05.16.03,
       USA                           MICROWAVE ELECTRONICS PACKAGE                                05.16.07,
                                                                                                  05.16.11
- -------------------------------------------------------------------------------------------------------------------
    PCT, Inc.          05.12.18      METHODS FOR HERMETI-CALLY SEALING      IN FORCE              BROADENING
       USA                           CERAMIC TO METALLIC SURFACES AND                             REISSUE DEADLINE
                                     ASSEMBLIES INCORPORATING SUCH SEALS                          04.24.03; MAINT.
                                                                                                  FEES DUE:
                                                                                                  10.24.04,
                                                                                                  10.24.08,
                                                                                                  10.24.12
- -------------------------------------------------------------------------------------------------------------------
    PCT, Inc.                        METHODS AND MATERIALS FOR SEALING      Pending; Designated   Maintenance fee
       EUROPE                        CERAMIC TO METALLIC SURFACES           countries are:        due annually.
                                                                            Switzerland-
                                                                            Liechtenstein,
                                                                            Germany; Denmark
                                                                            France, Great
                                                                            Britain, Italy,
                                                                            Netherlands and
                                                                            Sweden.
- -------------------------------------------------------------------------------------------------------------------
    PCT, Inc.          05.06.18      METHODS FOR TREATING CERAMIC           IN FORCE              BROADENING
       USA                           MATERIALS AND CERAMIC MATERIALS                              REISSUE DEADLINE
                                     PRODUCED THEREBY (Zirconia treatment                         05.15.03; MAINT.
                                     with metals)                                                 FEES DUE:
                                                                                                  11.15.04;
                                                                                                  11.15.08;
                                                                                                  11.15.12
- -------------------------------------------------------------------------------------------------------------------







- -------------------------------------------------------------------------------------------------------------
   APPLICANT/
    PATENTEE/        ATTORNEY
    ASSIGNEE          DOCKET                                           FILING         PATENT        ISSUE
     COUNTRY           NO.          INVENTORS        SERIAL NO.         DATE            NO.         DATE
- -------------------------------------------------------------------------------------------------------------
                                                                                
- -------------------------------------------------------------------------------------------------------------
    PCT, Inc.      2474/802 PCT  Brian Lasater      99 920 345.8      Priority
     EUROPE         Lasater 3                                       Date 05.05.99
                                                                    PCT/US99/09819
                                                                      Published
                                                                     11.18.99 as
                                                                    WO 99/58690.

- -------------------------------------------------------------------------------------------------------------
    PCT, Inc.       42474/17-5   Edward J. Rapoza                     07.09.91       5,110,307     05.05.92
       USA           Rapoza 1
- -------------------------------------------------------------------------------------------------------------
    PCT, Inc.        42474/17    Edward J. Rapoza                     05.04.92       5,405,272     04.11.95
       USA           Rapoza 2

- -------------------------------------------------------------------------------------------------------------
      UK(2)          42474/17    Edward J. Rapoza    92303983.8       05.01.92     EP 0 522 687    03.05.97
                     Rapoza 3                                                           B1
- -------------------------------------------------------------------------------------------------------------
    PCT, Inc.        42474/17    Edward J. Rapoza   Can. 20676671     04.30.92       2,067,667     12.25.01
                     Rapoza 4
- -------------------------------------------------------------------------------------------------------------
    PCT, Inc.        42474/17    William F.                           11.01.90       5,041,019     08.20.91
       USA           Sharp 1     Sharp, et al.
- -------------------------------------------------------------------------------------------------------------
    PCT, Inc.        42474/17    William F.                           03.18.91       5,109,594     05.05.92
       USA           Sharp 2     Sharp, et al.
- -------------------------------------------------------------------------------------------------------------
    PCT, Inc.        42474/17    Wayne R. Snow,                       09.26.85       4,690,480     09.01.87
       USA            Snow 1     et. al.
- -------------------------------------------------------------------------------------------------------------





- -------------------------------------------------------------------------------------------------------------------
   APPLICANT/
    PATENTEE/
    ASSIGNEE         EXPIRATION                                                                     MAINTENANCE
     COUNTRY            DATE                        TITLE                         STATUS            FEE DUE DATES
- ---------------------------------------------------------------------------------------------------------------------
                                                                                       
- ---------------------------------------------------------------------------------------------------------------------
    PCT, Inc.                       METHODS FOR TREATING CERAMIC           Pending;                Maintenance fee
     EUROPE                         MATERIALS AND IMPROVED TREATED         Switzerland-            due annually
                                    CERAMIC MATERIALS PRODUCED THEREBY     Liechtenstein
                                    (Zirconia staining with titanium)      Germany; Denmark
                                                                           France, Great Britain,
                                                                           Italy, Netherlands
                                                                           and Sweden
- -------------------------------------------------------------------------------------------------------------------
    PCT, Inc.         07.09.11      LASER WELDABLE HERMETIC CONNECTOR      IN FORCE               11.05.03
       USA
- --------------------------------------------------------------------------------------------------------------------
    PCT, Inc.         04.11.12      LASER WELDABLE HERMETIC CONNECTOR      IN FORCE               10.11.02,
       USA                                                                                        10.11.06
- --------------------------------------------------------------------------------------------------------------------
      UK(2)           05.01.12      LASER WELDABLE HERMETIC CONNECTOR      EU patent              ANNUALLY ON MAY
                                                                           enforceable in UK      3RD
- --------------------------------------------------------------------------------------------------------------------
    PCT, Inc.         04.30.12      LASER WELDABLE HERMETIC CONNECTOR      IN FORCE               ANNUALLY ON
                                                                                                  APRIL 30TH
- --------------------------------------------------------------------------------------------------------------------
    PCT, Inc.         11.01.10      TRANSITION JOINT FOR MICROWAVE         IN FORCE               02.20.03
       USA                          PACKAGE
- --------------------------------------------------------------------------------------------------------------------
    PCT, Inc.         11.01.10      METHOD OF MAKING SEALED TRANSITION     IN FORCE               11.05.03
       USA                          JOINT
- --------------------------------------------------------------------------------------------------------------------
    PCT, Inc.         09.26.05      TUBULAR BI-METAL CONNECTOR             IN FORCE               No further fees
       USA                                                                                        due
- -------------------------------------------------------------------------------------------------------------------



- --------

(2) Assignment to PCT, Inc. not yet recorded in UK; we are following up to
record.




                      PACIFIC AEROSPACE & ELECTRONICS, INC.
                               PATENT STATUS CHART



- ------------------------------------------------------------------------------------------------------------------
      APPLICANT/
      PATENTEE/
      ASSIGNEE           ATTORNEY                                            FILE         PATENT        ISSUE
      COUNTRY           DOCKET NO.        INVENTORS         SERIAL NO.       DATE           NO.         DATE
- ------------------------------------------------------------------------------------------------------------------
                                                                                    
Pacific Aerospace &     42474/900     David N. Crane      09/200,204       11.25.98     6,150,772     11.21.00
 Electronics, Inc.
        USA





- ------------------------------------------------------------------------------------------------------------------
Pacific Aerospace &     42474/901     Herman L.           09/302,590       04.30.99
Electronics, Inc.(3)                  ("Jack") Jones;
        USA                           Edward A. Taylor




- ------------------------------------------------------------------------------------------------------------------
Pacific Aerospace &     42474/902     Herman L.           09/303,196       04.30.99     6,284,389     09.04.01
 Electronics, Inc.                    ("Jack") Jones;
        USA                           Edward A. Taylor





- ------------------------------------------------------------------------------------------------------------------
Pacific Aerospace &       42474/      Herman L.           EP 00            11.15.01
 Electronics, Inc.       901-2.EP     ("Jack") Jones;     '928'580.0
                                      Edward A. Taylor    Nat'l phase of
       EUROPE                                               PCT/US00/
                                                              11579
- ------------------------------------------------------------------------------------------------------------------





- ------------------------------------------------------------------------------ -----------------------------------------
      APPLICANT/
      PATENTEE/                                                                                          MAINTENANCE
      ASSIGNEE         EXPIRATION                                                                          FEE DUE
      COUNTRY             DATE                          TITLE                          STATUS               DATES
- ------------------------------------------------------------------------------ -----------------------------------------
                                                                                           
Pacific Aerospace &    11.25.18         GAS DISCHARGE LAMP CONTROLLER          IN FORCE                BROADENING
 Electronics, Inc.                                                                                     REISSUE
        USA                                                                                            DEADLINE
                                                                                                       11.21.02;
                                                                                                       MAINT. FEES
                                                                                                       DUE:  05.21.04,
                                                                                                       05.21.08,
                                                                                                       05.21.12
- ------------------------------------------------------------------------------ -----------------------------------------
Pacific Aerospace &                     ELECTRONICS PACKAGES HAVING A          PENDING; Claims
Electronics, Inc.(3)                    COMPOSITE STRUCTURE AND METHODS FOR    allowed; Issue Fee
        USA                             MANUFACTURING SUCH ELECTRONICS         paid and formal
                                        PACKAGES                               drawings submitted.

                                                                               IN NEGOTIATIONS WITH
                                                                               JONES.

- ------------------------------------------------------------------------------ -----------------------------------------
Pacific Aerospace &       04.30.19      COMPOSITE MATERIALS AND METHODS FOR    IN FORCE                BROADENING
 Electronics, Inc.                      MANUFACTURING COMPOSITE MATERIALS                              REISSUE
        USA                                                                    IN NEGOTIATIONS WITH    DEADLINE
                                                                               JONES.                  09.04.03;
                                                                                                       MAINT. FEES
                                                                                                       DUE:  03.04.05
                                                                                                       03.04.09
                                                                                                       03.04.13
- ------------------------------------------------------------------------------ -----------------------------------------
Pacific Aerospace &                     COMPOSITE ELECTRONICS PACKAGES AND     PENDING.
 Electronics, Inc.                      METHODS FOR MANUFACTURE
                                                                               IN NEGOTIATIONS WITH
       EUROPE                                                                  JONES.

- ------------------------------------------------------------------------------ -----------------------------------------



- --------

(3) Mr. Jones holds a Security Interest in these applications but has consented
to the granting by the Company of a second priority perfected security interest
in these applications.




                          SEISMIC SAFETY PRODUCTS, INC.
                               PATENT STATUS CHART




- --------------------------------------------------------------------------------------------------------------
   APPLICANT/
    PATENTEE/        ATTORNEY
    ASSIGNEE          DOCKET                                                                        ISSUE
     COUNTRY           NO.          INVENTORS        SERIAL NO.      FILE DATE      PATENT NO.      DATE
- --------------------------------------------------------------------------------------------------------------
                                                                                 
Seismic Safety       42474/28    James C. McGill                      03.07.88      4,903,720      02.27.90
Prods., Inc.         McGill 1
USA
- --------------------------------------------------------------------------------------------------------------
Seismic Safety       42474/28    James C. McGill                      02.26.91      5,119,841      06.09.92
Prods., Inc.         McGill 2
USA
- --------------------------------------------------------------------------------------------------------------
Seismic Safety       42474/28    James C.                             11.09.93      5,409,031      04.25.95
Prods., Inc.         McGill 3    McGill, Antonio
USA                              F. Fernandez
- --------------------------------------------------------------------------------------------------------------
Seismic Safety       42474/28    James C.                             03.13.95      5,704,385      01.06.98
Prods., Inc.         McGill 4    McGill, Antonio
USA                              F. Fernandez
- --------------------------------------------------------------------------------------------------------------





- ----------------------------------------------------------------------------------------------------------------------
   APPLICANT/
    PATENTEE/
    ASSIGNEE            EXPIRATION                                                                     MAINTENANCE
     COUNTRY               DATE                          TITLE                         STATUS          FEE DUE DATES
- ----------------------------------------------------------------------------------------------------------------------
                                                                                           
Seismic Safety          03.07.08         SAFETY SHUTOFF DEVICE                  IN FORCE               All fees paid
Prods., Inc.
USA
- ----------------------------------------------------------------------------------------------------------------------
Seismic Safety          02.26.11         SAFETY SHUT OFF APPARATUS              IN FORCE               12.09.03
Prods., Inc.
USA
- ----------------------------------------------------------------------------------------------------------------------
Seismic Safety          04.25.12         SAFETY SHUT OFF VALVE                  IN FORCE               10.25.02,
Prods., Inc.                                                                                           10.25.06
USA
- ----------------------------------------------------------------------------------------------------------------------
Seismic Safety          01.06.15         AUTOMATIC AND MANUALLY OPERABLE        IN FORCE               07.06.05,
Prods., Inc.                             SAFETY SHUTOFF VALVE                                          07.06.09
USA
- ----------------------------------------------------------------------------------------------------------------------






                            AEROMET INTERNATIONAL PLC
                               PATENT STATUS CHART




- -----------------------------------------------------------------------------------------------------------------
   APPLICANT/
    PATENTEE/        ATTORNEY
    ASSIGNEE          DOCKET                                          FILING                        ISSUE
     COUNTRY           NO.          INVENTORS        SERIAL NO.        DATE         PATENT NO.      DATE
- -----------------------------------------------------------------------------------------------------------------
                                                                                 
- -----------------------------------------------------------------------------------------------------------------
Aeromet Int'l PLC                                     9804599.0     03.05.98
                                                      (initial)
                                                      9904741.7
                                                       (final)
- -----------------------------------------------------------------------------------------------------------------
Aeromet Int'l PLC                                    99104277.1
     EUROPE
- -----------------------------------------------------------------------------------------------------------------
Aeromet Int'l PLC                                      2264214
     CANADA
- -----------------------------------------------------------------------------------------------------------------
Aeromet Int'l      A00009359US   Butler              09/262,446       03.04.99      6,126,898      10.03.00
       USA                                                          priority to
                                                                      03.05.98
- -----------------------------------------------------------------------------------------------------------------
Aeromet Int'l                                         11-57989
      JAPAN
- -----------------------------------------------------------------------------------------------------------------





- ----------------------------------------------------------------------------------------------------------------
   APPLICANT/
    PATENTEE/                                                                                   MAINTENANCE
    ASSIGNEE       EXPIRATION                                                                   FEE DUE
     COUNTRY          DATE                     TITLE                          STATUS            DATES
- ----------------------------------------------------------------------------------------------------------------
                                                                                    
- ----------------------------------------------------------------------------------------------------------------
Aeromet Int'l PLC                CAST ALUMINUM-COPPER ALLOY          PENDING; no further
                                                                     information.


- ----------------------------------------------------------------------------------------------------------------
Aeromet Int'l PLC                CAST ALUMINUM-COPPER ALLOY          PENDING; no further
     EUROPE                                                          information.
- ----------------------------------------------------------------------------------------------------------------
Aeromet Int'l PLC                CAST ALUMINUM-COPPER ALLOY          PENDING; no further
     CANADA                                                          information.
- ----------------------------------------------------------------------------------------------------------------
Aeromet Int'l      03.04.19      CAST ALUMINUM-COPPER ALLOY          IN FORCE                   BROADENING
     USA                                                                                        REISSUE
                                                                                                DEADLINE
                                                                                                10.03.02;
                                                                                                MAINT. FEES
                                                                                                DUE:
                                                                                                04.03.04,
                                                                                                04.03.08,
                                                                                                04.03.12
- ----------------------------------------------------------------------------------------------------------------
Aeromet Int'l                    CAST ALUMINUM-COPPER ALLOY          PENDING; no further
    JAPAN                                                            information.
- ----------------------------------------------------------------------------------------------------------------





                       TRADEMARK STATUS REPORT FOR
                  PACIFIC AEROSPACE & ELECTRONICS, INC.




- ------------------------------------------------------------------------------------------------------
                         CLIENT/
                         MATTER                                                 SERIAL        FILING
      ASSIGNEE             NO.                MARK              COUNTRY           NO.          DATE
- ------------------------------------------------------------------------------------------------------
                                                                              
PCT, Inc.                42174/10     KRYOFLEX                    USA         73/117,580     03.01.77


- ------------------------------------------------------------------------------------------------------
PCT, Inc.                42174/11     HERMETIC ADVANTAGE          USA         74/521,789     05.03.94




- ------------------------------------------------------------------------------------------------------
PCT, Inc.                42174/12     PARTNERS WITH               USA         74/522,844     05.03.94
                                      TOMORROW



- ------------------------------------------------------------------------------------------------------
Seismic Safety           42174/16     NORTHRIDGE VALVE            USA         75/169,974     09.23.96
Products, Inc.



- ------------------------------------------------------------------------------------------------------





- -------------------------------------------------------------------------------------------------------------------------

                          REGISTRATION                                                 INT'L
      ASSIGNEE              NO./DATE                    GOODS/SERVICES                 CLASS             STATUS
- -------------------------------------------------------------------------------------------------------------------------
                                                                                     
PCT, Inc.                   1,114,452        CERAMIC MATERIALS SOLD AS A COMPONENT     10;21     REGISTERED;
                          Mar. 6, 1979       OF HEART PACEMAKERS                                 Next renewal due
                                                                                                 03.06.09
- -------------------------------------------------------------------------------------------------------------------------
PCT, Inc.                   1,998,984        ELECTRONIC COMPONENTS, NAMELY               9       REGISTERED;
                         Sept. 10, 1996      ELECTRONIC CONNECTORS AND HERMETIC                  SEC. 8/15 DECL due
                                             SEALING DEVICES                                     9.10.01 - 9.10.02;
                                                                                                 Renewal due 3.10.06 -
                                                                                                 9.10.06
- -------------------------------------------------------------------------------------------------------------------------
PCT, Inc.                   1,998,986        ELECTRONIC COMPONENTS, NAMELY               9       REGISTERED;
                         Sept. 10, 1996      ELECTRONIC CONNECTORS AND HERMETIC                  Sec 8/15 Decl due
                                             SEALING DEVICES FOR ELECTRONIC                      9.10.01 - 9.10.02;
                                             PACKAGES AND CONNECTORS                             Renewal due 3.10.06 -
                                                                                                 9.10.06
- -------------------------------------------------------------------------------------------------------------------------
Seismic Safety              2,119,389        VALVES FOR NATURAL GAS DISTRIBUTION         7       REGISTERED;
Products, Inc.            Dec. 9, 1997       SYSTEMS                                             Sec 8/15 Decl due
                                                                                                 12.9.02 - 12.9.03;
                                                                                                 RENEWAL due 6.9.07 -
                                                                                                 12.9.07
- -------------------------------------------------------------------------------------------------------------------------




                                  SCHEDULE 5.15

                           SECURITY INTERESTS CONSENTS

Consent of KeyBank dated March 19, 2002 made by KeyBank in favor of the Company
and Pacific Coast Technologies, Inc. (relating to the KeyBank Promissory Notes)

Consent of Herman L. Jones dated March 19, 2002 (relating to the Settlement
Agreement) (the "Jones Consent")



                                  SCHEDULE 5.17

                             UCC FILING INFORMATION


The Company and each of its Subsidiaries (other than its Foreign Subsidiaries)
is incorporated in the State of Washington.

OWNED REAL PROPERTY (U.S.):



- ---------------------------------------------------------------------------------------------------------------------
             Owner                                  Location                              Use
- ---------------------------------------------------------------------------------------------------------------------
                                                                     
1.   PA&E                                     430 Olds Station Road        P&E headquarters
                                              Wenatchee, WA 98801

- ---------------------------------------------------------------------------------------------------------------------
2.   Northwest Industries, Inc.               2249 Diamond Point Road      Bonded Metals Div. Technical operations
                                              Sequim, WA 98382

- ---------------------------------------------------------------------------------------------------------------------



LEASED REAL PROPERTY (U.S.):



- ---------------------------------------------------------------------------------------------------------------------
            Lessee and Address                      Lessor                          Use
- ---------------------------------------------------------------------------------------------------------------------
                                                                     
1.   Cashmere Manufacturing Co., Inc.         Port of Chelan               Mach. Div. Operations
     432 Olds Station Road
     Wenatchee, WA 98801
- ---------------------------------------------------------------------------------------------------------------------
2.   Pacific Coast Technologies, Inc.         Port of Chelan               Electr. Group operations
     434 Olds Station Rd.
     Wenatchee, WA 98801
- ---------------------------------------------------------------------------------------------------------------------
3.   PA&E                                     Port of Chelan               Mach. Div operations
     200 Olds Station Rd.
     Wenatchee, WA 98801
- ---------------------------------------------------------------------------------------------------------------------
4.   PA&E                                     Port of Chelan               Mach. Div operations
     2605 Chester Kimm Road
     Wenatchee, WA 98801
- ---------------------------------------------------------------------------------------------------------------------
5.   Electronic Specialty Corporation         Erickson Realty, Ltd         Display Div operations
     14511 NE 13th Ave
     Vancouver WA 98685
- ---------------------------------------------------------------------------------------------------------------------







- ---------------------------------------------------------------------------------------------------------------------
            Lessee and Address                      Lessor                          Use
- ---------------------------------------------------------------------------------------------------------------------
                                                                     
6.   Skagit Engineering &                     Sea-Land Development         Eng. & Fab. Div. Operations (not in use.
     Manufacturing, Inc.                                                   Partially terminated)
     500 Metcalf Street
     Sedro-Woolley, WA 98284
- ---------------------------------------------------------------------------------------------------------------------
7.   Skagit Engineering &                     220th Street LLC             Eng. & Fab. Office (subleased)
     Manufacturing, Inc. 6808
     220th St. SW Suite 200
     Mountlake Terrace, WA 98043
- ---------------------------------------------------------------------------------------------------------------------




                                  SCHEDULE 5.19

                            FICTITIOUS BUSINESS NAMES

DBA'S The following is a list of trade names that are registered with the State
of Washington, and are the names currently used by the Subsidiaries of the
Company in their operations.


Pacific Aerospace & Electronics, Inc. - U.S. Aerospace Group - Casting Division
(Aeromet America)

Pacific Aerospace & Electronics, Inc. - Electronics Group - Interconnect
Division (Balo Precision Parts)

Pacific Aerospace & Electronics, Inc. - U.S. Aerospace Group - Machining
Division (Cashmere Manufacturing Co., Inc.)

Pacific Aerospace & Electronics, Inc. - U.S. Electronics Group - Filter Division
(Ceramic Devices, Inc.)

Pacific Aerospace & Electronics, Inc. - U.S. Electronics Group - Display
Division (Electronic Specialty Corporation)

Pacific Aerospace & Electronics, Inc. - U.S. Electronics Group - Bonded Metals
Division (Northwest Technical Industries, Inc.)

Pacific Aerospace & Electronics, Inc. - U.S. Electronics Group - Interconnect
Division (Pacific Coast Technologies, Inc.)

Pacific Aerospace & Electronics, Inc. - U.S. Aerospace Group - Machining
Division (Seismic Safety Products, Inc.)

Pacific Aerospace & Electronics, Inc. - U.S. Aerospace Group - Engineering &
Fabrication Division (Skagit Engineering & Manufacturing, Inc.)

Pacific Aerospace & Electronics, Inc. - European Aerospace Group
(Aeromet International PLC)

PREVIOUS NAMES USED IN OPERATIONS:

Morel Industries, Inc. (former name of Aeromet America, Inc.)
Lyden Castparts, Inc. (name of company whose assets were acquired by
Aeromet America, Inc.)
Displays & Technologies, Inc. (name of company merged into Electronic Specialty
Corporation)



Nova-Tech Engineering, Inc. (name of company whose assets were acquired by
Skagit Engineering & Manufacturing, Inc.)
PCT Holdings, Inc. (former name of PA&E)



                                  SCHEDULE 5.22

                             AFFILIATE TRANSACTIONS

Employment agreement with Donald A. Wright. The existing employment agreement
employs Mr. Wright through fiscal 2003.

On August 15, 2001, Nick Gerde, who served as Vice President Finance of the
Company, as well as Treasurer and Assistant Secretary, left his employment with
the Company. In accordance with Mr. Gerde's employment agreement and separation
letter executed by Mr. Gerde and the Company, Mr. Gerde will receive severance
pay of $150,000, which is the equivalent of one year's salary. This severance is
payable on regular payroll days over a 12-month period. Mr. Gerde will also
receive medical benefits for one year.

On February 28, 2002, Sheryl A. Symonds, who served as Vice President
Administration and General Counsel, left her employment with the Company. In
accordance with Ms. Symonds' employment agreement and separation letter executed
by Ms. Symonds and the Company, Ms. Symonds will receive $205,710, which is the
equivalent of one year's salary. This severance is payable on regular payroll
days over a 12-month period. Ms. Symonds will also receive medical benefits for
one year.

Werner Hafelfinger who is currently the Vice President Operations and Chief
Operating Officer, will continue serving as the Vice President Operations and
Chief Operating Officer until May 17, 2002. In accordance with Mr. Hafelfinger's
employment agreement and separation letter executed by Mr. Hafelfinger and the
Company, Mr. Hafelfinger will receive $210,000, which is the equivalent of one
year's salary. This severance is payable on regular payroll days over a 12-month
period. Mr. Hafelfinger will also receive medical benefits for one year.

Donald A. Wright rents the fourth floor condominium in the headquarters building
from the Company and has an option to purchase the condominium for $250,000. The
option terminates ten business days after Mr. Wright's employment with the
Company ceases for any reason other than death.

GSC Partners CDO Fund, Limited, GSC Partners CDO Fund II, Limited, GSC Recovery
II, L.P. and GSC Recovery IIA, L.P., affiliates of GSCP Recovery, Inc, and as
applicable, GSC Recovery II, L.P. (participating noteholders in the Exchange),
which will collectively own approximately 54% of the Company's Common Stock on a
fully-diluted basis following the Exchange, intend to purchase the Notes from
the Initial Purchaser.

In August 2001, the Company entered into a lease agreement with the North
Central Educational Services District (the "NCESD"), pursuant to which the NCESD
leased the second floor of the Company's Wenatchee headquarters building from
the Company for $6,183 per month for a term of 24 months. In authorizing the
lease, the Board of Directors determined that the lease was made for fair market
value. Gene C. Sharratt, a director of the Company, is Superintendent of the
NCESD.




                                  SCHEDULE 5.24

                                  CAPITAL STOCK

                               PA&E CAPITALIZATION

1. Authorized Capital:     100,000,000 shares of common stock, $.001 par value
                           5,000,000 shares of preferred stock, $.001 par value

2. Issued and Outstanding: 39,315,309 shares of common stock
                           No shares of preferred stock

3. Options Outstanding under Stock Incentive Plan:  3,599,948

4. Warrants Outstanding:

                      Pacific Aerospace & Electronics, Inc.
                                 Warrant Ledger



- -------------------------------------------------------------------------------------------------------------------------------
                                       WARRANT                                                                       WARRANT
                                       #/OTHER        WARRANT      EXERCISE                  NON       EXPIRATION    SHARES
DATE ISSUED    WARRANT HOLDER          INFO           SHARES       PRICE        VESTED       VESTED    DATE          REMAINING
- -------------------------------------------------------------------------------------------------------------------------------
                                                                                             
   PUBLIC      WARRANTS
- -------------------------------------------------------------------------------------------------------------------------------
  6/01/96      Interwest Transfer Co.  693259-11-1    2,295,000     4.6875                     0        6/15/03
- -------------------------------------------------------------------------------------------------------------------------------
 NON-PUBLIC    WARRANTS
- -------------------------------------------------------------------------------------------------------------------------------
11/30/96(1)    Donald A. Wright            001          100,000    $2.0000        100,000      0       12/24/04        100,000
- -------------------------------------------------------------------------------------------------------------------------------
11/30/96(1)    Nick A. Gerde               001           25,000    $2.0000         25,000      0       02/01/05         25,000
- -------------------------------------------------------------------------------------------------------------------------------
11/30/96(2)    Edward A. Taylor            003           35,000    $2.0000         35,000      0       05/31/02         35,000
- -------------------------------------------------------------------------------------------------------------------------------
  06/03/97     Gregory K. Smith                          20,000    $3.4500         50,000      0       06/03/02         20,000
- -------------------------------------------------------------------------------------------------------------------------------
  06/03/97     Nestor Wiegand                             5,000    $3.4500          5,000      0       06/03/02          5,000
- -------------------------------------------------------------------------------------------------------------------------------
               Continental Capital &
  04/17/00     Equity Corporation         CCEC1          50,000    $3.5000         50,000      0       04/17/03         50,000
- -------------------------------------------------------------------------------------------------------------------------------
               Continental Capital &
  04/17/00     Equity Corporation         CCEC2          50,000    $5.5000         50,000      0       04/17/03         50,000
- -------------------------------------------------------------------------------------------------------------------------------
               Continental Capital &
  04/17/00     Equity Corporation         CCEC3          50,000    $7.5000         50,000      0       04/17/03         50,000
- -------------------------------------------------------------------------------------------------------------------------------







- -------------------------------------------------------------------------------------------------------------------------------
                                       WARRANT                                                                       WARRANT
                                       #/OTHER        WARRANT      EXERCISE                  NON       EXPIRATION    SHARES
DATE ISSUED    WARRANT HOLDER          INFO           SHARES       PRICE        VESTED       VESTED    DATE          REMAINING
- -------------------------------------------------------------------------------------------------------------------------------
                                                                                             
- -------------------------------------------------------------------------------------------------------------------------------
               Continental Capital &
  04/17/00     Equity Corporation         CCEC4          50,000    $9.5000         50,000      0       04/17/03         50,000
- -------------------------------------------------------------------------------------------------------------------------------
               Rochon Capital Group,
  07/27/00     Ltd.                       RCG 1          79,150    $1.7688         79,150      0       07/26/04         79,150
- -------------------------------------------------------------------------------------------------------------------------------
               Strong River
  07/27/00     Investments                CW 1          192,500    $2.0100        192,500      0       07/27/03        192,500
- -------------------------------------------------------------------------------------------------------------------------------
               Bay Harbor
  07/27/00     Investments, Inc.          CW 2          192,500    $2.0100        192,500      0       07/27/03        192,500
- -------------------------------------------------------------------------------------------------------------------------------
               B-III Capital
  03/01/01     Partners, L.P.             DDJ-1       1,883,923    $0.0010      1,883,923      0       03/01/06      1,883,923
- -------------------------------------------------------------------------------------------------------------------------------
               B-III A Capital
  03/01/01     Partners, L.P.             DDJ-2         807,396    $0.0010        807,396      0       03/01/06        807,396
- -------------------------------------------------------------------------------------------------------------------------------
               DDJ Canadian High
  03/01/01     Yield Fund                 DDJ-3         538,263    $0.0010        538,263      0       03/01/06        538,263
- -------------------------------------------------------------------------------------------------------------------------------
               State Street Bank &
  03/01/01     Trust, Custodian           DDJ-4         807,396    $0.0010        807,396              03/01/06        807,396
- -------------------------------------------------------------------------------------------------------------------------------
               First Albany
  04/09/01     Corporation                FAC-1         692,074    $0.4062        692,074              04/09/06        692,074
- -------------------------------------------------------------------------------------------------------------------------------


5. Capitalization of Subsidiaries of PA&E



Subsidiaries                                 100% Parent                     Shares O/S
- ------------                                 -----------                     ----------
                                                                       
Aeromet America, Inc.                        PA&E                               100,000
Balo Precision Parts, Inc.                   PA&E                               100,000
Cashmere Manufacturing Co., Inc.             PA&E                                 1,000
Ceramic Devices, Inc.                        PA&E                                 1,000
Electronic Specialty Corporation             PA&E                               100,000
Northwest Technical Industries, Inc.         PA&E                               100,000
Pacific Coast Technologies, Inc.             PA&E                            10,714,726
Seismic Safety Products, Inc.                PA&E                               100,000
Skagit Engineering & Manufacturing, Inc.     PA&E                                   100
PA&E International, Inc.                     PA&E                               100,000
Pacific A & E Limited                        PA&E International, Inc.                 1
Pacific Aerospace & Electronics (UK)         Pacific A&E Limited                      1
Limited
Aeromet International PLC                    Pacific Aerospace &              1,000,000
                                             Electronics (UK) Limited

PA&E Engineering, Inc.                       PA&E                               100,000




Aeromet International PLC also has several wholly-owned dormant U.K.
subsidiaries:



Subsidiary                                100% Parent                    Shares O/S
- ----------                                -----------                    ----------
                                                                   
Frank Ford (Aircraft Components)
Limited                                   Aeromet International PLC           1,000
Kent Aerospace Limited                    Aeromet International PLC             100
TKR Aerospace Limited                     Aeromet International PLC          13,520
TKR Group Limited                         Aeromet International PLC          30,000
TKR International Limited                 Aeromet International PLC       9,272,000
     (two classes of stock)                                               6,600,000
Truflo Gas Turbines Limited               Aeromet International PLC         250,000




                                  SCHEDULE 8.15

                           EXCLUDED PROPRIETARY RIGHTS

        The Company was in default under a technology transfer agreement dated
December 30, 1998 with Herman L. Jones relating to the following U.S. patent
applications and one European patent application: (i) U.S. Serial No.
09/302,590, (ii) U.S. Serial No. 09/303,196 (now U.S. Patent No. 6,284,389) and
(iii) E.P. Serial No. 99'920'345.8 (the "Patents").

        However, a settlement was reached between Mr. Jones and the Company.
Pursuant to the Settlement Agreement, the Company is permitted to retain the
Patents upon payment by the Company to Mr. Jones of an amount equivalent to
$950,000 (the "Purchase Price"). $200,000 of the Purchase Price will be paid by
the Company transferring to Mr. Jones the building owned by the Company in
Cashmere, WA. The remaining sum of $750,000 will be paid pursuant to a
promissory note. If the building is not transferred to Mr. Jones by June 1,
2002, $200,000 of the Purchase Price will be added to the outstanding principal
balance of the promissory note. Mr. Jones will retain a security interest in the
Patents until the promissory note is fully paid. Pursuant to the Jones Consent,
the Holders will be permitted to take a second priority lien on the Patents.



                                  SCHEDULE 9.3

                       INVESTMENTS IN FOREIGN SUBSIDIARIES

                      Pacific Aerospace & Electronics, Inc.
                       Investments in Foreign Subsidiaries
                             as of January 31, 2001



                                                    Common      Intercompany      Total
                                                    Stock        Investments    Investment
                                                  ----------    ------------    ----------
                                                                       
Subsidiary

    PA&E International, Inc.                      33,709,232         --         33,709,232
                                                  ----------                    ----------
    Total investment in foreign subsidiaries      33,709,232                    33,709,232


    Intercompany investments change on a daily basis due to PA&E's cash
    management system which transfers funds to and from subsidiaries as needed.




                                  SCHEDULE 9.4

                                      LIENS

Below is a list of Liens that will exist after application of the proceeds from
the issuance of the Notes:

- --------------------------------------------------------------------------------
                  DETAIL DEBT LISTING/LIENS/SECURITY INTERESTS
- --------------------------------------------------------------------------------



- ------------------------------------------------------------------------------------------------------------------------------
                     Creditor                 Balance                Security                       UCC Filing Information
                                                ($)
- ------------------------------------------------------------------------------------------------------------------------------
                                                                                           
PACIFIC AEROSPACE &
ELECTRONICS, INC.:
- ------------------------------------------------------------------------------------------------------------------------------
    Term Debt:
- ------------------------------------------------------------------------------------------------------------------------------
        KeyBank                              1,111,090  Real Estate - Corporate HQ Building                   N.A.
- ------------------------------------------------------------------------------------------------------------------------------
        Ford Credit                             19,707  Vehicle                                               N.A.
- ------------------------------------------------------------------------------------------------------------------------------
        Ford Credit                             29,078  Vehicle                                               N.A.
- ------------------------------------------------------------------------------------------------------------------------------
        Ford Credit                             15,634  Vehicle                                               N.A.
- ------------------------------------------------------------------------------------------------------------------------------
        Ford Credit                             24,878  Vehicle                                               N.A.
- ------------------------------------------------------------------------------------------------------------------------------
        Ford Credit                             12,411  Vehicle                                               N.A.
- ------------------------------------------------------------------------------------------------------------------------------
        Ford Credit                             18,731  Vehicle                                               N.A.
- ------------------------------------------------------------------------------------------------------------------------------
        Herman L. Jones                        750,000  Technology Patents                                99-130-0246
                                                                                                           5/10/1999
- ------------------------------------------------------------------------------------------------------------------------------
    Capital Leases:
- ------------------------------------------------------------------------------------------------------------------------------
        KeyCorp Leasing (a division                 --  Equipment                                         99-180-0281
        of Key Corporate Capital,                                                                         6/12/1999
        Inc.)
- ------------------------------------------------------------------------------------------------------------------------------
        Toyota Motor Credit Corporation             --  Forklift                                          99-286-0323
        Finance                                                                                            10/13/1999
- ------------------------------------------------------------------------------------------------------------------------------
        Toyota Motor Credit Corp.                   --  Forklift                                          99-312-0548
                                                                                                           11/08/1999
- ------------------------------------------------------------------------------------------------------------------------------
        U.S. Bancorp Leasing & Financial -          --  Equipment - HAAS VF-3 Machine                     99-323-0139
        Machine Tool Finance Group                      Center (operating lease assumed by                 11/19/1999
                                                        U.S. Castings, the purchaser of the
                                                        Casting Division)
- ------------------------------------------------------------------------------------------------------------------------------
        Transamerica Equipment Financial            --  Equipment - machinery                            2000-109-0048
        Services Corporation                                                                               4/18/2000
- ------------------------------------------------------------------------------------------------------------------------------
        Polaris Industries, Inc.                    --  Th MB-1060c High Resolution SVHS                 2000-132-0055
- ------------------------------------------------------------------------------------------------------------------------------







- ------------------------------------------------------------------------------------------------------------------------------
                     Creditor                 Balance                Security                       UCC Filing Information
                                                ($)
- ------------------------------------------------------------------------------------------------------------------------------
                                                                                           
                                                        Digital color cameras secured by                   5/11/2000
                                                        Inventory at Display Division)
- ------------------------------------------------------------------------------------------------------------------------------
        Jules and Associates, Inc.                  --  Equipment - Machinery                             98-168-0035
        (Assignee:CIT Group/                                                                                6/7/2000
        Equipment Financing, Inc.)                                                                 (Lease is also secured by
                                                                                                  Pacific Coast Technologies,
                                                                                                             Inc.)
- ------------------------------------------------------------------------------------------------------------------------------
        Jules and Associates, Inc.                  --  Equipment - Machinery                             98-149-0125
        (Assignee:CIT Group/                                                                                6/7/2000
        Equipment Financing, Inc.)                                                                 (Lease is also secured by
                                                                                                  Pacific Coast Technologies,
                                                                                                             Inc.)
- ------------------------------------------------------------------------------------------------------------------------------
        IBM Credit Corporation                      --  Equipment - Computers (operating                 2000-234-0246
                                                        lease)                                             8/21/2000
- ------------------------------------------------------------------------------------------------------------------------------
        De Lage Landen Financial Services           --  Equipment - Mazak FH-5800                           Original
        (assigned by United International                                                          2000-264-0248 (9/20/2000)
        L.L.C.)                                                                                            Assignment
                                                                                                          200-301-0213
                                                                                                           10/27/2000
- ------------------------------------------------------------------------------------------------------------------------------
        De Lage Landen Financial Services           --  Equipment - Mazak FH-5800                           Original
        (assigned by United International                                                                2000-264-0249
        L.L.C.)                                                                                            9/20/2000
                                                                                                           Assignment
                                                                                                          200-301-0214
                                                                                                           10/27/2000
- ------------------------------------------------------------------------------------------------------------------------------
        The CIT Group                               --  Equipment - Mazak FH-5800                           Original
                                                                                                         2000-280-0158
                                                                                                           10/6/2000
                                                                                                           Amendment
                                                                                                         2001-155-0529
                                                                                                            6/4/2001
- ------------------------------------------------------------------------------------------------------------------------------
        Amada Leasing Corp.                     34,078  Equipment - Hydraulic press brake                2000-304-0502
                                                                                                           10/30/2000
                                                                                                         (Lease is also
                                                                                                      secured by Cashmere
                                                                                                       Manufacturing Co.,
                                                                                                             Inc.)
- ------------------------------------------------------------------------------------------------------------------------------
CASHMERE MANUFACTURING
CO., INC.:
- ------------------------------------------------------------------------------------------------------------------------------
    Term Debt:
- ------------------------------------------------------------------------------------------------------------------------------
        Ford Credit                             25,447  Vehicle                                               N.A.
- ------------------------------------------------------------------------------------------------------------------------------
        Ellison Machinery Company               54,197  Fadal CNC machining center                          Original
                                                                                                          95-152-0359
- ------------------------------------------------------------------------------------------------------------------------------






- ------------------------------------------------------------------------------------------------------------------------------
                     Creditor                 Balance                Security                       UCC Filing Information
                                                ($)
- ------------------------------------------------------------------------------------------------------------------------------
                                                                                           
                                                                                                            6/1/1995
                                                                                                          Continuation
                                                                                                         2000-153-0135
                                                                                                            6/1/2000
- ------------------------------------------------------------------------------------------------------------------------------
        LCA a division of Associates            43,549  Fadal CNC machining center                          Original
        Commercial Corporation                                                                            97-279-0445
        (assigned by                                                                                       10/6/1997
        Ellison Machinery Company)                                                                         Assignment
                                                                                                          97-301-0192
                                                                                                           10/28/1977
- ------------------------------------------------------------------------------------------------------------------------------
        Metlife Capital Corporation             42,112  Fadal CNC machining center                          Original
        (assigned by                                                                                      98-020-0473
        Ellison Machinery Company)                                                                         10/20/1998
                                                                                                           Assignment
                                                                                                          98-099-0050
                                                                                                            4/9/1998
- ------------------------------------------------------------------------------------------------------------------------------
        Metlife Capital Corporation             42,112  Fadal CNC machining center                          Original
        (assigned by                                                                                      98-020-0474
        Ellison Machinery Company)                                                                         1/20/1998
                                                                                                           Assignment
                                                                                                          98-099-0049
                                                                                                            4/9/1998
- ------------------------------------------------------------------------------------------------------------------------------
        Metlife Capital Corporation             47,327  Fadal CNC machining center                          Original
        (assigned by                                                                                      98-020-0475
        Ellison Machinery Company)                                                                         1/20/1998
                                                                                                           Assignment
                                                                                                          98-099-0048
                                                                                                            4/9/1998
- ------------------------------------------------------------------------------------------------------------------------------
        Metlife Capital Corporation             47,327  Fadal CNC machining center                          Original
        assigned by                                                                                       98-090-0130
        Ellison Machinery Company                                                                          3/31/1998
                                                                                                           Assignment
                                                                                                          98-146-0022
                                                                                                           5/26/1998
- ------------------------------------------------------------------------------------------------------------------------------
        Ellison Machinery Company               11,189  Komo CNC machining center                           Original
                                                                                                          97-069-0691
                                                                                                           3/10/1997
                                                                                                           Assignment
                                                                                                          97-129-0237
                                                                                                            5/8/1997
- ------------------------------------------------------------------------------------------------------------------------------
        Mitsui Vendor Leasing                  337,525  2 Mori Seiki Horizontal                             Original
        (U.S.A.) Inc. (assigned by                      CNC Machine Centers                               97-167-0543
        Ellison Machinery Company)                                                                         6/16/1997
                                                                                                           Assignment
                                                                                                          97-234-0160
                                                                                                           8/22/1997
- ------------------------------------------------------------------------------------------------------------------------------







- ------------------------------------------------------------------------------------------------------------------------------
                     Creditor                 Balance                Security                       UCC Filing Information
                                                ($)
- ------------------------------------------------------------------------------------------------------------------------------
                                                                                           
- ------------------------------------------------------------------------------------------------------------------------------
        Metlife Capital Corporation            198,995  Mori Seiki machining cell                           Original
        (assigned by Ellison Machinery                                                                    98-058-0083
        Company)                                                                                           2/27/1998
                                                                                                           Assignment
                                                                                                          98-099-0089
                                                                                                            4/9/1998
- ------------------------------------------------------------------------------------------------------------------------------
        Metlife Capital Corporation                 --  Equipment - Fadal CNC Machine                       Original
        (assigned by Ellison Machinery                  Center                                            98-090-0131
        Corporation)**                                                                                     3/31/1998
                                                                                                           Assignment
                                                                                                          98-146-0023
                                                                                                           5/26/1998
- ------------------------------------------------------------------------------------------------------------------------------
    Capital Leases:
- ------------------------------------------------------------------------------------------------------------------------------
        GE Capital                              41,980  Okuma cadet                                         Original
                                                                                                          96-275-0061
                                                                                                           10/1/1998
                                                                                                          Continuation
                                                                                                         2000-153-0135
                                                                                                           5/10/2001
- ------------------------------------------------------------------------------------------------------------------------------
        GE Capital                              41,980  Okuma cadet                                         Original
                                                                                                          96-275-0062
                                                                                                           10/1/1996
                                                                                                          Continuation
                                                                                                         2001-130-0021
                                                                                                           5/10/2001
- ------------------------------------------------------------------------------------------------------------------------------
        NEC America                             83,999  Phone system                                     2000-301-0233
                                                                                                           10/27/2000
- ------------------------------------------------------------------------------------------------------------------------------
        Amada Leasing Corp.                     34,078  Amada press break                                2000-304-0502
                                                                                                           10/30/2000
                                                                                                   (Lease is also secured by
                                                                                                      Pacific Aerospace &
                                                                                                       Electronics, Inc.)
- ------------------------------------------------------------------------------------------------------------------------------
PACIFIC COAST TECHNOLOGIES,
INC.:
- ------------------------------------------------------------------------------------------------------------------------------
        Term Debt:
- ------------------------------------------------------------------------------------------------------------------------------
        KeyBank                                609,798  Real estate - building #7 expansion                   N.A.
- ------------------------------------------------------------------------------------------------------------------------------
    Capital Leases:
- ------------------------------------------------------------------------------------------------------------------------------
        GE Capital                              35,256  Okuma cadet                                       97-196-0052
                                                                                                           7/15/1997
- ------------------------------------------------------------------------------------------------------------------------------
        GE Capital                              35,744  Okuma cadet                                       97-261-0077
                                                                                                           9/18/1977
- ------------------------------------------------------------------------------------------------------------------------------






- ------------------------------------------------------------------------------------------------------------------------------
                     Creditor                 Balance                Security                       UCC Filing Information
                                                ($)
- ------------------------------------------------------------------------------------------------------------------------------
                                                                                           
- ------------------------------------------------------------------------------------------------------------------------------
        GE Capital                              41,195  Okuma crown                                       97-237-0047
                                                                                                           8/25/1997
                                                                                                   (Lease is also secured by
                                                                                                   Cashmere Manufacturing Co.
                                                                                                             Inc.)
- ------------------------------------------------------------------------------------------------------------------------------
        GE Capital                              98,759  Okuma CNC machining center                            N.A.
- ------------------------------------------------------------------------------------------------------------------------------
        CIT Group                               70,397  Tornos screw machine                              98-168-0035
                                                                                                            6/7/2000
                                                                                                   (Lease is also secured by
                                                                                                      Pacific Aerospace &
                                                                                                       Electronics, Inc.)
- ------------------------------------------------------------------------------------------------------------------------------
        CIT Group                               98,444  Okuma crown                                       98-149-0125
                                                                                                            6/7/2000
                                                                                                   (Lease is also secured by
                                                                                                      Pacific Aerospace &
                                                                                                       Electronics, Inc.)
- ------------------------------------------------------------------------------------------------------------------------------
        Copelco Capital Inc.                        --  Copier system (operating lease)                   97-066-0369
                                                                                                            3/7/1997
- ------------------------------------------------------------------------------------------------------------------------------
        General Electric Capital                    --  Accounts Receivables for which                    98-065-0033
        Corporation***                                  Allied Signal, Inc, is Account Debtor              7/15/1997
                                                        (pursuant to Purchase Agreement
                                                        dated 2/12/1998)
- ------------------------------------------------------------------------------------------------------------------------------
AEROMET INTERNATIONAL PLC:
- ------------------------------------------------------------------------------------------------------------------------------
      Capital Lease:
- ------------------------------------------------------------------------------------------------------------------------------
      Lloyds Bowmaker                          476,000  Equipment                                             N.A.
- ------------------------------------------------------------------------------------------------------------------------------
CERAMIC DEVICES INC.:
- ------------------------------------------------------------------------------------------------------------------------------
      General Electric Capital                      --  Accounts Receivables for which                    98-084-0103
      Corporation**                                     Allied Signal, Inc. is Account Debtor              3/25/1998
                                                        (pursuant to Purchase Agreement
                                                        dated 2/12/1998)
- ------------------------------------------------------------------------------------------------------------------------------
ELECTRONIC SPECIALTY CORPORATION:
- ------------------------------------------------------------------------------------------------------------------------------
      IKON Capital Inc.                             --  Copier (operating lease)                          98-040-0579
                                                                                                            2/9/1998
- ------------------------------------------------------------------------------------------------------------------------------
SKAGIT ENGINEERING &
MANUFACTURING, INC.:
- ------------------------------------------------------------------------------------------------------------------------------







- ------------------------------------------------------------------------------------------------------------------------------
                     Creditor                 Balance                Security                       UCC Filing Information
                                                ($)
- ------------------------------------------------------------------------------------------------------------------------------
                                                                                           
- ------------------------------------------------------------------------------------------------------------------------------
      AT&T Capital Leasing Service                  --  Equipment - Programmable Milling                    Original
      (assigned by Intech Funding Corp.)***             Matching and other parts and                      96-101-0080
                                                        software                                           4/10/1996
                                                                                                           Assignment
                                                                                                          96-164-0157
                                                                                                           6/12/1996
                                                                                                          Continuation
                                                                                                         2001-058-0222
                                                                                                           2/27/2001
- ------------------------------------------------------------------------------------------------------------------------------
      CIT Group/Equipment Financing, Inc.           --  Equipment-Cadet mate Vert. Machine                97-198-0083
      ***                                               Center; Planer Mill                                7/17/1997
- ------------------------------------------------------------------------------------------------------------------------------
      Kenco Equipment Lease Co. (and Bank           --  Equipment - Saw with Blade Break                  97-223-0098
      of America NT & SA as assignee)***                                                                   8/11/1997
- ------------------------------------------------------------------------------------------------------------------------------
      Theodore R. Davis ***                         --  Furniture, fixture, equipment,                    97-311-0321
                                                        inventory and proceeds therefrom                   11/7/1997
- ------------------------------------------------------------------------------------------------------------------------------
      Toyota Motor Credit Corporation               --  Forklift (operating lease)                        99-286-0323
      Equipment Finance                                                                                    10/13/1999
- ------------------------------------------------------------------------------------------------------------------------------


DDJ Capital Management, LLC, as agent for the Lenders under the DDJ Loan
Agreement, has a security interest in substantially all of the Company's and its
U.S. Subsidiaries' assets. These Liens will be released on the Closing Date.

 All the UCC liens listed in this schedule are filed in the Washington State
Department of Licensing.

* This promissory note was issued pursuant to a settlement agreement made
between the Company and Herman L. Jones dated February 28, 2002 whereby the
Company is permitted to retain the Jones Patents upon payment by the Company to
Mr. Jones of an amount equivalent to $950,000 (the "Purchase Price"). $200,000
of the Purchase Price will be paid by the Company transferring to Mr. Jones the
building owned by the Company in Cashmere, WA. The remaining sum of $750,000
will be paid pursuant to a promissory note. If the building in Cashmere, W.A. is
not transferred to Mr. Jones by June 1, 2002, the $200,000 of the Purchase Price
will be added to the outstanding principal balance of the promissory note. Mr.
Jones will retain a security interest in the Jones Patents until the promissory
note is fully paid.

** The Company is unaware of why this filing was made or is or what it secures
or secured.

*** The underlying debt was paid off when the Company acquired Skagit
Engineering & Manufacturing, Inc.



                                  SCHEDULE 9.5

                              INACTIVE SUBSIDIARIES

The following U.S. subsidiaries no longer have operations:

Aeromet America, Inc.
Balo Precision Parts, Inc.
Electronic Speciality Corporation
PA&E Engineering, Inc.
Skagit Engineering & Manufacturing Inc.



                                  SCHEDULE 9.12

                                  BANK ACCOUNTS


KEYBANK ACCOUNTS



    ACCOUNT NUMBER                       COMPANY                             ACCOUNT
- -------------------------------------------------------------------------------------------
                                                                  
     472131002629            PACIFIC COAST TECHNOLOGIES, INC.                GENERAL
- -------------------------------------------------------------------------------------------
     472131002611            PACIFIC COAST TECHNOLOGIES, INC.                PAYROLL
- -------------------------------------------------------------------------------------------
     472131002645                 CERAMIC DEVICES, INC.                      GENERAL
- -------------------------------------------------------------------------------------------
     472131002637                 CERAMIC DEVICES, INC.                      PAYROLL
- -------------------------------------------------------------------------------------------
     472131002595          NORTHWEST TECHNICAL INDUSTRIES, INC.              GENERAL
- -------------------------------------------------------------------------------------------
     472131002603          NORTHWEST TECHNICAL INDUSTRIES, INC.              PAYROLL
- -------------------------------------------------------------------------------------------
     472131002678            CASHMERE MANUFACTURING CO., INC.                GENERAL
- -------------------------------------------------------------------------------------------
     472131002660            CASHMERE MANUFACTURING CO., INC.                PAYROLL
- -------------------------------------------------------------------------------------------
     472131002652             SEISMIC SAFETY PRODUCTS, INC.                  GENERAL
- -------------------------------------------------------------------------------------------
     472131001738                 AEROMET AMERICA, INC.                      GENERAL
- -------------------------------------------------------------------------------------------
     472131001894                 AEROMET AMERICA, INC.                      PAYROLL
- -------------------------------------------------------------------------------------------
     472131003890                 AEROMET AMERICA, INC.                 GENERAL & PAYROLL
- -------------------------------------------------------------------------------------------
     473451001951        SKAGIT ENGINEERING & MANUFACTURING, INC.        PETTY CASH FUND
- -------------------------------------------------------------------------------------------
     472131003700            ELECTRONIC SPECIALTY CORPORATION                GENERAL
- -------------------------------------------------------------------------------------------
     472131003718            ELECTRONIC SPECIALTY CORPORATION                PAYROLL
- -------------------------------------------------------------------------------------------
     472131002389                          PA&E                              GENERAL
- -------------------------------------------------------------------------------------------
     472131002694                          PA&E                              PAYROLL
- -------------------------------------------------------------------------------------------
     472131005259                          PA&E                            HEALTH INS
- -------------------------------------------------------------------------------------------
     472131003932                          PA&E                              CLAIMS
- -------------------------------------------------------------------------------------------
     472131002686                          PA&E                             BENEFITS
- -------------------------------------------------------------------------------------------




                                                                       Exhibit A







                                  Form of Note

                               [Filed Separately]



                                                                     Exhibit B-1






                      Form of Opinion of New York Counsel

                            [Intentionally Omitted]






                                                                     Exhibit B-2






                     Form of Opinion of Washington Counsel

                            [Intentionally Omitted]






                                                                       Exhibit C




                         Form of Compliance Certificate

                            [Intentionally Omitted]



                                                                       Exhibit D



                           Form of Lockbox Agreement

                            [Intentionally Omitted]



                                                                       Exhibit E


          Form of Deed of Trust, Security Agreement and Fixture Filing

                               [Filed Separately]




                                                                       Exhibit F


                            Form of Pledge Agreement

                               [Filed Separately]



                                                                       Exhibit G


                           Form of Security Agreement

                               [Filed Separately]



                                                                       Exhibit H


                          Form of Subsidiary Guaranty

                               [Filed Separately]



                                                                       Exhibit I



                                EXCLUDED PERSONS


GSCP Recovery, Inc.

GSC Recovery II, L.P.

William E. Simon & Sons Special Situation Partners II, L.P.

M.W. Post Advisory Group L.L.C.

Alliance Capital Management L.P.

HBK Master Fund L.P.






================================================================================














                      PACIFIC AEROSPACE & ELECTRONICS, INC.

                                   $36,000,000

                   5.0 % Senior Secured Notes due May 1, 2007

                           (CUSIP Number: 693758 AD 6)

                            -------------------------

                             NOTE PURCHASE AGREEMENT

                            -------------------------






                           Dated as of March 19, 2002














================================================================================

EX-10.8

                                                                    Exhibit 10.8

                                                         CUSIP No.: 693758 AD 6

                      PACIFIC AEROSPACE & ELECTRONICS, INC.


                       5.0% SENIOR SECURED NOTES DUE 2007


        FOR VALUE RECEIVED, the undersigned, PACIFIC AEROSPACE & ELECTRONICS,
INC., a corporation organized under the laws of the State of Washington (the
"Company"), hereby unconditionally promises to pay to the order of JEFFERIES &
COMPANY, INC. or its registered assigns, the principal amount of THIRTY-SIX
MILLION UNITED STATES DOLLARS ($36,000,000.00) (the "Principal Amount").

        Interest Payment Dates: May 1 and November 1


        Reference is made to the further provisions of this Note contained
herein, which will for all purposes have the same effect as if set forth at this
place.


THIS NOTE IS BEING ISSUED WITH "ORIGINAL ISSUE DISCOUNT" AS SUCH TERM IS DEFINED
UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED. FOR INFORMATION REGARDING
THE ORIGINAL ISSUE PRICE, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT AND THE YIELD TO
MATURITY WITH RESPECT TO THE NOTES, A HOLDER OF A NOTE MAY CONTACT THE PRESIDENT
OR THE CHIEF FINANCIAL OFFICER OF PACIFIC AEROSPACE & ELECTRONICS, INC., 430
OLDS STATION ROAD, WENATCHEE, WASHINGTON 98801.


THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT
SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR ANY
APPLICABLE STATE SECURITIES LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE
HEREOF (1) REPRESENTS THAT IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED
IN RULE 144A UNDER THE SECURITIES ACT), AND (2) AGREES NOT TO OFFER, SELL OR
OTHERWISE TRANSFER THIS SECURITY PRIOR TO THE DATE THAT IS TWO YEARS



                                      A-1


(OR SUCH OTHER PERIOD THAT MAY HEREAFTER BE PROVIDED UNDER RULE 144(k) AS
PERMITTING RESALES BY NON-AFFILIATES OF RESTRICTED SECURITIES WITHOUT
RESTRICTION OR AS MAY BE REQUIRED BY APPLICABLE LAW) AFTER THE LATER OF THE
ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY
AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF
SUCH SECURITY) (THE "RESALE RESTRICTION TERMINATION DATE") EXCEPT (A) TO THE
COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED
EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE
ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON
IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE
144A) THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN
RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT
OCCUR IN OFFSHORE TRANSACTIONS AND WITHOUT DIRECTED SELLING EFFORTS WITHIN THE
MEANINGS OF SUCH TERMS AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT, (E)
TO AN INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF SUBPARAGRAPH
(A)(1), (2) (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING
THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH INSTITUTIONAL
ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR
OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE
SECURITIES ACT OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S RIGHT
PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION
OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION REASONABLY SATISFACTORY TO
IT THAT SUCH SALE, ASSIGNMENT OR OTHER TRANSFER IS BEING MADE IN COMPLIANCE WITH
APPLICABLE SECURITIES LAWS OF ANY U.S. STATE OR ANY OTHER APPLICABLE
JURISDICTION. THE HOLDER OF THIS SECURITY AGREES THAT IT WILL DELIVER TO EACH
PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT
OF THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER
THE RESALE RESTRICTION TERMINATION DATE.



                                      A-2


        IN WITNESS WHEREOF, the Company has caused this Note to be signed
manually or by facsimile by its duly authorized officer.


                                     PACIFIC AEROSPACE & ELECTRONICS, INC.



                                     By: /s/ Donald A. Wright
                                        --------------------------------------
                                     Name:   Donald A. Wright
                                     Title:  Chief Executive Officer
                                             and President


Dated: March 25, 2002




                                      A-3


                              (REVERSE OF SECURITY)


                       5.0% Senior Secured Notes Due 2007

        1. Interest. PACIFIC AEROSPACE & ELECTRONICS, INC., a corporation
organized under the laws of the State of Washington (the "Company"), promises to
pay interest on the Principal Amount of this Note at the rate per annum shown
above.


        Interest on the Notes will accrue from the most recent date on which
interest has been paid or, if no interest has been paid, from March 25, 2002.
Interest will accrue from the date of issuance of the Note at a rate of 5.0% per
annum on the outstanding Principal Amount and will be payable in cash
semi-annually in arrears on each Interest Payment Date, commencing May 1, 2002.
Cash interest will be computed on the basis of a year of 360 days, for the
actual number of days (including the first day but excluding the last day)
occurring in the period for which such interest is payable. The Company shall
pay interest on overdue principal and on overdue installments of interest
(without regard to any applicable grace periods) from time to time on demand at
the rate borne by the Notes plus 3.0% per annum, to the extent lawful.

        2. Method of Payment. The Company shall pay interest on the Notes or on
additional interest, if any, in respect of the Notes to the Persons who are the
registered Holders thereof. Holders must surrender Notes to the Company to
collect principal payments. The Company shall pay principal and interest in
Dollars in the times and manner set forth in the Note Purchase Agreement.

        3. Note Purchase Agreement. The Company issued the Notes pursuant to a
Note Purchase Agreement, dated as of March 19, 2002 (the "Note Purchase
Agreement"), among the Company, the Initial Purchaser and First Union National
Bank, as Collateral Agent (the "Collateral Agent"). This Note is one of a duly
authorized issue of Notes of the Company designated as its 5.0% Senior Secured
Notes due 2007. The Notes are limited to $36,000,000 in aggregate principal
amount, except as otherwise provided in the Note Purchase Agreement. The initial
Accreted Principal Amount of the Notes will be $22,000,000; therefore, the
"Original Issue Discount" is $14,000,000. "Accreted Principal Amount" of any
Note, at any date, shall equal the (i) the Original Issue Price of such Note
plus (ii) the accrued amortization of the Original Issue Discount attributable
ratably on a daily basis, using a daily level yield, to the period from and
including the Closing Date to (but excluding) the Maturity Date. The Notes will
mature on May 1, 2007. Capitalized terms used herein and not otherwise defined
shall have the meanings ascribed to such terms in the Note Purchase Agreement.
The terms of the Notes include those stated in the Note Purchase Agreement.
Notwithstanding anything to the contrary herein, the Notes are subject to all
such terms, and Holders of Notes are referred to the Note Purchase Agreement for
a statement of them. The Notes are senior secured obligations of the Company.



                                      A-4


        4. Optional Prepayment. The Company may prepay, in whole or in part, at
any time and from time to time, the outstanding Accreted Principal Amount of the
Notes at the prices (expressed as percentages of the Accreted Principal Amount
of the Notes on the date of such prepayment) corresponding to the relevant
period set forth in the table below, plus accrued and unpaid interest thereon to
the applicable prepayment date:




                                                       Premium to Accreted
                    Period                              Principal Amount
        --------------------------------               -------------------
                                                         
        Closing Date - November 30, 2002                     104.0%

        December 1, 2002 - November 30, 2003                 103.0%

        December 1, 2003 - November 30, 2004                 102.0%

        December 1, 2004 - Maturity Date                     100.0%



        5. Notice of Optional Prepayment. Notice of optional prepayment will be
mailed at least 10 days but not more than 30 days before the Business Day fixed
for such prepayment to each Holder of Notes to be redeemed at such Holder's
registered address.

        6. Mandatory Prepayment of the Notes. Section 7.1 of the Note Purchase
Agreement provides that, after certain Asset Dispositions, after certain sales
or issuances of Capital Stock or Stock Equivalents by the Company or any of its
Subsidiaries and upon the receipt of the proceeds of any insurance required to
be maintained pursuant to the Note Purchase Agreement, subject to further
limitations contained therein, the Company will prepay certain amounts of the
Notes in accordance with the procedures set forth in the Note Purchase
Agreement.

        The Notes are not entitled to the benefit of any sinking fund.

        7. Offers to Purchase. Section 7.3 of the Note Purchase Agreement
provides, that upon the occurrence of a Change of Control and with 100% of the
Excess Cash Flow in each year in which the Notes are outstanding, subject to
further limitations contained therein, the Company will make an offer to
purchase certain amounts of the Notes in accordance with the procedures set
forth in the Note Purchase Agreement.



                                      A-5


        8. Denominations; Transfer; Exchange. The Notes are in registered form.
A Holder shall register the transfer of or exchange Notes in accordance with the
Note Purchase Agreement. The Company may require a Holder, among other things,
to furnish appropriate endorsements and transfer documents and to pay certain
transfer taxes or similar governmental charges payable in connection therewith
as permitted by the Note Purchase Agreement.

        9. Persons Deemed Owners. The registered Holder of a Note shall be
treated as the owner of it for all purposes.

        10. Amendment; Supplement; Waiver. Subject to certain exceptions set
forth in the Note Purchase Agreement, the Note Purchase Agreement or the Notes
may be amended or supplemented with the written consent of the Company and the
Required Holders, and any past Default or Event of Default or noncompliance with
any provision may be waived with the written consent of the Required Holders.

        11. Restrictive Covenants. The Note Purchase Agreement imposes certain
limitations on the ability of the Company and its Subsidiaries to, among other
things, incur additional Debt, make payments in respect of its Capital Stock or
certain Debt, make certain Investments, incur Liens, enter into transactions
with Affiliates, merge or consolidate with any other Person, and complete
certain Asset Dispositions. Such limitations are subject to a number of
important qualifications and exceptions.

        12. Defaults and Remedies. If an Event of Default occurs and is
continuing, the Required Holders may declare all the Notes to be due and payable
in the manner, at the time and with the effect provided in the Note Purchase
Agreement. Holders of Notes may not enforce the Note Purchase Agreement or the
Notes except as provided in the Note Purchase Agreement.

        13. Collateral Agent Dealings with Company. The Collateral Agent under
the Note Purchase Agreement, in its individual or any other capacity, may become
the owner or pledgee of Notes and may otherwise deal with the Company, its
Subsidiaries or their respective Affiliates as if it were not the Collateral
Agent.

        14. Governing Law. This Note and the Note Purchase Agreement shall be
governed by and construed in accordance with the laws of the State of New York,
without regard to principles of conflict of laws (other than Section 5-1401 of
the New York General Obligations Law).

        15. CUSIP Numbers. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Notes as a convenience to the Holders of the
Notes. No representation is made as to the accuracy of such numbers as printed
on the Notes and reliance may be placed only on the other identification numbers
printed hereon.



                                      A-6


        16. Note Purchase Agreement. Each Holder, by accepting a Note, agrees to
be bound by all of the terms and provisions of the Note Purchase Agreement, as
the same may be amended, restated, supplemented or otherwise modified from time
to time.

        The Company will furnish to any Holder of a Note upon written request
and without charge a copy of the Note Purchase Agreement. Requests may be made
to: Pacific Aerospace & Electronics, Inc., 430 Olds Station Road, Wenatchee,
Washington 98801, Attention: President or Chief Financial Officer.



                                      A-7


                                 ASSIGNMENT FORM


        If you the Holder want to assign this Note, fill in and sign the form
below:

I or we assign and transfer this Note to:

________________________________________________________________________________

________________________________________________________________________________

________________________________________________________________________________
                  (Print or type name, address and zip code and
                  social security or tax ID number of assignee)

and irrevocably appoint ___________________________ , agent to transfer this
Note on the books of the Company. The agent may substitute another to act for
him.

Dated: __________________                Signed:________________________________



                                         NOTICE: The signature to any
                                         endorsement hereon must correspond with
                                         the name as written upon the face of
                                         the Note in every particular, without
                                         alteration or enlargement or any change
                                         whatever.

                                         If the endorsement be executed by an
                                         attorney, executor, administrator,
                                         trustee or guardian, the person
                                         executing the endorsement must give his
                                         full title in such capacity and proper
                                         evidence of authority to act in such
                                         capacity, if not on file with the Note,
                                         must be forwarded with this Note.

                                         (Sign exactly as your name appears on
                                         the other side of this Note)



                                      A-8


                      [OPTION OF HOLDER TO ELECT PURCHASE]


        If you want to elect to have this Note purchased by the Company pursuant
to Section 7.3(a) or 7.3(b) of the Note Purchase Agreement, check the
appropriate box:

        Section 7.3(a) [    ]


        Section 7.3(b) [    ]


        If you want to elect to have only part of this Note purchased by the
Company pursuant to Section 7.3(a) or 7.3(b) of the Note Purchase Agreement,
state the amount you elect to have purchased:


        $_____________________


        Dated:________________               _____________________


        NOTICE: The signature to any endorsement hereon must correspond with the
name as written upon the face of the Note in every particular, without
alteration or enlargement or any change whatever.

                                         If the endorsement be executed by an
                                         attorney, executor, administrator,
                                         trustee or guardian, the person
                                         executing the endorsement must give his
                                         full title in such capacity and proper
                                         evidence of authority to act in such
                                         capacity, if not on file with the Note,
                                         must be forwarded with this Note.



                                      A-9

EX-10.9

                                                                    Exhibit 10.9

- --------------------------------------------------------------------------------


                          SUBSIDIARY GUARANTY AGREEMENT

                              Dated March 25, 2002

                                      From

                             AEROMET AMERICA, INC.,
                           BALO PRECISION PARTS, INC.,
                        CASHMERE MANUFACTURING CO., INC.,
                             CERAMIC DEVICES, INC.,
                        ELECTRONIC SPECIALTY CORPORATION,
                      NORTHWEST TECHNICAL INDUSTRIES, INC.,
                        PACIFIC COAST TECHNOLOGIES, INC.,
                            PA&E INTERNATIONAL, INC.,
                         SEISMIC SAFETY PRODUCTS, INC.,
                                       and

                    SKAGIT ENGINEERING & MANUFACTURING, INC.,
                         each, as a Subsidiary Guarantor

                                   in favor of

             THE HOLDERS (AS DEFINED IN THE NOTE PURCHASE AGREEMENT
                               REFERRED TO HEREIN)


                                       and

                           FIRST UNION NATIONAL BANK,
                               as Collateral Agent

- --------------------------------------------------------------------------------





                                TABLE OF CONTENTS



                                                                                            Page
                                                                                             No.
                                                                                            ----
                                                                                      
    SECTION 1.    Definitions................................................................2
    SECTION 2.    Guaranty...................................................................2
    SECTION 3.    Guaranty Absolute..........................................................2
    SECTION 4.    Waivers....................................................................4
    SECTION 5.    Subrogation................................................................4
    SECTION 6.    Payments Free and Clear of Taxes, Etc......................................5
    SECTION 7.    Representations and Warranties.............................................6
    SECTION 8.    Covenants..................................................................7
    SECTION 9.    Amendments, Etc............................................................8
    SECTION 10.    Notices, Etc..............................................................8
    SECTION 11.    Set-off...................................................................8
    SECTION 12.    No Waiver.................................................................8
    SECTION 13.    Continuing Guaranty; Assignments under the Note Purchase
                    Agreement................................................................9
    SECTION 14.    Governing Law; Jurisdiction; Waiver of Jury Trial.........................9
    SECTION 15.    Counterparts.............................................................10
    SECTION 16.    Applicability of Note Purchase Agreement.................................10

    ANNEX I        --     ADDRESSES



                                       i



               THIS SUBSIDIARY GUARANTY AGREEMENT (this "Agreement"), dated as
of March 25, 2002, is made by Aeromet America, Inc., Balo Precision Parts, Inc.,
Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty
Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies,
Inc., PA&E International, Inc., Seismic Safety Products, Inc. and Skagit
Engineering & Manufacturing, Inc. (each, a "Subsidiary Guarantor" and,
collectively, the "Subsidiary Guarantors"), in favor of the Holders (as
hereinafter defined) party to the Note Purchase Agreement (as hereinafter
defined) and First Union National Bank, as collateral agent for the Holders (in
such capacity, the "Collateral Agent").

               WHEREAS, Pacific Aerospace & Electronics, Inc., a Washington
corporation (the "Company"), the Initial Purchaser (as hereinafter defined) and
the Collateral Agent have entered into that certain Note Purchase Agreement (the
"Note Purchase Agreement"), dated as of March 19, 2002, pursuant to which, among
other things, the Company has agreed to issue and sell, and the Holders have
agreed to purchase the Company's 5% Senior Secured Notes due May 1, 2007 (the
"Notes");

               WHEREAS, the Subsidiary Guarantors will derive substantial direct
and indirect benefit from the transactions contemplated by the Note Purchase
Agreement; and

               WHEREAS, it is a condition to closing the transactions
contemplated by the Note Purchase Agreement that the Subsidiary Guarantors
execute and deliver this Agreement;

               NOW, THEREFORE, in consideration of the premises and in order to
induce the Holders to enter into the Note Purchase Agreement, the Subsidiary
Guarantors hereby agree as follows:

               SECTION 1. Definitions.

               Capitalized terms used herein and not otherwise defined shall
have the meaning ascribed to such terms in the Note Purchase Agreement.

               SECTION 2. Guaranty.

               Each Subsidiary Guarantor, jointly and severally, hereby
unconditionally and irrevocably guarantees the punctual payment when due,
whether at stated maturity, by acceleration or otherwise, of all of the
Obligations now or hereafter existing under the Operative Agreements, whether
for principal, interest, fees, expenses or otherwise (such Obligations being the
"Guaranteed Obligations"), and agrees to pay any and all expenses (including
reasonable counsel fees and expenses) incurred by the Collateral Agent or the
Holders in enforcing any rights under this Agreement. Without limiting the
generality of the foregoing, the Subsidiary Guarantors' liability shall extend
to all amounts that constitute part of the Guaranteed Obligations and would be
owed by the Company to the Collateral Agent or the Holders under the Operative
Agreements but for the fact that they are unenforceable or not allowable due to
the existence of a bankruptcy, reorganization or similar proceeding involving
the Company. This guaranty is an absolute guaranty of payment and performance
and not a guaranty of collection.

               SECTION 3. Guaranty Absolute.





               The obligations of the Subsidiary Guarantors under this Agreement
are independent of the Obligations, and a separate action or actions may be
brought and prosecuted against the Subsidiary Guarantors to enforce this
Agreement, irrespective of whether any action is brought against the Company or
whether the Company is joined in any such action or actions. The liability of
the Subsidiary Guarantors under this Agreement shall be absolute and
unconditional irrespective of:

               (a) any lack of validity or enforceability of any Operative
Agreement or any agreement or instrument relating thereto;

               (b) any change in the time, manner or place of payment of, or in
any other term of, all or any of the Guaranteed Obligations, or any other
amendment or waiver of or any consent to departure from any Operative Agreement,
including without limitation any increase in the Guaranteed Obligations
resulting from the extension of additional credit to the Company or otherwise;

               (c) any taking, release or amendment or waiver of or consent to
departure from any other guaranty, for all or any of the Guaranteed Obligations;

               (d) any manner of sale or other disposition of any assets of the
Company or any of its Subsidiaries for all or any of the Guaranteed Obligations;

               (e) any change, restructuring or termination of the corporate
structure or existence of the Company or any of its Subsidiaries;

               (f) any exchange, release or non-perfection of any Lien on any
collateral for, or any release or amendment or waiver of any term of any other
guaranty of, or any consent to departure from any requirement of any other
guaranty of, all or any of the Obligations;

               (g) the absence of any attempt to collect any of the Obligations
from the Company or any other guarantor or any other action to enforce the same
or the election of any remedy by the Holders or the Collateral Agent;

               (h) the election by the Holders or the Collateral Agent in any
proceeding under chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") of the application of section 1111(b)(2) of the Bankruptcy
Code;

               (i) any borrowing or grant of a security interest by the Company,
as debtor-in-possession, under section 364 of the Bankruptcy Code;

               (j) the disallowance, under section 502 of the Bankruptcy Code,
of all or any portion of the claims of any of the Holders or the Collateral
Agent for payment of any of the Obligations; or

               (k) any other circumstance (including without limitation any
statute of limitations) that might otherwise constitute a defense available to,
or a discharge of, a borrower or a guarantor, other than the indefeasible
payment in full of the Obligations.


                                       3



This Agreement shall continue to be effective or be reinstated, as the case may
be, if at any time any payment of any of the Guaranteed Obligations is rescinded
or must otherwise be returned by the Collateral Agent or any Holder upon the
insolvency, bankruptcy or reorganization of the Company or otherwise, all as
though such payment had not been made.

               SECTION 4. Waivers.

               (a) Each Subsidiary Guarantor hereby waives promptness,
diligence, notice of acceptance and any other notice with respect to any of the
Guaranteed Obligations and this Agreement and any requirement that the
Collateral Agent, any Holder or any other Person protect, secure, perfect or
insure any Lien or any property subject thereto or exhaust any right or take any
action against the Company or any other Person.

               (b) Each Subsidiary Guarantor hereby waives any right to revoke
this Agreement and acknowledges that this Agreement is continuing in nature and
applies to all Guaranteed Obligations, whether existing now or in the future.

               (c) Each Subsidiary Guarantor acknowledges that it will receive
substantial direct and indirect benefits from the financing arrangements
contemplated by the Operative Agreements and that the waivers set forth in this
Section 4 are knowingly made in contemplation of such benefits.

               (d) Each Subsidiary Guarantor agrees that if, after the
occurrence and during the continuance of an Event of Default, the Holders or the
Collateral Agent are prevented by applicable law from exercising their
respective rights to accelerate the maturity of the Obligations, to collect
interest on the Obligations, or to enforce or exercise any other right or remedy
with respect to the Obligations, the Subsidiary Guarantors agree to pay to the
Collateral Agent for the account of the Holders, upon demand therefor, the
amount that would otherwise have been due and payable had such rights and
remedies been permitted to be exercised by the Holders or the Collateral Agent.

               SECTION 5. Subrogation.

               Until all amounts owed to the Holders with respect to the
Guaranteed Obligations are paid in full, none of the Subsidiary Guarantors will
exercise any rights that any of them may now or hereafter acquire against the
Company that arise from the existence, payment, performance or enforcement of
the Subsidiary Guarantors' obligations under this Agreement or any other
Operative Agreement, including without limitation any right of subrogation,
reimbursement, exoneration, contribution or indemnification and any right to
participate in any claim or remedy of the Collateral Agent or any Holder against
the Company, whether or not such claim, remedy or right arises at equity or
under contract, statute or common law, including without limitation the right to
take or receive from the Company, directly or indirectly, in cash or other
property or by set-off or in any other manner, payment or security on account of
such claim, remedy or right except as specifically otherwise provided in the
Operative Agreements. If any amount shall be paid to any Subsidiary Guarantor in
violation of the preceding sentence at any time prior to the payment in full in
cash of the Guaranteed Obligations and all other amounts payable under this
Agreement, such amount shall be held in trust for the benefit of the Collateral


                                       4



Agent and the Holders and shall forthwith be paid to the Collateral Agent to be
credited and applied to any unsatisfied Guaranteed Obligations and all other
amounts payable under this Agreement, whether matured or unmatured, in
accordance with the terms of the Operative Agreements, or to be held as
collateral for any unsatisfied Guaranteed Obligations or other amounts payable
under this Agreement thereafter arising. If (i) the Subsidiary Guarantors shall
make payment to the Collateral Agent or any other Holder of all or any part of
the Guaranteed Obligations and (ii) all of the Guaranteed Obligations and all
other amounts payable under this Agreement shall be paid in full in cash, the
Collateral Agent and the Holders will, at the Subsidiary Guarantors' request and
expense, execute and deliver to the Subsidiary Guarantors appropriate documents,
without recourse and without representation or warranty, necessary to evidence
the transfer by subrogation to the Subsidiary Guarantors of an interest in the
Guaranteed Obligations resulting from such payment by the Subsidiary Guarantors.

               SECTION 6. Payments Free and Clear of Taxes, Etc.

               (a) Any and all payments made by the Subsidiary Guarantors
hereunder shall be made in accordance with Section 2.4 of the Note Purchase
Agreement, free and clear of and without deduction for any and all present or
future Taxes, excluding Taxes measured by a Holder's net income and franchise
taxes imposed on it by the jurisdiction under the laws of which such Holder is
organized or is required to be qualified to do business or any political
subdivision of either of the foregoing. If any of the Subsidiary Guarantors
shall be required by law to deduct any Taxes from or in respect of any sum
payable hereunder to any Holder or the Collateral Agent, (i) the sum payable
shall be increased as may be necessary so that after making all required
deductions, such Holder or the Collateral Agent (as the case may be) receives an
amount equal to the sum it would have received had no such deductions been made,
(ii) such Subsidiary Guarantor shall make such deductions and (iii) such
Subsidiary Guarantor shall pay the full amount deducted to the relevant taxation
authority or other authority in accordance with applicable law.

               (b) Each Subsidiary Guarantor will indemnify each Holder and the
Collateral Agent for the full amount of Taxes (including without limitation any
Taxes imposed by any jurisdiction on amounts payable under Section 2.4 of the
Note Purchase Agreement) paid by such Holder or the Collateral Agent (as the
case may be) in connection with any amounts received by such Person hereunder
and any liability (including penalties, interest and expenses) arising therefrom
or with respect thereto. This indemnification shall be made within 30 days from
the date such Holder or the Collateral Agent (as the case may be) makes written
demand therefor. A certificate as to the amount of such payment or liability
delivered to the Company by a Holder, or by the Collateral Agent on behalf of a
Holder, shall be conclusive absent manifest error.

               (c) Within 45 days after the date of any payment of Taxes, the
applicable Subsidiary Guarantor will furnish to the Collateral Agent, at its
address referred to in the Note Purchase Agreement, appropriate evidence of
payment thereof. If no Taxes are payable in respect of any payment hereunder by
any Subsidiary Guarantor through an account or branch outside the United States
or on behalf of any Subsidiary Guarantor by a payor that is not a United States
person, such Subsidiary Guarantor will furnish, or will cause such payor to
furnish, to the Collateral Agent a certificate from each appropriate taxing
authority or authorities, or an opinion


                                       5



of counsel reasonably acceptable to the Collateral Agent, in either case stating
that such payment is exempt from or not subject to Taxes.

               (d) Without prejudice to the survival of any other agreement of
the Subsidiary Guarantors hereunder, the agreements and obligations of the
Subsidiary Guarantors contained in this Section 6 shall survive the payment in
full of the Guaranteed Obligations and all other amounts payable under this
Agreement.

               SECTION 7. Representations and Warranties.

               Each Subsidiary Guarantor hereby represents and warrants as
follows:

               (a) Corporate Existence. It: (i) is a corporation duly formed,
validly existing and in good standing under the laws of the state of its
incorporation; (ii) has all requisite power, and has all material governmental
licenses, authorizations, consents and approvals necessary, to own its assets
and carry on its business as now being or as proposed to be conducted; (iii) is
qualified to do or transact business in all jurisdictions in which the nature of
the business conducted by it makes such qualification necessary and where
failure so to qualify would reasonably be expected to have a Material Adverse
Effect.

               (b) Authority; Execution; Contravention. The execution and
delivery of this Agreement, the consummation of the transactions herein
contemplated and compliance with the terms and provisions hereof (i) are within
its powers, (ii) have been duly authorized by all necessary action, (iii)
require no action by or in respect of, or filing with, and Governmental
Authority, (iv) and do not contravene, or constitute a default under, any
provision of any applicable law, statute, ordinance, regulation, rule, order or
other governmental restriction or the charter or bylaws or equivalent documents
of such Subsidiary Guarantor (collectively, the "Charter Documents"), and (v) do
not contravene, or constitute a default under, any agreement, judgment,
injunction, order, decree, indenture, contract, lease, instrument or other
commitment to which it is a party or by which its assets are bound which could
reasonably be expected to have a Material Adverse Effect other than the Old
Notes Indenture and the Old Notes.

               (c) Approvals. No authorization or approval or other action by,
and no notice to or filing with, any Governmental Authority or regulatory body
is required for the due execution, delivery and performance by such Subsidiary
Guarantor of this Agreement.

               (d) Enforceability. This Agreement is the legal, valid and
binding obligation of such Subsidiary Guarantor enforceable against such
Subsidiary Guarantor in accordance with its terms, except as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
and similar laws of general application relating to or affecting the rights and
remedies of creditors and by general equitable principles, regardless of whether
such enforceability is considered in a proceeding in equity or law.

               (e) Litigation. There is no pending or, to the best of its
knowledge, threatened action or proceeding affecting such Subsidiary Guarantor
before any court, governmental agency or arbitrator which may materially
adversely affect the financial condition or operations of such Subsidiary
Guarantor or which purports to affect the legality, validity or enforceability
of this


                                       6



Agreement, except for the litigation matters described on Schedule 5.5 of the
Note Purchase Agreement.

               (f) Reliance. Such Subsidiary Guarantor has, independently and
without reliance upon the Collateral Agent or any Holder and based on such
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement.

               SECTION 8. Covenants.

               Each Subsidiary Guarantor shall, so long as any Guaranteed
Obligation is outstanding:

               (a) Provide to the Collateral Agent notice in writing of any
event, act or condition which has, or, upon the passing of time, the giving of
notice or both, could reasonably be expected to have, a Material Adverse Effect
promptly upon, and in any event within 5 Business Days after, such Subsidiary
Guarantor becoming aware of any such event, act or condition;

               (b) Keep proper books of record and account in which full, true
and correct entries in conformity with GAAP and all requirements of applicable
law shall be made of all dealings and transactions in relation to its business
and activities. Such Subsidiary Guarantor shall permit officers and designated
representatives of the Collateral Agent and each of the Holders to examine the
books and records of such Subsidiary Guarantor, and discuss the affairs,
finances and accounts of such Subsidiary Guarantor with, and be advised as to
the same by, its and their officers, all upon reasonable notice and at such
reasonable times as the Collateral Agent and the Holders may desire;

               (c) Do or cause to be done, all things necessary to preserve and
keep in full force and effect its existence as a corporation in good standing in
the state of its corporation and its qualification to do business as a foreign
corporation in each other jurisdiction where such qualification is necessary
except where the failure to be so qualified could not reasonably be expected to
have a Material Adverse Effect; provided that each such Subsidiary Guarantor may
dissolve or liquidate and complete Asset Dispositions in accordance with the
terms and conditions of the Note Purchase Agreement.

               (d) Submit or cause to be submitted when due all returns and
declarations required to be filed in respect of, and pay when required by any
applicable Governmental Authority, all Taxes and all charges, betterments, or
other assessments relating to its business, and all other lawful governmental
and non-governmental claims, except to the extent any of the same are subject to
a contest, or the failure to submit or pay the same could not reasonably be
expected to have a Material Adverse Effect;

               (e) Execute, deliver, and perform its obligations under this
Agreement in compliance with all applicable laws; and

               (f) Perform all of its obligations under the terms of each
agreement or instrument by which it or any of its properties is bound or to
which it is a party, where any


                                       7



failure to perform such obligations could reasonably be expected to result in a
Material Adverse Effect.

               SECTION 9. Amendments, Etc.

               No amendment or waiver of any provision of this Agreement and no
consent to any departure by the Subsidiary Guarantors therefrom shall in any
event be effective unless the same shall be in writing and signed by the
Collateral Agent and the Required Holders and, with respect to any amendment of
this Agreement, the Subsidiary Guarantors, and then such waiver or consent shall
be effective only in the specific instance and for the specific purpose for
which given; provided that no amendment, waiver or consent shall, unless in
writing and signed by all the Holders, (a) limit, assign or transfer the
liability of the Subsidiary Guarantors hereunder, (b) postpone any date fixed
for payment hereunder or (c) change the number of Holders required to take any
action hereunder.

               SECTION 10. Notices, Etc.

               All notices and other communications hereunder shall be given (in
the manner specified in the Note Purchase Agreement) to the parties hereto at
their respective addresses specified in the Note Purchase Agreement (or, if any
party hereto is not a party to the Note Purchase Agreement, at its address set
forth on Annex I hereto.

               SECTION 11. Set-off.

               Upon the occurrence and during the continuance of any Event of
Default, each of the Holders and the Collateral Agent is hereby authorized at
any time and from time to time, to the fullest extent permitted by law, to set
off and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held and other indebtedness at any time owing
by such Holder or Collateral Agent to or for the credit or the account of any of
the Subsidiary Guarantors against any and all of the obligations of any such
Subsidiary Guarantor now or hereafter existing under this Agreement,
irrespective of whether or not such Holder or the Collateral Agent shall have
made any demand under this Agreement and although such obligations may be
contingent and unmatured. Each of the Holders and the Collateral Agent agrees
promptly to notify the applicable Subsidiary Guarantor after any such set-off
and application made by it; provided, however, that the failure to give such
notice shall not affect the validity of such set-off and application. The rights
of each Holder and the Collateral Agent under this Section are in addition to
other rights and remedies (including, without limitation, other rights of
set-off) which such Holder or Collateral Agent may have.

               SECTION 12. No Waiver.

               No failure on the part of the Collateral Agent or any Holder to
exercise, and no delay in exercising, any right hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any right hereunder
preclude any other or further exercise thereof or the exercise of any other
right.


                                       8



               SECTION 13. Continuing Guaranty; Assignments under the Note
Purchase Agreement.

               This Agreement is a continuing guaranty and shall (a) remain in
full force and effect until the indefeasible cash payment in full of the
Guaranteed Obligations and all other amounts payable under this Agreement, (b)
be binding upon such Subsidiary Guarantor, its successors and assigns and (c)
inure to the benefit of and be enforceable by the Holders, the Collateral Agent
and their respective successors, transferees and assigns. Without limiting the
generality of the foregoing clause (c), any Holder may assign or otherwise
transfer all or any portion of its rights and obligations under the Note
Purchase Agreement and the other Operative Agreements in accordance with the
terms thereof to any other Person, and such other Person shall thereupon become
vested with all the benefits in respect thereof granted to such Holder herein or
otherwise, in each case as provided in Section 13 of the Note Purchase Agreement
and in compliance with applicable law.

               SECTION 14. Governing Law; Jurisdiction; Waiver of Jury Trial.

               (a) This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York.

               (b) Each Subsidiary Guarantor hereby irrevocably and
unconditionally submits, for itself and its property, to the nonexclusive
jurisdiction of any New York State court or federal court of the United States
of America sitting in New York City, and any appellate court from any such
court, in any action or proceeding arising out of or relating to this Agreement
or any of the other Operative Agreements to which it is or is to be a party, or
for recognition or enforcement of any judgment, and each Subsidiary Guarantor
hereby irrevocably and unconditionally agrees that all claims in respect of any
such action or proceeding may be heard and determined in any such New York State
court or, to the extent permitted by law, in such federal court. Each Subsidiary
Guarantor agrees that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the judgment or
in any other manner provided by law. Nothing in this Agreement shall affect any
right that any party may otherwise have to bring any action or proceeding
relating to this Agreement or any of the other Operative Agreements to which it
is or is to be a party in the courts of any jurisdiction.

               (c) Each Subsidiary Guarantor irrevocably and unconditionally
waives, to the fullest extent it may legally do so, any objection that it may
now or hereafter have to the laying of venue of any suit, action or proceeding
arising out of or relating to this Agreement or any of the other Operative
Agreements to which it is or is to be a party in any New York State or federal
court. Each Subsidiary Guarantor hereby irrevocably waives, to the fullest
extent permitted by law, the defense of an inconvenient forum to the maintenance
of such action or proceeding in any such court.

               (d) Each Subsidiary Guarantor hereby irrevocably waives all right
to trial by jury in any action, proceeding or counterclaim (whether based on
contract, tort or otherwise) arising our of or relating to any of the Operative
Agreements, the transactions contemplated thereby or the actions of the
Collateral Agent or any Holder in the negotiation, administration, performance
or enforcement thereof.


                                       9



               SECTION 15. Counterparts.

               This Agreement may be executed in counterparts, each of which
will be deemed an original, but all of which together will constitute one and
the same instrument.

               SECTION 16. Applicability of Note Purchase Agreement.

               In amplification of, and notwithstanding any other provisions of
this Agreement, in connection with its obligations hereunder, the Collateral
Agent has all of the rights, powers, privileges, exculpations, protections and
indemnities as are provided for or referred to in the Note Purchase Agreement.


                               [SIGNATURE PAGE FOLLOWS]


                                       10



               IN WITNESS WHEREOF, each Subsidiary Guarantor has caused this
Agreement to be duly executed and delivered by its officer thereunto duly
authorized as of the date first above written.

                                            AEROMET AMERICA, INC.


                                            By: /s/ Donald A. Wright
                                               ---------------------------------
                                            Name: Donald A. Wright
                                            Title: Executive Vice President

                                            BALO PRECISION PARTS, INC.


                                            By: /s/ Donald A. Wright
                                               ---------------------------------
                                            Name: Donald A. Wright
                                            Title: Executive Vice President

                                            CASHMERE MANUFACTURING CO., INC.


                                            By: /s/ Donald A. Wright
                                               ---------------------------------
                                            Name: Donald A. Wright
                                            Title: Executive Vice President

                                            CERAMIC DEVICES, INC.


                                            By: /s/ Donald A. Wright
                                               ---------------------------------
                                            Name: Donald A. Wright
                                            Title: Executive Vice President

                                            ELECTRONIC SPECIALTY CORPORATION


                                            By: /s/ Donald A. Wright
                                               ---------------------------------
                                            Name: Donald A. Wright
                                            Title: Executive Vice President





                                            NORTHWEST TECHNICAL INDUSTRIES, INC.


                                            By:  /s/ Donald A. Wright
                                               ---------------------------------
                                            Name: Donald A. Wright
                                            Title: Executive Vice President

                                            PACIFIC COAST TECHNOLOGIES, INC.


                                            By:  /s/ Donald A. Wright
                                               ---------------------------------
                                            Name: Donald A. Wright
                                            Title: Executive Vice President

                                            SEISMIC SAFETY PRODUCTS, INC.


                                            By:  /s/ Donald A. Wright
                                               ---------------------------------
                                            Name: Donald A. Wright
                                            Title: Executive Vice President

                                            PA&E INTERNATIONAL, INC.


                                            By:  /s/ Donald A. Wright
                                               ---------------------------------
                                            Name: Donald A. Wright
                                            Title: President





                                            FIRST UNION NATIONAL BANK,
                                            in its capacity as Collateral Agent
                                            for the Holders



                                            By:  /s/ Paul Thompson
                                               ---------------------------------
                                            Name: Paul Thompson
                                            Title: Vice President



                                                                         ANNEX I

                     ADDRESSES OF THE SUBSIDIARY GUARANTORS

Notices to each of the Subsidiary Guarantors may be sent c/o Pacific Aerospace &
Electronics, Inc., 430 Olds Station Road, Wenatchee, Washington  98801, to the
attention of the President or the Chief Financial Officer, Telephone No.:  (509)
667-9600, Facsimile No.:  (509) 667-9696.

EX-10.10

                                                                   Exhibit 10.10

================================================================================

                               SECURITY AGREEMENT

                                      among

                     PACIFIC AEROSPACE & ELECTRONICS, INC.,

                             AEROMET AMERICA, INC.,

                           BALO PRECISION PARTS, INC.,

                        CASHMERE MANUFACTURING CO., INC.,

                             CERAMIC DEVICES, INC.,

                        ELECTRONIC SPECIALTY CORPORATION,

                      NORTHWEST TECHNICAL INDUSTRIES, INC.,

                        PACIFIC COAST TECHNOLOGIES, INC.,

                            PA&E INTERNATIONAL, INC.,

                          SEISMIC SAFETY PRODUCTS, INC.

                                       and

                    SKAGIT ENGINEERING & MANUFACTURING, INC.,
                                  each a Debtor

                                       and

                           FIRST UNION NATIONAL BANK,
                               as Collateral Agent

                           Dated as of March 25, 2002

================================================================================



                                TABLE OF CONTENTS



                                                                                 Page
                                                                                 ----
                                                                              
SECTION 1. DEFINITIONS...........................................................  1


SECTION 2. ASSIGNMENT; SECURITY INTERESTS; INSURANCE PROCEEDS....................  2

     2.01  Assignment; Grant of Security Interests...............................  2
     2.02  Power of Attorney.....................................................  3
     2.03  Costs of Enforcement..................................................  4

SECTION 3. GENERAL REPRESENTATIONS AND WARRANTIES................................  5

     3.01  Location of Collateral................................................  5
     3.02  Debtor Organization...................................................  5
     3.03  Enforceability........................................................  5
     3.04  Ownership.............................................................  5
     3.05  Business..............................................................  5
     3.06  Control...............................................................  5
     3.07  Liens.................................................................  6
     3.08  Consents..............................................................  6

SECTION 4. SPECIAL PROVISIONS CONCERNING ACCOUNTS; INSTRUMENTS; CHATTEL PAPER;
           COMMERCIAL TORT CLAIMS................................................  6

     4.01  Additional Representations and Warranties.............................  6
     4.02  Maintenance of Records................................................  6
     4.03  Direction to Account Debtors; Contracting Parties; etc................  6
     4.04  Collection............................................................  7
     4.05  Instruments and Chattel Paper.........................................  7
     4.06  Commercial Tort Claims................................................  7

SECTION 5. SPECIAL PROVISIONS CONCERNING PATENTS, COPYRIGHTS AND TRADEMARKS......  7

     5.01  Additional Representations and Warranties.............................  7
     5.02  Infringements.........................................................  7
     5.03  Other Patents, Copyrights and Trademarks..............................  8

SECTION 6. PROVISIONS CONCERNING ALL COLLATERAL; INSURANCE.......................  8

     6.01  Protection of the Collateral Agent's Interests........................  8
     6.02  Further Actions.......................................................  8
     6.03  Financing Statements..................................................  8
  

                                       i


                                                                              
     6.04  Location..............................................................  9
     6.05  Adverse Claims........................................................  9
     6.06  Taxes.................................................................  9
     6.07  Tangible Property..................................................... 10
     6.08  No Other Liens........................................................ 10
     6.09  Access................................................................ 10

SECTION 7. REMEDIES UPON OCCURRENCE OF EVENT OF DEFAULT.......................... 10

     7.01  Remedies; Obtaining the Collateral Upon Default....................... 10
     7.02  Remedies; Disposition of the Collateral............................... 12
     7.03  Waiver of Claims...................................................... 12
     7.04  Application of Proceeds............................................... 13
     7.05  Remedies Cumulative................................................... 13
     7.06  Discontinuance of Proceedings......................................... 14

SECTION 8. INDEMNITY............................................................. 14


SECTION 9. MISCELLANEOUS......................................................... 14

     9.01  Notices............................................................... 14
     9.02  Waiver; Amendment..................................................... 14
     9.03  Obligations Absolute.................................................. 14
     9.04  Successors and Assigns................................................ 15
     9.05  Headings Descriptive, etc............................................. 15
     9.06  GOVERNING LAW; SUBMISSION TO JURISDICTION AND VENUE; WAIVER OF
           JURY TRIAL............................................................ 15
     9.07  The Debtors' Duties................................................... 16
     9.08  Termination; Release.................................................. 16
     9.09  Counterparts.......................................................... 16
     9.10  Severability.......................................................... 16
     9.11  Applicability of Note Purchase Agreement.............................. 17
     PATENT STATUS CHART.........................................................  8




SCHEDULE I      COMMERCIAL TORT CLAIMS
SCHEDULE II     DEBTOR AND COLLATERAL DETAILS
SCHEDULE III    PATENTS, COPYRIGHTS AND TRADEMARKS
SCHEDULE IV     ADDRESSES OF THE DEBTORS

                                       ii


                               SECURITY AGREEMENT

        SECURITY AGREEMENT, dated as of March 25, 2002 (this "Agreement"), by
and among Pacific Aerospace & Electronics, Inc., a Washington corporation (the
"Company"), and Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere
Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty
Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies,
Inc., PA&E International, Inc., Seismic Safety Products, Inc. and Skagit
Engineering & Manufacturing, Inc. (each a "Subsidiary Guarantor"; each
Subsidiary Guarantor and the Company are referred to herein individually as a
"Debtor" and collectively as the "Debtors"), and First Union National Bank, a
national banking association, in its capacity as Collateral Agent for the
Secured Parties (as hereinafter defined) (in such capacity, the "Collateral
Agent"),


                              W I T N E S S E T H :
                              - - - - - - - - - -


        WHEREAS, each Subsidiary Guarantor is a wholly-owned Subsidiary (as
hereinafter defined) of the Company;

        WHEREAS, the Company, the Initial Purchaser (as hereinafter defined) and
the Collateral Agent have entered into that certain Note Purchase Agreement,
dated as of March 19, 2002 (as such agreement may be amended, restated, modified
or supplemented from time to time, the "Note Purchase Agreement");

        WHEREAS, as a condition precedent to the obligations of the Initial
Purchaser under the Note Purchase Agreement, each Debtor is required to execute
and deliver this Agreement and to grant to the Collateral Agent for the benefit
of the Secured Parties (as hereinafter defined) a continuing security interest
in all of the Collateral (as hereinafter defined) in which it has an interest;

        NOW, THEREFORE, in consideration of the benefits to each Debtor, the
receipt and sufficiency of which are hereby acknowledged, each Debtor hereby
makes the following assignments, representations and warranties to the
Collateral Agent and hereby covenants and agrees with the Collateral Agent as
follows:

        SECTION 1. DEFINITIONS

        For all purposes of this Agreement, (i) capitalized terms not otherwise
defined herein shall have the meanings set forth in the Note Purchase Agreement,
(ii) the following terms, which are defined in the UCC (as hereinafter defined)
are used herein as so defined: Accession, Account, Chattel Paper, Copyrights,
Commercial Tort Claim, Deposit Account, Document, Equipment, Fixtures, General
Intangible, Goods, Instrument, Inventory, Investment Property, Letter-of-Credit
Right, Patent, Proceeds, Supporting Obligation, Tangible Chattel Paper, and
Trademark, and (iii) the principles of construction set forth in the Note
Purchase Agreement shall apply.

        In addition, the following terms shall have the meanings herein
specified:

        "Collateral" has the meaning provided in Section 2.01(a).

        "Collateral Agent" has the meaning specified in the preamble hereto.



        "Collateral Proceeds" shall mean, with respect to a Debtor, "proceeds"
as such term is defined in the UCC or under other relevant law and, in any
event, shall include, but shall not be limited to, (i) any and all proceeds of
any insurance, indemnity, warranty or guaranty payable to the Collateral Agent
or such Debtor from time to time, and claims for insurance, indemnity, warranty
or guaranty effected or held for the benefit of such Debtor, with respect to any
of the Collateral, (ii) any and all payments (in any form whatsoever) made or
due and payable to such Debtor from time to time in connection with any
requisition, confiscation, condemnation, seizure or forfeiture of all or any
part of the Collateral by any Governmental Authority (or any person acting under
color of Governmental Authority) and (iii) any and all other amounts from time
to time paid or payable under or in connection with any of the Collateral.

        "Company" has the meaning specified in the preamble hereto.

        "Debtor" has the meaning provided in the preamble of this Agreement.

        "Note Purchase Agreement" has the meaning provided in the second whereas
clause of this Agreement.

        "Secured Obligations" shall mean all obligations, fees, charges,
liabilities and indebtedness of every nature of each Debtor from time to time
owing to the Collateral Agent and/or the Secured Parties under the Note Purchase
Agreement and/or any other Operative Agreement to which such Debtor is a party.

        "Secured Party" shall mean the Collateral Agent, the Initial Purchaser
and each other Holder of the Notes.

        "Subsidiary Guarantor" has the meaning specified in the preamble hereto.

        "UCC" shall mean the Uniform Commercial Code as in effect in the State
of New York on the date hereof; provided, however, in the event that, by reason
of mandatory provisions of law, any or all of the attachment, perfection or
priority of the security interest in any Collateral is governed by the Uniform
Commercial Code as in effect in a jurisdiction other than the State of New York,
the term "UCC" shall mean the Uniform Commercial Code as in effect in such other
jurisdiction for purposes of the provisions hereof relating to such attachment,
perfection or priority and for purposes of definitions related to such
provisions.

        SECTION 2. ASSIGNMENT; SECURITY INTERESTS; INSURANCE PROCEEDS

        2.01    Assignment; Grant of Security Interests.

        (a)     Each Debtor, as security for the prompt and complete payment and
performance when due of the Secured Obligations of such Debtor, does hereby
assign, pledge, convey, set over and transfer unto the Collateral Agent for the
benefit of the Secured Parties, and does hereby grant to the Collateral Agent
for the benefit of the Secured Parties a continuing security interest of first
priority in, all of the right, title and interest of such Debtor in, to and
under all of the following, whether now existing or hereafter from time to time
acquired (collectively, the "Collateral"):

                                       2


                (i)     all Equipment, Inventory, Fixtures and Goods of such
        Debtor;

                (ii)    all Accounts, Deposit Accounts, Investment Property and
        all other cash and currency of such Debtor;

                (iii)   all General Intangibles of such Debtor;

                (iv)    all Chattel Paper, Documents and Instruments owned by
        such Debtor;

                (v)     all property and interests in property of such Debtor
        now or hereafter coming into the actual possession, custody or control
        of the Collateral Agent or any Secured Party in any way and for any
        purpose (whether for safe keeping, deposit, custody, pledge,
        transmission, collection or otherwise);

                (vi)    all books and records of such Debtor relating to any
        Collateral;

                (vii)   all other property and interests in property of such
        Debtor constituting personal property;

                (viii)  all Commercial Tort Claims of such Debtor, as specified
        on Schedule I;

                (ix)    all Letter-of-Credit Rights of such Debtor;

                (x)     all Supporting Obligations of such Debtor; and

                (xi)    all Accessions and all Collateral Proceeds and products
        of any and all of the foregoing.

        (b)     The Collateral pledged and the security interest granted by each
of the Debtors secures the prompt and complete payment and performance of all
the Secured Obligations owed by such Debtor, and the security interest of the
Collateral Agent held under this Agreement extends to all Collateral which any
Debtor may acquire at any time during the continuation of this Agreement.

        2.02    Power of Attorney.

        Each Debtor hereby irrevocably appoints the Collateral Agent as its
attorney-in-fact with right of substitution, so that the Collateral Agent or any
other Person empowered by the Collateral Agent shall be authorized, without need
of further authorization from such Debtor, at any time upon the occurrence of
and during the continuance of an Event of Default, in the Collateral Agent's
discretion to take any and all actions authorized or permitted to be taken by
the Collateral Agent under this Agreement or by law, including but not limited
to the power:

                (i)     to effect the sale of any of the Collateral in one or
more transactions to the extent permitted by law and in such other manner as may
be determined by the attorney-in-fact, including the direct sale without public
auction of

                                       3


        any such Collateral at such price, and upon such terms as may be
        determined by the attorney-in-fact;

                (ii)    to enter upon any premises where the Collateral or any
        part thereof may be located without the need for a court order or other
        form of authority otherwise than upon the authority granted herein;

                (iii)   to take and retain actual possession and control of any
        such Collateral as receivers without bond or otherwise, and transport
        any of it to any location as determined by such attorney-in-fact;

                (iv)    to make any repairs, additions and improvements on the
        Collateral as such attorney-in-fact shall deem proper or necessary;

                (v)     to administer, manage and use any of the Collateral;

                (vi)    to conclude any agreement and collect any monies
        thereunder or otherwise due to any Debtor in respect of, or generated
        through the usage of, any of the Collateral;

                (vii)   to institute and maintain such suits and proceedings as
        such attorney-in-fact shall deem expedient to prevent any impairment of
        the Collateral or to preserve and protect such attorney-in-fact's
        interest therein;

                (viii)  to execute and deliver such deeds of conveyance or sale
        as may be necessary or proper for the purpose of conveying full title
        and ownership, free from any claims and rights of any Debtor, to any of
        the Collateral, after foreclosure thereof; and

                (ix)    in general, to sign such agreements and documents and
        perform such acts and things required, necessary or, in the opinion of
        such attorney-in-fact, advisable, to fully accomplish the purpose
        hereof.

        Each Debtor hereby confirms and ratifies any and all actions and things
performed or done by the Collateral Agent as the Debtor's attorney-in-fact or
any of its representatives in each case pursuant to the powers granted
hereunder.

        This special power of attorney shall be deemed coupled with an interest,
and cannot be revoked by any Debtor until all of the Secured Obligations have
been paid in full.

        2.03    Costs of Enforcement.

        All reasonable costs, expenses, charges and fees paid or incurred by the
Collateral Agent in the exercise of any of the rights, remedies or powers
granted under this Agreement shall be for the account of the Debtors, and each
Debtor undertakes promptly on demand to pay the same or, as the case may be, to
reimburse the Collateral Agent therefor.

                                       4


        SECTION 3. GENERAL REPRESENTATIONS AND WARRANTIES

        Each Debtor represents and warrants, which representations and
warranties shall survive execution and delivery of this Agreement and the
payment in full of the Secured Obligations, as follows:

        3.01    Location of Collateral.

        All of the Inventory and Equipment is located at the places specified on
Schedule II. The office where each Debtor keeps its records concerning Accounts
and other Collateral is located at the address specified on Schedule II for such
Debtor. None of the Accounts is evidenced by an Instrument or by Chattel Paper
which have not been delivered to the Collateral Agent.

        3.02    Debtor Organization.

        Each Debtor's exact legal name, state of incorporation or formation,
principal place of business and chief executive office are (and for the four
months prior to the date hereof has been) as set forth on Schedule II. Each
Debtor is qualified to do business and in good standing in all states and other
jurisdictions in which the failure to be so qualified and in good standing would
have a Material Adverse Effect or a material adverse effect on the ability of
such Debtor to enforce the collection of Accounts due from customers residing in
such locations.

        3.03    Enforceability.

        This Agreement has been duly executed and delivered by each Debtor and
constitutes a legal, valid and binding obligation of such Debtor enforceable in
accordance with its terms, except to the extent that such enforcement may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors' rights generally and by general principles of
equity (whether enforcement is sought by proceedings in equity or at law).

        3.04    Ownership.

        Each Debtor is the legal, record and beneficial owner of, and has good
and marketable title to, the Collateral which it owns, free and clear of any
Lien whatsoever, except (i) for the Lien created hereby and any other Liens
permitted to be created pursuant to the Note Purchase Agreement, (ii) for the
Lien on patent no. 4,925,607 in favor of James C. Kyle and (iii) that the
assignments of patent nos. 4,925,607 and EP 0 522 687 B1 to Pacific Coast
Technologies, Inc. have not been recorded with the appropriate Governmental
Authorities. No financing statement or other security instrument is on file in
any jurisdiction covering any of the Collateral, other than such as have been
filed with respect to (i) the Lien created hereby or (ii) any other Liens
permitted to be created pursuant to the Note Purchase Agreement.

        3.05    Business.

        None of the Debtors conducts any business under any name or trade name
other than its proper legal name, which is the name set forth on Schedule II.
The taxpayer identification number of each Debtor is set forth on Schedule II.

        3.06    Control.

                                       5


        Except for Inventory in transit in the ordinary course of each Debtor's
business, such Debtor has exclusive possession and control of the Inventory and
Equipment.

        3.07    Liens.

        This Agreement creates a continuing Lien in the Collateral, securing the
payment of the Secured Obligations.

        3.08 Consents.

        No consent or authorization of, filing with, notice to, or other act by
or in respect of, any Governmental Authority or any other Person is required
with respect to each Debtor in connection with either (i) the grant by such
Debtor of the Lien created hereby or the execution, delivery or performance of
this Agreement by such Debtor or (ii) for the perfection of or the exercise by
the Collateral Agent of its rights and remedies hereunder, other than the filing
of financing statements and continuation statements with the Secretary of State
of the State of Washington.

        SECTION 4. SPECIAL PROVISIONS CONCERNING ACCOUNTS; INSTRUMENTS; CHATTEL
                   PAPER; COMMERCIAL TORT CLAIMS

        4.01    Additional Representations and Warranties.

        As of the time when each Account arises, each Debtor shall be deemed to
have represented and warranted, to the best of its knowledge and belief and
unless otherwise disclosed by such Debtor in writing to the Collateral Agent,
that such Account, and all records, papers and documents relating thereto (if
any) are genuine and in all respects what they purport to be, will evidence true
and valid obligations, enforceable in accordance with their respective terms and
will be in compliance and will conform with all applicable law.

        4.02    Maintenance of Records.

        Each Debtor will keep and maintain at its own cost and expense
satisfactory and complete records of the Accounts, including, but not limited
to, the originals of all documentation with respect thereto, records of all
payments received, all credits granted thereon (subject to customary record
retention policies) and all other dealings therewith, and such Debtor will make
the same available to the Collateral Agent and the Secured Parties and their
respective representatives for inspection, at such Debtor's own cost and
expense, at all reasonable times upon reasonable prior written notice. Each
Debtor shall, at its own cost and expense, deliver all tangible evidence of the
Accounts (including, without limitation, all documents evidencing the Accounts)
and such books and records to the Collateral Agent or to its representatives
(copies of which evidence and books and records may be retained by such Debtor)
upon its demand at any time after the occurrence of and during the continuance
of an Event of Default. If the Collateral Agent so directs, each Debtor shall
legend, in form and manner reasonably satisfactory to the Collateral Agent, the
Accounts, as well as books, records and documents of such Debtor evidencing or
pertaining to the same with an appropriate reference to the fact that the
Accounts have been assigned to the Collateral Agent and that the Collateral
Agent has a security interest therein.

        4.03    Direction to Account Debtors; Contracting Parties; etc.

                                       6


        Each Debtor agrees that upon the occurrence of and during the
continuance of an Event of Default, the Collateral Agent may, at its option,
directly notify the obligors with respect to any Accounts to make payments with
respect thereto as directed by the Collateral Agent and (ii) the Collateral
Agent may apply, without notice to or assent by such Debtor, any or all such
amounts in the manner provided in the Note Purchase Agreement.

        4.04    Collection.

        Each Debtor shall endeavor to cause to be collected from the account
debtor named in such Debtor's Accounts, as and when due (including, without
limitation, amounts which are delinquent, such amounts to be collected in
accordance with generally accepted lawful collection procedures) any and all
amounts owing under or on account of such Account, and apply forthwith upon
receipt thereof all such amounts as are so collected to the outstanding balance
of such Account, except that, unless an Event of Default shall have occurred and
be continuing (and shall not have been waived by an appropriate vote or other
action by the Secured Parties), such Debtor may, subject to compliance with the
Note Purchase Agreement and other Operative Agreements, allow in the ordinary
course of business as adjustments to amounts owing under such Debtor's Accounts
(i) an extension or renewal of the time or times of payment, or settlement for
less than the total unpaid balance, which such Debtor finds appropriate in
accordance with sound business judgment and (ii) a refund or credit due as a
result of returned or damaged merchandise or improperly performed services.

        4.05    Instruments and Chattel Paper.

        If any Collateral shall be evidenced by any Instrument or Chattel Paper,
each Debtor shall within 10 days thereof either (i) deliver or pay over or
otherwise credit to the account of the Collateral Agent such Instrument or
Chattel Paper; or (ii) notify the Collateral Agent thereof, and shall upon
request by the Collateral Agent promptly deliver such Instrument or Chattel
Paper to the Collateral Agent appropriately endorsed to the order of the
Collateral Agent as further security hereunder.

        4.06    Commercial Tort Claims.

        If any Debtor becomes involved, or becomes aware of a reasonable
likelihood of becoming involved, in a Commercial Tort Claim, such Debtor shall
within 10 days thereof provide the Collateral Agent with reasonable details
thereof such that Schedule I may be appropriately updated.

        SECTION 5. SPECIAL PROVISIONS CONCERNING PATENTS, COPYRIGHTS AND
                   TRADEMARKS

        5.01    Additional Representations and Warranties.

        Each Debtor represents and warrants that as of the Closing Date, such
Debtor owns the Patents, Copyrights and Trademarks set forth on Schedule III.

        5.02    Infringements.

                                       7


        Promptly upon learning thereof, each Debtor shall notify the Collateral
Agent in writing of all pertinent details available thereto, with respect to any
infringement or other violation of such Debtor's rights in any Patent, Copyright
or Trademark that could reasonably be expected to have a Material Adverse
Effect, whether or not such right is presently held by such Debtor. As to each
such instance, to the extent deemed appropriate by such Debtor in its
commercially reasonable judgement, and to the extent permitted by all
requirements of law, such Debtor shall diligently pursue a remedy. Promptly upon
learning thereof, such Debtor shall notify the Collateral Agent in writing of
any claim that any activity of such Debtor infringes or otherwise violates the
right of any third party with respect to any Patent, Copyright or Trademark.

        5.03    Other Patents, Copyrights and Trademarks.

        If any Debtor hereafter acquires rights in any material Patent,
Copyright or Trademark, such Debtor shall deliver to the Collateral Agent within
30 days, a copy of such Patent, Copyright or Trademark.

        SECTION 6. PROVISIONS CONCERNING ALL COLLATERAL; INSURANCE

        6.01    Protection of the Collateral Agent's Interests.

        Each Debtor will do nothing to impair the rights of the Collateral Agent
in the Collateral; provided, however, that nothing herein shall prevent such
Debtor, prior to the exercise by the Collateral Agent of any such rights, from
undertaking such Debtor's operations in the ordinary course of business. Each
Debtor assumes all liability and responsibility in connection with the
Collateral which it owns and the liability of such Debtor with respect to the
Secured Obligations shall in no way be affected or diminished by reason of the
fact that such Collateral may be lost, destroyed, stolen, damaged or for any
reason whatsoever be unavailable to such Debtor.

        6.02    Further Actions.

        Each Debtor will, at its own expense, make, execute, endorse,
acknowledge, file and/or deliver to the Collateral Agent from time to time such
lists, descriptions and designations of the Collateral, warehouse receipts,
receipts in the nature of warehouse receipts, bills of lading, documents of
title, vouchers, invoices, schedules, confirmatory assignments, conveyances,
financing statements, transfer endorsements, powers of attorney, certificates,
reports and other assurances or instruments and take such further steps relating
to the Collateral and other property or rights covered by the interests hereby
granted, which the Collateral Agent, upon written direction, deems reasonably
appropriate or advisable to perfect, preserve or protect its security interests
in the Collateral.

        6.03    Financing Statements.

        Each Debtor agrees to file such financing statements as are necessary to
establish and maintain the security interests contemplated hereunder as valid,
enforceable, first priority security interests as provided herein, and to sign
and deliver to the Collateral Agent such financing statements (or similar
statement or instrument of registration under the law of any jurisdiction), in
form reasonably acceptable to the Collateral Agent as it may from time to time
reasonably request or as are necessary or desirable in its reasonable opinion to
establish and maintain the security interests contemplated hereunder as valid,
enforceable first priority security interests as provided herein and the other
rights and security contemplated herein, all in accordance with the UCC or any
other

                                       8


applicable law. Each Debtor will pay any applicable filing fees and related
reasonable expenses in connection with such financing statements (or similar
statement or instrument of registration). Each Debtor authorizes the Collateral
Agent to file any such financing statements without the signature of such Debtor
to the extent permitted by law. In addition, each Debtor hereby irrevocably
makes, constitutes and appoints Collateral Agent (and all Persons designated by
the Collateral Agent for that purpose) such Debtor's true and lawful
attorney-in-fact to sign the name of such Debtor on any financing statement or
other writing necessary or requested by the Collateral Agent to perfect its Lien
on or in any of the Collateral or to maintain the perfection thereof. The
Collateral Agent agrees to provide the relevant Debtor with a copy of any
financing statement filed by it without the signature of such Debtor promptly
after the filing thereof.

        6.04    Location.

        Each Debtor shall not (i) change the location of its chief executive
office or principal place of business from the address specified on Schedule II
or remove its books and records from the location specified on Schedule II, (ii)
change its name (including the adoption of any new trade name), jurisdiction of
incorporation, identity or corporate structure, or (iii) change the location of
any other Collateral to a location not listed on Schedule II, unless, in any
such case, it shall have provided at least thirty (30) days' prior written
notice to the Collateral Agent of any such change; provided, however, this
Section 6.04 shall not restrict the Debtors from disposing of or removing any
Collateral for repairs or similar purposes in the ordinary course of its
business and in accordance with the terms of the Note Purchase Agreement. Each
Debtor shall from time to time notify the Collateral Agent of each location at
which any material portion of the Collateral or such books and records are to be
kept for temporary processing, storage, repair or similar purposes. No action
requiring notice to the Collateral Agent under this paragraph shall be effected
until such filings and other measures as may be required under applicable law to
continue uninterrupted the perfected Lien of the Collateral Agent on and in the
Collateral affected thereby shall have been taken, and until the Collateral
Agent shall have received such opinions of counsel with respect thereto as it
may have reasonably requested.

        6.05    Adverse Claims.

        Each Debtor shall defend the Collateral against all claims and demands
of all Persons (other than the Collateral Agent, the Secured Parties and holders
of Liens permitted to be created pursuant to the Note Purchase Agreement)
claiming an interest therein. Each Debtor shall pay promptly when due all
property and other taxes, assessments and governmental charges or levies imposed
upon, and all claims (including claims for labor, materials and supplies)
against, the Collateral, except to the extent that (i) such Debtor is, in good
faith and by appropriate proceedings, contesting the validity thereof and (ii)
the Collateral that is the subject thereof is not in imminent risk of seizure,
levy, sale, execution or other process.

        6.06    Taxes.

        Each Debtor confirms to the Collateral Agent that any and all taxes or
fees relating to its business, including, but not limited to, the Accounts and
all goods relating thereto, are its sole responsibility and shall be paid by
such Debtor when due; provided, however, that unless such taxes or fees
represent a Lien on the Collateral of such Debtor, no such tax need be paid if
the same is being contested, in good faith, by appropriate proceedings promptly
instituted and diligently conducted and if an adequate reserve or other
appropriate provision shall have been made therefor as reflected on the audited
financial statements for the relevant fiscal year in accordance with GAAP,

                                       9


and, to the extent such reserves shall be taken thereafter, consistent with such
Debtor's practices. Each Debtor shall maintain its status as a validly existing
legal entity, and shall remain qualified to do business and in good standing in
all states and other jurisdictions in which the failure to be so qualified and
in good standing would have a Material Adverse Effect or a material adverse
effect on the ability of such Debtor to enforce collection of the Accounts due
from customers residing in such locations.

        6.07    Tangible Property.

        Each Debtor agrees that all Collateral consisting of tangible property
is now and shall remain personal property, notwithstanding the manner in which
such Collateral or any part thereof shall now or hereafter be affixed or annexed
to real estate. Each Debtor shall use commercially reasonable efforts to obtain
and deliver to the Collateral Agent such instruments as may reasonably be
requested by the Collateral Agent pursuant to which any Person with an interest
in any real property upon which all or any part of the tangible Collateral is
now or may hereafter be located consents to the Liens created hereby, disclaims
any Lien on or other interest in the tangible Collateral, waives in favor of the
Collateral Agent all right to distrain or levy upon such Collateral for rent or
other payments due or to become due to such Person, and authorizes the
Collateral Agent to enter upon the relevant premises at any time to remove such
Collateral.

        6.08    No Other Liens.

        No Debtor shall grant, create or permit to exist any Lien upon all or
any portion of the Collateral, or any proceeds thereof, in favor of any other
Person other than the Collateral Agent and shall not create, or permit to exist,
any obligations, other than those secured by Liens permitted to be created
pursuant to the Note Purchase Agreement, that are secured thereby.

        6.09    Access.

        Each Debtor shall permit the Collateral Agent, or its representatives,
to have access to the Inventory and the Equipment, and other tangible Collateral
for purposes of inspection during normal business hours and upon reasonable
notice to such Debtor; and shall promptly notify the Collateral Agent in writing
of any material loss or damage to the Inventory, Equipment or other Collateral.

        SECTION 7. REMEDIES UPON OCCURRENCE OF EVENT OF DEFAULT

        7.01    Remedies; Obtaining the Collateral Upon Default.

        Each Debtor agrees that, if any Event of Default shall have occurred and
be continuing, subject to applicable cure periods, (and shall not have been
waived by an appropriate vote or other action by the Secured Parties), then and
in every such case, subject to the terms and provisions of the Note Purchase
Agreement and any applicable law, the Collateral Agent, in addition to any
rights now or hereafter existing under any applicable law, shall have all rights
as a secured creditor under the UCC or other any applicable law in all relevant
jurisdictions and may, acting pursuant to and in accordance with the terms of
the Note Purchase Agreement and other Operative Agreements:

                                       10


        (a)     personally, or by agents or attorneys, immediately retake
possession of the Collateral or any part thereof, from such Debtor or any other
Person who then has possession of any part thereof with or without notice or
process of law, and for that purpose may enter upon such Debtor's premises where
any of the Collateral is located and remove the same and use in connection with
such removal any and all services, supplies, aids and other facilities of such
Debtor; and

        (b)     instruct the obligor or obligors on any agreement, instrument or
other obligation, and the Accounts constituting the Collateral to make any
payment required by the terms of such instrument or agreement directly to the
Collateral Agent; and

        (c)     sell, assign or otherwise liquidate, or direct such Debtor to
sell, assign or otherwise liquidate, any or all of the Collateral or any part
thereof, and take possession of the proceeds of any such sale or liquidation;
and

        (d)     take possession of the Collateral or any part thereof, by
directing such Debtor in writing to deliver the same to the Collateral Agent at
any place or places designated by the Collateral Agent, in which event such
Debtor shall at its own expense:

                (i)     forthwith cause the same, to the extent reasonably
        feasible, to be moved to the place or places so designated by Collateral
        Agent and there delivered to the Collateral Agent,

                (ii)    store and keep any Collateral so delivered to the
        Collateral Agent (to the extent not physically delivered to the
        Collateral Agent) at such place or places pending further action by the
        Collateral Agent as provided in Section 7.02, and

                (iii)   while such Collateral shall be so stored and kept,
        provide such guards and maintenance services as shall be necessary to
        protect the same and to preserve and maintain them in good condition;

        it being understood that such Debtor's obligation to so deliver the
        Collateral is of the essence of this Agreement and that, accordingly,
        upon application to a court having jurisdiction, the Collateral Agent
        shall be entitled to a decree requiring specific performance by such
        Debtor of such obligation; and

        (e)     take and practice or use or sell any or all of such Patents,
Copyrights or Trademarks, or take and use or sell each Debtor's rights in such
Patents, Copyrights or Trademarks, along with the goodwill and all other
elements of such Debtor's ongoing business symbolized by such assets and secured
under this Agreement, and the right to carry on the business of the Debtors in
connection with which such assets have been used; and

        (f)     direct the Debtors to refrain, in which event the Debtors shall
refrain, from practicing under such Patent and Copyright rights directly or
indirectly, or from using the Trademarks in any manner, directly or indirectly,
and if requested by the Collateral Agent, the Debtors shall change their
respective names to eliminate therefrom any use of any Trademarks, and execute
any other and further documents which the Collateral Agent may request further
to confirm the foregoing and to permit the Collateral Agent to enforce its
remedies relating to such Trademarks, Patents and/or Copyrights.

                                       11


        7.02    Remedies; Disposition of the Collateral.

        Any Collateral repossessed by the Collateral Agent under or pursuant to
Section 7.01, and any other Collateral whether or not so repossessed by the
Collateral Agent, may be sold, assigned, leased or otherwise disposed of under
one or more contracts or as an entirety, and without the necessity of gathering
at the place of sale the property to be sold, and in general in such manner, at
such time or times, at such place or places and on such terms as the Collateral
Agent may, upon written direction in compliance with all applicable law,
determine to be commercially reasonable. Any of the Collateral may be sold,
leased or otherwise disposed of, in the condition in which the same existed when
taken by the Collateral Agent or after any overhaul or repair which the
Collateral Agent shall determine to be commercially reasonable. Any such
disposition which shall be a private sale or other private proceeding permitted
by such requirements shall be made upon not less than ten days' written notice
to the relevant Debtor specifying the time at which such disposition is to be
made and the intended sale price or other consideration therefor, and shall be
subject, for the ten days after the giving of such notice, to the right of such
Debtor or any nominee of such Debtor to acquire the Collateral involved at a
price or for such other consideration at least equal to the intended sale price
or other consideration so specified. To the extent permitted by all requirements
of law, the Collateral Agent may bid for and become the purchaser of the
Collateral or any item thereof, offered for sale in accordance with this Section
7.02. If, under any applicable law, the Collateral Agent shall be required to
make disposition of the Collateral within a period of time which does not permit
the giving of notice to the relevant Debtor as hereinabove specified, the
Collateral Agent shall give such Debtor only such notice of disposition as shall
be reasonably practicable in view of such applicable law.

        7.03    Waiver of Claims.

        Except as otherwise provided in this Agreement, EACH DEBTOR HEREBY
WAIVES, TO THE EXTENT PERMITTED BY ALL REQUIREMENTS OF LAW, NOTICE AND JUDICIAL
HEARING IN CONNECTION WITH THE COLLATERAL AGENT TAKING POSSESSION OR THE
COLLATERAL AGENT'S DISPOSITION OF ANY OF THE COLLATERAL, IN EACH CASE IF AND AS
PERMITTED BY ALL REQUIREMENTS OF LAW, INCLUDING, WITHOUT LIMITATION, ANY AND ALL
PRIOR NOTICE AND HEARING FOR ANY PREJUDGMENT REMEDY OR REMEDIES AND ANY SUCH
RIGHT WHICH SUCH DEBTOR WOULD OTHERWISE HAVE UNDER THE CONSTITUTION OR ANY
STATUTE OF THE UNITED STATES OR ANY POLITICAL SUBDIVISION THEREOF, and each
Debtor hereby further waives, to the extent permitted by all applicable law:

                (i)     all damages occasioned by such taking of possession
        except any damages which are the direct result of the gross negligence
        or willful misconduct of the Collateral Agent or any Person acting on
        its behalf or instruction;

                (ii)    all other requirements as to the time, place and terms
        of sale or other requirements with respect to the enforcement of the
        Collateral Agent's rights hereunder; and

                (iii)   all rights of redemption, appraisement, valuation, stay,
        extension or moratorium now or hereafter in force under any applicable
        law in order to prevent or delay the enforcement of this Agreement
        (including, without limitation, any right to claim that such enforcement
        should be stayed pending the outcome of any other

                                       12


        action or proceeding (including any arbitration proceeding)) or the
        absolute sale of the Collateral or any portion thereof, and such Debtor,
        for itself and all who may claim under it, insofar as it or they now or
        hereafter lawfully may, hereby waives the benefit of all such applicable
        of law.

Any sale of, or the grant of options to purchase, or any other realization upon,
any Collateral shall operate to divest all right, title, interest, claim and
demand, either at law or in equity, of the relevant Debtor therein and thereto,
and shall be a perpetual bar both at law and in equity against such Debtor and
against any and all Persons claiming or attempting to claim the Collateral so
sold, optioned or realized upon, or any part thereof, from, through and under
such Debtor.

        7.04    Application of Proceeds.

        The proceeds of any Collateral obtained pursuant to Section 7.01 or
disposed of pursuant to Section 7.02 shall be applied in the following order:

                FIRST, to the payment of all reasonable out-of-pocket fees and
        costs and expenses (including without limitation reasonable attorneys'
        fees) of the Collateral Agent under the Operative Agreements, including,
        but not limited to, those incurred in connection with enforcing the
        rights of Collateral Agent and the Holders under the Operative
        Agreements;

                SECOND, to the payment of all reasonable out-of-pocket costs and
        expenses (including without limitation, reasonable attorneys' fees) of
        each of the Holders in connection with enforcing its rights under the
        Operative Agreements or otherwise with respect to the Obligations owing
        to such Holder;

                THIRD, to the payment of all accrued interest and fees on or in
        respect of the Obligations;

                FOURTH, to the payment of the outstanding principal amount of
        the Obligations;

                FIFTH, to all other obligations which shall have become due and
        payable under the Operative Agreements or otherwise and not repaid
        pursuant to clauses "FIRST" through "FOURTH" above; and

                SIXTH, to the payment of the surplus, if any, to whoever may be
        lawfully entitled to receive such surplus.

        Each Debtor irrevocably waives the right to direct the application of
such payments and proceeds and acknowledges and agrees that the Collateral Agent
shall have the continuing and exclusive right to apply and reapply any and all
such payments and proceeds in the Collateral Agent's sole discretion,
notwithstanding any entry to the contrary upon any of its books and records.

        7.05    Remedies Cumulative.

        No failure or delay on the part of the Collateral Agent in exercising
any right, power or privilege hereunder or under any other Operative Agreement
and no course of dealing between any Debtor and the Collateral Agent shall
operate as a waiver thereof; nor shall any single or partial

                                       13


exercise of any right, power or privilege hereunder or under any other Operative
Agreement preclude any other or further exercise thereof or the exercise of any
other right, power or privilege hereunder or thereunder. The rights, powers and
remedies herein or in any other Operative Agreement expressly provided are
cumulative and not exclusive of any rights, powers or remedies which the
Collateral Agent or any Secured Party would otherwise have. No notice to or
demand on a Debtor in any case shall entitle the Debtor to any other or further
notice or demand in similar or other circumstances or constitute a waiver of the
rights of the Collateral Agent or any Secured Party to any other or further
action in any circumstances without notice or demand.

        7.06    Discontinuance of Proceedings.

        In case the Collateral Agent shall have instituted any proceeding to
enforce any right, power or remedy under this Agreement by foreclosure, sale,
entry or otherwise, and such proceeding shall have been discontinued or
abandoned for any reason or shall have been determined adversely to the
Collateral Agent, then and in every such case, the Debtor, Collateral Agent and
the Secured Parties shall be restored to their former positions and rights
hereunder with respect to the Collateral subject to the security interest
created under this Agreement, and all rights, remedies and powers of the
Collateral Agent shall continue as if no such proceeding had been instituted.

        SECTION 8. INDEMNITY

        The provisions of Section 15(b) of the Note Purchase Agreement are
incorporated herein by reference.

        SECTION 9. MISCELLANEOUS

        9.01    Notices.

        All notices and other communications hereunder shall be given in the
manner specified in Section 18 of the Note Purchase Agreement to the parties
hereto at their respective addresses specified in the Note Purchase Agreement
or, with respect to the Subsidiary Guarantors, at their respective addresses set
forth on Schedule IV hereto.

        9.02    Waiver; Amendment.

        This Agreement may be amended, restated, waived, discharged, or (except
as provided in Section 9.08) terminated only by an instrument in writing
executed by all of the parties hereto. Promptly after the execution of any and
all amendments , supplements and waivers, of and to the Collateral, originals,
if reasonably available and, if not, copies of such amendments, supplements and
waivers shall be delivered to the Collateral Agent.

        9.03    Obligations Absolute.

        The obligations of each Debtor under this Agreement shall be absolute
and unconditional and shall remain in full force and effect without regard to,
and shall not be released, suspended, discharged, terminated or otherwise
affected by, any circumstance or occurrence whatsoever, including, without
limitation: (i) any renewal, extension, amendment or modification of, or
addition or supplement to or deletion from, the Note Purchase Agreement or any
of the Operative Agreements or any other instrument or agreement referred to
therein, or any assignment or transfer of

                                       14


any thereof; (ii) any waiver, consent, extension, indulgence or other action or
inaction under or in respect of any such instrument or agreement or this
Agreement or any exercise or non-exercise of any right, remedy, power or
privilege under or in respect of this Agreement or any other Operative
Agreements; (iii) any furnishing of any additional security (including, without
limitation, any assets, whether now owned or hereafter acquired, upon which a
Lien is created or granted from time to time) to the Collateral Agent or any
acceptance thereof or any sale, exchange, release, surrender or realization of
or upon any security by the Collateral Agent; or (iv) any invalidity,
irregularity or unenforceability of all or part of the Secured Obligations or of
any security therefor. In the event of any inconsistency between this Agreement
and the Note Purchase Agreement, the Note Purchase Agreement shall govern.

        9.04    Successors and Assigns.

        This Agreement shall be binding upon and inure to the benefit of and be
enforceable by the respective successors and assigns of the parties hereto and
shall inure to the benefit of the Secured Parties; provided, however, that each
Debtor may not assign or transfer any of its rights or obligations hereunder
without the prior written consent of the Collateral Agent and the Secured
Parties. The Collateral Agent may transfer, assign or grant all or such relevant
part of its rights hereunder in accordance with the provisions of the Note
Purchase Agreement. All agreements, statements, representations and warranties
made by each Debtor herein or in any certificate or other instrument delivered
by such Debtor or on its behalf under this Agreement shall be considered to have
been relied upon by the Collateral Agent and the Secured Parties and shall
survive the execution and delivery of this Agreement, the Note Purchase
Agreement and the other Operative Agreements regardless of any investigation
made by the Collateral Agent and the Secured Parties or on their behalf.

        9.05    Headings Descriptive, etc.

        The headings of the several sections and subsections of this Agreement
are inserted for convenience only and shall not in any way affect the meaning or
construction of any provision of this Agreement.

        9.06    GOVERNING LAW; SUBMISSION TO JURISDICTION AND VENUE; WAIVER OF
JURY TRIAL.

        THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW
PRINCIPLES THEREOF (OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL
OBLIGATIONS LAW), EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE
SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR
COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF
NEW YORK.

        (a)     Each Debtor and the Collateral Agent, to the extent that they
may lawfully do so, hereby consent to service of process, and to be sued, in the
Borough of Manhattan, City and State of New York, and consent to the
nonexclusive jurisdiction of the courts of the State of New York located in such
Borough and the United States District Court for the Southern District of New
York, as well as to the jurisdiction of all courts to which an appeal may be
taken from such courts, for the

                                       15


purpose of any suit, action, or other proceeding arising out of any of their
obligations hereunder or with respect to the transactions contemplated hereby,
and expressly waive any and all objections they may have as to venue in any such
courts.

        (b)     EACH PARTY HERETO HEREBY KNOWINGLY, VOLUNTARILY, AND
INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS
AGREEMENT OR ANY OTHER OPERATIVE AGREEMENT, OR ANY COURSE OR CONDUCT, COURSE OF
DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN), OR ACTIONS OF THE DEBTORS OR
THE COLLATERAL AGENT. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PARTIES TO
ENTER INTO THIS AGREEMENT.

        9.07    The Debtors' Duties.

        It is expressly agreed, anything herein contained to the contrary
notwithstanding, that each Debtor shall remain liable to perform all of the
obligations, if any, assumed by it with respect to the Collateral and the
Collateral Agent shall have no obligations or liabilities with respect to any
Collateral by reason of or arising out of or in connection with this Agreement,
nor shall the Collateral Agent or the Secured Parties be required or obligated
in any manner to perform or fulfill any of the obligations of any Debtor under
or with respect to any Collateral.

        9.08    Termination; Release.

        This Agreement shall terminate when all Secured Obligations have been
paid in full, and the Collateral Agent, at the written request and expense of
the relevant Debtor, will promptly execute and deliver to such Debtor the proper
instruments (which shall include UCC termination statements on form UCC-3 or
such other similar form which may then be required by law to terminate such
security interest) acknowledging the termination of this Agreement, and will
promptly duly assign, transfer and deliver to such Debtor (without recourse and
without any representation or warranty) free from any interest of the Collateral
Agent or Lien granted hereunder such of the Collateral as may be in possession
of the Collateral Agent and has not theretofore been sold or otherwise applied
or released pursuant to this Agreement together with such notices to third
parties as may be necessary to countermand any notices previously sent to them
pursuant hereto.

        9.09    Counterparts.

        This Agreement may be executed in any number of counterparts and by the
different parties hereto on separate counterparts, each of which when so
executed and delivered shall be an original, but all of which shall together
constitute one and the same instrument.

        9.10    Severability.

        In case any one or more of the provisions contained in this Agreement
shall be invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein shall
not in any way be affected and/or impaired thereby. In addition, each Debtor and
the Collateral Agent undertake to negotiate in good faith with a view to
replacing such invalid, illegal or unenforceable provision with another
provision not so invalid, illegal or unenforceable with the same or similar
effect.

                                       16


        9.11    Applicability of Note Purchase Agreement.

        In amplification of, and notwithstanding any other provisions of this
Agreement, in connection with its obligations hereunder, the Collateral Agent
has all of the rights, powers, privileges, exculpations, protections and
indemnities as are provided for or referred to in the Note Purchase Agreement.

                            [SIGNATURE PAGE FOLLOWS]

                                       17


        IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered by their respective duly authorized officers as of the
date first above written.

                                        PACIFICE AEROSPACE & ELECTRONICS, INC.


                                        By: /s/ Donald A. Wright
                                           -------------------------------------
                                           Name:  Donald A. Wright
                                           Title: Chief Executive Officer
                                                  and President



                                        AEROMET AMERICA, INC.


                                        By: /s/ Donald A. Wright
                                           -------------------------------------
                                           Name:  Donald A. Wright
                                           Title: Executive Vice President



                                        BALO PRECISION PARTS, INC.


                                        By: /s/ Donald A. Wright
                                           -------------------------------------
                                           Name:  Donald A. Wright
                                           Title: Executive Vice President



                                        CASHMERE MANUFACTURING CO., INC.


                                        By: /s/ Donald A. Wright
                                           -------------------------------------
                                           Name:  Donald A. Wright
                                           Title: Executive Vice President



                                        CERAMIC DEVICES, INC.


                                        By: /s/ Donald A. Wright
                                           -------------------------------------
                                           Name:  Donald A. Wright
                                           Title: Executive Vice President



                                        ELECTRONIC SPECIALTY CORPORATION


                                        By: /s/ Donald A. Wright
                                           -------------------------------------
                                           Name:  Donald A. Wright
                                           Title: Executive Vice President





                                        NORTHWEST TECHNICAL INDUSTRIES, INC.


                                        By: /s/ Donald A. Wright
                                           -------------------------------------
                                           Name: Donald A. Wright
                                           Title: Executive Vice President



                                        PACIFIC COAST TECHNOLOGIES, INC.


                                        By: /s/ Donald A. Wright
                                           -------------------------------------
                                           Name: Donald A. Wright
                                           Title: Executive Vice President



                                        PA&E INTERNATIONAL, INC.


                                        By: /s/ Donald A. Wright
                                           -------------------------------------
                                           Name: Donald A. Wright
                                           Title: President



                                        SEISMIC SAFETY PRODUCTS, INC.


                                        By: /s/ Donald A. Wright
                                           -------------------------------------
                                           Name: Donald A. Wright
                                           Title: Executive Vice President



                                        SKAGIT ENGINEERING & MANUFACTURING, INC.


                                        By: /s/ Donald A. Wright
                                           -------------------------------------
                                           Name: Donald A. Wright
                                           Title: Executive Vice President



                                        FIRST UNION NATIONAL BANK, not in its
                                        individual capacity, but solely as
                                        Collateral Agent


                                        By: /s/ Paul Thompson
                                           -------------------------------------
                                           Name:  Paul Thompson
                                           Title: Vice President



                                                                      SCHEDULE I



                             COMMERCIAL TORT CLAIMS


None.



                                                                     SCHEDULE II



                          DEBTOR AND COLLATERAL DETAIL



    COMPANY                           LOCATION                          USE
    -------                           --------                          ---
                                                         
1.  PA&E                     430 Olds Station Road             PA&E headquarters
                             Wenatchee, WA 98801

2.  Northwest Technical      2249 Diamond Point Road           Bonded Metals Div. operations
    Industries, Inc.         Sequim, WA 98382

3.  Cashmere                 Port of Chelan                    Mach. Div. Operations
    Manufacturing Co.,       432 Olds Station Rd.
     Inc.                    Wenatchee, WA  98801

4.  Pacific Coast            Port of Chelan                    Electr. Group Operations
    Technologies, Inc.       434 Olds Station Rd.
                             Wenatchee, WA  98801

5.  PA&E                     Port of Chelan                    Mach. Div. Operations
                             200 Olds Station Rd.
                             Wenatchee, WA  98801

6.  PA&E                     Port of Chelan                    Mach. Div. Operations
                             2605 Chester Kimm Road
                             Wenatchee, WA  98801

7.  Electronic Specialty     Erickson Realty, Ltd.             Display Div. Operations
    Corporation              14511 NE 13th Ave.                (not in use)
                             Vancouver, WA  98685

8.  Skagit Engineering &     Sea-Land Development              Eng. & Fab. Div. Operations
    Manufacturing, Inc.      500 Metcalf Street                (not in use.
                             Sedro-Woolley, WA  98284          Partially terminated)




                                                        
9.  Skagit Engineering &     220th Street LLC                 Eng. & Fab. Office
    Manufacturing, Inc.      6808 220th St. SW                (subleased)
                             Suite 200
                             Mountlake Terrace, WA  98043

10. Northwest Technical      Rayonier, Inc.                   Remote blasting site
    Industries, Inc.         (site has no address)





                                                                    SCHEDULE III

                       PATENTS, COPYRIGHTS AND TRADEMARKS

                        PACIFIC COAST TECHNOLOGIES, INC.

                               PATENT STATUS CHART




       APPLICANT/
       PATENTEE/
        ASSIGNEE
        COUNTRY           ATTORNEY DOCKET NO.  INVENTORS         SERIAL NO.     FILING DATE      PATENT NO.       ISSUE DATE
- ----------------------    -------------------  -------------     ----------     -----------      ----------       ----------
                                                                                                
       PCT, Inc.                42474/5        James C. Kyle                     07.16.81        4,507,522         03.26.85


          USA                   Kyle 12
- ----------------------    -------------------  -------------     ----------     -----------      ----------       ----------
       PCT, Inc.                42474/5        James C. Kyle                     05.02.84        4,512,791         04.23.85


          USA                   Kyle 13
- ----------------------    -------------------  -------------     ----------     -----------      ----------       ----------
       PCT, Inc.                42474/5        James C. Kyle                     05.02.84        4,514,207         04.30.85


          USA                   Kyle 14
- ----------------------    -------------------  -------------     ----------     -----------      ----------       ----------
       PCT, Inc.                42474/5        James C. Kyle                     10.08.82        4,514,590         04.30.85


          USA                   Kyle 15

- ----------------------    -------------------  -------------     ----------     -----------      ----------       ----------
      PCT, Inc.                42474/5        James C. Kyle                     11.04.82        4,518,820         05.21.85


          USA                   Kyle 16
- ----------------------    -------------------  -------------     ----------     -----------      ----------       ----------
       PCT, Inc.                42474/5        James C. Kyle                     05.02.84        4,593,758         06.10.86


          USA                   Kyle 17
- ----------------------    -------------------  -------------     ----------     -----------      ----------       ----------





       APPLICANT/
       PATENTEE/
        ASSIGNEE
        COUNTRY                EXPIRATION DATE          TITLE                STATUS             MAINTENANCE FEE DUE DATES
- ----------------------         ---------------    -------------------------  -----------------  ----------------------------------
                                                                                    
       PCT, Inc.                   03.26.02       TERMINAL ASSEMBLY          IN FORCE           No further fees due


          USA
- ----------------------         ---------------    -------------------------  -----------------------------------------------------
       PCT, Inc.                   04.23.02       HERMETICALLY SEALED        IN FORCE           No further fees due
                                                  INSULATING ASSEMBLY

          USA
- ----------------------         ---------------    -------------------------  -----------------------------------------------------
       PCT, Inc.                   04.30.02       METHOD FOR MAKING          IN FORCE           No further fees due
                                                  TERMINAL ASSEMBLY FOR
                                                  HEART PACEMAKER
          USA
- ----------------------         ---------------    -------------------------  -----------------------------------------------------
       PCT, Inc.                   10.08.02       ELECTRICAL TERMINAL        IN FORCE           No further fees due
                                                  ASSEMBLY

          USA

- ----------------------         ---------------    -------------------------  -----------------------------------------------------
      PCT, Inc.                   11.04.02       TERMINAL ASSEMBLY FOR      IN FORCE           No further fees due
                                                  HEART PACEMAKER

          USA
- ----------------------         ---------------    -------------------------  -----------------------------------------------------
       PCT, Inc.                   06.10.03       HERMETICALLY SEALED        IN FORCE           No further fees due
                                                  INSULATING ASSEMBLY

          USA
- ----------------------         ---------------    -------------------------  -----------------------------------------------------







       APPLICANT/
        PATENTEE/
        ASSIGNEE
        COUNTRY           ATTORNEY DOCKET NO.      INVENTORS      SERIAL NO.    FILING DATE    PATENT NO.    ISSUE DATE
- ----------------------    -------------------    -------------    ----------    -----------    ----------    ----------
                                                                                           
       PCT, Inc.                42474/5          James C. Kyle                    12.04.84     4,654,752     03.31.87

          USA                   Kyle 18

- ----------------------    -------------------    -------------    ----------    -----------    ----------    ----------
       PCT, Inc.                42474/5          James C. Kyle                    06.29.84     4,657,337     04.14.87

          USA                   Kyle 19

- ----------------------    -------------------    -------------    ----------    -----------    ----------    ----------
      PCT, Inc.(1)              42474/5          James C. Kyle                    10.20.83     4,925,607     5.15.90

          USA                   Kyle 20

- ----------------------    -------------------    -------------    ----------    -----------    ----------    ----------
      PCT, Inc.                 42474/5          James C. Kyle                    09.20.82     4,935,583     06.19.90

          USA                   Kyle 21

- ----------------------    -------------------    -------------    ----------    -----------    ----------    ----------
      PCT, Inc.                 42474/6          Edward A.                        01.07.92     5,298,683     03.29.94
                                                 Taylor
          USA                   Taylor 1

- ----------------------    -------------------    -------------    ----------    -----------    ----------    ----------






       APPLICANT/
       PATENTEE/
        ASSIGNEE
        COUNTRY           EXPIRATION DATE              TITLE                  STATUS            MAINTENANCE FEE DUE DATES
- ----------------------    ---------------    -------------------------    ----------------    -----------------------------
                                                                                  
       PCT, Inc.              12.04.04       TERMINAL ASSEMBLY            IN FORCE            No further fees due
                                             AND METHOD OF MAKING
         USA                                 TERMINAL ASSEMBLY

- ----------------------    ---------------    -------------------------    ----------------    -----------------------------
       PCT, Inc.              06.29.04       ELECTRICAL CONNECTOR &       IN FORCE            No further fees due
                                             METHOD OF PRODUCING
         USA                                 ELECTRICAL CONNECTOR

- ----------------------    ---------------    -------------------------    ----------------    -----------------------------
      PCT, Inc.(1)            05.15.07       ELECTRICAL INSULATING        IN FORCE            Release of Sec'y Int. sent to
                                             MATERIAL FORMED FROM AT                          Kyle for signature 01.02.
         USA                                 LEAST ONE FLUX AND A                             Sec'y Int. not yet released;
                                             CRYSTALLINE STUFFING                             need to correct fee payment.
                                             MATERIAL
- ----------------------    ---------------    -------------------------    ----------------    -----------------------------
       PCT, Inc.              06.19.07       INSULATED CONDUCTOR WITH     IN FORCE            No further fees due
                                             CERAMIC-CONNECTED
         USA                                 ELEMENTS

- ----------------------    ---------------    -------------------------    ----------------    -----------------------------
       PCT, Inc.              01.07.12       DISSIMILAR METAL             IN FORCE            09.29.05
                                             CONNECTORS
         USA

- ----------------------    ---------------    -------------------------    ----------------    -----------------------------


- ----------------------
1    Assignment to PCT, Inc. included security interest to Kyle. Obligation to
     Kyle has been satisfied. Requested and have not yet received the executed
     release of the security interest.




       APPLICANT/
        PATENTEE/
        ASSIGNEE
        COUNTRY           ATTORNEY DOCKET NO.      INVENTORS      SERIAL NO.    FILING DATE    PATENT NO.    ISSUE DATE
- ----------------------    -------------------    -------------    ----------    -----------    ----------    ----------
                                                                                           
       PCT, Inc.              42474/7            Edward A.                       06.02.94      5,433,260     07.18.95
                                                 Taylor
          USA                 Taylor 2

- ----------------------    -------------------    -------------    ----------    -----------    ----------    ----------
       PCT, Inc.              42474/7            Edward A.                       06.19.95      5,675.122     10.07.97
                                                 Taylor
          USA                 Taylor 3

- ----------------------    -------------------    -------------    ----------    -----------    ----------    ----------
       PCT, Inc.              42474/19c1         Edward           09/006,696      01.14.98     5,986,208     11.16.99
                                                 A.Taylor;
          USA                 Taylor 5           Marshall Neal
                                                 Hulbert

- ----------------------    -------------------    -------------    ----------    -----------    ----------    ----------
       PCT, Inc.              42474/801          Brian Lasater    09/076,230      05.12.98     6,221,513     04.24.01

          USA                 Lasater 1

- ----------------------    -------------------    -------------    ----------    -----------    ----------    ----------
       PCT, Inc.             42474/801 PCT       Brian Lasater      99 921        Priority
                                                                     874.6          Date
        EUROPE            Lasater 1 PCT Int'l                                     05.11.99

                                                                                 PCT/US99/
                                                                                   10313

                                                                                 Published
                                                                                 11.18.09
                                                                                   as WO
                                                                                 99/58322.





       APPLICANT/
       PATENTEE/
        ASSIGNEE
        COUNTRY           EXPIRATION DATE              TITLE                   STATUS           MAINTENANCE FEE DUE DATES
- ----------------------    ---------------    -------------------------    ----------------    -----------------------------
                                                                                  
       PCT, Inc.              07.27.12       SEALABLE ELECTRONIC          IN FORCE            01.18.03, 01.18.07
                                             PACKAGES & METHODS OF
         USA                                 PRODUCING & SEALING SUCH
                                             PACKAGES
- ----------------------    ---------------    -------------------------    ----------------    -----------------------------
       PCT, Inc.              07.27.12       SEALABLE ELECTRONIC          IN FORCE            04.07.05
                                             PACKAGES
         USA                                                                                  04.07.09

- ----------------------    ---------------    -------------------------    ----------------    -----------------------------
       PCT, Inc.              03.19.16       WAVEGUIDE WINDOW             IN FORCE            05.16.03, 05.16.07, 05.16.11
                                             ASSEMBLY AND MICROWAVE
         USA                                 ELECTRONICS PACKAGE

- ----------------------    ---------------    -------------------------    ----------------    -----------------------------
       PCT, Inc.              05.12.18       METHODS FOR HERMETICALLY     IN FORCE            BROADENING REISSUE DEADLINE
                                             SEALING CERAMIC TO                               04.24.03; MAINT. FEES DUE:
         USA                                 METALLIC SURFACES AND                            10.24.04, 10.24.08, 10.24.12
                                             ASSEMBLIES
                                             INCORPORATING SUCH SEALS
- ----------------------    ---------------    -------------------------    ----------------    -----------------------------
       PCT, Inc.                             METHODS AND MATERIALS        Pending;            Maintenance fee due annually.
                                             FOR SEALING CERAMIC TO       Designated
        EUROPE                               METALLIC SURFACES            countries are:
                                                                          Switzerland-
                                                                          Liechtenstein,
                                                                          Germany; Denmark,
                                                                          France, Great
                                                                          Britain, Italy,
                                                                          Netherlands and
                                                                          Sweden;





       APPLICANT/
       PATENTEE/
        ASSIGNEE
        COUNTRY           ATTORNEY DOCKET NO.  INVENTORS         SERIAL NO.     FILING DATE      PATENT NO.       ISSUE DATE
- ----------------------    -------------------  -------------     ----------     -----------      ----------       ----------
                                                                                                

- ----------------------    -------------------  -------------     ----------     -----------      ----------       ----------
       PCT, Inc.          42474/802aLasater 4  Brian Lasater     09/235,223      01.22.99        6,232,004         05.15.01

          USA



- ----------------------    -------------------  -------------     ----------    --------------    ----------       ----------
       PPCT, Inc.            42474/802PCT      Brian Lasater    99 920 345.8     Priority
                                                                               Date 05.05.99
         EUROPE                Lasater 3
                                                                               PCT/US99/09819

                                                                               Published
                                                                               11.18.99 as
                                                                               WO 99/58690.
- ----------------------    -------------------  -------------     ----------    --------------    ----------       ----------
         PCT, Inc.            42474/17-5        Edward J.                      07.09.91           5,110,307         05.05.92
           USA                                  Rapoza
                              Rapoza





       APPLICANT/
       PATENTEE/
        ASSIGNEE
        COUNTRY           EXPIRATION DATE          TITLE               STATUS             MAINTENANCE FEE DUE DATES
- ----------------------    ---------------   -------------------------  --------------------------------------------------------
                                                                              

- ----------------------    --------------    -------------------------  ---------------------------------------------------------
       PCT, Inc.            05.06.18        METHODS FOR TREATING       IN FORCE           BROADENING REISSUE DEADLINE 05.15.03;
                                            CERAMIC MATERIALS AND                         MAINT. FEES DUE:  11.15.04;
          USA                               CERAMIC MATERIALS                             11.15.08; 11.15.12
                                            PRODUCED THEREBY
                                            (Zirconia treatment
                                            with metals)
- ----------------------    --------------    -------------------------  ---------------------------------------------------------
       PPCT, Inc.                           METHODS FOR TREATING       Pending;           Maintenance fee due annually
                                            CERAMIC MATERIALS AND      Switzerland-
         EUROPE                             IMPROVED TREATED CERAMIC   Liechtenstein,
                                            MATERIALS PRODUCED         Germany; Denmark
                                            THEREBY (Zirconia          France, Great
                                            staining with titanium)    Britain, Italy,
                                                                       Netherlands and
                                                                       Sweden
- ----------------------    --------------    -------------------------  ---------------------------------------------------------
         PCT, Inc.          07.09.11        LASER                      IN FORCE           11.05.03
                                            WELDABLE
           USA                              HERMETIC
                                            CONNECTOR





       APPLICANT/
       PATENTEE/
        ASSIGNEE
        COUNTRY           ATTORNEY DOCKET NO.  INVENTORS         SERIAL NO.     FILING DATE      PATENT NO.       ISSUE DATE
- ----------------------    -------------------  -------------     ----------     -----------      ----------       ----------
                                                                                                
       PCT, Inc.               42474/17        Edward J.                         05.04.92        5,405,272        04.11.95
                                               Rapoza

          USA                  Rapoza 2

- ----------------------    -------------------  -------------     ----------     ------------     ----------       ----------
                               42474/17        Edward J.         92303983.8      05.01.92        EP 0 522         03.05.97
                                               Rapoza                                            687 B1

        UK(2)                  Rapoza 3
- ----------------------    -------------------  -------------     ----------     -----------      ----------       ----------
    PCT, Inc.                  42474/17        Edward J.         Can.            04.30.92        2,067,667         12.25.01
    CANADA                                     Rapoza            20676671

                               Rapoza 4
- ----------------------    -------------------  -------------     ----------     -----------      ----------       ----------
       PCT, Inc.               42474/17        William F.                        11.01.90        5,041,019         08.20.91
                                               Sharp, et al.

          USA                   Sharp 1
- ----------------------    -------------------  -------------     ----------     -----------      ----------       ----------
       PCT, Inc.               42474/17        William F.                        03.18.91        5,109,594         05.05.92
                                               Sharp, et al.

          USA                   Sharp 2
- ----------------------    -------------------  -------------     ----------     -----------      ----------       ----------
       PCT, Inc.               42474/17        Wayne R. Snow,                    09.26.85        4,690,480         09.01.87
                                               et. al.

          USA                   Snow 1
- ----------------------    -------------------  -------------     ----------     -----------      ----------       ----------





       APPLICANT/
       PATENTEE/
       ASSIGNEE
        COUNTRY            EXPIRATION DATE              TITLE                STATUS            MAINTENANCE FEE DUE DATES
- ----------------------    ------------------   ------------------------   ----------------   -----------------------------
                                                                                 
       PCT, Inc.
                               04.11.12          LASER WELDABLE HERMETIC     IN FORCE          10.11.02, 10.11.06
                                                  CONNECTOR
          USA
- ----------------------    ------------------   ------------------------   ----------------   -----------------------------
                               05.01.12          LASER WELDABLE HERMETIC     EU patent         ANNUALLY ON MAY 3RD
        UK(2)                                     CONNECTOR                enforceable in
                                                                                UK
- ----------------------    ------------------   ------------------------   ----------------   -----------------------------
    PCT, Inc.                  04.30.12          LASER WELDABLE HERMETIC     IN FORCE          ANNUALLY ON APRIL 30TH
    CANADA                                        CONNECTOR

- ----------------------    -----------------   -------------------------   ---------------   -----------------------------
       PCT, Inc.               11.01.10          TRANSITION JOINT FOR        IN FORCE          02.20.03
                                                  MICROWAVE PACKAGE
          USA
- ----------------------    ------------------   ------------------------   ----------------   -----------------------------
       PCT, Inc.               11.01.10          METHOD OF MAKING SEALED     IN FORCE          11.05.03
                                                  TRANSITION JOINT
          USA
- ----------------------    ------------------   ------------------------   ----------------   -----------------------------
       PCT, Inc.               09.26.05          TUBULAR                     IN FORCE          No further fees due
                                                  BI-METAL CONNECTOR
          USA
- ----------------------    ------------------   ------------------------   ----------------   -----------------------------


__________________

(2) Assignment to PCT, Inc. not yet recorded in UK; we are the following up to
    record.



                      PACIFIC AEROSPACE & ELECTRONICS, INC.
                               PATENT STATUS CHART



      APPLICANT/          ATTORNEY DOCKET
   ASSIGNEE COUNTRY             NO.         INVENTORS               SERIAL NO.          FILE DATE       PATENT NO.
   ------------------     ---------------   -------------------     ---------           ---------       ----------
                                                                                         
  Pacific Aerospace &        42474/900      David N. Crane          09/200,204          11.25.98        6,150,772
   Electronics, Inc.




          USA


   ------------------     ---------------   -------------------     ---------           ---------       ----------
  Pacific Aerospace &        42474/901      Herman L. ("Jack")      09/302,590          04.30.99
Electronics, Inc.(3)                        Jones; Edward A.
                                            Taylor
          USA

   ------------------     ---------------   -------------------     ---------           ---------       ----------
  Pacific Aerospace &        42474/902      Herman L. ("Jack")      09/303,196          04.30.99        6,284,389
   Electronics, Inc.                        Jones; Edward A.
                                            Taylor
          USA


   ------------------     ---------------   -------------------     ---------           ---------       ----------





      APPLICANT/
   ASSIGNEE COUNTRY       ISSUE DATE       EXPIRATION DATE         TITLE                           STATUS
   ------------------     ----------       ---------------  ----------------------------           ----------------
                                                                                       
  Pacific Aerospace &      11.21.00        11.25.18         GAS DISCHARGE LAMP CONTROLLER          IN FORCE
   Electronics, Inc.

          USA
   ------------------     ----------       ---------------  ----------------------------           ----------------
 Pacific Aerospace &                                        ELECTRONICS PACKAGES HAVING A          PENDING; Claims
Electronics, Inc.(3)                                        COMPOSITE STRUCTURE AND METHODS FOR    allowed; Issue Fee
                                                            MANUFACTURING SUCH ELECTRONICS         paid and formal
          USA                                               PACKAGES                               drawings submitted.
   ------------------     ----------       ---------------  ----------------------------           ----------------
  Pacific Aerospace &      09.04.01           04.30.19      COMPOSITE MATERIALS AND METHODS FOR    IN FORCE
   Electronics, Inc.                                        MANUFACTURING COMPOSITE MATERIALS

          USA
   ------------------     ----------       ---------------  ----------------------------           ----------------





      APPLICANT/            MAINTENANCE
   ASSIGNEE COUNTRY         FEE DUE DATES
   ------------------       ----------------------
                         
  Pacific Aerospace &       BROADENING REISSUE
   Electronics, Inc.        DEADLINE 11.21.02;
                            MAINT. FEES DUE:

                            05.21.04,

          USA               05.21.08,
                            05.21.12

   ------------------       ----------------------
  Pacific Aerospace &
Electronics, Inc.(3)

          USA

   ------------------       ----------------------
  Pacific Aerospace &       BROADENING REISSUE
   Electronics, Inc.        DEADLINE 09.04.03;
                            MAINT. FEES DUE:
          USA               03.04.05
                            03.04.09
                            03.04.13
   ------------------       ----------------------


      (3)   Mr. Jones holds a Security Interest in these applications but has
consented to the granting by the Company of a second priority perfected security
interest in these applications in favor of the Collateral Agent.





      APPLICANT/          ATTORNEY DOCKET
   ASSIGNEE COUNTRY             NO.         INVENTORS               SERIAL NO.          FILE DATE       PATENT NO.
   ------------------     ---------------   -------------------     ---------           ---------       ----------
                                                                                         
  Pacific Aerospace &         42474/        Herman L. ("Jack")           EP 00          11.15.01
   Electronics, Inc.                        Jones; Edward A.           `928'580.0
                             901-2.EP       Taylor                    Nat'l phase
                                                                           of
                                                                     PCT/US00/11579
        EUROPE

- ------------------------ ------------------ ----------------------- ----------------- -------------- -----------------





      APPLICANT/                                                                                       MAINTENANCE
   ASSIGNEE COUNTRY       ISSUE DATE       EXPIRATION DATE         TITLE                  STATUS       FEE DUE DATES
   ------------------     ----------       ---------------  ----------------------------  -----------  -------------
                                                                                        
  Pacific Aerospace &                                       COMPOSITE ELECTRONICS         PENDING.
   Electronics, Inc.                                        PACKAGES AND METHODS FOR
                                                            MANUFACTURE
        EUROPE
   ------------------     ----------       ---------------  ----------------------------  -----------  -------------




                          SEISMIC SAFETY PRODUCTS, INC.
                               PATENT STATUS CHART



   APPLICANT/
   PATENTEE/          ATTORNEY DOCKET
ASSIGNEE COUNTRY           NO.           INVENTORS         SERIAL NO.        FILE DATE        PATENT NO.      ISSUE DATE
- ------------------    ---------------  --------------      ----------        ---------        ---------       ----------
                                                                                            
Seismic Safety           42474/28      James C. McGill                       03.07.88         4,903,720        02.27.90
Prods., Inc.

USA                      McGill 1
- ------------------    ---------------  --------------      ----------        ---------        ---------       ----------
Seismic Safety           42474/28      James C. McGill                       02.26.91         5,119,841        06.09.92
Prods., Inc.
                          McGill 2
USA
- ------------------    ---------------  --------------      ----------        ---------        ---------       ----------
Seismic Safety           42474/28      James C. McGill,                      11.09.93         5,409,031       04.25.95
Prods., Inc.                           Antonio F.
                                       Fernandez
                          McGill 3
USA
- ------------------    ---------------  --------------      ----------        ---------        ---------       ----------
Seismic Safety           42474/28      James C. McGill,                      03.13.95         5,704,385       01.06.98
Prods., Inc.                           Antonio F.
                                       Fernandez

                          McGill 4
USA
- ------------------    ---------------  --------------      ----------        ---------        ---------       ----------





   APPLICANT/
   PATENTEE/                                                                                   MAINTENANCE FEE
ASSIGNEE COUNTRY           EXPIRATION DATE              TITLE                     STATUS          DUE DATES
- ------------------         ---------------    ---------------------------        ---------     ---------------
                                                                                   
Seismic Safety             03.07.08            SAFETY SHUTOFF DEVICE             IN FORCE      All fees paid
Prods., Inc.

USA
- ------------------         ---------------    ---------------------------        --------      ---------------
Seismic Safety             02.26.11           SAFETY SHUT OFF APPARATUS          IN FORCE      12.09.03
Prods., Inc.

USA
- ------------------         ---------------    ---------------------------        --------      ---------------
Seismic Safety             04.25.12           SAFETY SHUT OFF VALVE              IN FORCE      10.25.02,
Prods., Inc.                                                                                   10.25.06


USA
- ------------------         ---------------    ---------------------------        --------      ---------------
Seismic Safety             01.06.15           AUTOMATIC AND MANUALLY             IN FORCE      07.06.05,
Prods., Inc.                                  OPERABLE SAFETY SHUTOFF
                                              VALVE
                                                                                               07.06.09
USA
- ------------------         ---------------    ---------------------------        --------      ---------------




                            AEROMET INTERNATIONAL PLC
                               PATENT STATUS CHART



     APPLICANT/
     PATENTEE/
     ASSIGNEE         ATTORNEY DOCKET
     COUNTRY                NO.             INVENTORS          SERIAL NO.       FILING DATE       PATENT NO.      ISSUE DATE
- ------------------    ---------------       ---------          ----------       -----------       ----------      ----------
                                                                                                
 Aeromet Int'l PLC                                             9804599.0        03.05.98
                                                               (initial)
         UK
                                                               9904741.7
                                                                (final)
- ------------------    ---------------       ---------          ----------       -----------       ----------      ----------
 Aeromet Int'l PLC                                             99104277.1


       EUROPE

- ------------------    ---------------       ---------          ----------       -----------       ----------      ----------
 Aeromet Int'l PLC                                              2264214

       CANADA
- ------------------    ---------------       ---------          ----------       -----------       ----------      ----------
   Aeromet Int'l         A00009359           Butler            09/262,446         03.04.99        6,126,898        10.03.00
                         US

        USA                                                                     priority to
                                                                                  03.05.98
- ------------------    ---------------       ---------          ----------       -----------       ----------      ----------
   Aeromet Int'l                                                11-57989


       JAPAN
- ------------------    ---------------       ---------          ----------       -----------       ----------      ----------





     APPLICANT/
     PATENTEE/
     ASSIGNEE                                                                                               MAINTENANCE FEE DUE
     COUNTRY               EXPIRATION DATE              TITLE                       STATUS                  DATES
- ------------------         ---------------    --------------------------        -------------------         --------------------
                                                                                                
 Aeromet Int'l PLC                            CAST ALUMINUM-COPPER ALLOY        PENDING; no further
                                                                                information.
         UK


- ------------------         ---------------    --------------------------        -------------------         --------------------
 Aeromet Int'l PLC                            CAST ALUMINUM-COPPER ALLOY        PENDING; no further
                                                                                information.

       EUROPE

- ------------------         ---------------    --------------------------        -------------------         --------------------
 Aeromet Int'l PLC                            CAST ALUMINUM-COPPER ALLOY        PENDING; no further
                                                                                information.
       CANADA
- ------------------         ---------------    --------------------------        -------------------         --------------------
   Aeromet Int'l               03.04.19       CAST ALUMINUM-COPPER ALLOY        IN FORCE                    BROADENING REISSUE
                                                                                                            DEADLINE 10.03.02;
                                                                                                            MAINT. FEES DUE:
        USA                                                                                                 04.03.04, 04.03.08,
                                                                                                            04.03.12
- ------------------         ---------------    --------------------------        -------------------         --------------------
   Aeromet Int'l                              CAST ALUMINUM-COPPER ALLOY        PENDING; no further
                                                                                information.

       JAPAN
- ------------------         ---------------    --------------------------        -------------------         --------------------




                           TRADEMARK STATUS REPORT FOR
                      PACIFIC AEROSPACE & ELECTRONICS, INC.





                        CLIENT/
    ASSIGNMENT         MATTER NO.            MARK              COUNTRY      SERIAL NO.       FILING DATE
- --------------------  ------------   ----------------------  -----------  ---------------  ---------------
                                                                            
PCT, Inc.               42174/10     KRYOFLEX                USA          73/117,580        03.01.77




- --------------------  ------------   ----------------------  -----------  ---------------  ---------------
PCT, Inc.               42174/11     HERMETIC ADVANTAGE      USA          74/521,789        05.03.94





- --------------------  ------------   ----------------------  -----------  ---------------  ---------------

PCT, Inc.               42174/12     PARTNERS WITH           USA          74/522,844        05.03.94
                                     TOMORROW



- --------------------  ------------   ----------------------  -----------  ---------------  ---------------
Seismic Safety          42174/16     NORTHRIDGE VALVE        USA          75/169,974        09.23.96
Products, Inc.



- --------------------  ------------   ----------------------  -----------  ---------------  ---------------





                           REGISTRATION                                      INT'L
     ASSIGNMENT              NO./DATE             GOODS /SERVICES            CLASS                     STATUS
- --------------------      --------------    ---------------------------   -----------   -------------------------------------
                                                                            
PCT, Inc.                 1,114,452         CERAMIC MATERIALS SOLD        10; 21        REGISTERED;
                                            AS A COMPONENT OF HEART
                          Mar. 6, 1979      PACEMAKERS                                  Next renewal due 03.06.09
- --------------------      --------------    ---------------------------   -----------   ------------------------------------
PCT, Inc.                 1,998,984         ELECTRONIC COMPONENTS,         9            REGISTERED;
                                            NAMELY ELECTRONIC
                                            CONNECTORS AND                              SEC. 8/15 DECL due 9.10.01 - 9.10.02;
                          Sept. 10, 1996    HER-METIC SEALING                           Renewal due 3.10.06 - 9.10.06
                                            DEVICES
- --------------------      --------------    ---------------------------   -----------   ------------------------------------

PCT, Inc.                 1,998,986         ELECTRONIC COMPONENTS,         9            REGISTERED;
                                            NAMELY ELECTRONIC
                                            CON-NECTORS AND
                          Sept. 10, 1996    HERMETIC SEALING                            Sec 8/15 Decl due 9.10.01 - 9.10.02;
                                            DEVICES FOR ELEC-TRONIC
                                            PACKAGES AND CONNECTORS
                                                                                        Renewal due 3.10.06 - 9.10.06
- --------------------      --------------    ---------------------------   -----------   ------------------------------------
Seismic Safety            2,119,389         VALVES FOR NATURAL GAS         7            REGISTERED;
Products, Inc.                              DISTRIBUTION SYSTEMS
                          Dec. 9, 1997                                                  Sec 8/15 Decl due 12.9.02 - 12.9.03;

                                                                                        RENEWAL due 6.9.07 - 12.9.07
- --------------------      --------------    ---------------------------   -----------   ------------------------------------



                                                                    SCHEDULE IV


                            ADDRESSES OF THE DEBTORS





         NAME OF DEBTOR                          STATE OF INCORPORATION              PRINCIPAL PLACE OF BUSINESS
         --------------                          ----------------------          ----------------------------------
                                                                          
Pacific Aerospace & Electronics, Inc.                 Washington                 430 Olds Station Road, Third Floor
                                                                                 Wenatchee, Washington 98801

Aeromet America, Inc.                                 Washington                 430 Olds Station Road
                                                                                 Wenatchee, Washington 98801

Balo Precision Parts, Inc.                            Washington                 430 Olds Station Road
                                                                                 Wenatchee, Washington 98801

Cashmere Manufacturing Co., Inc.                      Washington                 432 Olds Station Road
                                                                                 Wenatchee, Washington 98801

Ceramic Devices, Inc.                                 Washington                 434 Olds Station Road
                                                                                 Wenatchee, Washington 98801

Electronic Specialty Corporation                      Washington                 14511 NE 13th Avenue
                                                                                 Vancouver, WA 98685

Northwest Technical Industries, Inc.                  Washington                 2249 Diamond Point Road
                                                                                 Sequim, WA 98382

Pacific Coast Technologies, Inc.                      Washington                 434 Olds Station Road
                                                                                 Wenatchee, Washington 98801

PA&E International Inc.                               Washington                 430 Olds Station Road
                                                                                 Wenatchee, Washington 98801

Seismic Safety Products, Inc.                         Washington                 430 Olds Station Road
                                                                                 Wenatchee, Washington 98801

Skagit Engineering & Manufacturing, Inc.              Washington                 500 Metcalf Street
                                                                                 Sedro-Woolley, WA 98284

EX-10.11

                                                                   Exhibit 10.11
- --------------------------------------------------------------------------------




                             STOCK PLEDGE AGREEMENT

                                      among

                      PACIFIC AEROSPACE & ELECTRONICS, INC.

                                       and

                            PA&E INTERNATIONAL, INC.,
                                 each a Pledgor,

                                       and

                           FIRST UNION NATIONAL BANK,
                               as Collateral Agent

                            -------------------------

                           Dated as of March 25, 2002

                            -------------------------




- --------------------------------------------------------------------------------





                                TABLE OF CONTENTS


                                                                                  Page
                                                                                  ----
                                                                            
SECTION 1.     DEFINITIONS.........................................................1

SECTION 2.     THE PLEDGE..........................................................2

SECTION 3.     SECURITY FOR OBLIGATIONS............................................3

SECTION 4.     REPRESENTATIONS AND WARRANTIES......................................3

SECTION 5.     COVENANTS...........................................................4

SECTION 6.     ADVANCES BY LENDERS.................................................5

SECTION 7.     VOTING RIGHTS; DIVIDENDS............................................5

SECTION 8.     CONTINUED PERFECTION OF SECURITY INTEREST...........................6

SECTION 9.     OBLIGATIONS OF THE PLEDGORS AND RIGHTS OF THE COLLATERAL AGENT......6

SECTION 10.    REMEDIES OF THE COLLATERAL AGENT....................................6

SECTION 11.    COLLATERAL AGENT APPOINTED ATTORNEY-IN-FACT.........................8

SECTION 12.    SECURITY INTEREST ABSOLUTE..........................................9

SECTION 13.    AMENDMENTS; ETC.....................................................9

SECTION 14.    NOTICES.............................................................9

SECTION 15.    CONTINUING ASSIGNMENT; PLEDGE AND SECURITY INTEREST; RELEASE.......10

SECTION 16.    APPLICATION OF PROCEEDS............................................10

SECTION 17.    SEVERABILITY.......................................................11

SECTION 18.    HEADINGS...........................................................11

SECTION 19.    GOVERNING LAW......................................................11

SECTION 20.    CONSENT TO JURISDICTION............................................11

SECTION 21.    WAIVER OF JURY TRIAL...............................................12

SECTION 22.    EXECUTION IN COUNTERPARTS..........................................12

SECTION 23.    APPLICABILITY OF NOTE PURCHASE AGREEMENT...........................12



                                       i



Annex 1-A - Certificates of Stock of the Domestic Subsidiaries

Annex 1-B - Certificates of Stock of the Foreign Subsidiaries





                             STOCK PLEDGE AGREEMENT

               STOCK PLEDGE AGREEMENT, dated as of March 25, 2002 (this
"Agreement"), among PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington
corporation (the "Company"), and PA&E INTERNATIONAL, INC. and each other
Subsidiary (as hereinafter defined) of the Company that may become a "pledgor"
hereunder (collectively, the "Pledgor Subsidiaries"; the Company and the Pledgor
Subsidiaries are referred to herein individually as a "Pledgor" and
collectively, as the "Pledgors"), and FIRST UNION NATIONAL BANK, acting in its
capacity as collateral agent (the "Collateral Agent") for the Holders (as
hereinafter defined),

                              W I T N E S S E T H:

               WHEREAS, the Company, the Initial Purchaser (as hereinafter
defined) and the Collateral Agent have entered into that certain Note Purchase
Agreement, dated as of March 19, 2002 (as such agreement may be amended,
restated, modified or supplemented from time to time, the "Note Purchase
Agreement"); and

               WHEREAS, it is a condition precedent to the obligations of the
Initial Purchaser under the Note Purchase Agreement, that the Pledgors execute
and deliver this Agreement pursuant to which, among other things, the Pledgors
shall grant to the Collateral Agent, for the benefit of the Holders, a
continuing security interest in all of the Collateral (as hereinafter defined)
to secure all of the Obligations (as hereinafter defined);

               NOW, THEREFORE, in consideration of the agreements and covenants
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, each Pledgor hereby makes the
following assignments, representations and warranties to the Collateral Agent
and hereby covenants and agrees with the Collateral Agent as follows:

               SECTION 1.    Definitions

               Except as otherwise indicated herein, as used in this Agreement,
the following terms have the following meanings:

               "Domestic Subsidiaries" means each Subsidiary that is a
corporation incorporated under the laws of the United States of America or any
State or territory thereof.

               "Foreign Subsidiaries" means each Subsidiary that is a
corporation incorporated under the laws of any jurisdiction other than the
United State of America or any State or territory thereof.

               "UCC" means the Uniform Commercial Code, as in effect in any
applicable jurisdiction.





               (a) Capitalized terms used and not otherwise defined herein shall
have the meanings set forth in the Note Purchase Agreement, and the principles
of construction set forth in the Note Purchase Agreement shall apply.

               (b) Except for the terms defined in this Agreement or in the Note
Purchase Agreement, all terms defined in Article 8 or 9 of the UCC of the State
of New York which are used in this Agreement shall have the meanings specified
in such Articles.

               SECTION 2.    The Pledge.

               Each Pledgor hereby pledges and hypothecates to the Collateral
Agent for the benefit of the Holders, and hereby grants to the Collateral Agent
for the benefit of the Holders a continuing security interest in and to, all of
its presently owned or hereafter acquired right, title and interest in and to
the following (the "Collateral"):

               (a) (i) the shares of common stock of each of the Domestic
Subsidiaries, identified in Annex 1-A hereto, representing 100% of the issued
and outstanding common stock of each of the Domestic Subsidiaries, and all other
shares of Capital Stock of whatever class of each of the Domestic Subsidiaries
now or hereafter owned by such Pledgor, in each case together with the
certificates evidencing the same, and (ii) the shares of common stock of each of
the Foreign Subsidiaries, identified in Annex 1-B hereto, representing 65% (or,
if as a result of a change in applicable law, such Pledgor can pledge a greater
percentage without causing adverse tax consequences to the Pledgor, such greater
percentage) of the issued and outstanding voting stock (within the meaning of
Treas. Reg. Section 1.956-2(c)(2)) and 100% of any nonvoting classes of stock
(within the meaning of Treas. Reg. Section 1.956-2(c)(2)) of each of the Foreign
Subsidiaries, and all other shares of Capital Stock of whatever class, now or
hereafter owned by such Pledgor, necessary to maintain the security interest
created hereby in 65% (or, if as a result of a change in applicable law, such
Pledgor can pledge a greater percentage without causing adverse tax consequences
to such Pledgor, such greater percentage) of the voting stock and 100% of the
nonvoting stock of each of the Foreign Subsidiaries, in each case together with
the certificates representing the same (the shares of stock referred to in
clauses (i) and (ii), collectively, the "Pledged Shares");

               (b) all shares, securities, moneys or property representing a
dividend on any of the Pledged Shares, or representing a distribution or return
of capital upon or in respect of the Pledged Shares, or resulting from a
split-up, revision, reclassification or other like change of the Pledged Shares
or otherwise received in exchange therefor, and any Stock Equivalents issued to
the holders of, or otherwise in respect of, the Pledged Shares;

               (c) all securities in substitution for or in addition to any of
the foregoing, any certificates representing or evidencing such securities, and
all cash, securities, distributions and other property at any time and from time
to time received, receivable or otherwise distributed in respect of or in
exchange for any or all of the foregoing; and


                                       2



               (d) all Proceeds of and to any of the property of such Pledgor
described in the preceding clauses of this Section 2.

               SECTION 3.    Security for Obligations.

               The Collateral secures the prompt and complete payment and
performance of all the Obligations.

               SECTION 4.    Representations and Warranties.

               Each Pledgor represents and warrants as follows:

               (a) No consent of any other Person and no authorization,
approval, or other action by, or notice to or filing with, any Person is
required (i) for the pledge and assignment by such Pledgor of the Collateral
pursuant to this Agreement, (ii) for the validity, perfection or maintenance of
the first priority security interest created hereby or (iii) for the exercise by
the Collateral Agent of the voting or other rights provided for in this
Agreement or the remedies in respect of such Collateral pursuant to this
Agreement or as provided by law, except in each case for those which have been
duly obtained or made, which are in full force and effect and as may be required
in connection with any disposition of any portion of the Collateral by laws
affecting the offering and sale of securities generally.

               (b) Each Pledgor is the legal and beneficial owner of, and has
good title to, the Collateral of such Pledgor free and clear of all Liens,
except for the security interest created by this Agreement and Liens for taxes,
assessments, governmental charges or levies not yet due or which are being
contested in good faith and by appropriate proceedings if adequate reserves with
respect thereto are maintained on the books of the Company and each of its
Subsidiaries, as the case may be, in accordance with GAAP (such Liens,
"Governmental Liens").

               (c) Each Pledgor owns all of the issued and outstanding Capital
Stock of the Domestic Subsidiaries and the Foreign Subsidiaries of such Pledgor.

               (d) This Agreement creates a valid security interest in and to
all of the Collateral securing the payment of all the Obligations. The Pledged
Shares pledged by each Pledgor hereunder are, and any securities pledged in
substitution therefor or in addition thereto will be duly and validly pledged
hereunder in accordance with all applicable Requirements of Law.

               (e) Each Pledgor has the right to pledge the Pledged Shares owned
by it as herein provided.

               (f) Any certificate evidencing the Pledged Shares pledged by a
Pledgor hereunder is, and any certificate pledged hereunder in substitution
therefor or in addition thereto will be, issued in the name of such Pledgor and
the form of transfer applicable to each such certificate has been, or when
issued will then have been duly executed in blank or is, or when issued will
then be, the subject of a duly executed


                                       3



transfer duly signed in blank by or under the authority of the appropriate
officer of such Pledgor. Each such transfer will give the Collateral Agent the
rights and authority it purports to give.

               (g) Prior to or concurrently with the execution and delivery of
this Agreement, each Pledgor shall have delivered to the Collateral Agent or its
agent all certificates evidencing the Pledged Shares owned by it and any related
instrument of transfer, duly endorsed by such Pledgor, evidencing any pledge of
Pledged Shares made by such Pledgor to the Collateral Agent.

               (h) None of the Collateral pledged by the Pledgors hereunder
constitutes margin stock, as defined in Regulation U of the Board of Governors
of the Federal Reserve System.

               (i) No Pledgor owns any Capital Stock in any Subsidiary other
than as set forth on Annex 1-A and Annex 1-B attached hereto.

               (j) No Pledgor is a party to any outstanding agreement, option or
contract to sell or otherwise transfer all or any portion of the Collateral. No
part of the Collateral is subject to the terms of any agreement restricting the
sale or transfer of such Collateral. No Person has any right to purchase or
terminate any or all of the interests of any Pledgor in the Pledged Shares of
the Subsidiaries.

               SECTION 5.    Covenants.

               Each Pledgor agrees that so long as any of the Secured
Obligations remains outstanding:

               (a) Books and Records. It will mark its books and records (and
cause the issuer of the Pledged Shares of such Pledgor to mark its books and
records) to reflect the security interest granted to the Collateral Agent
pursuant to this Agreement.

               (b) Defense of Collateral. It will defend the Collateral against
all claims and demands of all Persons (other than the Collateral Agent, the
Holders claiming an interest in any of the Collateral and the holders of
Governmental Liens). It will discharge or cause to be discharged all Liens on
any or all of the Collateral, except for the security interest created by this
Agreement and Governmental Liens.

               (c) Location of Office. It shall keep its principal place of
business and chief executive office and the office where it keeps its records
concerning the Collateral at the address specified in the Note Purchase
Agreement; or, upon thirty (30) days' prior written notice to the Collateral
Agent, at such other location in a jurisdiction where all action required by
Section 8 shall have been taken with respect to the Collateral.

               (d) Disposition of Collateral. It shall not transfer, sell,
assign (by operation of law or otherwise) or otherwise dispose of any of the
Collateral owned by it or create or suffer to exist any Lien upon or with
respect to any of the Collateral owned


                                       4



by it, except for (i) the pledge, hypothecation and security interest created by
this Agreement and (ii) as otherwise expressly permitted by the Note Purchase
Agreement.

               SECTION 6.    Advances by Lenders.

               On failure of any Pledgor to perform any of the covenants and
agreements contained herein, the Collateral Agent may, at its sole option and in
its sole discretion, perform the same and in so doing may expend such sums as
the Collateral Agent may reasonably deem advisable in the performance thereof,
including, without limitation, the payment of any insurance premiums, the
payment of any Taxes, a payment to obtain a release of a Lien or potential Lien,
expenditures made in defending against any adverse claim and all other
expenditures which the Collateral Agent or the Holders may make for the
protection of the security hereof or which may be compelled to make by operation
of law. All such sums and amounts so expended shall be repayable by the Pledgors
on a joint and several basis promptly upon timely notice thereof and demand
therefor, shall constitute additional Secured Obligations and shall bear
interest from the date said amounts are expended at the default rate of 8.0%. No
such performance of any covenant or agreement by the Collateral Agent or the
Holders on behalf of any Pledgor, and no such advance or expenditure therefor,
shall relieve the Pledgors of any default under the terms of this Agreement, the
other Operative Agreements or any other documents relating to the Secured
Obligations. The Collateral Agent and the Holders may make any payment hereby
authorized in accordance with any bill, statement or estimate procured from the
appropriate public office or holder of the claim to be discharged without
inquiry into the accuracy of such bill, statement or estimate or into the
validity of any tax assessment, sale, forfeiture, tax lien, title or claim
except to the extent such payment is being contested in good faith by a Pledgor
in appropriate proceedings and against which adequate reserves are being
maintained in accordance with GAAP.

               SECTION 7.    Voting Rights; Dividends.

               So long as no Default or Event of Default shall have occurred and
be continuing, subject to applicable cure periods (or, in the case of clause (a)
of this Section, as long as no notice thereof shall have been given by the
Collateral Agent to the relevant Pledgor):

               (a) Each Pledgor shall be entitled to exercise any and all
management, voting and other consensual rights pertaining to the Collateral in a
manner consistent with the terms of this Agreement and the other Operative
Agreements; provided, however, that such Pledgor shall not exercise, or refrain
from exercising, any such right if such action or inaction would have a Material
Adverse Effect;

               (b) Each Pledgor shall be entitled to receive and retain any and
all dividends paid in respect of the Collateral owned by it (other than any and
all dividends paid or payable other than in cash in respect of, and instruments
and other property received, receivable or otherwise distributed in respect of,
or in exchange for, any Collateral, all of which shall be forthwith delivered to
the Collateral Agent to hold as Collateral and shall, if received by such
Pledgor, be received in trust for the benefit of the


                                       5



Collateral Agent, be segregated from the other property or funds of such
Pledgor, and be forthwith delivered to the Collateral Agent as Collateral in the
same form as so received (with any necessary indorsement)); provided that if any
of the Pledgors' Subsidiaries are dissolved or liquidated in accordance with the
terms and conditions of the Note Purchase Agreement, each such Pledgor shall be
entitled to receive and retain any and all dividends paid in respect of such
liquidation or dissolution.

               (c) The Collateral Agent shall execute and deliver (or cause to
be executed and delivered) to the Pledgors all such proxies and other
instruments as any Pledgor may reasonably request for the purpose of enabling
such Pledgor to exercise the voting and other rights which it is entitled to
exercise pursuant to paragraph (a) above and to receive the dividends which it
is authorized to receive and retain pursuant to paragraph (b) above.

               SECTION 8. Continued Perfection of Security Interest.

               Each Pledgor agrees that it will not take any actions or fail to
perform any of its duties or obligations under this Agreement so that after
giving effect to such action or inaction the Collateral Agent will not then, or
with the passage of time cease to have, a first priority perfected security
interest in and to any of the Collateral owned by it.

               Each Pledgor agrees that from time to time, at the expense of
such Pledgor, it will promptly execute and deliver all further instruments and
documents, and take all further action that may be necessary or that the
Collateral Agent may reasonably request, in order to perfect and protect the
pledge, hypothecation and security interest granted or purported to be granted
hereby or to enable the Collateral Agent to exercise and enforce its rights and
remedies hereunder with respect to any Collateral owned by such Pledgor. In
connection with the foregoing, each Pledgor agrees to file, and further hereby
authorizes the Collateral Agent to file, at any time and from time to time
Financing Statements in any jurisdiction that may be necessary, or that the
Collateral Agent deems necessary to create, perfect and protect the pledge,
hypothecation and security interest granted or purported to be granted hereby.

               SECTION 9. Obligations of the Pledgors and Rights of the
Collateral Agent.

               The powers conferred on the Collateral Agent hereunder are solely
to protect the interest in the Collateral for the benefit of the Holders and
shall not impose any duty upon it to exercise any such powers. Except for the
safe custody of any Collateral in its possession and the accounting for moneys
actually received by it hereunder, the Collateral Agent shall have no duty as to
any Collateral or as to the taking of any necessary steps to preserve rights
against prior parties or any other rights pertaining to any Collateral and no
such duties shall be implied as arising hereunder. The Collateral Agent shall
not be required to take steps necessary to preserve any rights against prior
parties to any of the Collateral.

               SECTION 10. Remedies of the Collateral Agent.


                                       6



               At any time after an Event of Default has occurred and so long as
it is continuing, subject to applicable cure periods, the Collateral Agent has
the right to do any or all of the following:

               (a) The Collateral Agent may exercise any and all rights and
remedies of the Pledgors under or in connection with the Pledged Shares or
otherwise in respect of the Collateral.

               (b) Subject to compliance with applicable law, the Collateral
Agent shall have the right in its discretion and without prior notice to the
relevant Pledgor, to transfer to or to register in the name of the Collateral
Agent or any of its nominees any or all of the Collateral owned by such Pledgor.

               (c) Upon receipt of written notice of such Event of Default,
subject to applicable cure periods, from the Collateral Agent or any Holder, all
rights of the Pledgors to receive the dividends and distributions which they
would otherwise be authorized to receive and retain, shall cease for so long as
such Event of Default is continuing, and all such rights shall thereupon become
vested in the Collateral Agent who shall thereupon have the sole right to
receive and hold as Collateral such dividends and distributions. All dividends
and distributions which are received by any Pledgor contrary to the provisions
of this paragraph shall be received in trust for the benefit of the Collateral
Agent as security for the Obligations, shall be segregated from other funds of
the relevant Pledgor and shall be forthwith paid over to the Collateral Agent or
its agent as Collateral in the same form as so received (with any necessary
indorsement).

               (d) The Collateral Agent may file any claims, commence, maintain,
settle or discontinue any actions, suits or other proceedings deemed by the
Collateral Agent in its sole discretion necessary or advisable for the purpose
of collecting upon the Collateral and execute any instrument and do all other
things deemed necessary and proper by the Collateral Agent in its sole
discretion to protect and preserve and permit the Collateral Agent to realize
upon the Collateral and the other rights contemplated thereby.

               (e) The Collateral Agent may exercise in respect of the
Collateral, in addition to other rights and remedies provided for herein or
otherwise available to it, all the rights and remedies of a secured party upon
default under the UCC, and may also, without notice except as specified below,
sell the Collateral or any part thereof in one or more parcels at public or
private sale, at any exchange, broker's board or at any of the Collateral
Agent's offices or elsewhere, for cash, on credit or for future delivery, and
upon such other terms as the Collateral Agent may deem commercially reasonable.
Each Pledgor agrees that, to the extent notice of sale shall be required by law,
at thirty (30) Business Days' notice to such Pledgor of the time and place of
any public sale or the time after which any private sale is to be made shall
(subject to applicable law) constitute reasonable notification. The Collateral
Agent shall not be obligated to make any sale of Collateral regardless of notice
of sale having been given. The Collateral Agent may adjourn any public or
private sale from time to time by announcement at the time and place fixed
therefor, and such sale may, without further notice, be made at the time and
place to which it was so adjourned.


                                       7



               (f) In view of the position of each Pledgor in relation to the
Collateral owned by it, or because of other current or future circumstances, a
question may arise under the Securities Act of 1933, as amended, as now or
hereafter in effect, any rules or regulations promulgated thereunder, or any
similar statute hereafter enacted analogous in purpose or effect (such Act, such
rules and regulations and any such similar statute as from time to time in
effect being called the "Federal Securities Laws") with respect to any
disposition of the Collateral permitted hereunder. Each Pledgor understands that
compliance with the Federal Securities Laws may strictly limit the course of
conduct of the Collateral Agent if the Collateral Agent were to attempt to
dispose of all or any part of the Collateral owned by such Pledgor, and may also
limit the extent to which or the manner in which any subsequent transferee of
any Collateral could dispose of the same. Similarly, there may be other legal
restrictions or limitations affecting the Collateral Agent in any attempt to
dispose of all or part of the Collateral under applicable "Blue Sky" or other
state securities laws or the securities laws of countries other than the United
States or similar laws analogous in purpose or effect. Each Pledgor recognizes
that, in light of the foregoing restrictions and limitations, the Collateral
Agent may, with respect to any sale of Collateral owned by such Pledgor, to the
extent commercially reasonable, limit the purchasers to those who will agree,
among other things, to acquire Collateral for their own account, for investment,
and not with a view to the distribution or resale thereof. Each Pledgor
acknowledges and agrees that, in light of the foregoing restrictions and
limitations, the Collateral Agent, in a commercially reasonable manner, (i) may
proceed to make such a sale whether or not a registration statement for the
purpose of registering the Collateral or part thereof shall have been filed
under the Federal Securities Laws and (ii) may approach and negotiate with any
one or more possible purchasers to effect such sale. Each Pledgor acknowledges
and agrees that any such sale may result in prices and other terms less
favorable to the seller than if such sale were a public sale without such
restrictions. In the event of any such sale, the Collateral Agent shall incur no
responsibility or liability for selling all or any part of the Collateral at a
price that the Collateral Agent, in a commercially reasonable manner, may in
good faith deem reasonable under the circumstances, notwithstanding the
possibility that a substantially higher price might have been realized if the
sale were deferred until after registration as aforesaid or if more purchasers
were approached. The provisions of this paragraph will apply notwithstanding the
existence of a public or private market upon which the quotations or sales
prices may exceed substantially the price at which the Collateral Agent sells
the Pledged Shares. Each Pledgor agrees that sales made in accordance with this
paragraph in all respects will be made in a commercially reasonable manner.

               (g) All payments made under or in connection with the Pledged
Shares or otherwise in respect of the Collateral and received by the Collateral
Agent as Collateral in accordance with the provisions hereof may, in the
discretion of the Collateral Agent, be held by the Collateral Agent as
collateral for, and then or as soon thereafter as is reasonably practicable
applied in whole or in part by the Collateral Agent for the benefit of the
Holders against all or any part of the Obligations in accordance with the terms
of the Note Purchase Agreement.

               SECTION 11. Collateral Agent Appointed Attorney-in-Fact.


                                       8



               Each Pledgor hereby appoints the Collateral Agent such Pledgor's
attorney-in-fact, with full authority in the place and stead of such Pledgor and
in the name of such Pledgor or otherwise, upon the occurrence of and during the
continuance of an Event of Default in the Collateral Agent's discretion, to take
any and all actions authorized or permitted to be taken by the Collateral Agent
under this Agreement or by law, including but not limited to the power to take
any action and to execute any instrument which the Collateral Agent may deem
necessary or advisable to accomplish the purposes of this Agreement, including,
without limitation, to ask for, demand, collect, sue for, recover, compound,
receive and give acquittance and receipts for moneys due and to become due under
or in connection with the Collateral, to receive, indorse, and collect any
drafts or other instruments, documents and chattel paper in connection
therewith, and to file any claims or take any action or institute any
proceedings which the Collateral Agent may deem to be necessary or desirable for
the collection thereof. Such appointment of the Collateral Agent as the
Pledgors' attorney-in-fact is coupled with an interest and is irrevocable.

               SECTION 12. Security Interest Absolute.

               The obligations of each Pledgor under this Agreement shall be
absolute and unconditional, and shall remain in full force and effect without
regard to, and shall not be released, suspended, discharged, terminated or
otherwise affected by, any circumstance or occurrence whatsoever, including,
without limitation: (a) any renewal, extension, amendment or modification of, or
addition or supplement to or deletion from, the Note Purchase Agreement or any
other Operative Agreement or any other instrument or agreement referred to
therein, or any assignment or transfer of any thereof; (b) any waiver, consent,
extension, indulgence or other action or inaction under or in respect of any
such instrument or agreement or this Agreement or any exercise or non-exercise
of any right, remedy, power or privilege under or in respect of this Agreement
or any other Operative Agreement; (c) any furnishing of any additional security
(including, without limitation, any assets, whether now owned or hereafter
acquired, upon which a Lien is created or granted from time to time pursuant to
the other Collateral Documents) to the Collateral Agent or any acceptance
thereof or any sale, exchange, release, surrender or realization of or upon any
security by the Collateral Agent; or (d) any invalidity, irregularity or
unenforceability of all or part of the Obligations or of any security therefor.
In the event of any inconsistency between this Agreement and the Note Purchase
Agreement, the Note Purchase Agreement shall govern.

               SECTION 13. Amendments; Etc.

               This Agreement may be amended, restated, changed, waived,
discharged or terminated only (i) by an instrument in writing executed by the
parties hereto and (ii) in accordance with Section 17 of the Note Purchase
Agreement.

               SECTION 14. Notices.

               All notices and other communications hereunder shall be given (in
the manner specified in the Note Purchase Agreement) to the parties hereto at
their respective


                                       9



addresses specified in the Note Purchase Agreement (or, if any party hereto is
not a party to the Note Purchase Agreement, at its address set forth under its
name on the signature page hereto).

               SECTION 15. Continuing Assignment; Pledge and Security Interest;
Release.

               This Agreement shall create a continuing pledge, assignment of,
hypothecation of and security interest in the Collateral and shall (a) remain in
full force and effect until the indefeasible payment in full of the Obligations
(other than contingent surviving obligations) and (b) inure to the benefit of,
and be enforceable by, the Collateral Agent, the Holders and their respective
successors, transferees and assigns. Without limiting the generality of the
foregoing clause (b), any Holder may assign or otherwise transfer all or any
portion of its rights in the Obligations to the extent and in the manner
provided in the Note Purchase Agreement, and such assignee shall thereupon
become vested with all the benefits in respect thereof granted to such Holder
herein or otherwise. Upon the indefeasible payment in full of the Obligations
(other than contingent surviving obligations), the security interest granted
hereby shall terminate and all rights to the Collateral shall revert to the
Pledgor. Upon any such termination, the Collateral Agent will, at the Pledgors'
expense, execute and deliver to the Pledgors such documents as the Pledgors
shall reasonably request to evidence such termination.

               SECTION 16. Application of Proceeds.

               Upon the occurrence and during the continuation of an Event of
Default, any payments in respect of the Obligations and any proceeds of the
Collateral, when received by the Collateral Agent or any of the Holders in cash
or its equivalent, will be applied in reduction of the Obligations in the
following order:

                      FIRST, to the payment of all reasonable out-of-pocket fees
        and costs and expenses (including without limitation reasonable
        attorneys' fees) of the Collateral Agent under the Operative Agreements,
        including, but not limited to, those incurred in connection with
        enforcing the rights of Collateral Agent and the Holders under the
        Operative Agreements;

                      SECOND, to the payment of all reasonable out-of-pocket
        costs and expenses (including without limitation, reasonable attorneys'
        fees) of each of the Holders in connection with enforcing its rights
        under the Operative Agreements or otherwise with respect to the
        Obligations owing to such Holder;

                      THIRD, to the payment of all accrued interest and fees on
        or in respect of the Obligations;

                      FOURTH, to the payment of the outstanding principal amount
        of the Obligations;


                                       10



                      FIFTH, to all other obligations which shall have become
        due and payable under the Operative Agreements or otherwise and not
        repaid pursuant to clauses "FIRST" through "FOURTH" above; and

                      SIXTH, to the payment of the surplus, if any, to whoever
        may be lawfully entitled to receive such surplus.

               Each Debtor irrevocably waives the right to direct the
application of such payments and proceeds and acknowledges and agrees that the
Collateral Agent shall have the continuing and exclusive right to apply and
reapply any and all such payments and proceeds in the Collateral Agent's sole
discretion, notwithstanding any entry to the contrary upon any of its books and
records.

               SECTION 17. Severability.

               If any provision of this Agreement shall be held, or deemed to be
or shall, in fact, be illegal, inoperative or unenforceable, the same shall not
affect any other provision or provisions herein contained or render the same
invalid, inoperative or unenforceable to any extent whatever.

               SECTION 18. Headings.

               The headings of the various sections and paragraphs of this
Agreement are for convenience of reference only, do not constitute a part hereof
and shall not affect the meaning or construction of any provision hereof.

               SECTION 19. GOVERNING LAW.

               THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICT OF
LAW PRINCIPLES THEREOF (EXCEPT SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK
GENERAL OBLIGATIONS LAW), EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION
OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY
PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE
STATE OF NEW YORK.

               SECTION 20. CONSENT TO JURISDICTION.

               EACH PLEDGOR (I) IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE
JURISDICTION OF ANY NEW YORK STATE COURT OR FEDERAL COURT SITTING IN THE
SOUTHERN DISTRICT OF NEW YORK IN ANY ACTION ARISING OUT OF THIS AGREEMENT, (II)
AGREES THAT ALL CLAIMS IN SUCH ACTION MAY BE DECIDED IN SUCH COURT, (III)
WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN
INCONVENIENT FORUM AND (IV) CONSENTS TO THE SERVICE OF PROCESS BY MAIL. A FINAL
JUDGMENT IN ANY SUCH ACTION SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER
JURISDICTIONS.


                                       11



               NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE COLLATERAL AGENT TO
SERVE LEGAL PROCESS IN ANY MANNER PERMITTED BY LAW OR AFFECT ITS RIGHT TO BRING
ANY ACTION IN ANY OTHER COURT.

               SECTION 21. WAIVER OF JURY TRIAL.

               EACH PLEDGOR HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY
IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS
AGREEMENT.

               SECTION 22. Execution in Counterparts.

               This Agreement may be executed in counterparts and by different
parties hereto in separate counterparts, each of which when so executed shall be
deemed to be an original and all of which taken together shall constitute one
and the same instrument.

               SECTION 23. Applicability of Note Purchase Agreement.

               In amplification of, and notwithstanding any other provisions of
this Agreement, in connection with its obligations hereunder, the Collateral
Agent has all of the rights, powers, privileges, exculpations, protections and
indemnities as are provided for or referred to in the Note Purchase Agreement.

                            [SIGNATURE PAGE FOLLOWS]


                                       12



               IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed and delivered by their duly authorized officers as of the
date first above written.

                                       PACIFIC AEROSPACE & ELECTRONICS, INC.,
                                       as Pledgor


                                       By: /s/ Donald A. Wright
                                          -----------------------------
                                          Name: Donald A. Wright
                                          Title: Chief Executive Officer and
                                                 President


                                       PA&E INTERNATIONAL, INC., as Pledgor


                                       By: /s/ Donald A. Wright
                                          -----------------------------
                                          Name: Donald A. Wright
                                          Title: President

                                       Address:

                                       c/o Pacific Aerospace & Electronics, Inc.
                                       430 Olds Station Road
                                       Wenatchee, Washington  98801





                                       FIRST UNION NATIONAL BANK, not in its
                                       individual capacity, but solely as
                                       Collateral Agent


                                        By: /s/ Paul Thompson
                                           -----------------------------
                                           Name: Paul Thompson
                                           Title: Vice President





                                                                       ANNEX 1-A

                      CERTIFICATES OF DOMESTIC SUBSIDIARIES




                                                                                            Number of
                                                                 Percentage   Certificate  Outstanding
Pledgor                     Issuing Corporation                  Ownership      Number       Shares
- -------                     -------------------                  ---------    -----------  -----------
                                                                               
Pacific Aerospace &         Aeromet America, Inc.                  100.0%         3          100,000
Electronics, Inc.

Pacific Aerospace &         Balo Precision Parts, Inc.             100.0%         3          100,000
Electronics, Inc.

Pacific Aerospace &         Cashmere Manufacturing Co., Inc.       100.0%        38            1,000
Electronics, Inc.

Pacific Aerospace &         Ceramic Devices, Inc.                  100.0%         2            1,000
Electronics, Inc.

Pacific Aerospace &         Electronic Specialty Corporation       100.0%         2            100,000
Electronics, Inc.

Pacific Aerospace &         Northwest Technical Industries,        100.0%         2            100,000
Electronics, Inc.           Inc.

Pacific Aerospace &         Pacific Coast Technologies, Inc.,      100.0%        67         10,714,726
Electronics, Inc.

Pacific Aerospace &         PA&E International, Inc.,              100.0%         1            100,000
Electronics, Inc.

Pacific Aerospace &         Seismic Safety Products, Inc.          100.0%         3            100,000
Electronics, Inc.

Pacific Aerospace &         Skagit Engineering &                   100.0%        002               100
Electronics, Inc.           Manufacturing, Inc.

Pacific Aerospace &         PA&E Engineering, Inc.                 100.0%         1            100,000
Electronics, Inc.






                                                                       ANNEX 1-B

                      CERTIFICATES OF FOREIGN SUBSIDIARIES




                                                                                            Number of
                                                                 Percentage   Certificate  Outstanding
Pledgor                     Issuing Corporation                  Ownership      Number       Shares
- -------                     -------------------                  ---------    -----------  -----------
                                                                               
PA&E International, Inc.    Pacific A & E Limited                100.0%           1                 1

EX-10.12

                                                                   EXHIBIT 10.12




                               EXCHANGE AGREEMENT


                                  BY AND AMONG


                     PACIFIC AEROSPACE & ELECTRONICS, INC.,
                             AEROMET AMERICA, INC.,
                           BALO PRECISION PARTS, INC.,
                        CASHMERE MANUFACTURING CO., INC.,
                             CERAMIC DEVICES, INC.,
                        ELECTRONIC SPECIALTY CORPORATION,
                      NORTHWEST TECHNICAL INDUSTRIES, INC.,
                        PACIFIC COAST TECHNOLOGIES, INC.,
                            PA&E INTERNATIONAL, INC.,
                         SEISMIC SAFETY PRODUCTS, INC.,
                    SKAGIT ENGINEERING & MANUFACTURING, INC.

                                       AND


                         THE HOLDERS OF THE OUTSTANDING
                  11 1/4% SENIOR SUBORDINATED NOTES DUE 2005 OF
                      PACIFIC AEROSPACE & ELECTRONICS, INC.
                            NAMED IN EXHIBIT A HERETO



                           Dated as of March 19, 2002



                                TABLE OF CONTENTS



                                                                                   Page
                                                                                   ----
                                                                                

                                    ARTICLE 1

                                   DEFINITIONS

1.1.    Definitions...................................................................2

                                    ARTICLE 2

                                  THE EXCHANGE

2.1.    Exchange......................................................................3
        2.1.1. Common Stock...........................................................4
        2.1.2. Preferred Stock........................................................4
        2.1.3. New Notes..............................................................4
2.2.    U.S. Federal Income Tax Treatment.............................................4

                                    ARTICLE 3

                         REPRESENTATIONS AND WARRANTIES
                  OF THE COMPANY AND THE SUBSIDIARY GUARANTORS

3.1.    Representations and Warranties of the Company and the Subsidiary
        Guarantors....................................................................4
        3.1.1. Organization and Standing..............................................4
        3.1.2. Authority and Enforceability...........................................5
        3.1.3. Consents and Approvals.................................................5
        3.1.4. No Violations..........................................................6
        3.1.5. Validity of Stock and Notes............................................7
        3.1.6. Litigation and Claims Against the Company..............................7
        3.1.7. Capitalization.........................................................8
        3.1.8. SEC Reports and Financial Statements...................................8
        3.1.9. Undisclosed Liabilities................................................9
        3.1.10. Material Contracts...................................................10
        3.1.11. Compliance...........................................................10
        3.1.12. Title to Property and Assets.........................................10
        3.1.13. Related Party Transactions...........................................10
        3.1.14. No Fees..............................................................11
        3.1.15. Proprietary Rights...................................................11
        3.1.16. Employee Benefit Plans...............................................11
        3.1.17. Labor Relations; Employees...........................................13
        3.1.18. Environmental Matters................................................13
        3.1.19. Section 3(a)(9) Exemption; Blue Sky Exemption........................14
        3.1.20. Board Representation; Compliance with Rule 14f-1.....................14
        3.1.21. Tax Returns..........................................................15



                                       i


                                                                                
                                    ARTICLE 4

                         REPRESENTATIONS AND WARRANTIES
                                 OF THE HOLDERS

4.1.    Representations and Warranties of the Holders................................17
        4.1.1. Ownership of Notes....................................................17
        4.1.2. Authority.............................................................17
        4.1.3. Consents and Approvals................................................17
        4.1.4. No Violations.........................................................18
        4.1.5. No Fees...............................................................18

                                    ARTICLE 5

                               REGISTRATION RIGHTS

5.1.    Demand Registrations.........................................................18
        5.1.1. Demand Registrations..................................................18
        5.1.2. Participation.........................................................19
        5.1.3. Underwriting Requirements.............................................19
        5.1.4. Preemption of Requested Registration..................................20
        5.1.5. Exceptions............................................................20
        5.1.6. Registration Statement Form...........................................21
5.2.    Piggyback Registrations......................................................21
        5.2.1. Piggyback Rights......................................................21
        5.2.2. Right to Terminate Registration.......................................21
        5.2.3. Underwriting Requirements.............................................22
5.3.    Shelf Registration...........................................................22
5.4.    Obligations of the Company...................................................23
5.5.    Information from Holder......................................................26
5.6.    Expenses of Registration.....................................................26
5.7.    Delay of Registration........................................................27
5.8.    Indemnification..............................................................27
5.9.    "Market Stand-Off" Agreement.................................................30

                                    ARTICLE 6

                                    COVENANTS

6.1.    Further Actions..............................................................31
6.2.    Proxy Statement..............................................................31
6.3.    Meetings.....................................................................31
6.4.    Transferability..............................................................31
6.5.    Voting Agreement.............................................................32
6.6.    Board of Directors...........................................................32
        6.6.1. Election of Directors.................................................32
        6.6.2. Vacancies.............................................................33
        6.6.3. Removal of Holder Nominees............................................34




                                       ii


                                                                                
6.7.    Exercise of Specified Rights.................................................34
6.8.    No Voting Obligations - HBK Master Fund L.P..................................34
6.9.    Grant of Stock Options.......................................................34

                                    ARTICLE 7

                                     CLOSING

7.1.    Closing......................................................................35
7.2.    Deliveries by the Company....................................................35
7.3.    Deliveries by the Holders....................................................36

                                    ARTICLE 8

                                    SURVIVAL

8.1.    Survival.....................................................................37

                                    ARTICLE 9

                                  MISCELLANEOUS

9.1.    Entirety.....................................................................37
9.2.    Counterparts.................................................................37
9.3.    Fees and Expenses............................................................37
9.4.    Notices and Waivers..........................................................37
9.5.    Table of Contents and Captions...............................................38
9.6.    No Assignment................................................................38
9.7.    Successors and Assigns.......................................................39
9.8.    Severability.................................................................39
9.9.    Applicable Law...............................................................39
9.10.   Amendment....................................................................39
9.11.   Third Party Beneficiaries....................................................39
9.12.   Publicity....................................................................39




                                      iii


                         TABLE OF SCHEDULES AND EXHIBITS

Schedule 3.1.3      -  Company Consents and Approvals
Schedule 3.1.4      -  No Violations
Schedule 3.1.6      -  Litigation and Claims against the Company
Schedule 3.1.7      -  Outstanding Options
Schedule 3.1.8      -  SEC Reports and Financial Statements
Schedule 3.1.9      -  Material Adverse Effect
Schedule 3.1.10     -  Material Contracts
Schedule 3.1.12     -  Title to Property and Assets
Schedule 3.1.13     -  Related Party Transactions
Schedule 3.1.15     -  Proprietary Rights
Schedule 3.1.16(a)  -  Employee Benefit Plans
Schedule 3.1.16(f)  -  Payments, Vestings or Liabilities
Schedule 3.1.16(g)  -  Claims With Respect to Plans
Schedule 3.1.16(h)  -  Post-Employment Life or Health Insurance Coverage
Schedule 3.1.18     -  Environmental Matters
Schedule 3.1.21     -  Tax Returns


Exhibit A  -  Holders/Allocation of New Securities
Exhibit B  -  Certificate of Designation
Exhibit C  -  New Notes Indenture
Exhibit D  -  Opinion of Company Counsel as to matters of Washington Law
Exhibit E  -  Opinion of Company Counsel as to matters other than Washington Law
Exhibit F  -  Amendment to Employment Agreement - Donald A. Wright
Exhibit G  -  Supplemental Indenture
Exhibit H  -  Form of Guarantee
Exhibit I  -  Note Purchase Agreement



                                       iv


                               EXCHANGE AGREEMENT


               THIS EXCHANGE AGREEMENT (this "Agreement") is made and entered
into as of March 19, 2002 by and among Pacific Aerospace & Electronics, Inc., a
corporation organized under the laws of the State of Washington (the "Company"),
Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co.,
Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest
Technical Industries, Inc., Pacific Coast Technologies, Inc., PA&E
International, Inc., Seismic Safety Products, Inc. and Skagit Engineering &
Manufacturing, Inc. (collectively, the "Subsidiary Guarantors") and the
noteholders named in Exhibit A (the "Holders") of the Company's 11 1/4% Senior
Subordinated Notes due 2005 (the "Old Notes") issued pursuant to that certain
indenture (the "Old Indenture") dated as of July 30, 1998 by and among the
Company, the Guarantors (as defined therein) and the Bank of New York (as
successor to IBJ Schroeder Bank & Trust Company), as Trustee.

               WHEREAS, the Company has failed to pay the interest payment on
the Old Notes which was due on August 1, 2001, and did not make that payment by
the expiration of the 30-day grace period, giving rise to certain rights of the
Holders under the Old Indenture to accelerate payment of the Old Notes;

               WHEREAS, the Company and the Holders have entered into a Second
Amended and Restated Agreement (as amended through the date hereof, the "Lock-Up
Agreement"), dated as of January 11, 2002, pursuant to which the Holders have
agreed to exchange their Old Notes for certain other securities of the Company,
including common stock, convertible preferred stock and pay-in-kind senior
subordinated notes, as more particularly described therein;

               WHEREAS, this Agreement provides for the exchange of such
securities of the Company for the Old Notes;

               WHEREAS, following the execution of this Agreement, upon receipt
of requisite shareholder approval to amend the Articles of Incorporation of the
Company to increase the number of authorized shares of common stock of the
Company as necessary to effect the full conversion of the convertible preferred
stock into shares of common stock, the convertible preferred stock shall
automatically convert into the number of shares of common stock of the Company
(the "Conversion Shares") which will give the Holders, in the aggregate, 97.5%
of the Company's common stock on a fully diluted basis (the "Automatic
Conversion"); and

               WHEREAS, it is intended for U.S. federal income tax purposes that
the Exchange (as defined below) shall qualify as a reorganization within the
meaning of Section 368(a)(1)(E) of the Internal Revenue Code of 1986, as amended
(the "Code").

               NOW, THEREFORE, in consideration of the foregoing and of the
respective representations, warranties and agreements set forth herein, and
intending to be legally bound hereby, the parties hereto agree as follows:



ARTICLE 1

                                   DEFINITIONS

               1.1. Definitions. The following terms are defined in the sections
indicated:



       Defined Term                                         Section
       ------------                                         -------
                                                         
       2001 Financial Statement Report...................   Section 5.3
       Action............................................   Section 3.1.6
       Agreement.........................................   Preamble
       Amendment.........................................   Section 6.2
       Automatic  Conversion.............................   Recitals
       CEO...............................................   Section 6.5
       Certificate of Designation........................   Section 2.1.2
       Closing...........................................   Section 7.1
       Code..............................................   Recitals
       Common Stock......................................   Section 2.1
       Company...........................................   Preamble
       Company Rights....................................   Section 3.1.15
       Company SEC Filing................................   Section 3.1.8
       Contract..........................................   Section 3.1.4(b)
       Conversion Shares.................................   Recitals
       COO...............................................   Section 6.5
       Demand Request ...................................   Section 5.1.1
       Designated Registration...........................   Section 5.2.1
       DTC...............................................   Section 7.2(i)
       Enforceability Exceptions.........................   Section 3.1.2
       Environmental Laws................................   Section 3.1.18
       ERISA.............................................   Section 3.1.16
       ERISA Plan........................................   Section 3.1.16
       Exchange..........................................   Section 2.1
       Exchange Act......................................   Section 3.1.8
       Expiring Nominee..................................   Section 6.6.1(e)
       GAAP..............................................   Section 3.1.8(a)
       Governmental Entity...............................   Section 3.1.3
       Guarantees........................................   Section 3.1.2
       Holders...........................................   Preamble
       Holder Nominee....................................   Section 6.6
       Initiating Holder(s)..............................   Section 5.1.1
       Inspectors........................................   Section 5.4(o)
       Law...............................................   Section 3.1.4(e)
       Liens.............................................   Section 3.1.4(c)
       Lock-Up Agreement.................................   Recitals
       Material Adverse Effect...........................   Section 3.1.1
       Material Contract.................................   Section 3.1.10



                                       2




       Defined Term                                         Section
       ------------                                         -------
                                                         
       Materials of Environmental Concern................   Section 3.1.18
       New Notes ........................................   Section 2.1
       New Notes Indenture...............................   Section 2.1.3
       New Options.......................................   Section 6.9
       Old Indenture.....................................   Preamble
       Old Notes.........................................   Preamble
       Option Rights.....................................   Section 3.1.7
       Order.............................................   Section 3.1.4(e)
       Permit............................................   Section 3.1.4(e)
       PIK Notes.........................................   Section 3.1.2
       Plan(s)...........................................   Section 3.1.16(a)
       Preferred Stock...................................   Section 2.1
       Proprietary Rights................................   Section 3.1.15
       Proxy Statement...................................   Section 6.2
       Records...........................................   Section 5.4(o)
       Registrable Securities ...........................   Section 5.1.1
       Registration Expenses.............................   Section 5.6
       Resale Registration Statement.....................   Section 5.3
       Rule 14f-1 Filing.................................   Section 3.1.20(a)
       SEC...............................................   Section 3.1.8(a)
       Securities Act....................................   Section 3.1.7
       Specified Rights..................................   Section 3.1.7
       Subsidiary Guarantors.............................   Preamble
       Supplemental Indenture............................   Section 7.2(ix)
       Tax Return........................................   Section 3.1.21(e)
       Taxable Period....................................   Section 3.1.21(e)
       Taxes.............................................   Section 3.1.21(e)
       Transaction Documents.............................   Section 3.1.2
       Voting Officer....................................   Section 6.5
       Violation.........................................   Section 5.8(a)



                                   ARTICLE 2

                                  THE EXCHANGE

               2.1. Exchange. Upon the terms and subject to the conditions set
forth in this Agreement, the Company is hereby issuing and delivering to each
Holder which exchanges its Old Notes pursuant hereto, with respect to each
$1,000 aggregate principal amount of Old Notes (and accrued but unpaid interest
thereon through the date of the Exchange) so tendered, (i) 807.207 shares of
common stock, par value $0.001 per share, of the Company (the "Common Stock"),
(ii) 0.0158 shares of Series C Convertible Preferred Stock, par value $0.001 per
share, of the Company (the "Preferred Stock") and (iii) $235.4788 aggregate
amount of 10% pay-in-kind senior subordinated notes due November, 2007 of the
Company, (the "New Notes") as set forth for each participating


                                       3


Holder on Exhibit A hereto, all in exchange for cancellation of the Old Notes
(together with accrued interest thereon through the date of the Exchange) so
exchanged by such Holder (whether held beneficially or of record by such Holder)
(such exchanges collectively, the "Exchange").

                      2.1.1. Common Stock. Immediately following the exchange,
        the Holders will hold in the aggregate over 50% of the outstanding
        shares of Common Stock.

                      2.1.2. Preferred Stock. The Preferred Stock issued
        hereunder to the Holders is issued pursuant to, and shall have the terms
        and conditions set forth in, the Certificate of Designation attached
        hereto as Exhibit B (the "Certificate of Designation").

                      2.1.3. New Notes. The New Notes issued hereunder to the
        Holders are issued pursuant to, and shall have the terms and conditions
        set forth in, the indenture by and between the Company, the Subsidiary
        Guarantors and U.S. Bank National Association, as trustee, dated as of
        the date hereof and in the form attached hereto as Exhibit C (the "New
        Notes Indenture").

               2.2. U.S. Federal Income Tax Treatment. The parties hereto (i)
agree that it is their intention that the Exchange contemplated hereby qualify
as a reorganization within the meaning of Section 368(a)(1)(E) of the Code
pursuant to which no gain or loss is recognized and (ii) hereby adopt this
Agreement as a plan of reorganization within the meaning of Treasury Regulation
Section 1.368-2(g).

                                   ARTICLE 3

                         REPRESENTATIONS AND WARRANTIES
                  OF THE COMPANY AND THE SUBSIDIARY GUARANTORS

               3.1. Representations and Warranties of the Company and the
Subsidiary Guarantors. The Company and each of the Subsidiary Guarantors hereby,
jointly and severally, represent and warrant to the Holders that the statements
contained in this Section 3.1 are true, correct and complete as to itself and
its subsidiaries as of the date of this Agreement, other than those
representations and warranties that speak only as of a specified date:

                      3.1.1. Organization and Standing. The Company is a
        corporation duly organized and validly existing under the laws of the
        State of Washington. Each of the subsidiaries of the Company is a
        corporation duly organized and validly existing under the laws of the
        jurisdiction of its incorporation. Each of the Company and its
        subsidiaries has full corporate or other power and authority to carry on
        its business as it is currently conducted and to own and operate the
        properties currently owned and operated by it. Each of the Company and
        its subsidiaries is duly qualified or licensed to do business and is in
        good standing as a foreign corporation authorized to do business in all
        jurisdictions in which the


                                       4


        character of the properties owned or the nature of the business
        conducted by it would make such qualification or licensing necessary,
        except where the failure to be so qualified or licensed is not
        reasonably likely to have a material adverse effect on the financial
        condition, results of operations, properties, business or prospects of
        the Company and its subsidiaries, taken as a whole (a "Material Adverse
        Effect").

                      3.1.2. Authority and Enforceability. Each of the Company
        and the Subsidiary Guarantors has full corporate power and authority to
        execute and deliver this Agreement, the New Notes, the New Notes
        Indenture, additional notes issued in kind in lieu of cash payment of
        interest on the New Notes (hereinafter, the "PIK Notes"), the
        Supplemental Indenture (as defined in Section 7.2(x) hereof) and the
        guarantees (the "Guarantees") contemplated in Article 11 of the New
        Notes Indenture (collectively, the "Transaction Documents"), to which it
        is a party, and to perform its obligations hereunder and thereunder. The
        Transaction Documents and the consummation of the transactions
        contemplated hereby and thereby have been duly and validly authorized by
        the Company and each of the Subsidiary Guarantors, as applicable. The
        Transaction Documents have been duly executed and delivered by the
        Company and each of the Subsidiary Guarantors, as applicable, and the
        Transaction Documents constitute, and in the case of the PIK Notes (when
        issued in accordance with the New Notes Indenture), will constitute,
        valid, legal and binding obligations of the Company and the Subsidiary
        Guarantors, as applicable, enforceable against the Company and the
        Subsidiary Guarantors in accordance with their respective terms, except
        as enforceability may be limited by (A) applicable bankruptcy,
        insolvency, reorganization, moratorium, fraudulent conveyance or other
        similar laws relating to or affecting creditors' rights generally and
        (B) general principles of equity (regardless of whether such
        enforceability is considered in a proceeding in equity or at law)
        (clauses (A) and (B) being hereinafter referred to as the
        "Enforceability Exceptions").

                      3.1.3. Consents and Approvals. Except as set forth on
        Schedule 3.1.3, no notices, reports, registrations or other filings are
        required to be made by or on behalf of the Company or any of its
        subsidiaries with, nor are any consents, approvals or authorizations
        required to be obtained by or on behalf of the Company or any of its
        subsidiaries from, any court or other governmental, administrative or
        regulatory authority in the United States or elsewhere (each, a
        "Governmental Entity") in connection with the execution, delivery or
        performance of this Agreement or the other Transaction Documents, or the
        consummation of the transactions contemplated hereby and thereby, in
        each case except for those the failure to make or obtain which,
        individually or in the aggregate, are not reasonably likely to have a
        Material Adverse Effect or materially adversely affect the Company's or
        any of the Subsidiary Guarantors' ability to perform its obligations
        hereunder and under any of the other Transaction Documents or pursuant
        to the Certificate of Designation.


                                       5


                      3.1.4. No Violations. Except as set forth on Schedule
        3.1.4, the execution, delivery and performance of each of the
        Transaction Documents will not:

                      (a) violate or contravene any provision of the articles of
        incorporation or bylaws or similar organizational documents of the
        Company or any of its subsidiaries;

                      (b) violate, conflict with, or constitute or result in a
        default, acceleration or termination of, or entitle any party to
        terminate, accelerate, alter the terms of or cause a default under (in
        each case, with or without notice or lapse of time or both), any
        provision of any agreement, license, lease, contract, loan, note,
        mortgage, indenture, bond or other written or oral obligation to which
        the Company or any of its subsidiaries is a party or by which any of
        their assets are bound (each, a "Contract"), except, in each case, for
        such violations, conflicts, breaches or defaults which individually or
        in the aggregate are not reasonably likely to have a Material Adverse
        Effect or materially adversely affect the Company's or any of the
        Subsidiary Guarantors' ability to perform its obligations hereunder and
        under any of the other Transaction Documents or pursuant to the
        Certificate of Designation;

                      (c) except pursuant to the terms of this Agreement or any
        of the other Transaction Documents, result in the creation or imposition
        of any liens, mortgages, security interests, charges, restrictions,
        pledges, equitable interests, rights of first refusal, preemptive
        rights, adverse claims or other encumbrances of any nature whatsoever
        (collectively, "Liens") with respect to any of the assets or properties
        of the Company or any of its subsidiaries;

                      (d) require the Company or any of its subsidiaries to
        obtain the consent, waiver, authorization or approval of any person
        except where the failure to obtain such consent, waiver, authorization
        or approval is not reasonably likely to have a Material Adverse Effect
        or materially adversely affect the Company's or any of the Subsidiary
        Guarantors' ability to perform its obligations hereunder and under any
        of the other Transaction Documents or pursuant to the Certificate of
        Designation; or

                      (e) violate, contravene or conflict with any award,
        judgment, decree, directive, requirement or other order of any
        Governmental Entity (each, an "Order"), any federal, state, local,
        municipal or foreign statute, law, rule, code, ordinance or regulation
        or common law (each, a "Law") or any federal, state, local, municipal or
        foreign permit (each, a "Permit") applicable to the Company or any of
        its subsidiaries except where such violation, contravention or conflict
        is not reasonably likely to have a Material Adverse Effect or materially
        adversely affect the Company's or any of the Subsidiary Guarantors'
        ability to perform its obligations hereunder and under any of the other
        Transaction Documents or pursuant to the Certificate of Designation.


                                       6


                      3.1.5. Validity of Stock and Notes(a) . (a) The shares of
        the Common Stock being issued in the Exchange are duly authorized,
        validly issued, fully paid and nonassessable and free and clear of any
        Liens, and have not been issued in violation of any preemptive right or
        similar rights of any shareholder of the Company or any of its
        subsidiaries.

                      (b) The Conversion Shares to be issued pursuant to the
        Automatic Conversion of the Preferred Stock following the receipt of
        requisite shareholder approval of the Amendment (as defined in Section
        6.2) and the filing of such Amendment with the Secretary of State of the
        State of Washington will be duly authorized, validly issued, fully paid
        and nonassessable and free and clear of any Liens and, when issued upon
        such Automatic Conversion, will not have been issued in violation of any
        preemptive right or similar right of any shareholder of the Company or
        any of its subsidiaries.

                      (c) The shares of the Preferred Stock being issued in the
        Exchange are duly authorized and validly issued, fully paid and
        nonassessable and free and clear of any Liens, have not been issued in
        violation of any preemptive right or similar rights of any shareholder
        of the Company or any of its subsidiaries, and holders thereof are
        entitled to the rights and privileges set forth in the Certificate of
        Designation.

                      (d) The New Notes being issued in the Exchange are, and
        the PIK Notes at the time of their issuance pursuant to the terms of the
        New Notes Indenture will be, duly and validly authorized, executed,
        issued and delivered by the Company and constitute valid and legally
        binding obligations of the Company, entitled to the benefits provided by
        the New Notes Indenture, and enforceable in accordance with their terms
        subject to the Enforceability Exceptions, and the New Notes Indenture is
        duly authorized, executed and delivered by the Company and each of the
        Subsidiary Guarantors and duly qualified under the Trust Indenture Act
        of 1939, as amended and constitutes a valid and legally binding
        obligation of the Company and each of the Subsidiary Guarantors,
        enforceable in accordance with its terms, subject to the Enforceability
        Exceptions.

                      3.1.6. Litigation and Claims Against the Company. Except
        as set forth on Schedule 3.1.6, there are no actions, suits, claims,
        investigations or other legal or administrative proceedings by or before
        any Governmental Entity or arbitration panel (each, an "Action") or
        Orders pending or, to the knowledge of the Company, threatened against
        the Company or any of its subsidiaries or any of their respective
        assets, at law or in equity, individually or in the aggregate, that (i)
        is reasonably likely to have a Material Adverse Effect or materially
        adversely affect the Company's or any of the Subsidiary Guarantors'
        ability to perform its obligations hereunder and under any of the other
        Transaction Documents or pursuant to the Certificate of Designation or
        (ii) challenges or seeks to prevent the Exchange or the transactions
        contemplated by this Agreement and the other Transaction Documents.


                                       7


                      3.1.7. Capitalization. Immediately prior to the Exchange,
        the authorized capital stock of the Company consists of 100,000,000
        shares of Common Stock, of which 39,315,309 are issued and outstanding
        as of the date hereof and 11,473,150* of which are reserved for issuance
        as set forth on Schedule 3.1.7, and 5,000,000 shares of preferred stock,
        par value $0.001 per share, none of which are issued and outstanding.
        There are no shares of Common Stock which are treasury shares. All of
        the issued shares of capital stock of the Company (i) have been duly
        authorized, validly issued, fully paid and are nonassessable, and are
        free and clear of all Liens, (ii) have been issued in accordance with
        the Securities Act of 1933, as amended (the "Securities Act") and
        applicable state securities Laws and (iii) have not been issued in
        violation of any preemptive right or similar rights of any shareholder
        of the Company or any of its subsidiaries. Except as set forth on
        Schedule 3.1.7, all of the issued shares of capital stock of or other
        equity interests in each subsidiary of the Company (i) have been duly
        authorized, validly issued, fully paid and are nonassessable, and are
        owned directly or indirectly by the Company, free and clear of all
        Liens, (ii) have been issued in accordance with the Securities Act and
        applicable state securities Laws and (iii) have not been issued in
        violation of any preemptive right or similar rights of any shareholder
        of the Company or any of its subsidiaries. As of the date hereof, except
        pursuant to this Agreement and the other Transaction Documents and
        except as set forth on Schedule 3.1.7, there are no outstanding or
        authorized shares of phantom stock, options, warrants, purchase rights,
        subscription rights, conversion rights, exchange rights, stock
        appreciation rights, profit sharing rights or similar rights or other
        contracts or commitments or preemptive rights that could require the
        Company or any of its subsidiaries to issue, sell or otherwise cause to
        become outstanding any of its capital stock or any other debt or equity
        security (collectively, the "Option Rights"), and there are no
        outstanding securities convertible or exchangeable into shares of such
        capital stock or any other debt or equity security (together with the
        Option Rights, the "Specified Rights"). As of the date hereof, except
        for the Transaction Documents there are no agreements to which the
        Company or any of its subsidiaries is a party or, to the knowledge of
        the Company, to which any stockholder is a party, providing for voting
        rights, rights of first refusal, calls, commitments, stock restriction
        or other similar rights relating to any securities of the Company or any
        of its subsidiaries.

                      3.1.8. SEC Reports and Financial Statements(a) . (a)
        Except as described on Schedule 3.1.8, the Company has filed all
        required forms, reports and documents with the Securities and Exchange
        Commission (the "SEC") since January 1, 1996 (the "Company SEC
        Filings"), each of which complied in all


- --------

        * This amount includes 2,207,560 shares of Common Stock reserved for
issuance in connection with stock options granted to Donald A. Wright, which Mr.
Wright has agreed to cancel in exchange for new options following the Exchange.


                                       8


        material respects with all applicable requirements of the Securities Act
        and the Securities Exchange Act of 1934, as amended (the "Exchange
        Act"), each as in effect on the dates such forms, reports and documents
        were filed. None of the Company SEC Filings (as amended through the date
        hereof), including, without limitation, any financial statements or
        schedules included or incorporated by reference therein, contained or
        incorporated by reference, when filed (or, in the case of filings
        amended by the Company, at such time as amended), any untrue statement
        of a material fact or omitted to state a material fact required to be
        stated or incorporated by reference therein or necessary in order to
        make the statements therein, in light of the circumstances under which
        they were made, not misleading. Except as described on Schedule 3.1.8,
        the consolidated financial statements of the Company included or
        incorporated by reference in the Company SEC Filings complied as to form
        in all material respects with applicable accounting requirements and the
        published rules and regulations of the SEC with respect thereto
        (including footnote disclosure) and fairly present in all material
        respects, in conformity with generally accepted accounting principles
        applied on a consistent basis ("GAAP") (except as may be indicated in
        the notes thereto), the consolidated financial position of the Company
        and its consolidated subsidiaries as of the dates thereof and their
        consolidated results of operations and changes in financial position for
        the periods then ended (subject, in the case of the unaudited interim
        financial statements, to normal year-end adjustments and to the fact
        that quarterly financial statements exclude certain footnotes required
        by GAAP).

                      (b) The Proxy Statement (as defined in Section 6.2), when
        prepared and filed with the SEC as contemplated in Section 6.2, will
        comply in all material respects with all applicable requirements of the
        Exchange Act, as in effect on the date such Proxy Statement is filed and
        the date it is mailed to the stockholders of the Company. The Proxy
        Statement and any documents incorporated by reference therein (other
        than with respect to information provided by the Holders to the Company
        expressly for inclusion in such document) will not contain, when filed
        and when mailed to the stockholders of the Company, any untrue statement
        of a material fact or omit to state a material fact required to be
        stated or incorporated by reference therein or necessary in order to
        make the statements therein, in light of the circumstances under which
        they were made, not misleading. The only information provided by the
        Holders to the Company for inclusion in the Proxy Statement is (i) the
        biographical information for each of the Holder Nominees (as defined
        below) expressly required for such inclusion pursuant to the Exchange
        Act and (ii) the aggregate principal amount of Old Notes either
        beneficially owned by such Holder or over which such Holder, alone or
        with its Affiliates (as defined in the Exchange Act, and over whom the
        Holder exercises sufficient control to insure enforcement of the
        provisions of this Agreement and the other Transaction Documents), has
        investment authority or discretion.

                      3.1.9. Undisclosed Liabilities. Except (a) as and to the
        extent reflected or adequately reserved against in the audited
        consolidated balance sheet


                                       9


        of the Company as of May 31, 2001 or in the notes thereto and (b) for
        liabilities which have been incurred since May 31, 2001 in the ordinary
        course of business consistent with past practice, there are no
        liabilities or obligations, secured or unsecured (whether absolute,
        accrued, contingent or otherwise), matured or unmatured, of the Company
        or any of its subsidiaries which would be required, in accordance with
        United States generally accepted accounting principles applied on a
        consistent basis, to be reflected or reserved against in the audited
        consolidated balance sheet of the Company as of May 31, 2001 or in the
        notes thereto or that, individually or in the aggregate, would
        reasonably be expected to have a Material Adverse Effect. Except as set
        forth in Schedule 3.1.9, since May 31, 2001, there has not been any
        Material Adverse Effect.

                      3.1.10. Material Contracts. True and complete copies of
        the contracts, agreements, licenses and commitments (whether oral or
        written), material to the Company and its subsidiaries, taken as a whole
        (each, a "Material Contract") have been made available to the Holders
        prior to the date of this Agreement. All Material Contracts are valid
        and binding obligations of the Company and/or the applicable subsidiary,
        as the case may be, and to the knowledge of the Company, the other party
        or parties thereto, enforceable in accordance with their terms, subject
        to the Enforceability Exceptions. Except as set forth in Schedule
        3.1.10, none of the Company nor any of its subsidiaries is in default
        under any of the Material Contracts, and no event has occurred, which,
        with notice or lapse of time or both, could constitute a default, except
        for such defaults that, individually or in the aggregate, are not
        reasonably likely to have a Material Adverse Effect, and to the
        knowledge of the Company, except as set forth on Schedule 3.1.10, no
        other party thereto is in material default thereunder.

                      3.1.11. Compliance. Each of the Company and its
        subsidiaries has complied with all Laws and Orders applicable to its
        business and has obtained all Permits necessary for the conduct of its
        business, and such Permits are in full force and effect, except where
        failure to comply or to obtain such permits is not reasonably likely to
        have a Material Adverse Effect.

                      3.1.12. Title to Property and Assets. Except as set forth
        in Schedule 3.1.12 hereto, as of January 31, 2002, each of the Company
        and its subsidiaries has good and marketable title to all of its
        material real properties and assets and has good and valid title to, or
        a valid leasehold interest in, its other material property, in each case
        free and clear of all Liens. The material properties and assets of the
        Company and its subsidiaries are in good operating condition and repair,
        normal wear and tear excepted.

                      3.1.13. Related Party Transactions. Except for this
        Agreement and the other Transaction Documents, and except as set forth
        in Schedule 3.1.13, there are no agreements, understandings or proposed
        transactions among the Company or any of its subsidiaries on the one
        hand, and any of its respective officers, directors, shareholders,
        Affiliates (as such term is defined for purposes of the Securities Act),
        or any Affiliate thereof, on the other hand.


                                       10


                      3.1.14. No Fees. Except for Jefferies & Company, Inc. and
        Houlihan Lokey Howard & Zukin Financial Advisors, Inc., whose fees shall
        be paid in accordance with Section 9.3 of this Agreement, no investment
        banker, financial advisor, consultant or other intermediary is entitled
        to any fee or commission from the Company or any of its subsidiaries for
        services rendered on behalf of the Company or any of its subsidiaries in
        connection with the transactions contemplated by this Agreement and the
        other Transaction Documents.

                      3.1.15. Proprietary Rights. Except as set forth on
        Schedule 3.1.15: (i) each of the Company and its subsidiaries is the
        sole owner, free and clear of any Lien, of, or has a valid license or
        other right, without the payment of any royalty except with respect to
        off-the-shelf software and otherwise on commercially reasonable terms,
        to all U.S. and foreign trademarks, service marks, logos, corporate and
        trade names, internet domain names, patents, registered designs,
        copyrights, computer software and databases, whether or not registered,
        web sites (and all intellectual property and proprietary rights
        incorporated therein) and all other trade secrets, research and
        development, know-how, proprietary and intellectual property rights and
        information, including all grants, registrations and applications
        relating thereto (collectively, the "Proprietary Rights"), used in the
        conduct of its business as now conducted, except for such Proprietary
        Rights the absence of which is not reasonably likely to have a Material
        Adverse Effect (such Proprietary Rights owned by or licensed to the
        Company or any of its subsidiaries, subject to such exception,
        collectively, the "Company Rights"); (ii) each of the Company and its
        subsidiaries has taken commercially reasonable actions to protect the
        Company Rights, and to acquire Proprietary Rights, consistent with
        prudent commercial practices in their respective industry; (iii) each of
        the rights of the Company and its subsidiaries in the Company Rights is
        valid and enforceable; (iv) none of the Company or its subsidiaries has
        received any demand, claim, notice or inquiry from any person or entity
        in respect of any Company Rights which challenges, threatens to
        challenge, or inquires as to whether there is any basis to challenge,
        the validity of, or the rights of the Company and its subsidiaries in,
        any such Company Rights, and the Company does not know of any basis for
        any such challenge; (v) none of the Company or its subsidiaries is in
        violation or infringement of, and none has violated or infringed, any
        Proprietary Rights of any other person or entity, except as is not
        reasonably likely to have a Material Adverse Effect; (vi) to the
        knowledge of the Company, no person or entity is infringing any Company
        Rights; and (vii) except on an arm's-length basis for value and other
        commercially reasonable terms, none of the Company or its subsidiaries
        has granted any license with respect to any Company Rights to any person
        or entity.

                      3.1.16. Employee Benefit Plans(a) . (a) For purposes
        hereof, each employee benefit or compensation plan, fund, program,
        arrangement, agreement or policy maintained or contributed to by the
        Company or any of its subsidiaries or as to which the Company or any of
        its subsidiaries has any liability shall be referred to herein as the
        "Plans" and individually as a "Plan". For purposes


                                       11


        hereof, "Plans" shall include any Plan that is an "employee benefit
        plan" within the meaning of the Employee Retirement Income Security Act
        of 1974, as amended ("ERISA") (each, an "ERISA Plan").

                      (b) Schedule 3.1.16(a) lists all Plans as of the date
        hereof, and the Company has provided the Holders with all documents
        relating to any of the Plans.

                      (c) Each ERISA Plan is in compliance in all material
        respects with the applicable provisions of ERISA and the Code,
        including, in the case of any ERISA Plan intended to be qualified under
        Code Section 401(a), the provisions of Code Section 401(a). A
        determination letter has been received from the IRS as to each ERISA
        Plan that is intended to be qualified under Code Section 401(a) and to
        the knowledge of the Company nothing has occurred that would be
        reasonably likely to result in the revocation of any such determination
        letter.

                      (d) With respect to any ERISA Plan maintained, sponsored
        or required to be contributed to within the last six years by the
        Company, any subsidiary or any trade or business which together with the
        Company or any subsidiary would be treated as a single employer under
        Section 414 of the Code that is subject to Title IV of ERISA, (i) no
        "accumulated funding deficiency", as defined in Section 412 of the Code,
        has been incurred, whether or not waived, that has not been satisfied in
        full and (ii) the actuarially determined present value of all "benefit
        liabilities" within the meaning of Section 4001(a)(16) of ERISA (as
        determined on the basis of the actuarial assumptions contained in the
        plans' most recent actuarial valuation) did not exceed the then current
        value of the assets of such plans, and (iii) there has not been an
        adverse change in the financial condition of such ERISA Plan which would
        have caused a material change in the funded status of such plan. No
        ERISA Plan to which the Company contributes or otherwise has any
        liability is a multiemployer pension plan within the meaning of Section
        3(37) of ERISA.

                      (e) None of the Company or any of its subsidiaries has
        engaged in any "prohibited transactions" (as described in Section 4975
        of the Code or in Part 4 of Subtitle B of Title I of ERISA) with respect
        to any Plan.

                      (f) Except as disclosed on Schedule 3.1.16(f), the
        consummation of the transactions contemplated by this Agreement will not
        (i) entitle any person to payments under any Plan to which he would not
        be entitled if the transactions contemplated by this Agreement were not
        consummated, (ii) accelerate the time of payment or vesting, or increase
        the amount of compensation or benefits due to any person under any Plan,
        or (iii) result in any liability under Title IV of ERISA.

                      (g) Except as disclosed on Schedule 3.1.16(g), no Plan is
        subject to any pending, or to the knowledge of the Company, threatened
        with any, dispute, lawsuit, claim (other than routine claims for
        benefits), investigation or complaint


                                       12


        to, or by, any person or Governmental Entity. Except as disclosed on
        Schedule 3.1.16(g), no Plan is the subject of an audit or, to the
        knowledge of the Company, under investigation by any Governmental
        Entity, nor, to the knowledge of the Company, is any such audit or
        investigation threatened.

                      (h) Except as set forth on Schedule 3.1.16(h), neither the
        Company nor any of its subsidiaries has any obligation to provide any
        post-employment health or life insurance coverage under any Plan or
        arrangement, other than such benefits required by law, and each Plan may
        be amended or terminated without incurring liability thereunder.

                      3.1.17. Labor Relations; Employees. No labor dispute with
        the employees of the Company or any of its subsidiaries exists or, to
        the knowledge of the Company, is imminent that is reasonably likely to
        have a Material Adverse Effect. No collective bargaining agreement
        covering any of the employees of the Company or any of its subsidiaries
        exists and, to the knowledge of the Company, no such agreement is
        imminent.

                      3.1.18. Environmental Matters(a) . (a) Except as disclosed
        in Schedule 3.1.18 or as is not reasonably likely to have a Material
        Adverse Effect, (i) each of the Company and its subsidiaries is in
        compliance with all applicable federal, state, local, municipal, and
        foreign Laws and Orders relating to pollution, preservation or
        protection of human health or safety or the environment, including,
        without limitation, ambient air, surface water, groundwater, land
        surface or subsurface strata, and natural resources, and mitigation of
        adverse effects thereon (together "Environmental Laws") and including,
        without limitation, Laws and Orders relating to the presence,
        manufacture, generation, processing, distribution, use, treatment,
        storage, disposal, transport, handling, emission, discharge, release or
        threatened release of chemicals, pollutants, contaminants, wastes,
        radioactive, toxic or hazardous substances or wastes, petroleum or
        petroleum-derived substances, products or wastes, asbestos or
        asbestos-containing materials, polychlorinated biphenyls, lead or
        lead-based paints or materials, or any constituent, breakdown product or
        by-product of any of the foregoing ("Materials of Environmental
        Concern"), and recordkeeping, notification, disclosure and reporting
        requirements with respect thereto, (ii) each of the Company and its
        subsidiaries possesses all Permits and other governmental authorizations
        required under applicable Environmental Laws, and is in compliance with
        the terms and conditions thereof and (iii) each of the Company and its
        subsidiaries is in compliance with the terms and conditions of any
        instrument or agreement pursuant to which any of them has settled or
        discharged any liability under Environmental Laws.

                      (b) Except as disclosed in the Company SEC Filings or in
        Schedule 3.1.18 or except as is not reasonably likely to have a Material
        Adverse Effect, (i) neither the Company nor any of its subsidiaries has
        received any communication (written or oral), whether from a
        Governmental Entity, citizens group, employee or otherwise, which
        alleges that the Company or any of its


                                       13


        subsidiaries (or any person or entity whose liability the Company or any
        of its subsidiaries has acquired, retained or assumed either
        contractually or by operation of law) is, has been or may be in
        violation of or not in compliance with any Environmental Law or has or
        may have any liability (including, without limitation, liability for
        investigatory costs, cleanup costs, response costs, corrective action,
        natural resource damages, property damage, personal injury, or fines or
        penalties) under any Environmental Law and (ii) there are no past or
        present actions, activities, circumstances, conditions, events or
        incidents, including, without limitation, the release, emission,
        discharge, presence or disposal of any Materials of Environmental
        Concern at any location and at any time, that would form the basis for
        any future liability arising under or relating to Environmental Laws of
        or to the Company or any of its subsidiaries or of or to any person or
        entity whose liability the Company or any of its subsidiaries has
        acquired, retained or assumed either contractually or by operation of
        law.

                      (c) Each of the Company and its subsidiaries has made
        available to the Holders any assessments, reports, data, results of
        investigations or audits, notices of violation, complaints, agreements
        and notices relating to contribution or indemnification rights or
        obligations, that are in the possession of the Company or any of its
        subsidiaries regarding actual or potential liabilities arising under or
        relating to Environmental Laws of or to the Company or its subsidiaries
        or of or to any person or entity whose liability the Company or any of
        its subsidiaries has acquired, retained or assumed either contractually
        or by operation of law, except as relates to such liabilities which are
        not reasonably likely to have a Material Adverse Effect.

                      3.1.19. Section 3(a)(9) Exemption; Blue Sky Exemption.
        Assuming no person, other than the Company, has paid or given, directly
        or indirectly, any commission or other remuneration for soliciting the
        Exchange and the other transactions contemplated in this Agreement or
        the other Transaction Documents, the issuance and delivery of the Common
        Stock, the Preferred Stock and the New Notes by the Company in exchange
        for each of the Holders' Old Notes pursuant to the terms of this
        Agreement and the other Transaction Documents is exempt pursuant to
        Section 3(a)(9) of the Securities Act from the registration requirements
        of the Securities Act. No consent, approval, filing, notice or similar
        action is required in connection with the Exchange pursuant to any state
        securities or "Blue Sky" Laws.

                      3.1.20. Board Representation; Compliance with Rule
        14f-1(a) . (a) The Company has complied with the requirements of Rule
        14f-1 pursuant to the Exchange Act and filed with the SEC, and
        transmitted to all holders (as of the applicable record date) of
        securities of the Company who would be entitled to vote at a meeting for
        the election of directors of the Company, the information contemplated
        by Rule 14f-1 under the Exchange Act (the "Rule 14f-1 Filing"), and
        taken all other actions required under Section 14 of the Exchange Act
        and Rule 14f-1 promulgated thereunder necessary to consummate the
        transactions contemplated in this Agreement and the other Transaction


                                       14


        Documents, including, without limitation, the appointment of directors
        contemplated by Section 3.1.20(b) hereof. The Rule 14f-1 Filing complied
        in all material respects with all applicable requirements of the
        Securities Act and the Exchange Act, as in effect on the date of such
        filing and such transmission to securityholders of the Company of the
        Rule 14f-1 Filing. The Rule 14f-1 Filing (other than with respect to the
        information provided in writing by the Holders to the Company expressly
        for inclusion in such filing) did not contain or incorporate by
        reference, when filed and when transmitted to securityholders of the
        Company, any untrue statement of a material fact or omit to state a
        material fact required to be stated or incorporated by reference therein
        or necessary in order to make the statements therein, in light of the
        circumstances under which they were made, not misleading.

                      (b) As of the date hereof, Messrs. Werner Hafelfinger,
        Dale L. Rasmussen, Gene C. Sharratt, Robert M. Stemmler and William A.
        Wheeler have tendered their resignations as directors of the Company
        and, Messrs. Robert A. Hamwee, Matthew Kaufman, Richard Detweiler and
        Carl Goldsmith have been duly appointed by the holders of the Preferred
        Stock in accordance with Washington law, the Articles of Incorporation
        of the Company and the Bylaws of the Company, as directors of the
        Company.

                      3.1.21. Tax Returns(a) . (a) Except as set forth on
        Schedule 3.1.21, all Tax Returns required to be filed by or with respect
        to the Company or any of its subsidiaries for all Taxable Periods have
        been timely filed. All such Tax Returns (i) were prepared in the manner
        required by applicable Law, (ii) are true, correct, and complete in all
        material respects, and (iii) accurately reflect the liability for Taxes
        of the Company and its subsidiaries. All Taxes shown to be payable on
        such Tax Returns, and all assessments of Tax made against the Company or
        any of its subsidiaries with respect to such Tax Returns, have been paid
        when due. No adjustment relating to any such Tax Return has been
        proposed or, to the Company's knowledge threatened formally or
        informally by any Taxing authority and no basis exists for any such
        adjustment. Since the date of the most recent Company SEC Filing,
        neither the Company nor any subsidiary has incurred any liability for
        Taxes that would result in a material decrease in the net worth of the
        Company or any such subsidiary.

                      (b) Except as set forth on Schedule 3.1.21, the Company
        and each of its subsidiaries have paid, or caused to be paid, all Taxes
        due, whether or not shown (or required to be shown) on a Tax Return, and
        have provided a sufficient reserve for the payment of all Taxes not yet
        due and payable in the Company SEC Filing; and such Taxes paid or
        provided for include those for which the Company or any of its
        subsidiaries may be liable in its own right, or as the transferee of the
        assets of, or as successor to, any other corporation, association,
        partnership, joint venture, or other entity.

                      (c) The Company and each of its subsidiaries have complied
        in all material respects with the requirements relating to the
        withholding and payment


                                       15


        of Taxes, and have, within the time and in the manner prescribed by law,
        withheld from employee wages and paid over to the proper governmental
        authorities all amounts required.

                      (d) Neither the Company nor any of its subsidiaries has
        incurred, or will incur, any material Tax liability in connection with
        (i) the Exchange or (ii) the other transactions contemplated by this
        Agreement.

                      (e) As used herein the following terms have the following
        respective meanings:

                             (i) "Tax" or "Taxes" shall mean any and all
                      federal, state, local and foreign taxes, assessments and
                      other governmental charges, duties, impositions, levies
                      and liabilities, including, without limitation, taxes
                      based upon or measured by gross receipts, income, profits,
                      sales, use and occupation, and value added, ad valorem,
                      transfer, gains, franchise, withholding, payroll,
                      recapture, employment, excise, unemployment, insurance,
                      social security, business license, occupation, business
                      organization, stamp, environmental and property taxes,
                      together with all interest, penalties and additions
                      imposed with respect to such amounts. For purposes of this
                      Agreement, "Taxes" also includes any obligations under any
                      agreements or arrangements with any Person with respect to
                      the liability for, or sharing of, Taxes (including
                      pursuant to Treas. Reg. Section 1.1502-6 or comparable
                      provisions of state, local or foreign Tax law) and
                      including any liability for Taxes as a transferee or
                      successor, by contract or otherwise.

                             (ii) "Taxable Period" means any taxable year or any
                      other period that is treated as a taxable year (or other
                      period, or portion thereof, in the case of a Tax imposed
                      with respect to such other period; e.g., a quarter) with
                      respect to which any Tax may be imposed under any
                      applicable statute, rule, or regulation.

                             (iii) "Tax Return" means any report, return,
                      election, notice, estimate, declaration, information
                      statement and other forms and documents (including,
                      without limitation, all schedules, exhibits and other
                      attachments thereto) relating to and filed or required to
                      be filed with a taxing authority in connection with any
                      Taxes (including, without limitation, estimated Taxes).


                                       16


                                   ARTICLE 4

                         REPRESENTATIONS AND WARRANTIES
                                 OF THE HOLDERS

               4.1. Representations and Warranties of the Holders. (i) Each
Holder hereby represents and warrants to the Company, severally, only as to
itself, and not jointly, that the statements contained in this Section 4.1 with
respect to such Holder are correct and complete as of the date of this
Agreement, other than those representations and warranties that speak only as of
a specified date:

                      4.1.1. Ownership of Notes. (i) The Holder either (A)
        beneficially owns the principal amount of Old Notes set forth opposite
        its name in Exhibit A attached hereto or (B) alone or with its
        Affiliates (as defined in the Exchange Act, and over whom the Holder
        exercises sufficient control to insure enforcement of the provisions of
        this Agreement and the other Transaction Documents) has investment
        authority or discretion over the principal amount of Old Notes set forth
        opposite its name in Exhibit A attached hereto, free and clear of any
        and all Liens, and the Holder has not granted, sold, conveyed,
        transferred or otherwise disposed of any right, title or interest
        (legal, record or beneficial) in and to such Old Notes to any person;
        and (ii) the Holder has the full right and authority to cancel the
        indebtedness represented by such Old Notes as contemplated by this
        Agreement. The debt evidenced by the Old Notes is no longer outstanding,
        the Holder does not have any rights thereunder and none of the Company,
        any of its subsidiaries or the Holder will have any obligations
        thereunder, except for those rights and obligations which the Company
        will have with respect to holders of such notes who are not parties to
        this Agreement or the other Transaction Documents.

                      4.1.2. Authority. The Holder has the power, authority and
        capacity necessary to execute, deliver and perform its obligations under
        this Agreement and any of the other Transaction Documents to which the
        Holder is a party and to consummate the transactions contemplated hereby
        and thereby and to execute the consent contemplated in Section 7.3(ii).
        The execution, delivery and performance of this Agreement and any other
        Transaction Document to which the Holder is a party and the consent
        contemplated in Section 7.3(ii) and the consummation of the transactions
        contemplated herein and therein have been duly and validly authorized by
        all necessary action in respect thereof on the part of the Holder. This
        Agreement and any other Transaction Document to which the Holder is a
        party have been duly executed and delivered and represent legally valid
        and binding obligations of the Holder, enforceable against the Holder in
        accordance with their terms, subject to the Enforceability Exceptions.

                      4.1.3. Consents and Approvals. Except for the filing of
        Schedule 13D and Form 3 with the SEC, no notices, reports, registrations
        or other filings are required to be made by the Holder or on its behalf
        with, nor are any consents, approvals or authorizations required to be
        obtained by the Holder or on its behalf


                                       17


        from, any Governmental Entity in connection with the execution, delivery
        or performance of this Agreement or any other Transaction Document to
        which the Holder is a party, in each case except for those the failure
        to make or obtain which, individually or in the aggregate, is not
        material.

                      4.1.4. No Violations. The execution, delivery and
        performance of this Agreement will not:

               (a) violate or contravene any provision of the articles of
        incorporation or bylaws or similar organizational documents of the
        Holder;

               (b) violate, conflict with, or constitute or result in a default,
        acceleration or termination of, or entitle any party to terminate,
        accelerate, alter the terms of or cause a default under (in each case,
        with or without notice or lapse of time or both), any provision of any
        agreement, license, lease, contract, loan, note, mortgage, indenture,
        bond or other written or oral obligation to which the Holder is a party
        or by which any of the Holder's assets are bound, except, in each case,
        for such violations, conflicts, breaches or defaults which individually
        or in the aggregate are not reasonably likely to materially adversely
        affect the Holder's ability to perform its obligations hereunder;

               (c) require the Holder to obtain the consent, waiver,
        authorization or approval of any person except where the failure to
        obtain such consent, waiver, authorization or approval is not reasonably
        likely to materially adversely affect the Holder's ability to perform
        its obligations hereunder; or

               (d) violate, contravene or conflict with any Order, Law or
        Permit, applicable to the Holder except where such violation,
        contravention or conflict is not reasonably likely to materially
        adversely affect the Holder's ability to perform its obligations
        hereunder.

                      4.1.5. No Fees. No investment banker, financial advisor,
        consultant or other intermediary is entitled to any fee or commission
        from the Holder for services rendered on behalf of the Holder in
        connection with the transactions contemplated by this Agreement and the
        other Transaction Documents.

                                    ARTICLE 5

                               REGISTRATION RIGHTS

               5.1. Demand Registrations.

                      5.1.1. Demand Registrations. Subject to the conditions of
        this Section 5.1, at any time on and after the date hereof, any of the
        Holders individually or together with other Holders (the "Initiating
        Holder" or "Initiating Holders") holding in the aggregate at least 50%
        of the total outstanding number of shares or aggregate principal amount,
        as applicable, of Registrable Securities for


                                       18


        which a Demand Request (as hereinafter defined) is made may make a
        written request (a "Demand Request") that the Company file a
        registration statement under the Securities Act on the appropriate form
        covering the registration of Registrable Securities. Such Demand Request
        shall specify the aggregate number of shares or aggregate principal
        amount of Registrable Securities proposed to be sold and will also
        specify the intended method or methods of disposition thereof. The
        Company shall only be required to effect three registrations pursuant
        hereto and no more than two in any 12-month period. "Registrable
        Securities" shall mean (i) the shares of the Common Stock acquired by
        the Holders pursuant to the terms of this Agreement, including the
        Conversion Shares acquired by the Holders upon the Automatic Conversion
        of the Preferred Stock and (ii) the New Notes and the PIK Notes;
        provided, that any Registrable Securities transferred (A) pursuant to a
        registration statement under the Securities Act covering such
        Registrable Securities that has been declared effective by the SEC or
        (B) pursuant to Rule 144 promulgated pursuant to the Securities Act to a
        non-affiliate of the Company, shall be excluded from the definition of
        "Registrable Securities".

                      5.1.2. Participation. Within twenty (20) days of the
        receipt of any Demand Request, the Company shall give written notice of
        such Demand Request to all Holders. Subject to the provisions of this
        Section 5.1, the Company shall include in such demand registration all
        Registrable Securities that the Holders request to be registered in a
        written request from such Holders received by the Company within twenty
        (20) days of the mailing of the Company's notice pursuant to this
        Section 5.1.2.

                      5.1.3. Underwriting Requirements. The Company shall have
        the right to select an investment banking firm to act as managing
        underwriter from a list of five (5) investment banking firms chosen by
        the Initiating Holder out of the top ten managers of underwritten equity
        offerings in the country based on the volume of underwritten equity
        offerings for the past two years. Notwithstanding any other provision of
        this Section 5.1, if the managing underwriter with respect to a proposed
        offering made pursuant to a Demand Request advises the Company and the
        Holders in writing that, in its good faith opinion, the number of
        securities requested to be included in such offering exceeds the number
        of securities which can be sold in such offering without being likely to
        have an adverse effect on the offering of securities as then
        contemplated (including the price at which it is proposed to sell the
        securities), then the Company shall so advise all Holders of Registrable
        Securities that would otherwise be underwritten pursuant hereto, and the
        number of shares that may be included in the registration shall be
        allocated: (i) first, to securities being sold for the account of the
        Holders of Registrable Securities on a pro rata basis based on the
        number of Registrable Securities requested to be included in such
        registration by all such Holders; provided that if the Initiating Holder
        is unable to register at least 50% of its Registrable Securities
        proposed to be registered in its or their Demand Request, such Demand
        Request shall be deemed to have been withdrawn, but the Company shall be
        obligated to continue to pursue the registration of Registrable
        Securities initiated by the making of such Demand Request, and the
        Initiating Holder shall retain its rights


                                       19


        to registration under this Section 5.1 as though no request for such
        registration had been made by such Holder; (ii) second, to securities
        being sold for the account of the Company; and (iii) last, to any other
        shareholders the Company may determine to allow to participate in the
        registration.

                      5.1.4. Preemption of Requested Registration.
        Notwithstanding anything to the contrary contained herein, at any time
        within twenty (20) business days after receiving a Demand Request, the
        Company may elect to effect an underwritten primary registration in lieu
        of the registration requested in the Demand Request if the Company's
        Board of Directors believes that such primary registration would be in
        the best interests of the Company or if the managing underwriter with
        respect to the proposed offering requested in the Demand Request advises
        the Company and the Holders in writing that in its good faith opinion,
        in order to sell the Registrable Securities to be sold, the Company
        should include its own securities. If the Company so elects to effect a
        primary registration, the Company shall give prompt written notice to
        all Holders of Registrable Securities of its intention to effect such a
        registration and shall afford the Holders of the Registrable Securities
        piggyback rights contained in Section 5.2 with respect to such primary
        registration. In the event that the Company so elects to effect a
        primary registration after receiving a Demand Request, such Demand
        Request shall be deemed to have been withdrawn and the Initiating Holder
        shall retain its rights to registration under this Section 5.1 as though
        no request for such registration had been made by them.

                      5.1.5. Exceptions. Notwithstanding the foregoing
        provisions, the Company shall not be required to effect a registration
        pursuant to this Section 5.1:

                             (i) in any particular jurisdiction in which the
                      Company would be required to qualify to do business, where
                      not otherwise required, or to execute a general consent to
                      service of process in effecting such registration,
                      qualification or compliance; or

                             (ii) after the Company has effected the number of
                      registrations required pursuant to Sections 5.1.1, and
                      such registrations have been declared or ordered
                      effective, shall remain effective for at least the period
                      of time provided in Section 5.4(a) hereof, and no stop
                      order shall have been issued with respect thereto; or

                             (iii) during the period starting with the date
                      thirty (30) days prior to the Company's good faith
                      estimate of the date of the filing of, and ending on a
                      date one hundred eighty (180) days following the effective
                      date of, a registration subject to the Holders' rights
                      under Section 5.2; provided that the Company is actively
                      employing in good faith reasonable efforts to cause such
                      registration statement to become effective. If a demand
                      registration is delayed, deferred or otherwise not
                      effected due to


                                       20


                      this Section 5.1.5(iii), the Initiating Holder's request
                      shall be deemed withdrawn and the Initiating Holder shall
                      retain its rights to registration under this Section 5.1
                      as though no request for such registration had been made
                      by such Holder; or

                             (iv) if the Board of Directors of the Company, in
                      its good faith judgment, determines that a registration of
                      Registrable Securities should not be made because it would
                      be seriously detrimental to the Company to register such
                      Registrable Securities, then in such event the Company
                      shall have the right to defer the filing or registration
                      statement pursuant to a Demand Request for a period of not
                      more than one hundred eighty (180) days after receipt of
                      such Demand Request (provided, however, that the Company
                      shall not defer its obligation in this manner more than
                      once in any twelve-month period).

                      5.1.6. Registration Statement Form. The Company may, if
        permitted by law, effect any registration of Registrable Securities
        pursuant to Section 5.1 by the filing of a registration statement on
        Form S-3 unless, in the event such registration involves an underwritten
        public offering, the managing underwriter shall notify the Company in
        writing that, in the judgment of such managing underwriter, the use of a
        more detailed form or inclusion of additional information, which in each
        case shall be specified in such notice, is reasonably necessary to
        effectively market the offering of such Registrable Securities, in which
        case such registration shall be effected on the form so specified or
        shall include the information so specified, as applicable.

               5.2. Piggyback Registrations.

                      5.2.1. Piggyback Rights. If (but without any obligation to
        do so) the Company proposes to register any of its shares of Common
        Stock or other securities under the Securities Act in connection with
        the public offering of such securities (other than a registration
        relating solely to the sale of securities to participants in a Company
        employee benefit plan or a registration relating to a corporate
        reorganization or other transaction under Rule 145 of the Securities Act
        (each, a "Designated Registration")), whether or not for its own
        account, the Company shall, at such time, promptly give each Holder
        written notice of such registration. Upon the written request of each
        Holder given in writing to the Company within fifteen (15) days after
        receipt of such notice by the Company, the Company shall, subject to the
        provisions of Section 5.2.3, use its reasonable best efforts to prepare,
        file and cause to become effective a registration statement which
        includes all of the Registrable Securities that each such Holder has
        requested to be registered.

                      5.2.2. Right to Terminate Registration. The Company shall
        have the right to terminate or withdraw any registration initiated by it
        under this Section 5.2 prior to the effectiveness of such registration,
        whether or not any


                                       21


        Holder has elected to include securities in such registration. The
        expenses of such withdrawn registration shall be borne by the Company in
        accordance with Section 5.6 hereof. Any such withdrawal shall be without
        prejudice to the rights of any Holder to request that a registration be
        effected under Section 5.1 or to be included in subsequent registrations
        under Section 5.2.1.

                      5.2.3. Underwriting Requirements. In connection with any
        offering involving an underwriting of shares issued by the Company, the
        Company shall not be required under this Section 5.2 to include any of a
        Holder's Registrable Securities in such underwriting unless such Holder
        accepts the terms of the underwriting as agreed upon between the Company
        and the underwriters selected by the Company and enters into an
        underwriting agreement in customary form with an underwriter or
        underwriters selected by the Company. If the total amount of securities,
        including Registrable Securities, requested by shareholders to be
        included in such offering exceeds the amount of securities to be sold,
        other than by the Company, that the underwriters determine in their
        reasonable discretion is compatible with the success of the offering,
        then the Company shall be required to include in the offering only that
        number of such securities, including Registrable Securities, that the
        underwriters determine in their good faith opinion will not jeopardize
        the success of the offering. If such registration as initially proposed
        by the Company was in whole or in part requested by holders of
        securities of the Company, other than the Holders of Registrable
        Securities in their capacities as such, pursuant to demand registration
        rights, then the number of shares that may be included in the
        underwriting shall be allocated as follows: (x) first, such securities
        held by the holders initiating such registration and, if applicable, any
        securities proposed by the Company to be sold for its own account,
        allocated in accordance with the priorities then existing among the
        Company and such holders, (y) second, any Registrable Securities
        requested to be included in such registration by Holders of Registrable
        Securities, pro rata on the basis of the number of Registrable
        Securities requested to be included in such registration and (z) last,
        any other securities of the Company proposed to be included in such
        registration, allocated among the holders thereof in accordance with the
        priorities then existing among the Company and such holders. Any
        Registrable Securities excluded or withdrawn from such underwriting
        shall be withdrawn from the registration.

               5.3. Shelf Registration. The Company shall use its best efforts
to obtain, and to cause its independent auditors to deliver, as promptly as
practicable following the date hereof, an unqualified audit opinion on the
consolidated financial statements of the Company as of December 31, 2000 and
December 31, 2001 and for each of the years ending May 31, 1999, 2000 and 2001
(the "2001 Financial Statement Report"). The Company shall, within 5 business
days following its receipt of the 2001 Financial Statement Report, (i) prepare
and file with the SEC a registration statement pursuant to which the Holders may
resell from time to time any Registrable Securities received in the Exchange or
upon the Automatic Conversion (the "Resale Registration Statement") and (ii) use
its best efforts to have the Resale Registration Statement declared effective by
the SEC as promptly as practicable following the filing thereof. The


                                       22


Company shall prepare and file such amendments and supplements to the Resale
Registration Statement and the prospectus used in connection therewith and take
any other actions as may be necessary to keep the Resale Registration Statement
effective for a period of two years from the date upon which the SEC declares
the Resale Registration Statement effective.

               5.4. Obligations of the Company. Whenever required under this
Article 5 to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:

                      (a) prepare and file with the SEC, no later than
        forty-five (45) days after the Company's receipt of a Demand Request
        made pursuant to Section 5.1.1, a registration statement with respect to
        such Registrable Securities and use its reasonable best efforts to cause
        such registration statement to become effective and, keep such
        registration statement effective for a period of one year or, if
        earlier, until the distribution contemplated in the registration
        statement has been completed; provided, however, that such one year
        period shall be extended by the number of calendar days in any period
        beginning with the delivery of the notification contemplated by the
        first clause of subsection 5.4(g), and ending with the delivery of the
        supplements or amendments contemplated by subsection 5.4(g);

                      (b) prepare and file with the SEC such amendments and
        supplements to such registration statement and the prospectus used in
        connection with such registration as may be necessary to comply with the
        provisions of the Securities Act with respect to disposition of all
        securities covered by such registration statement for the period set
        forth in paragraph 5.4(a) above or Section 5.3, as applicable;

                      (c) furnish to each selling Holder and counsel selected by
        the selling Holders copies of all documents proposed to be filed with
        the SEC in connection with such registration, which documents will be
        subject to the review of such counsel and each selling Holder;

                      (d) furnish to the selling Holders, without charge, such
        number of (i) conformed copies of the registration statement and of each
        amendment or supplement thereto (in each case including all exhibits and
        documents filed therewith), and (ii) copies of the prospectus included
        in such registration statement, including each preliminary prospectus
        and any summary prospectus, in conformity with the requirements of the
        Securities Act, and such other documents as they may reasonably request
        in order to facilitate the disposition of Registrable Securities owned
        by them in accordance with the intended method or methods of such
        disposition;

                      (e) in the event of any underwritten public offering,
        enter into and perform its obligations under an underwriting agreement,
        in usual and customary form, with the managing underwriter of such
        offering and enter into


                                       23


        such other agreements and take such other actions in order to expedite
        or facilitate the disposition of such Registrable Securities, including,
        without limitation, preparing for, and participating in, "road shows"
        and all other customary selling efforts, all as the underwriters
        reasonably request;

                      (f) promptly notify each selling Holder covered by such
        registration statement (i) of the issuance of any stop order by the SEC
        in respect of such registration statement (and use every reasonable
        effort to obtain the lifting of any such stop order at the earliest
        possible moment), (ii) of any period when the registration statement
        ceases to be effective, (iii) when such registration statement or any
        prospectus used in connection therewith, or any amendment or supplement
        thereto, has been filed and, with respect to such registration statement
        or any post-effective amendment thereto, when the same has become
        effective or (iv) of the receipt by the Company of any notification with
        respect to the suspension of the qualification of any Registrable
        Securities for sale under the applicable securities or blue sky laws of
        any jurisdiction;

                      (g) notify each selling Holder covered by such
        registration statement, at any time when a prospectus relating thereto
        is required to be delivered under the Securities Act, of the happening
        of any event as a result of which the prospectus included in such
        registration statement, as then in effect, includes or incorporates by
        reference an untrue statement of a material fact or omits to state a
        material fact required to be stated therein or necessary to make the
        statements therein not misleading in the light of the circumstances then
        existing, and, as promptly as is practicable, prepare, file with the SEC
        and furnish to such selling Holder a reasonable number of copies of any
        supplement to or amendment of such prospectus as may be necessary so
        that, as thereafter delivered to the purchasers of such securities, such
        prospectus shall not include or incorporate by reference an untrue
        statement of a material fact or omit to state a material fact required
        to be stated therein or necessary to make the statements therein not
        misleading in light of the circumstances then existing;

                      (h) cause all such Registrable Securities registered
        hereunder to be listed on each national securities exchange on which
        similar securities issued by the Company are then listed;

                      (i) provide a transfer agent and registrar for all
        Registrable Securities registered pursuant hereunder and a CUSIP number
        for all such Registrable Securities, in each case not later than the
        effective date of such registration;

                      (j) use its reasonable best efforts to register and
        qualify the securities covered by such registration statement under such
        other securities or blue sky Laws of such jurisdictions as shall be
        reasonably requested by the selling Holders (or obtain an exemption from
        registration or qualification under such Laws) and do any and all other
        acts and things which may be necessary or advisable to enable such
        selling Holders to consummate the disposition of the


                                       24


        Registrable Securities in such jurisdictions in accordance with the
        intended method or methods of distribution thereof; provided, however,
        that the Company shall not be required in connection therewith or as a
        condition thereto to qualify to do business, where not otherwise
        required, or to file a general consent to service of process in any such
        states or jurisdictions;

                      (k) furnish to each selling Holder a signed counterpart,
        addressed to such selling Holder, of an opinion of counsel for the
        Company experienced in securities Law matters, dated the effective date
        of the registration statement (and, if any registration includes an
        underwritten public offering, the date of the closing under the
        underwriting agreement) covering such matters as are customarily covered
        in opinions of issuer's counsel delivered to the underwriters in
        underwritten public offerings of securities and such other matters as
        may be reasonably requested by the Initiating Holders, if any;

                      (l) to the extent the Company is able, after using its
        best efforts, to cause the independent accountants who have issued an
        audit report on the Company's financial statements included (or
        incorporated by reference) in the registration statement to issue a
        "comfort" letter to each selling Holder after using the Company's best
        efforts to obtain such a letter, furnish to each selling Holder a signed
        counterpart of such "comfort" letter, dated the effective date of the
        registration statement (and, if any registration includes an
        underwritten public offering, the date of the closing under the
        underwriting agreement), signed by the independent public accountants
        covering such matters as are customarily covered in accountant's letters
        delivered to the underwriters in underwritten public offerings of
        securities and such other matters as may be reasonably requested by the
        Initiating Holders, if any;

                      (m) use its reasonable best efforts to cause all
        Registrable Securities covered by such registration statement to be
        registered with or approved by such other Governmental Entities as may
        be necessary by virtue of the business and operations of the Company to
        enable each selling Holder thereof to consummate the disposition of such
        Registrable Securities in accordance with the intended method or methods
        of disposition thereof;

                      (n) otherwise use its best efforts to comply with all
        applicable rules and regulations of the SEC, and make available to its
        security holders, as soon as reasonably practicable, an earnings
        statement of the Company (in form complying with the provisions of Rule
        158 under the Securities Act) covering the period of at least twelve
        (12) months, but not more than eighteen (18) months, beginning with the
        first month after the effective date of the registration statement;

                      (o) make available for inspection by any selling Holder,
        any underwriter participating in any disposition pursuant to such
        registration statement and any attorney, accountant or other agent
        retained by any such Holder or underwriter (collectively, the
        "Inspectors"), all financial and other records,


                                       25


        pertinent corporate documents and properties of the Company
        (collectively, the "Records") as shall be reasonably necessary to enable
        them to exercise their due diligence responsibility, and cause the
        Company's officers, directors and employees to supply all information
        reasonably requested by any such Inspector in connection with such
        registration statement, and permit the Inspectors to participate in the
        preparation of such registration statement and any prospectus contained
        therein and any amendment or supplement thereto. Records which the
        Company determines, in good faith, to be confidential and which it
        notifies the Inspectors are confidential shall not be disclosed by the
        Inspectors unless (i) the disclosure of such Records is necessary to
        avoid or correct a misstatement or omission in the registration
        statement, (ii) the release of such Records is ordered pursuant to a
        subpoena or other order from a court of competent jurisdiction or (iii)
        the information in such Records has been made generally available to the
        public. The selling Holder of Registrable Securities agrees by
        acquisition of such Registrable Securities that it will, upon learning
        that disclosure of such Records is sought in a court of competent
        jurisdiction, give notice to the Company and allow the Company, at the
        Company's expense, to undertake appropriate action to prevent disclosure
        of the Records deemed confidential; and

                      (p) use its reasonable best efforts to take all other
        steps necessary to effect the registration and disposition of such
        Registrable Securities as contemplated hereby.

               5.5. Information from Holder. Except with respect to the
Company's obligations contained in Section 5.3, it shall be a condition
precedent to the obligations of the Company to take any action pursuant to this
Article 5 with respect to the Registrable Securities of any selling Holder that
such Holder shall, within ten (10) business days of a written request by the
Company, furnish to the Company such information regarding itself, the
Registrable Securities held by it, and the intended method of disposition of
such securities as shall be reasonably required by the Company to effect the
registration of such Holder's Registrable Securities. In any registration
statement with respect to any Registrable Securities or any amendment or
supplement thereto, the Company agrees not to refer to any selling Holder of any
Registrable Securities covered thereby by name, or otherwise identify such
seller as the holder of any Registrable Securities, without the prior written
consent of such selling Holder, such consent not to be unreasonably withheld.

               5.6. Expenses of Registration. The Company shall pay all
Registration Expenses in connection with registrations, filings or
qualifications which the Company is required to effect pursuant to Sections 5.1
and 5.3 and which it effects pursuant to Section 5.2. For purposes of this
Section, "Registration Expenses" shall mean all expenses other than underwriting
discounts and commissions incident to the Company's performance of its
obligations under or compliance with Sections 5.1, 5.2, 5.3 and 5.4, including
(without limitation) all registration, filing and qualification fees (including
Blue Sky fees), NASD fees and other fees and expenses associated with listing
securities on the Nasdaq National Market or any national securities exchange,
printers' and accounting fees, transfer agent fees and expenses, trustee fees
and expenses, rating agency fees and


                                       26


expenses, word processing and duplicating fees, messenger and delivery expenses,
fees and disbursements of underwriters customarily paid by issuers or sellers of
securities, fees and disbursements of counsel for the Company and the reasonable
fees and disbursements of one counsel for the selling Holders (which counsel
shall be selected by the Initiating Holders, if any, and otherwise by a majority
in interest of the Holders participating in such registration).

               5.7. Delay of Registration. No Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Article 5.

               5.8. Indemnification. In the event any Registrable Securities are
included in a registration statement under this Article 5:

                      (a) To the extent permitted by law, the Company will
        indemnify and hold harmless each selling Holder, the partners, officers,
        directors, members and shareholders of each selling Holder, legal
        counsel and accountants for each selling Holder, any underwriter (as
        defined in the Securities Act) for such Holder and each person, if any,
        who controls such Holder or underwriter, within the meaning of the
        Securities Act or the Exchange Act, against any losses, claims, damages,
        expenses or liabilities (joint or several) (or actions, proceedings or
        settlements in respect thereof), to which they may become subject under
        the Securities Act, the Exchange Act or other federal, state, local or
        foreign securities Laws, insofar as such losses, claims, damages,
        expenses or liabilities (or actions, proceedings or settlements in
        respect thereof) arise out of or are based upon any of the following
        statements, omissions or violations (collectively, a "Violation") by the
        Company: (i) any untrue statement or alleged untrue statement of a
        material fact contained or incorporated by reference in such
        registration statement, including any preliminary prospectus or final
        prospectus contained therein or any amendments or supplements thereto,
        or any other document required in connection therewith or any
        qualification or compliance associated therewith; (ii) the omission or
        alleged omission to state therein a material fact required to be stated
        therein, or necessary to make the statements therein (in the case of a
        prospectus, in the light of the circumstances under which they were
        made) not misleading; or (iii) any violation or alleged violation by the
        Company of the Securities Act, the Exchange Act, any securities Laws or
        any rule or regulation promulgated under the Securities Act, the
        Exchange Act or any securities Laws; and the Company will reimburse each
        such selling Holder, partner, officer, director, member, shareholder,
        counsel, accountant, underwriter or controlling person for any legal or
        other expenses reasonably incurred by them in connection with
        investigating or defending or settling any such loss, claim, damage,
        liability or action as such expenses are incurred; provided, however,
        that the indemnity agreement contained in this Section 5.8(a) shall not
        apply to amounts paid in settlement of any such loss, claim, damage,
        liability or action if such settlement is effected without the consent
        of the Company (which consent shall not be unreasonably withheld,
        delayed or conditioned), nor shall the


                                       27


        Company be liable in any such case for any such loss, claim, damage,
        liability or action to the extent that it arises out of or is based upon
        a Violation that occurs in reliance upon and in conformity with written
        information furnished expressly for use in connection with the
        applicable registration statement by any such Holder, underwriter or
        controlling person; provided, further, that the foregoing indemnity
        agreement with respect to any preliminary prospectus shall not inure to
        the benefit of any Holder or underwriter, or any person controlling such
        Holder or underwriter, from whom the person asserting any such losses,
        claims, damages or liabilities purchased securities in the offering, if
        a copy of the prospectus (as then amended or supplemented if the Company
        shall have furnished any amendments or supplements thereto) was not sent
        or given by or on behalf of such Holder or underwriter to such person,
        if required by law so to have been delivered, at or prior to the written
        confirmation of the sale of the securities to such person, and if the
        prospectus (as so amended or supplemented) would have cured the defect
        giving rise to such loss, claim, damage or liability. Such indemnity
        shall remain in full force and effect regardless of any investigation
        made by or on behalf of any Holder or any other person entitled to
        indemnification pursuant to this Section 5.8(a) and shall survive the
        transfer of such securities by any Holder.

                      (b) To the extent permitted by law, each selling Holder,
        on a several and not joint basis, will indemnify and hold harmless the
        Company, each of its directors, each of its officers who has signed the
        registration statement, each person, if any, who controls the Company
        within the meaning of the Securities Act, legal counsel and accountants
        for the Company, any underwriter, any other Holder selling securities in
        such registration statement and any controlling person of any such
        underwriter or other Holder, against any losses, claims, damages,
        expenses or liabilities (joint or several) (or actions, proceedings or
        settlements in respect thereof) to which any of the foregoing persons
        may become subject, under the Securities Act, the Exchange Act or any
        state or foreign securities Laws, insofar as such losses, claims,
        damages or liabilities (or actions, proceedings or settlements in
        respect thereto) arise out of or are based upon any Violation (but
        excluding clause (iii) of the definition thereof), in each case to the
        extent (and only to the extent) that such Violation occurs in reliance
        upon and in conformity with written information furnished by such Holder
        expressly for use in connection with the applicable registration
        statement; and each such Holder will reimburse any person intended to be
        indemnified pursuant to this Section 5.8(b) for any legal or other
        expenses reasonably incurred by such person in connection with
        investigating or defending any such loss, claim, damage, liability or
        action; provided, however, that the indemnity agreement contained in
        this Section 5.8(b) shall not apply to amounts paid in settlement of any
        such loss, claim, damage, liability or action if such settlement is
        effected without the consent of such Holder (which consent shall not be
        unreasonably withheld, delayed or conditioned); provided, further, that
        in no event shall any indemnity under this Section 5.8(b) exceed the net
        proceeds from the offering received by such Holder. Such indemnity shall
        remain in full force and effect regardless of any investigation made by
        or on behalf of the Company or any such director, officer or controlling
        person and shall survive the transfer of such securities by any Holder.


                                       28


                      (c) Promptly after receipt by an indemnified party under
        this Section 5.8 of written notice of the commencement of any action
        (including any governmental action), such indemnified party will, if a
        claim in respect thereof is to be made against any indemnifying party
        under this Section 5.8, deliver to the indemnifying party a written
        notice of the commencement thereof and the indemnifying party shall have
        the right to participate in, and, to the extent the indemnifying party
        so desires, jointly with any other indemnifying party similarly noticed,
        to assume the defense thereof with counsel mutually satisfactory to the
        parties; provided, however, that an indemnified party (together with all
        other indemnified parties that may be represented without conflict by
        one counsel) shall have the right to retain one separate counsel, with
        the reasonable fees and expenses to be paid by the indemnifying party,
        if representation of such indemnified party by the counsel retained by
        the indemnifying party would be inappropriate due to actual or potential
        differing interests between such indemnified party and any other party
        represented by such counsel in such proceeding. The failure to deliver
        written notice to the indemnifying party within a reasonable time of the
        commencement of any such action, if materially prejudicial to its
        ability to defend such action, shall relieve such indemnifying party of
        any liability to the indemnified party under this Section 5.8 to the
        extent of such prejudice, but the omission to so deliver written notice
        to the indemnifying party will not relieve it of any liability that it
        may have to any indemnified party otherwise than under this Section 5.8.
        No indemnifying party, in the defense of any such claim or action,
        shall, except with the consent of each indemnified party, consent to
        entry of any judgment or enter into any settlement that does not include
        as an unconditional term thereof the giving by claimant or plaintiff to
        such indemnified party of a full and unconditional release from all
        liability in respect of such claim or action, or which contains any
        admission of liability or responsibility with respect to such
        indemnified party.

                      (d) If the indemnification provided for in this Section
        5.8 is held by a court of competent jurisdiction to be unavailable to an
        indemnified party with respect to any loss, liability, claim, damage or
        expense referred to herein, then the indemnifying party, in lieu of
        indemnifying such indemnified party hereunder, shall contribute to the
        amount paid or payable by such indemnified party as a result of such
        loss, liability, claim, damage or expense in such proportion as is
        appropriate to reflect the relative fault of and, except as to the
        Company where the Company does not participate in the offering, the
        relative benefits received by the indemnifying party on the one hand and
        of the indemnified party on the other in connection with the statements
        or omissions that resulted in such loss, liability, claim, damage or
        expense, as well as any other relevant equitable considerations;
        provided that no person guilty of fraud shall be entitled to
        contribution. The relative fault of the indemnifying party and of the
        indemnified party shall be determined by reference to, among other
        things, whether the untrue or alleged untrue statement of a material
        fact or the omission or alleged omission to state a material fact
        relates to information supplied by the indemnifying party or by the
        indemnified party and the parties' relative intent, knowledge, access to
        information, and opportunity to correct or prevent such


                                       29


        statement or omission. The relative benefits received by the
        indemnifying party and the indemnified party shall be determined by
        reference to the net proceeds and underwriting discounts and commissions
        from the offering received by each such party. In no event shall any
        contribution under this Section 5.8(d) exceed the net proceeds from the
        offering received by such Holder, less any amounts paid under Section
        5.8(b).

                      (e) The obligations of the Company and Holders under this
        Section 5.8 shall survive the completion of any offering of Registrable
        Securities under this Article 5.

                      (f) Indemnification similar to that specified in this
        Section 5.8 (with appropriate modifications) shall be given by the
        Company and each seller of Registrable Securities with respect to any
        required registration (other than under the Securities Act) or other
        qualification of such Registrable Securities under any Law or regulation
        of any Governmental Entity other than the Securities Act.

                      (g) Any indemnification required to be made by an
        indemnifying party pursuant to this Section 5.8 shall be made by
        periodic payments to the indemnified party during the course of the
        action or proceeding, as and when bills are received by such
        indemnifying party with respect to an indemnifiable loss claim, damage,
        expense or liability incurred by such indemnified party.

                      (h) The obligations of the parties under this Section 5.8
        shall be in addition to any liability which any party may otherwise have
        to any other party.

               5.9. "Market Stand-Off" Agreement. If requested by the Company or
the representative of the underwriters of Common Stock (or other securities) of
the Company, each Holder shall not sell or otherwise transfer or dispose of any
Common Stock (or any other securities convertible into Common Stock) of the
Company held by such Holder (other than those included in the registration) for
a period specified by the representative of the underwriters not to exceed
ninety (90) days following the effective date of a registration statement of the
Company filed under the Securities Act; provided that all officers and directors
of the Company enter into similar agreements. Each Holder agrees to execute and
deliver such other agreements as may be reasonably requested by the Company or
the underwriter which are consistent with the foregoing or which are necessary
to give further effect thereto. The obligations described in this Section 5.9
shall not apply to a Designated Registration. The Company may impose
stop-transfer instructions with respect to the shares of Common Stock subject to
the foregoing restriction until the end of such period, not to exceed a ninety
(90) day period.


                                       30


                                    ARTICLE 6

                                    COVENANTS

               6.1. Further Actions. Following the execution of this Agreement,
each of the parties hereto shall execute and deliver such instruments and take
such other actions as may reasonably be required to (i) carry out the intent of
this Agreement and the other Transaction Documents and (ii) consummate the
Exchange; provided that no Holder shall be required to incur any expense,
liability or other monetary obligation with respect thereto.

               6.2. Proxy Statement. The Company has prepared and filed with the
SEC a proxy statement (the "Proxy Statement") for purposes of obtaining the
approval of the shareholders of the Company to amend the Articles of
Incorporation of the Company to increase the authorized number of shares of
Common Stock to effect the Automatic Conversion (the "Amendment"). The Company
shall provide the Holders with a copy of such filing and any related filings
with the SEC. The Company will use commercially reasonable efforts to cause the
Proxy Statement to be cleared by the SEC and mailed to its stockholders at the
earliest practicable date.

               6.3. Meetings. The Company shall take all lawful action to (i)
cause a special meeting of its stockholders to be duly called and held as soon
as practicable after the date of this Agreement for the purpose of voting on and
obtaining the approval of the shareholders of the Amendment and (ii) solicit
proxies from its stockholders to obtain the vote required under Washington Law
and in accordance with the Articles of Incorporation of the Company for the
approval and adoption of the Amendment. The Board of Directors of the Company
shall recommend approval and adoption of the Amendment and shall not withdraw,
amend or modify in any manner such recommendation (or announce publicly its
intention to do so).

               6.4. Transferability. The Holders shall not sell, assign or
otherwise transfer the Preferred Stock issued hereunder without the prior
written consent of the Company, which consent shall not be unreasonably
withheld, delayed or conditioned; provided, however, that the Holders may sell,
assign or otherwise transfer the Preferred Stock without the Company's prior
written consent to any purchaser or transferee if such transfer is in compliance
with applicable securities Laws and any other Laws applicable to such transfer,
the purchaser or transferee agrees in writing to be bound by the terms of this
Agreement and the other Transaction Documents, and the transferring Holder
provides notice to the other Holders and the Company as contemplated in Section
9.4. The Common Stock, the New Notes and the PIK Notes shall be transferable
without the Company's consent upon compliance with all applicable securities
Laws and any other Laws applicable to such transfer; provided, however, that no
shares of Common Stock may be transferred unless the transferee agrees in
writing to be bound by the terms of this Agreement and the other Transaction
Documents, and the transferring Holder provides notice to the other Holders and
the Company as contemplated in Section 9.4.


                                       31


               6.5. Voting Agreement. Each of the Holders, the Chief Executive
Officer of the Company, Donald A. Wright (the "CEO"), and the Chief Operating
Officer of the Company, Werner Hafelfinger (the "COO", who together with the CEO
shall be parties to this Agreement solely for purposes of Sections 6.5, 6.6 and
6.7 and are referred to each as a "Voting Officer"), hereby agrees to vote, or
cause to be voted, or if applicable, execute written consents with respect to,
all shares of capital stock of the Company held by such Holder or Voting
Officer, respectively, and entitled to vote, or that such Holder or Voting
Officer, respectively, has the power to vote or in respect of which such Holder
or Voting Officer, respectively, has the power to direct the vote, in favor of
approving the Amendment, in any and all votes or solicitations of written
consents with respect to the approval of the Amendment, or any other
circumstances upon which a vote, consent or other approval is sought with
respect to the approval of the Amendment.

               6.6. Board of Directors. For so long as the Holders own
securities having, in the aggregate, at least 33.3% of the outstanding voting
power of the Company and subject to Section 6.6.3, the Board of Directors will
consist of (i) three persons nominated by GSCP Recovery, Inc. and GSC Recovery
II, L.P. or their affiliates, (ii) one person nominated by MW Post Advisory
Group L.L.C. or its affiliates and (iii) the Chief Executive Officer of the
Company. Each person nominated for election as a director of the Company
pursuant to this Section 6.6, and each person nominated for election as a
director of the Company in lieu of any such person pursuant to Section 6.6.1(c),
or to fill a vacancy on the Board of Directors created by such person pursuant
to Section 6.6.2, is referred to herein as a "Holder Nominee."

                      6.6.1. Election of Directors.

                      (a) For so long as the Holders own securities having, the
        aggregate at least 33.3% of the outstanding voting power of the Company,
        each Holder agrees to take all actions necessary to cause the Holder
        Nominees to be elected as directors of the Company in any and all
        elections of directors.

                      (b) Each Voting Officer agrees to take all actions
        necessary to cause the Holder Nominees to be elected as directors of the
        Company at the next election of directors or upon the next solicitation
        of written consents, or upon the next occasion upon which a vote,
        consent or other approval is sought, with respect to the election of
        directors, following the date of this Agreement.

                      (c) For so long as the Holders own securities having, in
        the aggregate, at least 33.3% of the outstanding voting power of the
        Company and without limiting the generality or effect of Section
        6.6.1(a), each Holder will vote or cause to be voted, or if applicable
        execute written consents with respect to, all shares of capital stock of
        the Company held by such Holder and entitled to vote, or that such
        Holder has the power to vote or in respect of which such Holder has the
        power to direct the vote, in favor of the election of the Holder
        Nominees to the Board of Directors of the Company in any and all
        elections of, or solicitations of written consents, or in any other
        circumstances upon which a


                                       32


        vote, consent or other approval is sought, with respect to the election
        of directors.

                      (d) Each Voting Officer will vote or cause to be voted, or
        if applicable execute written consents with respect to, all shares of
        capital stock of the Company held by such Voting Officer and entitled to
        vote, or that such Voting Officer has the power to vote or in respect of
        which such Voting Officer has the power to direct the vote, in favor of
        the election of the Holder Nominees to the Board of Directors of the
        Company at the next election of directors or upon the next solicitation
        of written consents, or upon the next occasion upon which a vote,
        consent or other approval is sought, with respect to the election of
        directors, following the date of this Agreement.

                      (e) Without limiting the generality or effect of this
        Section 6.6.1, for so long as the Holders have the rights contemplated
        by Section 6.6, at each meeting of the shareholders of the Company at
        which the term of office of any Holder Nominee (an "Expiring Nominee")
        expires, each such Expiring Nominee will be nominated for election to
        another term as a director of the Company and will be included in the
        slate of nominees recommended to shareholders of the Company for
        election as directors of the Company in any proxy statement prepared by
        or on behalf of the Company with respect to such meeting; provided that,
        if any Holder or Holders that nominated any Holder Nominee that is an
        Expiring Nominee so specify or if any Expiring Nominee declines or is
        unable to accept the nomination, another individual designated by the
        Holder or Holders that nominated such Expiring Nominee, in lieu of such
        Expiring Nominee, will be nominated for election as a director of the
        Company and will be included in the slate of nominees recommended to
        shareholders of the Company for election as directors of the Company in
        any such proxy statement.

                      (f) Without limiting any other provision of this Agreement
        imposing obligations on transferees generally, it is expressly agreed
        that the voting and related obligations contained in this Section 6.6
        shall bind any transferee of any Holder or of any Voting Officer and no
        transfer by such Holder or Voting Officer shall be valid until such
        Holder or Voting Officer has delivered written evidence reasonably
        satisfactory to the remaining Holders executed by the transferee
        obligating such transferee to be bound by the terms contained in this
        Section 6.6.

                      6.6.2. Vacancies. Except as contemplated in Section 6.6,
each director will hold his or her office as a director of the Company for such
term as is provided in the Company's Articles of Incorporation and Bylaws or
until his or her death, restriction or removal from the Board of Directors or
until his or her successor has been duly elected and qualified in accordance
with the provisions of this Agreement, the Company's Articles of Incorporation
and Bylaws and applicable law. If any Holder Nominee ceases to serve as a
director of the Company for any reason during his or her term, a nominee for the
vacancy resulting therefrom will be designated by the Holder or Holders that
nominated such director.


                                       33


                      6.6.3. Removal of Holder Nominees. For so long as the
Holders own securities having, in the aggregate, at least 33.3% of the
outstanding voting power of the Company, if any Holder or Holders that nominated
any Holder Nominee shall notify the Company in writing of its desire to have
removed from the Board of Directors, with or without cause, a Holder Nominee,
each Holder will, if necessary, subject to all applicable requirements of law,
use its respective best efforts to take or cause to be taken all such action as
may be required to remove such Holder Nominee from the Board of Directors.
Subject to the immediately preceding sentence, none of the Holders will vote or
cause to be voted, or execute written consents with respect to, any shares of
the Company's capital stock that it has the power to vote or in respect of which
it has the power to direct the vote for the removal of any Holder Nominee
nominated by any other Holder without the prior written consent of the Holder or
Holders that nominated such Holder Nominee.

               6.7. Exercise of Specified Rights. Each of the Voting Officers
hereby agrees that he or she will not exercise or cause to be exercised, in
whole or in part, or take any other similar action having the effect of such
exercise, any Specified Rights which such Voting Officer has, or may be entitled
to, except for options granted to Donald A. Wright pursuant to the 2002 Stock
Option Plan, and each of the Voting Officers hereby agrees to enter into and
execute any agreement or other documentation reasonably requested by the Holders
to effect the covenants contained in this Section 6.7.

               6.8. No Voting Obligations - HBK Master Fund L.P. Solely for
purposes of Sections 6.5, 6.6 and 6.7 above, the term "Holders" shall not
include HBK Master Fund L.P. and, accordingly, HBK Master Fund L.P. shall not be
entitled to any of the rights or remedies, nor subject to any of the obligations
or restrictions, contemplated in Sections 6.5, 6.6 and 6.7.

               6.9. Grant of Stock Options. The Company hereby agrees to grant
to Donald A. Wright one or more options to purchase the Company's Common Stock
(the "New Options"), in consideration for cancellation by Mr. Wright of his
existing unexercised stock options of the Company (such cancellation to be
effective as of the date of grant of the New Options). The New Options shall be
exercisable for five percent (5%) of the Company's Common Stock on a
fully-diluted basis immediately following the Exchange. The New Options shall
vest over three (3) years and may be exercised over a ten-year term. The New
Options shall contain exercise prices designed to incentivize Mr. Wright's
performance as President and Chief Executive Officer of the Company, and shall
be based upon reasonable targets established by the Compensation Committee of
the Board of Directors after discussion with Mr. Wright, in accordance with the
targets previously discussed between Mr. Wright and the Holders.


                                       34


                                    ARTICLE 7

                                     CLOSING

               7.1. Closing. The closing (the "Closing") of the transactions
contemplated by this Agreement and the other Transaction Documents and the
deliveries contemplated in Sections 7.2 and 7.3 hereof are taking place as of
the date hereof at the offices of Milbank Tweed Hadley & McCloy, One Chase
Manhattan Plaza, New York, NY 10005. All of the securities to be delivered at
Closing as contemplated in Sections 7.2 and 7.3 below shall be dated as of the
date hereof.

               7.2. Deliveries by the Company. The Company is delivering to the
Holders at the Closing, the following:

                             (i) evidence reasonably satisfactory to the Holders
                      that The Depository Trust Company ("DTC") has recorded in
                      its book-entry system as holders, in the aggregate, of the
                      number of shares of Common Stock set forth on Exhibit A
                      for each Holder, the DTC Participants identified to the
                      Company by such Holder;

                             (ii) evidence reasonably satisfactory to the
                      Holders that DTC has recorded in its book-entry system as
                      holders, in the aggregate, of the number of shares of
                      Preferred Stock set forth on Exhibit A for each Holder,
                      the DTC Participants identified to the Company by such
                      Holder;

                             (iii) evidence reasonably satisfactory to the
                      Holders that the Company has delivered and DTC has
                      received one or more global certificates representing
                      $15,000,000 aggregate principal amount of New Notes and
                      has recorded in its book-entry system as holders, in the
                      aggregate, of the aggregate principal amount of the New
                      Notes set forth on Exhibit A for each Holder, the DTC
                      Participants identified by such Holder;

                             (iv) the New Notes Indenture, duly executed by the
                      Company, each Subsidiary Guarantor, and the trustee with
                      respect thereto, attached hereto as Exhibit C;

                             (v) evidence, reasonably satisfactory to the
                      Holders, that all consents, approvals and waivers listed
                      in Schedules 3.1.3 and 3.1.4 required in connection with
                      the Exchange and the transactions contemplated by this
                      Agreement and the other Transaction Documents, have been
                      obtained without the imposition of any non-customary
                      limitation, requirement or condition, and all waiting
                      periods the expiration of which are required under
                      applicable Law for such consummation have expired or been
                      terminated;


                                       35


                             (vi) written opinions of counsel for the Company in
                      the form attached hereto as Exhibit D and Exhibit E;

                             (vii) a written opinion reasonably acceptable to
                      the Holders from Houlihan Lokey Howard & Zukin Financial
                      Advisors, Inc. as to the fairness of the transactions
                      contemplated by this Agreement and the other Transaction
                      Documents to the Company's existing shareholders not
                      participating in the Exchange;

                             (viii) an amendment to his existing employment
                      agreement executed by Donald A. Wright and the Company in
                      the form attached hereto as Exhibit F;

                             (ix) a copy of the supplemental indenture attached
                      hereto as Exhibit G (the "Supplemental Indenture")
                      executed by the Company and the trustee pursuant thereto;

                             (x) the Guarantees duly executed by each of the
                      Subsidiary Guarantors, substantially in the form of
                      Exhibit H hereto; and

                             (xi) a fully executed Note Purchase Agreement
                      executed by the Company, Jefferies & Company, Inc. and
                      First Union National Bank, as collateral agent in the form
                      attached hereto as Exhibit I.

               7.3. Deliveries by the Holders. The Holders are delivering to
the Company at the Closing, the following:

                             (i) the Old Notes held by each of the Holders (via
                      DTC's book-entry system);

                             (ii) evidence reasonably satisfactory to the
                      Company that each of the Holders has delivered
                      instructions to its respective DTC Participants with
                      respect to the tendering of the Old Notes held by such DTC
                      Participant for the benefit of such Holder and such
                      Holder's consent to the Supplemental Indenture;

                             (iii) their written consent to the Company entering
                      into the Supplemental Indenture; and

                             (iv) evidence, reasonably satisfactory to the
                      Company, that all consents, approvals and waivers listed
                      in Section 4.1.3, required in connection with the Exchange
                      and the transactions contemplated by this Agreement and
                      the other Transaction Documents, have been obtained
                      without the imposition of any non-customary limitation,
                      requirement or condition, and all waiting


                                       36


                      periods the expiration of which are required under
                      applicable Law for such consummation have expired or been
                      terminated.

                                    ARTICLE 8

                                    SURVIVAL

               8.1. Survival. The representations and warranties contained in
this Agreement shall survive the execution and delivery of this Agreement and
the Closing for a period of one (1) year, regardless of any investigation made
by the parties hereto or by any person on their behalf.

                                    ARTICLE 9

                                  MISCELLANEOUS

               9.1. Entirety. This Agreement and the other Transaction Documents
to be delivered in connection herewith embody the entire agreement among the
parties with respect to the subject matter hereof and thereof, and all other
prior agreements between the parties with respect thereto are hereby and thereby
superseded in their entirety.

               9.2. Counterparts. Any number of counterparts of this Agreement
may be executed and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute one instrument.

               9.3. Fees and Expenses. Except as otherwise provided herein and
for that certain letter agreement dated August 21, 2001 between the Company and
Dewey Ballantine LLP, the parties hereto shall each bear their respective
expenses incurred in connection with the negotiation, preparation, execution,
and performance of this Agreement, the other Transaction Documents and the
transactions contemplated hereby and thereby, including without limitation, all
fees and expenses of agents, representatives, investment bankers, counsel and
accountants.

               9.4. Notices and Waivers. All notices, requests, instructions,
claims, demands, consents and other communications required or permitted to be
given under this Agreement or the other Transaction Documents shall be in
writing and shall be deemed to have been duly given on the date delivered by
hand or by courier service such as Federal Express, or by other messenger (or,
if delivery is refused, upon presentment) or upon receipt by facsimile
transmission (with confirmation), or upon delivery by registered or certified
mail (return receipt requested), postage prepaid, to the parties at the
following addresses (or to such other persons or addresses as the person to whom
notice is given may have previously furnished to the other parties hereto in
writing in the manner set forth above (provided that notice of any change in
address shall be effective only upon receipt thereof)):


                                       37


                      (a) If to the Company:

                             Pacific Aerospace & Electronics, Inc.
                             430 Old Station Road, Third Floor
                             Wenatchee, WA 98801
                             Telephone: (509) 667-9600
                             Facsimile: (509) 667-9696
                             Attention: Donald A. Wright

                             with a copy to:

                             Milbank Tweed Hadley & McCloy
                             601 South Figueroa Street
                             Los Angeles, CA 90017
                             Telephone: (213) 892-4333
                             Facsimile: (213) 892-4733
                             Attention: Kenneth J. Baronsky

                      (b) If to the Holders:

                             At the addresses set forth opposite
                             each Holders' name in Exhibit A
                             hereto

                             with a copy to:

                             Dewey Ballantine LLP
                             1301 Avenue of the Americas
                             New York, NY 10019
                             Telephone: (212) 259-8000
                             Facsimile: (212) 259-6333
                             Attention: Jonathan L. Freedman
                                        Michael J. Sage

               9.5. Table of Contents and Captions. The table of contents, table
of exhibits and captions contained in this Agreement are solely for convenient
reference and shall not be deemed to affect the meaning or interpretation of any
article, section, or paragraph hereof or thereof.

               9.6. No Assignment. No assignment of this Agreement or of any
rights or obligations hereunder may be made by any party without the prior
written consent of the other party hereto; provided, however, that the Holders
may assign their respective rights and obligations hereunder without the
Company's prior written consent to any assignee if such assignee agrees to be
bound by the terms of this Agreement and the other Transaction Documents.


                                       38


               9.7. Successors and Assigns. This Agreement shall be binding upon
and shall inure to the benefit of and be enforceable by the successors and
permitted assigns of the parties hereto.

               9.8. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, void, or unenforceable, the remainder of the terms, provisions,
covenants and restrictions shall remain in full force and effect and shall in no
way be affected, impaired or invalidated.

               9.9. Applicable Law. This Agreement shall be governed by the laws
of the State of New York applicable to contracts made and to be wholly performed
in the State of New York without giving effect to the principles of conflicts of
laws thereof.

               9.10. Amendment. This Agreement may not be amended, modified or
supplemented and no waivers of or consents to departures from the provisions
hereof may be given unless consented to in writing by all parties hereto. Unless
otherwise specified in such waiver or consent, a waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
it is given.

               9.11. Third Party Beneficiaries. Except as set forth in Section
5.8 hereof, nothing expressed or implied in this Agreement or any agreement
delivered in connection herewith is intended or shall be construed to confer
upon or give to any third party any rights or remedies against any party hereto.
The persons entitled to indemnification pursuant to Section 5.8 are intended
third party beneficiaries of such Section 5.8.

               9.12. Publicity. None of the parties hereto shall issue any press
release or make any public disclosure regarding the transactions contemplated
hereby and by the other Transaction Documents unless such press release or
public disclosure shall be approved by the other parties hereto. Notwithstanding
the foregoing, each of the parties hereto may, in documents required to be filed
by it with the SEC or other Governmental Entity, make such statements with
respect to the transactions contemplated by this Agreement and by the other
Transaction Documents as each may be advised by counsel is legally necessary,
and may make such disclosure as it is advised by its counsel is required by Law.

                            [Signature Pages Follow]



                                       39


               IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be signed in their respective names by their respective duly authorized
representatives, all as of the day and year first above written.

                                        PACIFIC AEROSPACE &
                                           ELECTRONICS, INC.


                                        By: /s/ Donald A. Wright
                                           ------------------------------------
                                           Name: Donald A. Wright
                                           Title: President and Chief Executive
                                                  Officer

                                        DONALD A. WRIGHT
                                        (solely for purposes of Sections 6.5,
                                        6.6, 6.7 and 6.9 hereof)

                                        /s/ Donald A. Wright
                                        ---------------------------------------


                                        WERNER HAFELFINGER
                                        (solely for purposes of Sections 6.5,
                                        6.6 and 6.7 hereof)

                                        /s/ Werner Hafelfinger
                                        ---------------------------------------


                                        AEROMET AMERICA, INC.


                                        By: /s/ Donald A. Wright
                                           ------------------------------------
                                           Name:  Donald A. Wright
                                           Title: Executive Vice President


                                        BALO PRECISION PARTS, INC.


                                        By:  /s/ Donald A. Wright
                                           ------------------------------------
                                           Name:  Donald A. Wright
                                           Title: Executive Vice President



                                        CASHMERE MANUFACTURING CO.,
                                           INC.


                                        By:  /s/ Donald A. Wright
                                           ------------------------------------
                                           Name:  Donald A. Wright
                                           Title: Executive Vice President

                                        CERAMIC DEVICES, INC.


                                        By:  /s/ Donald A. Wright
                                           ------------------------------------
                                           Name:  Donald A. Wright
                                           Title: Executive Vice President

                                        ELECTRONIC SPECIALTY
                                        CORPORATION


                                        By:  /s/ Donald A. Wright
                                           ------------------------------------
                                           Name:  Donald A. Wright
                                           Title: Executive Vice President

                                        NORTHWEST TECHNICAL
                                           INDUSTRIES, INC.


                                        By:  /s/ Donald A. Wright
                                           ------------------------------------
                                           Name:  Donald A. Wright
                                           Title: Executive Vice President

                                        PACIFIC COAST TECHNOLOGIES, INC.


                                        By:  /s/ Donald A. Wright
                                           ------------------------------------
                                           Name:  Donald A. Wright
                                           Title: Executive Vice President

                                        PA&E INTERNATIONAL, INC.


                                        By:  /s/ Donald A. Wright
                                           -----------------------------------
                                           Name:  Donald A. Wright
                                           Title: President


                                        SEISMIC SAFETY PRODUCTS, INC.


                                        By:  /s/ Donald A. Wright
                                           -----------------------------------
                                           Name:  Donald A. Wright
                                           Title: Executive Vice President


                                        SKAGIT ENGINEERING &
                                           MANUFACTURING, INC.


                                        By:  /s/ Donald A. Wright
                                           -----------------------------------
                                           Name:  Donald A. Wright
                                           Title: Executive Vice President



                                        HOLDERS:


                                        GSCP RECOVERY, INC.


                                        By: /s/ Matthew Kaufman
                                           -----------------------------------
                                           Name: Matthew Kaufman
                                           Title: Managing Director


                                        ALLIANCE CAPITAL MANAGEMENT L.P.,
                                        as investment advisor

                                        By:  Alliance Capital Management Corp.

                                        By: /s/ Michael E. Sohr
                                           -----------------------------------
                                           Name: Michael E. Sohr
                                           Title: Vice President


                                        M.W. POST ADVISORY GROUP L.L.C.,
                                        as investment advisor


                                        By: /s/ Carl H. Goldsmith
                                           -----------------------------------
                                           Name: Carl H. Goldsmith
                                           Title: Managing Director


                                        WILLIAM E. SIMON & SONS SPECIAL
                                        SITUATION PARTNERS II, L.P.

                                        By: WILLIAM E. SIMON & SONS SPECIAL
                                            SITUATION PARTNERS II, L.L.C.
                                            ITS GENERAL PARTNER

                                        By: /s/ John E. Klinge
                                           -----------------------------------
                                           Name: John E. Klinge
                                           Title: Authorized Signatory


                                        HBK MASTER FUND L.P.

                                        By: HBK INVESTMENTS L.P.
                                            INVESTMENT MANAGER

                                        By: /s/ William E. Rose
                                           -----------------------------------
                                           Name: William E. Rose
                                           Title: Authorized Signatory



                                        GSC RECOVERY II, L.P.

                                        By:  GSC Recovery II GP, L.P.,
                                             its general partner

                                        By:  GSC RII, LLC,
                                             its general partner

                                        By:  GSCP (NJ) Holdings, L.P.,
                                             its sole member

                                        By:  GSCP (NJ), Inc.,
                                             its general partner


                                        By: /s/ Matthew Kaufman
                                           -----------------------------------
                                           Name: Matthew Kaufman
                                           Title: Managing Director


                     PACIFIC AEROSPACE & ELECTRONICS, INC.

                              AEROMET AMERICA, INC.

                           BALO PRECISION PARTS, INC.

                        CASHMERE MANUFACTURING CO., INC.

                              CERAMIC DEVICES, INC.

                        ELECTRONIC SPECIALTY CORPORATION

                      NORTHWEST TECHNICAL INDUSTRIES, INC.

                        PACIFIC COAST TECHNOLOGIES, INC.

                            PA&E INTERNATIONAL, INC.

                          SEISMIC SAFETY PRODUCTS, INC.

                    SKAGIT ENGINEERING & MANUFACTURING, INC.


                                    SCHEDULES

                                       TO

                               EXCHANGE AGREEMENT

                           DATED AS OF MARCH 19, 2002

      These Schedules are furnished by Pacific Aerospace & Electronics, Inc., a
Washington corporation ("PA&E," "PACIFIC AEROSPACE" or the "COMPANY") as of the
date hereof pursuant to and as part of the Exchange Agreement dated as of March
19, 2002 (the "AGREEMENT"), by and among Aeromet America, Inc., Balo Precision
Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic
Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast
Technologies Inc., PA&E International, Inc., Seismic Safety Products, Inc., and
Skagit Engineering & Manufacturing Inc. (collectively, the "SUBSIDIARY
GUARANTORS") and the holders of the outstanding 11 1/4% senior subordinated
notes due 2005 of the Company participating in the Exchange (the "HOLDERS").
Unless otherwise provided herein, the defined terms in these Schedules have the
same meaning as under the Agreement. All attachments hereto are incorporated
into these Schedules.

      Matters disclosed for the purpose of one section of these Schedules shall
constitute disclosure of such matters for the purposes of other sections only in
the event it is manifestly obvious that such matters apply. The duplication or
cross-referencing of any disclosures made herein shall not, in any instance or
in the aggregate, effect a waiver of the foregoing statement. Headings have been
provided for the sections of these Schedules for convenience of reference only
and shall to no extent have the effect of amending or changing any express
description of the sections set forth in the Agreement.




      These Schedules relate to certain matters concerning the disclosures
required and transactions contemplated by the Agreement. These Schedules are
qualified in their entirety by reference to specific provisions of the
Agreement, and are not intended to constitute, and shall not be construed as an
admission that such information is material except to the extent required by the
Agreement.

      Copies of all agreements, contracts and documents referenced in this
Disclosure Schedule have been made available for inspection by the Holders.




                                 SCHEDULE 3.1.3

                   COMPANY CONSENTS AND APPROVALS (GOVERNMENT)

      1.    SEC filings regarding the Exchange and the securities issued
            therein.

      2.    Filing of the Certificate of Designation for the Series C
            Convertible Preferred Stock and an amendment to the Company's
            Articles of Incorporation to increase the number of shares of Common
            Stock authorized for issuance, each with the State of Washington
            Secretary of State.

      3.    Securities filings that may be required under state blue sky laws.




                                 SCHEDULE 3.1.4

                                  NO VIOLATIONS

      Currently exercisable warrants issued by the Company contain provisions
requiring the Company to reserve at all times a sufficient number of shares of
Common Stock to effect the exercise of such warrants. For the time between the
date of the Exchange and the effective filing of an amendment to the Company's
Articles of Incorporation increasing the number of shares of authorized Common
Stock the Company may issue, the Company will not have a sufficient number of
shares of Common Stock reserved if such warrants are exercised in technical
breach of such warrant agreements. All such warrant agreements contain
provisions that state the Company must take action as quickly as possible to
again have a sufficient amount of Common Stock reserved for exercise of the
warrants.

      The Company has obtained waivers from both Strong River and Bay Harbor for
the covenant set forth in their respective warrants requiring the Company to
reserve at all times and keep available out of the aggregate of its authorized
but unissued Common Stock the number of Warrant Shares which are then issuable
and deliverable upon the exercise of the Warrant. The waivers are effective
until such time as the Company has amended its Articles of Incorporation to
increase its authorized shares of Common Stock as required in the Restructuring.
However, no waiver has been obtained from DDJ Capital Management, LLC ("DDJ") as
of the date hereof, under the warrants issued under a warrant agreement dated
March 1, 2001 between DDJ as agent for certain lenders (the "Holders"), the
Holders and the Company.

      The Exchange will violate the Company's existing senior secured loan
documents (under which DDJ acts as agent), under which the Company is already in
payment default.

      The Company has been notified by KeyBank National Association ("KeyBank")
that it is not in compliance with certain covenants of loans that are secured by
the Company's headquarters building and other assets of the Company and its
subsidiaries. Such defaults will not be cured by the completion of the Exchange.
KeyBank has agreed, however, pursuant to a forbearance letter dated March 15,
2002, to continue to forbear from exercising its remedies under its two
Promissory Notes until May 31, 2003. Such forbearance is conditioned upon there
being no loan or lease payment delinquency or defaults after April 1, 2002. The
Company has obtained the consent of KeyBank to the granting of certain security
interests in connection with the Exchange and the Company's new senior secured
financing.




                                 SCHEDULE 3.1.6

                    LITIGATION AND CLAIMS AGAINST THE COMPANY

LITIGATION

      The Company has the three following litigation matters outstanding:

            1.    BONKOWSKI V. PACIFIC AEROSPACE & ELECTRONICS, INC., CHELAN
                  COUNTY (WA) SUPERIOR COURT CAUSE NO. 00-2-00523-1

            Date filed: June 2000

            Location: Wenatchee, WA

            Nature of dispute: A former employee whose position was eliminated
in 1999 has asserted claims for, among other things, unlawful termination and
age discrimination. This matter is in the discovery stage, and trial is
currently scheduled on June 17, 2002. The Company took Bonkowski's deposition on
January 15 and 16, 2002, and is in the process of preparing a summary judgment
motion.

            Amount at issue: Unknown

            Settlement: The Company has made a settlement offer of $10,000,
which was rejected. The plaintiff also agreed to mediate and then changed his
mind.

            2.    BOTHELL, d/b/a ATLAS TECHNOLOGIES V. HITACHI ZOSEN CORP.,
NORTHWEST TECHNICAL INDUSTRIES, INC., AND K. SHIMOTSUMA ASSOCIATES, INC.,
JEFFERSON COUNTY (WA) SUPERIOR COURT CAUSE NO. 99-2-00230-9

            Date filed: August 1999

            Location: Port Angeles, WA

            Nature of dispute: Northwest Technical Industries, Inc. ("NTI"), a
wholly owned subsidiary of the Company, was sued on a 1994/1995 contract under
which NTI bonded metals for vacuum flanges produced by Atlas for Hitachi prior
to the Company's acquisition of NTI. Hitachi did not accept or pay for all of
the flanges. Atlas claims that, if it is proved that the flanges were defective,
NTI must have provided Atlas with defective materials and that NTI violated
provisions of a confidentiality agreement. NTI produced discovery materials for
plaintiff's counsel in approximately November 1999, which plaintiff's counsel
has yet to pick up. A trial date was set recently for Fall 2002 after the Court
threatened to dismiss the case for lack of activity, but the plaintiff's counsel
has not yet followed up regarding discovery.

            Amount at issue: Unknown




            Settlement: N/A

            3.    SUPERIOR FORGE, INC. V. PACIFIC AEROSPACE & ELECTRONICS, INC.,
SUPERIOR COURT OF THE STATE OF CALIFORNIA, COUNTY OF ORANGE, CENTRAL JUSTICE
CENTER, CASE NO. 02CC02864

            Served on PA&E February 19, 2002

            Collection claim for $51,631.04





                                 SCHEDULE 3.1.7

                               OUTSTANDING OPTIONS

                                        
      1.    Authorized Capital:            100,000,000 shares of common stock,
                                           $.001 par value
                                           5,000,000 shares of preferred stock,
                                           $.001 par value

      2.    Issued and Outstanding:        39,315,309 shares of common stock
                                           No shares of preferred stock

      3.    Options Outstanding under Stock Incentive Plan: 3,599,948

      4.    Warrants Outstanding:





- ---------------------------------------------------------------------------------------------------------------
DATE ISSUED       WARRANT HOLDER           WARRANT       WARRANT      EXERCISE     VESTED     NON    EXPIRATION
                                           # /OTHER      SHARES       PRICE                  VESTED     DATE
                                           INFO
- ---------------------------------------------------------------------------------------------------------------
    PUBLIC        WARRANTS
- ---------------------------------------------------------------------------------------------------------------
                                                                                
     6/01/96      Interwest Transfer     693259-11-1    2,295,000      4.6875                  0       6/15/03
                    Co.
- ---------------------------------------------------------------------------------------------------------------
   NON-PUBLIC     WARRANTS
- ---------------------------------------------------------------------------------------------------------------
    11/30/96(1)   Donald A. Wright           001          100,000     $2.0000     100,000      0      12/24/04
- ---------------------------------------------------------------------------------------------------------------
    11/30/96(1)   Nick A. Gerde              001           25,000     $2.0000      25,000      0      02/01/05
- ---------------------------------------------------------------------------------------------------------------
    11/30/96(2)   Edward A. Taylor           003           35,000     $2.0000      35,000      0      05/31/02
- ---------------------------------------------------------------------------------------------------------------
    06/03/97      Gregory K. Smith                         20,000     $3.4500      50,000      0      06/03/02
- ---------------------------------------------------------------------------------------------------------------
    06/03/97      Nestor Wiegand                            5,000     $3.4500       5,000      0      06/03/02
- ---------------------------------------------------------------------------------------------------------------
    04/17/00      Continental
                  Capital & Equity
                  Corporation                CCEC1         50,000     $3.5000      50,000      0      04/17/03
- ---------------------------------------------------------------------------------------------------------------
    04/17/00      Continental
                  Capital & Equity
                  Corporation                CCEC2         50,000     $5.5000      50,000      0      04/17/03
- ---------------------------------------------------------------------------------------------------------------
    04/17/00      Continental
                  Capital & Equity
                  Corporation                CCEC3         50,000     $7.5000      50,000      0      04/17/03
- ---------------------------------------------------------------------------------------------------------------
    04/17/00      Continental
                  Capital & Equity
                  Corporation                CCEC4         50,000     $9.5000      50,000      0      04/17/03
- ---------------------------------------------------------------------------------------------------------------
    07/27/00      Rochon Capital
                  Group, Ltd.                 RCG1         79,150     $1.7688      79,150      0      07/26/04
- ---------------------------------------------------------------------------------------------------------------
    07/27/00      Strong River
                  Investments                  CW1        192,500     $2.0100     192,500      0      07/27/03
- ---------------------------------------------------------------------------------------------------------------
    07/27/00      Bay Harbor
                  Investments, Inc.           CW 2        192,500     $2.0100     192,500      0      07/27/03
- ---------------------------------------------------------------------------------------------------------------







- ---------------------------------------------------------------------------------------------------------------
DATE ISSUED       WARRANT HOLDER           WARRANT       WARRANT      EXERCISE     VESTED     NON    EXPIRATION
                                           # /OTHER      SHARES       PRICE                  VESTED     DATE
                                           INFO
- ---------------------------------------------------------------------------------------------------------------
                                                                                
                  B-III Capital              DDJ-1      1,883,923     $0.0010     1,883,923    0     03/01/06
    03/01/01      Partners, L.P.
- ---------------------------------------------------------------------------------------------------------------
    03/01/01      B-III A Capital            DDJ-2        807,396     $0.0010       807,396    0     03/01/06
                  Partners, L.P.
- ---------------------------------------------------------------------------------------------------------------
    03/01/01      DDJ Canadian High          DDJ-3        538,263     $0.0010       538,263    0     03/01/06
                  Yield Fund
- ---------------------------------------------------------------------------------------------------------------
    03/01/01      State Street Bank          DDJ-4        807,396     $0.0010       807,396          03/01/06
                  & Trust, Custodian
- ---------------------------------------------------------------------------------------------------------------
    04/09/01      First Albany               FAC-1        692,074     $0.4062       692,074          04/09/06
                  Corporation
- ---------------------------------------------------------------------------------------------------------------





                                 SCHEDULE 3.1.8

                      SEC REPORTS AND FINANCIAL STATEMENTS

      KPMG's report on the Company's consolidated financial statements for the
fiscal year ended May 31, 2001 was a disclaimer of opinion.




                                 SCHEDULE 3.1.9

                             MATERIAL ADVERSE EFFECT

      The Company failed to make a semi-annual interest payment of approximately
$3.6 million as required under the terms of its 11 1/4% Senior Subordinated
Notes (the "Old Notes") that was due on August 1, 2001, and the Company also
failed to make that payment within the 30-day grace period that expired on
August 31, 2001. The Company also failed to make a payment of interest that was
due on the Old Notes on February 1, 2002 and did not make such payment during
the 30-day grace period provided therein

      In addition, the Company did not make a quarterly interest payment of
approximately $618,000 that was due on its existing senior secured loan (the
"Senior Debt") on September 30, 2001, or before the expiration of the 5-day
grace period. The Company entered into a forbearance agreement with the holders
of the Senior Debt to waive payment defaults and certain other defaults on the
Senior Debt. However, this agreement expired on December 31, 2001. Additionally,
the Company failed to repay the Senior Debt on December 31, 2001, its maturity
debt.

      The Company has been notified by KeyBank National Association ("KeyBank")
that it is not in compliance with certain covenants of loans that are secured by
the Company's headquarters building and other assets of the Company and its
subsidiaries. Such defaults will not be cured by the completion of the Exchange.
KeyBank has agreed, however, pursuant to a forbearance letter dated March 15,
2002, to continue to forbear from exercising its remedies under its two
Promissory Notes until May 31, 2003. Such forbearance is conditioned upon there
being no loan or lease payment delinquency or defaults after April 1, 2002. The
Company has obtained the consent of KeyBank to the granting of certain security
interests in connection with the Exchange and the Company's new senior secured
financing.

      On February 28, 2002, Sheryl A. Symonds, who served as Vice President
Administration and General Counsel, left her employment with the Company. Werner
Hafelfinger who is currently the Vice President Operations and Chief Operating
Officer, will continue serving as the Vice President Operations and Chief
Operating Officer until May 17, 2002. After those dates, the Company will be
operating without several of its key personnel.

      There has been an overall economic decline in the Aerospace industry due
to both the recent economic downturn and the September 11, 2001 attacks since
May 31, 2001 that has contributed significantly to poor operating results.




                                 SCHEDULE 3.1.10

                               MATERIAL CONTRACTS

The Company is in default under the following Material Contracts:

      1.    The Old Indenture;

      2.    The Term Loan Agreement governing the Company's Senior Debt;

      3.    KeyBank Deed of Trust on corporate headquarters dated September 30,
            1998 and the related Promissory Note dated as of September 30. 1998;

      4.    KeyBank Promissory Note dated as of March 18, 1998 (relating to
            improvements on building #7); and

      5.    Technology transfer agreement dated September 30,1998 with Herman L.
            Jones relating to the following U.S. patent application and one
            European patent applications: (i) U.S. Serial No. 09/302,590, (ii)
            U.S. Serial No. 09/303,196 (now U.S. Patent No. 6,284,389) and (iii)
            E.P. Serial No. 99'920'345.8. The Company has entered into a
            Settlement Agreement with Mr. Jones dated February 28, 2002
            regarding this dispute.




                                 SCHEDULE 3.1.12

                          TITLE TO PROPERTY AND ASSETS

                      Pacific Aerospace & Electronics, Inc.
                           Detail Actual Debt Listing
                             As of January 31, 2002




        Creditor                                Principal Balance                        Security
        --------                                -----------------                        --------
                                                                        
Pacific Aerospace:
 Term Debt:
  KeyBank                                         $ 1,111,090                 Real Estate - Corporate Building
  Ford Credit                                          19,707                 Vehicle
  Ford Credit                                          29,078                 Vehicle
  Ford Credit                                          15,634                 Vehicle
  Ford Credit                                          24,878                 Vehicle
  Ford Credit                                          12,411                 Vehicle
  Ford Credit                                          18,731                 Vehicle
  DDJ                                              13,731,446                 Substantially all assets
  Senior Subordinated Notes                        63,700,000                 None

Cashmere Manufacturing:
 Term Debt:
  KeyBank                                             121,959                 Real Estate - Building #7 expansion
  Ford Credit                                          25,447                 Vehicle
  Ellison Machinery Company                            54,197                 Fadal CNC machining center
  Ellison Machinery Company                            43,549                 Fadal CNC machining center
  Ellison Machinery Company                            42,112                 Fadal CNC machining center
  Ellison Machinery Company                            42,112                 Fadal CNC machining center
  Ellison Machinery Company                            47,327                 Fadal CNC machining center
  Ellison Machinery Company                            47,327                 Fadal CNC machining center
  Ellison Machinery Company                            11,189                 Komo CNC machining center
  Ellison Machinery Company                           337,525                 Mori Seiki machining cell
  Ellison Machinery Company                           198,995                 Mori Seiki machining cell
 Capital Leases
  GE Capital                                           41,980                 Okuma cadet
  GE Capital                                           41,980                 Okuma cadet
  NEC                                                  83,999                 Phone system
  Amada Leasing Corp.                                  34,078                 Amada press break

Pacific Coast Technologies:
 Term Debt:
  KeyBank                                             487,839                 Real estate - building #7 expansion
 Capital Leases:
  GE Capital                                           35,256                 Okuma cadet
  GE Capital                                           35,744                 Okuma cadet








        Creditor                                Principal Balance                        Security
        --------                                -----------------                        --------
                                                                        
  GE Capital                                           41,196                 Okuma crown
  GE Capital                                           98,759                 Okuma CNC machining center
  CIT Group                                            70,397                 Tornos screw machine
  CIT Group                                            98,444                 Okuma crown

Pacific A & E Limited:
 Term Debt:
  PA&E International, Inc.                         38,908,000                 None (Intercompany note)

Pacific Aerospace & Electronics (UK) Limited:
 Term Debt:
  Pacific A & E Limited                            29,481,000                 None (Intercompany note)

Aeromet International:
 Capital Lease:                                       476,000                 Equipment
  Lloyds Bowmaker

                                                 ------------

Total term debt and capital leases              $ 149,569,386
                                                 ============





                                 SCHEDULE 3.1.13

                           RELATED PARTY TRANSACTIONS

      Employment agreement with Donald A. Wright. Pursuant to the existing
employment agreement, Mr. Wright is employed through fiscal 2003. Mr. Wright is
expected to terminate his existing employment agreement in connection with the
Exchange transaction and enter into a new employment agreement with the Company.

      On August 15, 2001, Nick Gerde, who served as Vice President Finance of
the Company, as well as Treasurer and Assistant Secretary, left his employment
with the Company. In accordance with Mr. Gerde's employment agreement and
separation letter executed by Mr. Gerde and the Company, Mr. Gerde will receive
severance pay of $150,000, which is the equivalent of one year's salary. This
severance is payable on regular payroll days over a 12-month period. Mr. Gerde
will also receive medical benefits for one year.

      On February 28, 2002, Sheryl A. Symonds, who served as Vice President
Administration and General Counsel, left her employment with the Company. In
accordance with Ms. Symonds' employment agreement and separation letter executed
by Ms. Symonds and the Company, Ms. Symonds will receive $205,710, which is the
equivalent of one year's salary. This severance is payable on regular payroll
days over a 12-month period. Ms. Symonds will also receive medical benefits for
one year.

      Werner Hafelfinger who is currently the Vice President Operations and
Chief Operating Officer, will continue serving as the Vice President Operations
and Chief Operating Officer until May 17, 2002. In accordance with Mr.
Hafelfinger's employment agreement and separation letter executed by Mr.
Hafelfinger and the Company, Mr. Hafelfinger will receive $210,000, which is the
equivalent of one year's salary. This severance is payable on regular payroll
days over a 12-month period. Mr. Hafelfinger will also receive medical benefits
for one year.

      Donald A. Wright rents the fourth floor condominium in the headquarters
building from PA&E and has an option to purchase the condominium for $250,000.
The option terminates ten business days after Mr. Wright's employment with the
Company ceases for any reason other than death.

      GSC Partners, CDO Fund, Limited, GSC Partners CDO Fund II, Limited, GSC
Recovery II, L.P. and GSC Recovery IIA, L.P., affiliates of GSCP Recovery, Inc,
and as applicable, GSC Recovery II, L.P. (participating noteholders in the
Exchange), which will collectively own approximately 54% of the Company's Common
Stock on a fully-diluted basis following the Exchange, intend to purchase, at or
around the time of the Exchange transaction, certain senior secured discount
notes of the Company.

      In August 2001, the Company entered into a lease agreement with North
Central Educational Services District (the "NCESD"), pursuant to which the NCESD
leased the second floor of the Company's Wenatchee headquarters building from
the Company for $6,183 per month for a term of 24 months. In authorizing the
lease, the Board of Directors determined that




the lease was made for fair market value. Gene C. Sharratt, a director of the
Company, is Superintendent of the NCESD.



                                 SCHEDULE 3.1.15

                               PROPRIETARY RIGHTS

      The Company was in default under a technology transfer agreement dated
December 30,1998 with Herman L. Jones relating to the following U.S. patent
applications and one European patent application: (i) U.S. Serial No.
09/302,590, (ii) U.S. Serial No. 09/303,196 (now U.S. Patent No. 6,284,389) and
(iii) E.P. Serial No. 99'920'345.8 (the "Jones Patents").

      However, a settlement was reached between Mr. Jones and the Company.
Pursuant to the settlement agreement dated February 28, 2002, the Company is
permitted to retain the Jones Patents upon payment by the Company to Mr. Jones
of an amount equivalent to $950,000 (the "Purchase Price"). $200,000 of the
Purchase Price will be paid by the Company transferring to Mr. Jones the
building owned by the Company in Cashmere, WA. If the building in Cashmere, WA
is not transferred to Mr. Jones by June 1, 2002, the $200,000 of the Purchase
Price will be added to the outstanding principal balance of the promissory note.
The remaining sum of $750,000 will be paid pursuant to a promissory note. Mr.
Jones will retain a security interest in the Jones Patents until the promissory
note is fully paid.




                               SCHEDULE 3.1.16(a)

                             EMPLOYEE BENEFIT PLANS

                          PA&E'S EMPLOYEE BENEFIT PLANS

Mutual of Omaha Medical, Dental & Vision Insurance

ADP 401(k) Retirement Plan

Conover Flexible Benefits Plan


                          PA&E'S STOCK INCENTIVE PLANS

2002 Stock Option Plan (adopted by the Board of Directors on February 27, 2002)

Amended and Restated Stock Incentive Plan

Amendment No. 1 to the Amended and Restated Stock Incentive Plan

Amended and Restated Independent Director Stock Plan

1999 Stock Incentive Plan

1997 Employee Stock Purchase Plan




                               SCHEDULE 3.1.16(f)

                        PAYMENTS, VESTINGS OR LIABILITIES

No exceptions.




                               SCHEDULE 3.1.16(g)

                          CLAIMS WITH RESPECT TO PLANS

None.




                               SCHEDULE 3.1.16(h)

                POST-EMPLOYMENT LIFE OR HEALTH INSURANCE COVERAGE

Medical benefits for the following people continue until the stated date, or
earlier, if they become covered by new employers:

Nick Gerde (until 8/15/02)

Sheryl A. Symonds (until 2/28/03)

Duncan Crighton (until 5/31/03)

Werner Hafelfinger (until 5/17/03)




                                 SCHEDULE 3.1.18

                              ENVIRONMENTAL MATTERS

No exceptions.




                                 SCHEDULE 3.1.21

                                   TAX RETURNS

      The Company is in the process of discussions with the Inland Revenue
service in the United Kingdom regarding the amount of taxes owing in the United
Kingdom. The main issue concerns the interest on the loan of Sterling Pounds
23,700,000 from the Company to Pacific A&E (UK) Limited.

      The Company has not filed U.S. federal income tax returns for the years
ending May 31, 2000 and May 31, 2001. Both returns are currently being completed
by KPMG; and it is anticipated that no tax or penalties will be due with respect
to either of these returns.




                                                                       Exhibit A


                     HOLDERS/ALLOCATION OF NEW SECURITIES*




- ------------------------------------------------------------------------------------------------------------------------------
                                                                                     Number of     Number of      Aggregate
                                                                      Aggregate      Shares of     Shares of      Principal
                                                                      Principal       Common       Preferred      Amount of
                                                                      Amount of        Stock        Stock         New Notes
                                                                      Old Notes      Received      Received       Received
          Holders                             Address                    Held        Hereunder     Hereunder      Hereunder
                                                                                                   
- ------------------------------------------------------------------------------------------------------------------------------
GSCP Recovery, Inc.                  500 Campus Drive, Suite 220
                                     Florham Park, NJ 07932           $24,260,000    19,582,848     380.85       $ 5,712,716
- ------------------------------------------------------------------------------------------------------------------------------
GSC Recovery II, L.P.                500 Campus Drive, Suite 220
                                     Florham Park, NJ 07932           $10,000,000     8,072,072     156.99       $ 2,354,788
- ------------------------------------------------------------------------------------------------------------------------------
Alliance Capital Management L.P.     1345 Avenue of the Americas
                                     39th Floor
                                     New York, NY 10105               $ 8,500,000     6,861,262     133.44       $ 2,001,570
- ------------------------------------------------------------------------------------------------------------------------------
M.W. Post Advisory Group L.L.C.      1880 Century Park East
                                     Suite 820
                                     Los Angeles, CA 90067            $17,145,000    13,839,568     269.15       $ 4,037,284
- -------------------------------------------------------------------------------------------------------------------------------
William E. Simon & Sons              10990 Wilshire Blvd.
   Special Situation Partners        Suite 500
   II, L.P.                          Los Angeles, CA 90024            $ 2,500,000     2,018,018      39.25       $   588,697
- ------------------------------------------------------------------------------------------------------------------------------
HBK Master Fund L.P.                 300 Crescent Ct. #700
                                     Dallas, TX 75201                 $   295,000       238,126       4.63       $    69,466
- ------------------------------------------------------------------------------------------------------------------------------

Unknown Holder                                                        $ 1,000,000       807,207      15.70       $   235,479
- ------------------------------------------------------------------------------------------------------------------------------

                  TOTAL:                                              $63,700,000    51,419,101      1,000       $15,000,000
                  ------
- ------------------------------------------------------------------------------------------------------------------------------



- --------

        * Amounts in this table may deviate in immaterial respects from the
number of shares and/or notes actually received by the Holders due to rounding.
For each $1,000 principal amount of Old Notes tendered, Holders shall receive
$235.4788 principal amount of New Notes, 807.207 shares of Common Stock and
0.0158 shares of Preferred Stock. The number of shares of Common Stock and
Preferred Stock received in the Exchange will be rounded down to the closest
whole number of shares. The principal amount of New Notes received in the
Exchange will be rounded down to the closest dollar.


                                      A-1


                                                                       Exhibit B


                           Certificate of Designation

                               [Filed Separately]





                                       B-1


                                                                       Exhibit C


                              New Notes Indenture

                               [Filed Separately]



                                       C-1


                                                                       Exhibit D


           Opinion of Company Counsel as to matters of Washington Law


                             [Intentionally Omitted]


                                       D-1



                                                                       Exhibit E


       Opinion of Company Counsel as to matters other than Washington Law

                            [Intentionally Omitted]





                                       E-1



                                                                       Exhibit F


                        Amendment to Employment Agreement

                               [Filed Separately]




                                       F-1


                                                                       Exhibit G


                             Supplemental Indenture

                            [Intentionally Omitted]




                                       G-1


                                                                       Exhibit H


                                Form of Guarantee

                               [Filed Separately]




                                       H-1


                                                                       Exhibit I


                             Note Purchase Agreement

                               [Filed Separately]




                                       I-1

EX-10.13

                                                                   EXHIBIT 10.13

                                 (Face of Note)

               10% Senior Subordinated Pay-In-Kind Notes due 2007
No. 1

                                                                CUSIP: 693758AE4
                                                             ISIN:  US693758AE42

                      PACIFIC AEROSPACE & ELECTRONICS, INC.

promises to pay to Cede & Co. or registered assigns, the principal sum of
Fifteen Million Dollars ($15,000,000) on November 1, 2007.

Interest Payment Dates:  May 1 and November 1

Record Dates: April 15 and October 15





                                       1


        IN WITNESS WHEREOF, Pacific Aerospace & Electronics, Inc. has caused
this instrument to be duly executed.


                                 PACIFIC AEROSPACE & ELECTRONICS, INC.


                                 By: /s/ Donald Wright
                                     -------------------------------------------
                                     Donald Wright
                                     Chief Executive Officer and President


                                 By: /s/ Charles A. Miracle
                                     -------------------------------------------
                                     Charles A. Miracle
                                     Chief Financial Officer and Vice President-
                                     Finance

This is one of the 10% Senior Subordinated Pay-In-Kind Notes referred to in the
within-mentioned Indenture:

U.S. Bank National Association,
as Trustee


By: /s/ Frank P. Leslie, III
    ---------------------------
    Name:  Frank P. Leslie, III
    Title: Vice President


Dated: March 19, 2002



                                       2

               10% Senior Subordinated Pay-In-Kind Notes due 2007

        THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A
NOMINEE OR A DEPOSITARY OR A SUCCESSOR DEPOSITARY. UNLESS AND UNTIL IT IS
EXCHANGED IN WHOLE OR IN PART FOR NOTES IN CERTIFICATED FORM, THIS NOTE MAY NOT
BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE
DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER
NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A
SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS
CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY (55 WATER STREET, NEW YORK, NEW YORK) ("DTC"), TO THE ISSUER OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS MAY BE
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR SUCH OTHER ENTITY AS MAY BE REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

        Capitalized terms used herein shall have the meanings assigned to them
in the Indenture referred to below unless otherwise indicated.

        1.     Interest. Pacific Aerospace & Electronics, Inc., a Washington
corporation (the "Company"), promises to pay interest on the principal amount of
this Note (as set forth in this Section below) at ten percent (10%) per annum
(increased as provided in the final paragraph of this Section 1) from March 19,
2002 until maturity. The Company will pay interest semi-annually on May 1 and
November 1 of each year, or if any such day is not a Business Day, on the next
succeeding Business Day (each an "Interest Payment Date").

        On each Interest Payment Date the Company shall, in lieu of the payment
of interest in cash on the Notes, pay interest on all outstanding Notes in
whole, but not in part, through the issuance of additional 10% Senior
Subordinated Pay-In-Kind Notes ("PIK Notes"), in denominations (rounded, if
necessary to the nearest dollar) of $1 and integral multiples thereof, in an
aggregate principal amount equal to the amount of interest that would be payable
with respect to such Notes if such interest were paid in cash. On each such
Interest Payment Date, the Company shall issue and deliver PIK Notes to the
Trustee in the name of each holder of PIK Notes ("Holder") (in an aggregate
amount of interest then due such Holder) as of the relevant Record Date in the
aggregate principal amount required to pay such interest. Each PIK Note is an
additional obligation of the Company, is guaranteed by each of the Guarantors
and shall be governed by, and entitled to the benefits of, and shall be subject
to the terms of, the


Indenture and shall rank pari passu with and be subject to the same terms
(including the interest rate from time to time payable thereon) as the Notes
with respect to which such PIK Notes were issued (except, as the case may be,
with respect to the issuance date and aggregate principal amount). At all times
after the Company has issued PIK Notes, the term "Notes" shall also include any
issued and outstanding PIK Notes.

        Interest on the Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the date of
issuance; provided that if there is no existing Default in the payment of
interest, and if this Note is authenticated between a record date referred to on
the face hereof and the next succeeding Interest Payment Date, interest shall
accrue from such next succeeding Interest Payment Date. The first Interest
Payment Date shall be May 1, 2002. The Company shall pay interest (including
post-petition interest in any proceeding under any Bankruptcy Law) on overdue
principal and premium, if any, at the rate equal to 1% per annum in excess of
the then applicable interest rate on the Notes to the extent lawful in
accordance with Section 2.12 of the Indenture. Interest will be computed on the
basis of a 360-day year of twelve 30-day months.

        Notwithstanding the foregoing, in the event that the Series C Preferred
Stock of the Company is not converted into Common Stock, par value of $0.001 per
share, pursuant to the terms of such Series C Preferred Stock (the "Automatic
Conversion") on or prior to June 1, 2002, the Company, without any further
action by the Trustee or any Holder, shall pay interest on the principal amount
of this Note at an increased rate equal to fourteen percent (14%) per annum from
and after such time until the Automatic Conversion takes place. The Company
shall promptly notify the Trustee and the Holders in writing upon the occurrence
of the Automatic Conversion.

        2.     Method of Payment. The Company will pay interest on the Notes to
the Persons who are registered Holders of Notes at the close of business on the
April 15 or October 15 next preceding the Interest Payment Date, even if such
Notes are cancelled after such record date and on or before such Interest
Payment Date, except as provided in Section 2.12 of the Indenture with respect
to defaulted interest. The Notes will be payable as to principal and premium, if
any, at the office or agency of the Company maintained for such purpose in the
Borough of Manhattan, The City of New York, provided that payment by wire
transfer of immediately available funds will be required with respect to
principal of, and premium, if any, on all Notes the Holders of which shall have
provided wire transfer instructions to the Company or the Paying Agent. For
interest payments paid in kind, the Notes will be payable in accordance with
Section 1 above.

        3.     Paying Agent and Registrar. Initially, U.S. Bank, National
Association, the Trustee under the Indenture, will act as Paying Agent and
Registrar. The Company may change any Paying Agent or Registrar without notice
to any Holder. The Company or any of its Subsidiaries may act in any such
capacity in accordance with the Indenture.

        4.     Indenture. The Company issued the Notes under an Indenture dated
as of March 19, 2002 ("Indenture") between the Company, the Guarantors and the
Trustee. The terms of the Notes include those stated in the Indenture and those
made part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (15 U.S. Code ss.ss. 77aaa-77bbbb)


                                       4


(the "Act"). The Notes are subject to all such terms, and Holders are referred
to the Indenture and such Act for a statement of such terms. The Notes are
limited to $15,000,000 in aggregate principal amount. Notwithstanding the
foregoing, the aggregate principal amount of Notes permitted to be outstanding
at any time may exceed $15,000,000 by an amount sufficient to permit payments of
interest in kind as provided for herein and in the Indenture.

        5.     Optional Redemption.

        (a)    The Company shall have the right to redeem the Notes, in whole or
in part, at any time after the date of the Indenture at a redemption price equal
to 100% of the principal amount of such notes being redeemed, together with
accrued and unpaid interest thereon, to the date of redemption.

        (b)    Notice of redemption will be mailed at least 15 days but not more
than 60 days before the redemption date to each Holder whose Notes are to be
redeemed at its registered address. If any Note or PIK Note is to be redeemed in
part only, the notice of redemption that relates to such Note or PIK Note shall
state the portion of the principal amount thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of Holder thereof upon cancellation of the original Note or PIK Note. Notes
in denominations larger than $1,000 may be redeemed in part but only in integral
multiples of $1,000, unless all of the Notes held by a Holder are to be
redeemed. On and after the redemption date interest ceases to accrue on Notes or
portions thereof called for redemption unless the Company defaults in such
payments due on the redemption date.

        6.     Mandatory Redemption.

               The Company shall not be required to make mandatory redemption
payments with respect to the Notes.

        7.     Repurchase at Option of Holder Upon Certain Events.

               After the Company has indefeasibly repaid in full or otherwise
fully discharged all of the obligations in respect of Senior Indebtedness, then
upon the occurrence of a Change of Control, each Holder shall have the right, at
such Holder's option, pursuant to an offer (subject only to conditions required
by applicable law, if any) by the Company (the "Change of Control Offer") to
require the Company to repurchase all or any part of such Holder's Notes upon
the terms set forth in the Indenture.

        8.     Denominations, Transfer, Exchange. The Notes are in registered
form without coupons in denominations of $1,000 and integral multiples of
$1,000. The transfer of Notes may be registered and Notes may be exchanged as
provided in the Indenture. The Registrar and the Trustee may require a Holder,
among other things, to furnish appropriate endorsements and transfer documents
and the Company may require a Holder to pay any taxes and fees required by law
but only to the extent contemplated by the Indenture.

        9.     Persons Deemed Owners. The registered Holder of a Note or a PIK
Note may be treated as its owner for all purposes.


                                       5


        10.    Amendment, Supplement and Waiver. Subject to certain exceptions,
the Indenture or the Notes may be amended or supplemented with the written
consent of the Holders of at least a majority in aggregate principal amount of
the then outstanding Notes, and any existing default or compliance with any
provision of the Indenture, the Notes or the Guarantees may be waived with the
written consent of the Holders of at least a majority in aggregate principal
amount of the then outstanding Notes in accordance with Section 9.02 of the
Indenture. Without the consent of any Holder of a Note or a PIK Note, the
Indenture or the Notes may be amended or supplemented to cure any ambiguity,
defect or inconsistency, in a manner not adverse to any Holder, to provide for
uncertificated Notes in addition to or in place of Certificated Notes, to
provide for the assumption of the Company's obligations to the Holders of the
Notes in case of a merger, sale or consolidation pursuant to Article 5 of the
Indenture, to provide for additional Guarantors, successor guarantors or for the
release or assumption of the Guarantee in compliance with the Indenture, to make
any change that would provide any additional rights or benefits to the Holders
of the Notes (including the addition of any Guarantors) or that does not
adversely affect the rights under the Indenture of any such Holder, to comply
with the requirements of the SEC in order to effect or maintain the
qualification of the Indenture under the Act or to evidence, and provide for
acceptance of, the appointment of a successor Trustee.

        11.    Subordination. The payment of principal of, premium, if any, and
interest on the Notes will be subordinated in right of payment to all Senior
Indebtedness as set forth in Article 10 of the Indenture.

        12.    Trustee Dealings with Company. The Trustee, in its individual or
any other capacity, may make loans to, accept deposits from, and perform
services for the Company or its Affiliates, and may otherwise deal with the
Company or its Affiliates, as if it were not the Trustee.

        13.    No Recourse Against Others. A director, officer, employee,
incorporator or shareholder, of the Company, as such, shall not have any
liability for any Obligations of the Company under the Notes or the Indenture or
for any claim based on, in respect of, or by reason of, such Obligations or
their creation, except that this provision shall in no way limit the Obligation
of any Guarantor pursuant to any guarantee of the Notes. Each Holder by
accepting a Note or PIK Note waives and releases all such liability. This waiver
and release are part of the consideration for the issuance of the Notes.

        14.    Authentication. This Note shall not be valid until authenticated
by the manual signature of the Trustee or an authenticating agent.

        15.    Abbreviations. Customary abbreviations may be used in the name of
a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).

        16.    CUSIP Numbers. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers
in notices of


                                       6


redemption as a convenience to Holders. No representation is made as to the
accuracy of such numbers either as printed on the Notes or as contained in any
notice of redemption and reliance may be placed only on the other identification
numbers placed thereon.

        The Company will furnish to any Holder upon written request and without
charge a copy of the Indenture. Requests may be made to:

               Pacific Aerospace & Electronics, Inc.
               430 Olds Station Road, Third Floor
               Wenatchee, Washington 98801
               Telephone No.: (509) 667-9600
               Telecopier No.: (509) 667-9696
               Attention: President



                                       7


                   SCHEDULE OF EXCHANGES OF CERTIFICATED NOTE

        The following exchanges of a part of this Global Note for Certificated
Notes have been made:



                                                                             Principal Amount of this        Signature of
                         Amount of decrease in     Amount of increase in      Global Note following     authorized officer of
                          Principal Amount of    Principal Amount of this         such decrease            Trustee or Note
Date of Exchange           this Global Note             Global Note               (or increase)               Custodian
- ----------------           ----------------             -----------               -------------               ---------
                                                                                            









                                       8


                                 Assignment Form

        To assign this Note, fill in the form below: (I) or (we) assign and
transfer this Note to __________________________________________________________
                            (Insert assignee's soc. sec. or tax I.D. no.)

________________________________________________________________________________

________________________________________________________________________________

________________________________________________________________________________

________________________________________________________________________________
              (Print or type assignee's name, address and zip code)

and irrevocably appoint ___________________________________________ to transfer
this Note on the books of the Company. The agent may substitute another to act
for him.

Date: ____________________

    Your Signature: ____________________________________________________________
                    (Sign exactly as your name appears on the face of this Note)

Signature Guarantee.



                                       9


                       Option of Holder to Elect Purchase

        If you want to elect to have this Note purchased by the Company pursuant
to Section 4.07 of the Indenture, check the box below:

               [ ]  Section 4.07

        If you want to elect to have only part of the Note purchased by the
Company pursuant to Section 4.07 of the Indenture, state the amount you elect to
have purchased: $__________

Date: ____________________

    Your Signature: ____________________________________________________________
                    (Sign exactly as your name appears on the face of this Note)

Signature Guarantee.




                                       10

EX-10.14

                                                                   EXHIBIT 10.14
                              SUBSIDIARY GUARANTEE


               The Guarantors listed below (hereinafter referred to as the
"Guarantors," which term includes any successor or assign under the Indenture
(the "Indenture") and any additional Guarantors), have irrevocably and
unconditionally guaranteed (i) the due and punctual payment of the principal of,
premium, if any, and interest on the 10% Senior Subordinated Pay-In-Kind Notes
due 2007 (the "Notes") of Pacific Aerospace & Electronics, Inc., a Washington
corporation (the "Company"), whether at stated maturity, by acceleration or
otherwise, the due and punctual payment of interest on the overdue principal and
premium, if any, on the Notes, and the due and punctual performance of all other
obligations of the Company, to the Holders or the Trustee all in accordance with
the terms set forth in Article 11 of the Indenture, (ii) in case of any
extension of time of payment or renewal of any Notes or any such other
obligations, that the same will be promptly paid in full when due or performed
in accordance with the terms of the extension or renewal, whether at stated
maturity, by acceleration or otherwise, and (iii) the payment of any and all
costs and expenses (including reasonable attorneys' fees) incurred by the
Trustee or any Holder in enforcing any rights under this Subsidiary Guarantee.

               The obligations of each Guarantor to the Holder and to the
Trustee pursuant to this Subsidiary Guarantee and the Indenture are expressly
set forth in Article 11 of the Indenture and reference is hereby made to such
Indenture for the precise terms of this Subsidiary Guarantee.

               No shareholder, officer, director or incorporator, as such, past,
present or future of each Guarantor shall have any liability under this
Subsidiary Guarantee by reason of his or its status as such shareholder,
officer, director or incorporator.

               This is a continuing Guarantee and shall remain in full force and
effect and shall be binding upon each Guarantor and its successors and assigns
until full and final payment of all of the Company's obligations under the Notes
and Indenture and shall inure to the benefit of the successors and assigns of
the Trustee and the Holders, and, in the event of any transfer or assignment of
rights by any Holder or the Trustee, the rights and privileges herein conferred
upon that party shall automatically extend to and be vested in such transferee
or assignee, all subject to the terms and conditions hereof. This is a Guarantee
of payment and not of collectibility.

               This Subsidiary Guarantee shall not be valid or obligatory for
any purpose until the certificate of authentication on the Notes to which this
Subsidiary Guarantee relates shall have been executed by the Trustee under the
Indenture by the manual signature of one of its authorized officers.

               The Obligations of each Guarantor under its Subsidiary Guarantee
shall be limited to the extent necessary to insure that it does not constitute a
fraudulent conveyance under applicable law.

               The Obligations of each Guarantor under its Subsidiary Guarantee
pursuant to Article 11 of the Indenture shall be junior and subordinated to the
Senior Indebtedness (as defined in the Indenture) of such Guarantor on the same
basis as the Notes are junior and subordinated to the Senior Indebtedness of the
Company. For the purposes of the foregoing sentence, (a) each Guarantor may
make, and the Trustee and the Holders of the Notes shall have the right to
receive and/or retain, payments by any of the Guarantors only at such times as
they may receive and/or retain payments in respect of the Notes pursuant to the
Indenture, including Article 10 thereof, and (b) the rights and obligations of
the relevant parties relative to the Subsidiary Guarantees and Senior
Indebtedness of any Guarantor shall be the same as their respective rights and
obligations relative to the Notes and Senior Indebtedness of the Company
pursuant to Article 10 of the Indenture.




               THE TERMS OF ARTICLE 11 OF THE INDENTURE ARE INCORPORATED HEREIN
BY REFERENCE.

               Capitalized terms used herein have the same meanings given in the
Indenture unless otherwise indicated.




               IN WITNESS WHEREOF, each of the parties have executed this
Subsidiary Guarantee as of March 19, 2002.



                                    GUARANTORS:

                                    AEROMET AMERICA, INC.


                                    By: /s/ Donald A. Wright
                                        --------------------------------
                                         Donald A. Wright
                                         Executive Vice President


                                    BALO PRECISION PARTS, 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 AEROSPACE & ELECTRONICS
                                    INTERNATIONAL, 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


                                    SEISMIC SAFETY PRODUCTS, 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

EX-10.15

                                                                  EXHIBIT 10.15

                        CONVERSION ADJUSTMENT AGREEMENT


               Conversion Adjustment Agreement (this "Agreement"), dated as of
March 19, 2002, by and among Pacific Aerospace & Electronics, Inc., a Washington
corporation (the "Company"), GSCP Recovery, Inc., GSC Recovery II, L.P.,
Alliance Capital Management L.P., M.W. Post Advisory Group L.L.C., William E.
Simon & Sons Special Situation Partners II, L.P. and HBK Master Fund L.P.
(collectively, the "Holders").


                                    RECITALS

               WHEREAS, reference is made to the Exchange Agreement, dated as of
the date hereof (the "Exchange Agreement"), among, the Company, the Holders, and
the Subsidiary Guarantors (as defined therein) pursuant to which each of the
Holders have agreed to exchange their 11 1/4% Senior Subordinated Notes due 2005
of the Company (the "Old Notes") held by such Holders for certain other
securities of the Company, including common stock, preferred stock and
pay-in-kind senior subordinated notes (collectively, the "New Securities"), as
more particularly described therein;

               WHEREAS, for each $1,000 of Old Notes tendered to the Company
pursuant to the terms of the Exchange Agreement, the Holders will receive .0158
shares of the Company's Series C Convertible Preferred Stock, par value $0.001
(the "Preferred Stock"), rounded down to the nearest whole share;

               WHEREAS, upon receipt of requisite shareholder approval to amend
the Articles of Incorporation of the Company to increase the number of
authorized shares of common stock of the Company, par value $0.001 (the "Common
Stock"), as necessary to effect the full conversion of the Preferred Stock into
shares of Common Stock, the Preferred Stock shall automatically convert (the
"Automatic Conversion") into the number of shares of Common Stock of the Company
which when added to the number of shares of Common Stock of the Company received
at Closing (as defined in the Exchange Agreement) will give the Holders on a
fully-diluted basis, in the aggregate, 97.5% of the outstanding shares of Common
Stock of the Company (the "Conversion Shares");

               WHEREAS, the New Securities, including the shares of Preferred
Stock, are being distributed to the Holders via the book-entry system of The
Depository Trust Company ("DTC") upon tender of the Old Notes held by the
Holders;

                WHEREAS, the distribution of the New Securities, including the
Preferred Stock, via DTC's book-entry system and the effects of rounding down to
the nearest whole share would, in the absence of this Agreement, otherwise
result in a disproportionate allocation of shares of Preferred Stock among the
Holders following such distribution that is inconsistent with the economic
arrangement agreed to among the parties prior to the exchange transaction (the
"Economic Arrangement"); and

               WHEREAS, as more particularly described herein, the Holders
desire that the number of Conversion Shares to be received by each Holder upon
the Automatic Conversion of the Preferred Stock be adjusted to reflect the
Economic Arrangement.




               NOW THEREFORE, in consideration of the mutual covenants and
obligations set forth herein, and subject to the terms and conditions contained
herein, the Company and each Holder hereby agree as follows:


                     Section I. NUMBER OF CONVERSION SHARES

               Section 1.1 Conversion Adjustment. Notwithstanding (i) the number
of shares of Preferred Stock received by each Holder at Closing, (ii) the
Conversion Price as set forth in the Designation of Rights and Preferences of
Series C Voting Convertible Preferred Stock (the "Certificate of Designation")
of the Company, and (iii) the number of accounts in which the Preferred Stock is
held by the Holders, the Company and each Holder hereby agree that the number of
Conversion Shares each Holder shall receive upon consummation of the Automatic
Conversion shall be calculated on a pro-rata basis as determined by the
aggregate principal amount of Old Notes tendered by such Holder in relation to
the aggregate principal amount of Old Notes tendered by all of the Holders in
the Exchange, the aggregate principal amount of which shall be $63,700,000 (the
"Conversion Adjustment"). This Section 1.1 is designed solely to effect the true
economic transaction agreed to between the Company and the Holders and to
resolve any disproportionate distributions of Preferred Stock that would
otherwise arise as a result of the rounding down of shares in DTC's book-entry
system.

               Notwithstanding the foregoing, the Conversion Adjustment shall
not serve to increase the aggregate number of Conversion Shares issuable upon
the Automatic Conversion, as such terms are set forth in the Company's
Certificate of Designation.

               Section 1.2 Amendment. This Agreement may not be amended,
modified or supplemented unless consented to in writing by all parties hereto.

               Section 1.3 Governing Law. This Agreement shall be governed by
the laws of the State of New York applicable to contracts made and to be wholly
performed in the State of New York without giving effect to the principles of
conflicts of laws thereof.

               Section 1.4 Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be an original but all of which
together shall constitute one instrument.




                                       2



               IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.



                                       THE COMPANY

                                       PACIFIC AEROSPACE &
                                       ELECTRONICS, INC.

                                       BY:  /S/ Donald A. Wright
                                          _________________________________
                                       Name:  Donald A. Wright
                                       Title: President and
                                              Chief Executive Officer

                                       THE HOLDERS

                                       GSCP RECOVERY, INC

                                       By:  /s/ Matthew Kaufman
                                          _________________________________
                                       Name:  Matthew Kaufman
                                       Title: Managing Director

                                       GSC RECOVERY II, L.P.

                                       By:    GSC Recovery II GP, L.P.,
                                              its general partner

                                       By:    GSC RII, LLC,
                                              its general partner

                                       By:    GSCP (NJ) Holdings, L.P.,
                                              its sole member

                                       By:    GSCP (NJ), Inc.,
                                              its general partner

                                       By:  /s/ Matthew Kaufman
                                          _________________________________
                                       Name:  Matthew Kaufman
                                       Title: Managing Director




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                                  ALLIANCE CAPITAL MANAGEMENT L.P.,
                                  as investment advisor

                                  By:  Alliance Capital Management Corp.

                                  By:  /s/ Michael E. Sohr
                                     ___________________________________________
                                  Name:  Michael E. Sohr
                                  Title: Vice President

                                  M.W. POST ADVISORY GROUP L.L.C.,
                                  as investment advisor

                                  By:  /s/ Carl H. Goldsmith
                                     ___________________________________________
                                  Name:  Carl H. Goldsmith
                                  Title: Managing Director

                                  WILLIAM E. SIMON & SONS SPECIAL SITUATION
                                  PARTNERS II, L.P.

                                  By: William E. Simon & Sons Special
                                      Situations II, L.L.C., its General Partner

                                  By:  /s/ John E. Klinge
                                     ___________________________________________
                                  Name:  John E. Klinge
                                  Title: Authorized Signatory

                                  HBK MASTER FUND L.P.

                                  By: HBK Investments L.P.
                                      Investment Manager

                                  By:  /s/ William E. Rose
                                     ___________________________________________
                                  Name:  William E. Rose
                                  Title: Authorized Signatory




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