-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ItQ7LZ5/AxRUQ+dwTTYZkH2Xmq9a7dsGnfB4rt+BYY1zw1nQK/AmBpMfKrCDGTeb lhMQ5HuraYjEwQNDrKC09Q== 0000893877-98-000593.txt : 19980901 0000893877-98-000593.hdr.sgml : 19980901 ACCESSION NUMBER: 0000893877-98-000593 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 21 CONFORMED PERIOD OF REPORT: 19980531 FILED AS OF DATE: 19980828 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PACIFIC AEROSPACE & ELECTRONICS INC CENTRAL INDEX KEY: 0000790023 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 911744587 STATE OF INCORPORATION: WA FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26088 FILM NUMBER: 98700946 BUSINESS ADDRESS: STREET 1: 430 OLDS STATION RD CITY: WENATCHEE STATE: WA ZIP: 98801 BUSINESS PHONE: 5096679600 MAIL ADDRESS: STREET 1: 430 OLDS STATION ROAD CITY: WENATCHEE STATE: WA ZIP: 98801 FORMER COMPANY: FORMER CONFORMED NAME: PCT HOLDINGS INC /NV/ DATE OF NAME CHANGE: 19950223 FORMER COMPANY: FORMER CONFORMED NAME: VERAZZANA VENTURES LTD DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: VERAZZANA VENTURES SYSTEMS LTD DATE OF NAME CHANGE: 19890618 10-K 1 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended May 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 0-26088 PACIFIC AEROSPACE & ELECTRONICS, INC. (Exact name of registrant as specified in its charter) Washington 91-1744587 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 430 Olds Station Road Wenatchee, Washington 98801 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (509) 667-9600 Securities registered pursuant to Section 12(b) of the Act Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value (Title of class) Common Stock Purchase Warrants (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting stock held by non-affiliates, based on the closing price for the registrant's Common Stock on the Nasdaq National Market System, as of August 27, 1998: approximately $46,808,154.00. Indicate the number of shares outstanding of each of the registrant's classes of common equity, as of August 27, 1998: Common Stock, $.001 par value ("Common Stock"): 15,986,323 shares Documents Incorporated by Reference: None, except certain Exhibits referred to on the list of Exhibits, contained in Item 14 of this report. TABLE OF CONTENTS ----------------- Item of Form 10-K Page - ----------------- ---- PART I Item 1 - Description of Business............................................ 1 Item 2 - Description of Property............................................17 Item 3 - Legal Proceedings..................................................18 Item 4 - Submission of Matters to a Vote of Security Holders................18 PART II Item 5 - Market for Common Equity and Related Shareholder Matters...........19 Item 6 - Selected Financial Data ...........................................23 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.....................25 Item 8 - Financial Statements...............................................31 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................54 PART III Item 10 - Directors and Executive Officers of the Company....................55 Item 11 - Executive Compensation.............................................58 Item 12 - Security Ownership of Certain Beneficial Owners and Management..............................................62 Item 13 - Certain Relationships and Related Transactions.......................................................64 Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K....66 SIGNATURES....................................................................71 EXHIBIT INDEX.................................................................72 i PART I ITEM 1. DESCRIPTION OF BUSINESS Overview Pacific Aerospace & Electronics, Inc. and its subsidiaries as of May 31, 1998 (the "Company") develop, manufacture and market high-performance electronics and metal components and assemblies for the aerospace, defense, electronics and transportation industries. The Company has been an active consolidator of companies, having integrated eight U.S. operating companies since 1990. On July 30, 1998, the Company nearly doubled its size by acquiring Aeromet International plc, a British limited company ("Aeromet"). See "--Corporate History--Aeromet Acquisition," and "--Risk Factors--Acquisition Risks" and "--Management of Growth." The Company has focused its consolidation strategy on identifying and acquiring companies that (i) provide the opportunity for increased sales penetration with the Company's existing customers and new sales to the Company's potential customers and (ii) extend and vertically integrate the Company's manufacturing capabilities or product lines. Since the Company acquired Aeromet after fiscal 1998, references to the "Company" in this Form 10-K generally do not include Aeromet, which is addressed separately. Corporate History The Holding Company Donald A. Wright, the Company's Chief Executive Officer and President, acquired Pacific Coast Technologies, Inc. ("Pacific Coast") in 1990. In 1994, Mr. Wright formed PCT Holdings, Inc., a Washington corporation, to hold the stock of Pacific Coast and future acquisitions. In 1995, that holding company merged into a wholly owned subsidiary of Verazzana Ventures, Ltd. ("Verazzana"), an inactive public company. In that merger, Verazzana changed its name to PCT Holdings, Inc., a Nevada corporation ("PCTH"). In 1996, PCTH merged into the Company, with the Company as the surviving entity, in order to reincorporate under the laws of the State of Washington. Acquisitions Through May 31, 1998 The following chart identifies each of the Company's acquisitions through May 31, 1998, the year in which each acquisition was completed and the current location of the acquired company's facilities, assets or processes:
Year of Acquired Company Acquisition Current Location ---------------- ----------- ---------------- Pacific Coast Technologies, Inc. 1990 Wenatchee, Washington Cashmere Manufacturing Co., Inc. ("Cashmere") 1994 Wenatchee, Washington Ceramic Devices, Inc. ("Ceramic Devices") 1995 Wenatchee, Washington Morel Industries, Inc. ("Morel") 1995 Entiat, Washington Seismic Safety Products, Inc. ("Seismic") 1995 Wenatchee, Washington Northwest Technical Industries, Inc. ("NTI") 1997 Sequim, Washington Balo Precision Parts, Inc. ("Balo") 1998 Butler, New Jersey Electronic Speciality Corporation and Displays & Technologies, Inc. (collectively, "ESC") 1998 Vancouver, Washington
1 Aeromet Acquisition On July 30, 1998, the Company acquired Aeromet through the Company's indirect wholly owned subsidiary, Pacific Aerospace & Electronics (UK) Limited, for (pound)42 million (approximately $69 million) in cash (the "Aeromet Acquisition"). Aeromet is the largest company acquired by the Company to date and nearly doubles the Company's workforce, facilities and revenues. Aeromet is one of the leading suppliers in the United Kingdom of magnesium and aluminum precision sand and investment castings and titanium and aluminum formed sheet products for the aerospace, defense and motorsport industries in Europe. The Aeromet Acquisition has significantly expanded the Company's customer base and product offerings. Aeromet's casting and forming technologies and products are complementary extensions of the Company's precision metals product lines. In order to fund the Aeromet Acquisition and provide working capital, the Company issued $75 million of 11 1/4% Senior Subordinated Notes due 2005 (the "Notes") in a private placement under Rule 144A of the Securities Act of 1933, as amended ("Securities Act") that closed simultaneously with the Aeromet Acquisition (the "Offering"). The Notes were purchased by qualified institutional buyers and were issued pursuant to an Indenture (the "Indenture"), dated July 30, 1998, between the Company, the Company's U.S. subsidiaries (the "Subsidiaries") and IBJ Schroder Bank & Trust Company, as trustee. The Notes (i) are senior subordinated, unsecured, general obligations of the Company, (ii) will mature on August 1, 2005, unless previously redeemed pursuant to the Indenture, and (iii) are jointly and severally guaranteed on a senior subordinated basis by each of the Subsidiaries. See "--Business Considerations--Significant Leverage; Liquidity" and "--Restrictive Debt Covenants." Business Strengths Significant Customer Base The Company counts among its customers many of the world's leading aerospace, defense, electronics and transportation companies, including The Boeing Company ("Boeing"), Raytheon/ Hughes Aircraft Company ("Raytheon/Hughes"), Honeywell, Inc. ("Honeywell"), Lockheed Martin Corporation ("Lockheed Martin"), Northrop Grumman Corporation ("Northrop Grumman"), Space Systems/Loral, Inc., Westinghouse Electric Corporation, TRW, Inc., and Litton Industries Inc. ("Litton"). Aeromet's leading customers include British Aerospace plc ("British Aerospace"), Rolls Royce plc ("Rolls Royce"), GKN Westland Aerospace, a division of GKN plc ("GKN Westland"), Lucas Aerospace plc ("Lucas Aerospace") and Alenia (Aermacchi). The Company believes that one of the key advantages of the Aeromet Acquisition is the opportunity it creates for the Company to access this significant base of additional customers. Strong Position in Major Aerospace and Defense Programs The Company supplies components and parts to Boeing for each of Boeing's 737, 747, 757, 767 and 777 commercial aircraft construction programs. Aeromet participates in the Airbus A300/310, A320 and A330/340 commercial aircraft construction programs. In addition, both the Company and Aeromet participate in major defense and military aircraft programs. The Company has received numerous quality awards from customers such as Boeing, Northrop Grumman and the aerospace group of Kawasaki Heavy Industries Ltd. ("Kawasaki"). 2 Diversity of Product Offerings and Capabilities The Company manufactures a broad range of precision cast, machined and assembled electronics products, which in fiscal 1998 were sold to over 250 customers in approximately 25 countries. Aeromet manufactures a broad range of precision cast and formed metal products. In calendar 1997, Aeromet products were sold to over 350 customers in approximately 16 countries. The Company collaborates with many of its customers to develop products that meet specific design or customization requests. In addition, many of the Company's custom-developed electronics components have become widely accepted in the industry. The Company believes that its experience and capabilities in working with the changing needs of its customers will allow it to continue to respond to changing market trends in its industries. Strong Technology Position The Company and Aeromet utilize specialized manufacturing techniques, advanced materials science, process engineering and proprietary technologies or processes in the manufacture of their metals and assembled products. In particular, the Company has a broad base of expertise in the manufacture of cast aluminum products using lost foam, sand and permanent mold casting technologies, and in its precision machined, explosively bonded and assembled electronics products. Aeromet possesses specialized expertise in casting magnesium and aluminum products using lost wax and sand casting techniques and its licensed "Sophia Process" technology, and in super plastic forming of titanium and stretch forming of aluminum alloys. The Company owns 32 U.S. patents used in the manufacture of its electronics products and maintains an ongoing program of evaluating and protecting its proprietary rights and processes. The Company and Aeromet have a number of additional patent applications pending. Strategy The Company's objective is to generate profitable growth by taking advantage of available opportunities in its industries. The Company believes that pursuing the following business strategies will enable the Company to increase market penetration, create operating efficiencies and enhance its competitive position in its core markets. Leverage the Aeromet Platform The Aeromet Acquisition significantly enhances the Company's commercial aerospace and defense industry presence and provides the Company with a solid platform from which to access major European commercial aircraft and aircraft engine programs as well as markets within the European defense and transportation industries. These markets would be difficult for the Company to enter without a physical presence in Europe. The Company also believes that Aeromet may provide a strategic opportunity for pursuing acquisitions of other European aerospace, defense and transportation companies on a model similar to that which the Company has pursued successfully in the United States. Increase Margins Through Enhanced Marketing and Vertical Integration The Company's strategy is to improve profit margins and revenues by (i) consolidating the marketing of companies that share similar product lines or customer bases and by leveraging the synergies among its consolidated companies in order to increase customer penetration and (ii) continuing to vertically integrate its manufacturing processes in order to improve operating efficiencies and to develop new products and product enhancements. A key component of this strategy is to use the Company's and Aeromet's expertise in advanced materials science and in the manufacture and assembly of precision products to identify new products, services and markets. The Company also 3 intends to capitalize on the current shift of commercial aircraft manufacturers and defense contractors toward purchasing from a smaller number of suppliers that can supply more complete systems and preassembled parts. Assembled parts and systems generally are higher margin products than individual metal parts. By producing products that integrate the Company's and Aeromet's metals casting, forming and machining expertise with the Company's expertise in the manufacture of connectors, seals, filters, relays and electronic packages, the Company expects to improve its profit margins and position itself to capture a larger share of its customers' total product requirements. Leverage Product Development through Strategic and Proprietary Technologies The Company develops new products from existing technologies in response to specific customer requests. The Company plans to continue development of new products for its customers and, where appropriate, to apply for additional patents for those new technologies. The Company may acquire additional strategic and proprietary technologies from third parties and expects to continue to develop its research and development capabilities. The Company does not expect to devote substantial resources to research and development that is not funded by customers. Pursue Other Strategic Acquisitions The Company believes that there are and will continue to be opportunities to grow the Company and enhance its profitability through acquisitions. The Company intends to continue to pursue acquisitions of companies and technologies that it believes will provide the opportunity for increased sales penetration with existing customers and new sales to potential customers, and that will extend and vertically integrate the Company's products and technologies. Industry Overview The aerospace supply industry is currently enjoying favorable trends driven by strong growth in commercial aircraft fundamentals. Industry sources estimate that the worldwide market for aircraft, including components, will be approximately $520 billion over the ten-year period of 1997 through 2007. Demand for aerospace components is closely related to delivery and use rates for commercial aircraft. Delivery and use rates are in turn directly related to the actual and projected volume of passenger and freight traffic, average aircraft age and global fleet size. According to the Boeing 1998 Current Market Outlook, world air traffic grew 6% from 1996 to 1997, following a 7% increase in the previous year. Boeing and Airbus forecast that world air traffic will grow by more than 5% each year over the next ten years. Boeing also projects that during this same period domestic and international airlines will lease or purchase over 7,600 new aircraft, thereby increasing the worldwide commercial fleet from approximately 12,300 aircraft at the end of 1997 to approximately 17,700 aircraft (net of retirements) at the end of 2007. In 1997, Boeing delivered over 320 new aircraft compared to 220 new aircraft it delivered in the prior year. In 1997, Airbus delivered 182 new aircraft compared to 126 in the prior year. Boeing predicts that in 1998, approximately 550 airplanes will be delivered. The Company believes that through the near term the world's airlines will continue to add capacity and order new aircraft in order to meet anticipated demand. Additionally, according to the U.S. Department of Defense, defense procurement funding is expected to grow by 40%, from approximately $43 billion in 1998 to approximately $60 billion in 2001. The Company believes that both its electronics and aerospace business segments will benefit from this trend. 4 As in other transportation segments, aircraft manufacturers and defense contractors have been aggressively searching for ways to improve the quality and reduce the cost of their manufactured products. One major area of focus has been the manner in which they work with their supply base. Similar to automotive manufacturers, aircraft manufacturers and defense contractors have increasingly become product designers and assemblers rather than vertically integrated manufacturers. As a result, these manufacturers are outsourcing component manufacturing to independent suppliers, seeking to benefit from an independent supplier's lower cost structure and specialized manufacturing knowledge. Suppliers that demonstrate an ability to effectively deliver a high quality product on the required delivery schedule at a reasonable cost will benefit from this shift. In addition, commercial aircraft manufacturers are tending, and defense contractors are being strongly encouraged by the U.S. Department of Defense, to purchase from suppliers that can supply more complete systems and preassembled parts. These shifts are leading to a consolidation in the supply base. Certain segments of the aerospace supply base are already consolidated, such as engines, avionics and landing gears. Other segments, however, including structural components and electronics, remain fragmented. The Company believes that this trend toward consolidation presents an opportunity for suppliers with the financial and management resources to complete acquisitions and expand their operations. The electronics industry is similarly enjoying revenue growth in several product sectors. According to the Economic Industries Alliance, the annual worldwide market for electronics and components produced in the United States totaled approximately $460 billion in 1997, representing an 11% increase over 1996 figures. Electronics components comprise the largest portion of the worldwide electronics market, accounting for $148 billion in sales in 1997. The Company estimates the current size of the electronics connector market to be approximately $1 billion in annual sales. The Company believes that both defense industry sales and sales of hermetically sealed components accounted for significant portions of that market. Additionally, the Company estimates the size of the electronics packaging market to be over $50 million in annual sales. The growth in the electronics industry has been fueled by several factors, including the rapid pace of technological advancement and development of new products. The growth in demand by consumers and businesses for technologically advanced electronics products has prompted manufacturers to create more elaborate designs, which frequently require more components per unit. Additionally, international demand for advanced electronics components is growing rapidly as an increasing array of more complex products becomes available in developing regions. The Company expects these favorable trends in the electronics industry to continue and believes the outlook for the electronics component supply industry will continue to be strong. 5 Products, Processes and Markets The products, manufacturing processes and markets of the Company in fiscal 1998 and of Aeromet, and the industry segments in which they operate, are summarized separately below. See "Financial Statements -- Note 3."
Segments Manufacturing Processes Sample Products Company/Facility - ----------------------------------------------------------------------------------------------------------------------- Aerospace Metals Hot and superplastic Jet engine bulkhead components, Aeromet: Welwyn Forming titanium forming airframe and engine details, Garden City, England helicopter erosion shields --------------------------------------------------------------------------------------- Cold stretch Aircraft skin panels, leading Aeromet: aluminum forming edges and acoustic panels Birmingham, England ------------------------------------------------------------------------------------------------------- Precision Sand, lost foam and Aircraft and truck parts Pacific Aerospace: Casting permanent mold Entiat, Washington casting --------------------------------------------------------------------------------------- Investment casting Aircraft parts Aeromet: Worcester and Rochester, England --------------------------------------------------------------------------------------- Sand casting Aircraft engine parts and Aeromet: windscreen canopies; Sittingbourne, England motorsport engine parts ------------------------------------------------------------------------------------------------------- Precision Precision machining Aircraft parts Pacific Aerospace: Machining of bonded and cast Wenatchee, Washington metals ------------------------------------------------------------ Aircraft parts Aeromet: Sittingbourne, England - ----------------------------------------------------------------------------------------------------------------------- Electronics Explosive Explosive bonding Bonded stainless steel and Pacific Aerospace: Bonding of dissimilar metals aluminum for use in electronic Sequim, Washington connectors and assemblies ------------------------------------------------------------------------------------------------------- Assembled Design and Electronic connectors and Pacific Aerospace: Electronic manufacture assemblies with ceramic and Wenatchee, Washington Products glass hermetic seals Butler, New Jersey ------------------------------------------------------------ Ceramic discoidal electromagnetic Pacific Aerospace: filters and capacitors Wenatchee, Washington ------------------------------------------------------------ Relays and solenoids; ruggedized Pacific Aerospace: flat panel displays Vancouver, Washington - -----------------------------------------------------------------------------------------------------------------------
Metals Forming At its Welwyn Garden City and Birmingham facilities, Aeromet uses hot and cold metal forming technologies to manufacture titanium and aluminum assemblies and details for the commercial aerospace and defense industry. Aeromet also performs finishing, welding, brazing and riveting processes on these parts. Testing of these products is done using non-destructive techniques and in-house X-ray facilities. Interactive discussions with customers enable Aeromet to closely match component design to the most suitable forming process. Hot Forming of Titanium. Aeromet's Welwyn Garden City facility specializes in hot and super-plastic forming of titanium, and the Company believes it has the largest independent capability in the European Union for that process. Unlike most sheet metal materials, titanium and its alloys are extremely difficult to form in a cold condition. To overcome this, Aeromet has developed at its Welwyn Garden City site a variety of hot forming processes, including hot die forming, hot brake press forming, superplastic forming, gas blow forming and hot stretch-forming. These processes maximize weight savings, maintain structural integrity, minimize cost and enable the designer to manipulate the developing alloys into complex shapes. The components have no spring back, little or no residual stress and are repeatable in form and thickness. Aeromet undertakes responsibility for the design and manufactures the necessary tooling using its in-house pattern facility, coupled with a tool bedding, fettling and surface dressing capability. The forming equipment consists of air circulating, low thermal mass heat treatment furnaces for temperatures up to 1,100 degrees centigrade and related 6 quenching facilities. The Welwyn Garden City site also has the capability to chemically mill three-dimensional components in titanium. Aeromet markets its hot-formed titanium products primarily to the commercial aircraft, helicopter and military aircraft markets. Aeromet's titanium products include jet engine Nacelle bulkhead components, airframe and engine details and erosion shields for helicopters. Aeromet's titanium products are included on the Airbus model 320, 321, 330 and 340 aircraft, the Boeing model 717 and 737 aircraft and the Dash 8-400 aircraft. Cold Forming of Aluminum Alloys. At its Birmingham facility, Aeromet specializes in the pressing and cold forming of aluminum alloys used for aircraft skin panels, leading edges and acoustic panel liners. Stretch forming is a process well suited to producing aircraft skin panels and leading edges. Specialized equipment in the Birmingham facility has the capability to form sheets up to 8 feet wide and up to 13 feet long with stretching loads of up to 700 tons being applied. Most tools are machined from oxidation-resistant stainless steel castings, and forming dies up to four tons can be handled. Together with specialist gripper jaws and rotational platen, this enables Aeromet to stretch-form aluminum alloys into a wide variety of shapes and sizes. Aeromet's capabilities extend from design to completion, including tooling design and manufacture, forming, chemical milling, trimming, assembly and quality control. The cold formed aluminum alloy products are marketed primarily to the aerospace market. Precision Casting Pacific Aerospace. At its Morel facility in Entiat, Washington, the Company designs and manufactures precision cast aluminum parts using permanent mold, sand and lost foam casting technologies. The cast parts produced at the Morel facility are sold principally to the transportation and aerospace industries. Permanent Mold Casting. The permanent mold process is well-suited for high strength, long production life parts that do not require frequent changes in design and can be made in high volume. The Company uses this process primarily to produce components used in diesel engines and other structural parts for the transportation industry. The permanent mold process uses a cast iron mold to shape the part to be cast. Molten aluminum is ladled into the heated mold and, once cooled, the casting is removed from the mold. As the mold is not destroyed in the production process, it can be reused. Sand Casting. The sand casting process is more appropriate for lower volume parts. This process uses a wooden pattern of the part to be cast, with complex geometry and high metalicized quality. The Company uses this process to produce parts for the aerospace industry such as housings. An automatic molding machine hydraulically squeezes molding sand to accurately reproduce the pattern. After molten aluminum is poured into the mold, the sand is removed, leaving the casting. The sand mold is destroyed in the process but the sand may be recycled for future moldings. Lost Foam Casting. The lost foam process is well-suited for producing parts with complex patterns, which reduces the amount of machining that would be required if the parts had been made with sand or permanent mold castings. The Company uses this process to produce support brackets and housings for the transportation and aerospace industries. In the lost foam process, the pattern is created from expanded polystyrene beads. The foam pattern is then suspended in a large metal flask and surrounded with dry sand. Molten aluminum is poured directly on the pattern, which vaporizes as the aluminum replaces every detail of the pattern. The lost foam process allows for complex details of a part to be cast with little or no touch-up, and the tooling used to create the polystyrene patterns has an unlimited life as the tooling only comes in contact with the polystyrene beads. 7 Aeromet. At its Rochester, Worcester and Sittingbourne, England facilities, Aeromet manufactures aluminum investment castings and aluminum and magnesium precision sand castings. Aeromet is a European leader in the production of light alloy sand and investment castings for the commercial aerospace and defense sectors. Precision Investment Casting. At its Worcester, England facility, Aeromet manufactures aluminum investment casting products, including aircraft and defense system components such as electronic enclosures, aircraft engine outer guide vanes, navigation lights, wing tip fences, winglet components, duct stators and heads up display units. At its Rochester, England facility, Aeromet manufactures aircraft components such as pressure tight fuel connectors. The versatility, accuracy and replicability of the investment casting process provides many advantages over more traditional methods of machining and fabricating metal products from solid components. The investment casting process uses a metal die manufactured to required specifications. Aeromet's precision tooling capabilities permit production of metal dies that incorporate a variety of details and features. A die can be reused to produce the required number of parts without degradation to the original die. Aeromet's production of the die gives the customer an incentive to order additional units of the part from Aeromet. Sophia Process Investment Casting. At its Worcester, England facility, Aeromet uses the computerized "Sophia Process" to manufacture significantly larger, more complex castings than can be made as a single part using more traditional investment casting processes. Aeromet is one of only four licensees of the Sophia Process, and is licensed to make and sell metal castings in the United Kingdom, Ireland, Australia, New Zealand and certain African and Asian countries. Parts made with the Sophia Process have relatively thin wall thickness but have strength and ductility values comparable to fabricated, forged and machined solid components. The Sophia Process stringently controls the heat level and process parameters to make lighter but stronger components that resist fracture and fatigue, and reduces machining, fabrication and assembly costs, by eliminating both doublers at material interfaces and the weakness and stress associated with riveted assemblies. Aeromet uses high strength alloys with good castability to ensure that the integrity and enhanced properties from one casting are identical to the next, and to achieve the desired combination of tensile strength, ductility and elongation. Parts made with the Sophia Process are used for the commercial aerospace, defense and transportation industries. Such applications include civil aircraft, military aircraft, missiles and underwater weapons applications and applications for the motorsport industry. Aeromet is using the Sophia Process to produce components for the Airbus A320, A330 and A340 aircraft, such as navigation light housings and wing tip fences, as a single part. Parts manufactured with the Sophia Process constituted 2% of Aeromet's 1997 net revenues. The Company believes that the advantages of the Sophia Process and the increasing customer awareness of those advantages will result in increased demand for parts fabricated using the Sophia Process. Sand Casting. At its Sittingbourne, England facility, Aeromet manufactures aluminum and magnesium alloy precision sand castings, including machined and finished parts for the commercial aerospace, defense and motorsport industries. Sand casting is suitable for products that are larger than the typical investment casting parts or products that require heavy wall sections. These products include aircraft engine heat exchangers and air intakes, aircraft engine fuel pump housings, aircraft windscreen canopies and high performance motorsport engine components and gearboxes. The aluminum and magnesium alloys have high strength and long freezing ranges and are resistant to elevated temperatures. For such customer requirements, sand casting provides an effective method of producing components with strength and uniformity. Aeromet has made significant advances in both the process and materials technology for magnesium and aluminum sand castings. Aeromet uses engineered patterns utilizing computer assisted design technologies in order to achieve repeatable high casting integrity and enhanced mechanical properties. Aeromet has complete non-destructive testing and inspection facilities, such as dye penetrant flaw detection and X-ray testing of components, as required by the rigorous standards of the aerospace industry. 8 Precision Machining Pacific Aerospace. At its Cashmere facility in Wenatchee, Washington, the Company operates a precision machine shop that produces precision machined components, structural parts and assemblies principally from aluminum and explosively bonded metals for the commercial aerospace and defense industries. These products range from small connectors to complex assemblies for use in commercial and military aircraft, heavy trucks and seismic safety gas shutoff valves. The Company uses computerized numerical control ("CNC") machining cells to manufacture particularly complex components and assembly housings. The Company builds its machined products either to customer specifications or according to an engineering and tooling design developed by the Company to suit a customer's particular need. The Company has a direct computer link to Boeing that allows immediate access to the drawings for Boeing parts. The Company inspects and tests its machined products at various stages of production using non-destructive methods such as X-ray, ultra-sound and dyes before being passed for shipment to the customer. The Company's machining operations are ISO 9002 compliant, qualifying it to perform work for most aerospace, medical equipment and general electronic companies, and are also DI-9000A approved by Boeing. In response to changes in its customers' manufacturing processes, the Company often supplies its precision machined parts on a "just in time to point of use" basis. As a result of these processes and the high quality of its machined parts, the Company has won numerous awards for supplier excellence from Boeing, Northrop Grumman and Kawasaki. Aeromet. At its Sittingbourne, England facility, Aeromet operates a precision machine shop that provides machinery and assembling capabilities for Aeromet's casting and forming operations. This machining facility has the technical capabilities to provide the range of machining services for complete production and finishing of components, including design, pattern production, casting and final machining of a component. Aeromet also performs specialized machining of small detail components in steel and titanium. Explosive Bonding At its NTI facility in Sequim, Washington, the Company manufactures over 30 specialty metals using explosive metallurgical technology. Using this technology, an explosive charge combines, at the molecular level, the surfaces of metals such as aluminum and stainless steel, that will not normally bond to each other using adhesives or welding. The result is a strong but lightweight metal that can be machined and welded into complex assemblies. The Company finishes the metals to the customer's specifications using milling, welding, lathe and rolling techniques, and tests the finished products in its metallurgical lab using non-destructive testing such as dye penetration and ultrasonic scanning. The Company also uses its explosive technology to shock-harden metals for use in applications where extremely high tensile strength is required, such as rail track intersections and switch components and to pressure form complex metal parts under water. The Company's explosively bonded metals are used by customers in the aerospace, defense, energy and marine industries. Explosively bonded metals are used to fabricate products for highly specialized applications such as satellites, aircraft and missiles where weight minimization is a critical factor; oil drill heads, aircraft engine exchange tubes, and flanges and feed-throughs for nuclear particle accelerators where strength at high temperature and heat dissipation are critical; and naval interfaces and galvanic structures where corrosion resistance is a requirement. Assembled Electronics Products The Company develops, manufactures and markets a wide array of complex hermetically-sealed electronic connectors and assemblies, ceramic capacitors and filters, relays and solenoids and 9 flat panel display units. These products are used for specialized applications in the aerospace, defense, telecommunications, energy, medical and electronics industries. Many of the Company's assembled electronics products are specifically engineered to withstand degradation or destruction in harsh environments, such as the ocean, space and the human body. These environments experience extremes in temperature, pressure, corrosiveness and impact that can make product repair or replacement difficult or impossible. To meet the demands of these challenging applications, the Company has developed or acquired 32 patents and many proprietary processes. The types of assembled electronics products manufactured by the Company, and their respective manufacturing processes are as follows: Hermetically Sealed Products. At its Pacific Coast facility in Wenatchee, Washington, and at its Balo facility in Butler, New Jersey, the Company designs and manufactures two lines of hermetically sealed electronic connectors, feed-throughs, assemblies and instrument packages. Electronics must be hermetically sealed when used in locations where the external environment can penetrate the unit. The product line manufactured at the Balo facility is sealed with a cost-effective, traditional glass-based sealant, which provides an effective seal in less demanding environments. The product line manufactured at the Pacific Coast facility is sealed with the Company's more expensive, proprietary Kryoflex ceramic sealant for use in products that must withstand extremely invasive environments, such as pacemakers, down-hole drilling tools, the fiber optic termini used on the Space Station and radar arrays. Both lines of the Company's hermetically sealed products are manufactured to customer specifications using the Company's engineering and design expertise, metallurgical and ceramic analysis capabilities and ceramics formulation and production processes. Raw materials for the connectors' packages and assemblies are formed on the Company's machining centers, CNC lathes, Swiss screw machines and CNC-controlled laser welding machines. The Company also has the capacity to electroplate and chemically film its products. The Company's Pacific Coast facility also manufactures hermetically bonded products using the Company's proprietary ceramic adhesive. This ceramic adhesive bonds metals that will not normally bond, such as aluminum and stainless steel. The resulting component is nearly as light as aluminum but has the superior bonding and sealing capacity of stainless steel, making it the preferred product where weight minimization is important, such as in space applications. The Company also holds patents in metal matrix composite technology, which the Company believes will allow it to produce even lighter, more durable electronics packages in the future. Ceramic Filters. At its Ceramic Devices facility in Wenatchee, Washington, the Company designs and manufactures very small, specialized multilayer discoidal (round) ceramic capacitors and filters. These products are advanced electronic circuit filtering devices designed to filter out electromagnetic interference ("EMI") and other undesirable electrical signals that pose significant problems for the manufacturers and users of high-performance, high-reliability electronic systems operating in harsh environments. The Company's products include mini screw-in filters for telecommunications, aerospace and defense applications; ring laser gyros; commercial eyelets for identification friend or foe systems and satellite amplifiers; high reliability bolts for the space shuttle's main engine controllers; filter pins and custom filter assemblies and broad bands for military display systems. The Company is an approved supplier of EMI devices to most aerospace and defense contractors, and uses these filters in its own hermetically sealed electronic products. The Company's Ceramic Devices operation has a self contained facility with plating, Swiss turning, assembly, and product testing capabilities, and has received a number of military and industry qualification ratings. Relays and Solenoids. At its ESC facility in Vancouver, Washington, the Company designs, manufactures and markets electromechanical devices, such as relays, solenoids, sensors, electronic assemblies, actuators, time delays and flat panel display units used in a wide variety of satellite, aircraft and military hardware applications. The Company's relay and solenoid products function as automatic electrical switches, designed to military specifications, for use in demanding environments. 10 These high reliability but low power switches use only one to ten amperes, making them suitable for applications such as satellite power bus controllers and aircraft fuel control valves. The Company's products have been used in many space vehicles launched by the United States and European countries. The Company has specialized equipment for CNC milling, turning and welding which is used for producing these products. Flat Panel Displays and Optical Filters. At its Displays & Technologies unit at the ESC facility, the Company designs and manufactures ruggedized and optically enhanced flat panel displays and optical filters. The flat panel display unit is used for commercial applications that range from GPS displays and light control filters used on private and commercial aircraft to ground vehicle displays and automatic teller machine displays. Military uses include military aircraft cockpit instrumentation and high impact displays on M1A2 tanks. These displays allow users to view the image at a much higher resolution than standard commercial resolutions. The Company's flat panel display product is a commercial liquid crystal display ("LCD") sandwiched between layers of glass and optical filter in the front, and heating and cooling units, and a computerized optical enhancer, in the back. The entire unit is mounted in a heavy duty housing unit. Sales and Marketing; Distribution The Company markets its precision cast and precision machined products using the Company's direct sales force. The Company currently has direct regional sales personnel covering the west coast of the United States and intends to expand this sales force to cover other geographic regions as the Company's business expands. The Company markets its assembled electronics products in the United States, Europe and Japan through a network of manufacturer representatives and resellers, generally established on a geographic basis. In addition, the Company maintains an internal sales and customer service staff and engineering capability for its assembled electronics products to meet customer requirements for technical support. Aeromet utilizes its own employee sales force for sales of its products to customers in England and Wales. This internal sales force is organized into two groups, one group responsible for sales of precision castings and one group responsible for metal formed products. Aeromet uses independent agents to market its products to customers in Scotland and in countries other than the United Kingdom. Customers The Company's top five customers, Boeing, PACCAR, Northrop Grumman, Deere & Company and Honeywell, accounted for approximately 28%, 17%, 8%, 4% and 4%, respectively, of the Company's fiscal 1998 net sales. Aeromet's top five customers, British Aerospace, Rolls Royce, GKN Westland, Lucas Aerospace and Alenia (Aermacchi), accounted for 12%, 11%, 7%, 6% and 5% of Aeromet's calendar 1997 net sales. No other customer accounted for more than 5% of either the Company's or Aeromet's revenues during those periods. Because of the relatively small number of customers for most of the products made by both the Company and Aeromet, the Company's largest customers can influence product pricing and other terms of trade. The loss of any of the Company's or Aeromet's largest customers or reduced or canceled orders from any of those customers could have a material adverse effect on the Company and its financial performance. The Company and Aeromet currently serve substantially different customer bases in similar markets. For example, the Company currently supplies components and parts to Boeing (not currently a significant Aeromet customer) for each of Boeing's 737, 747, 757, 767 and 777 commercial aircraft construction programs. Aeromet currently supplies components and parts for each of Airbus' A300/310, A320 and A330/340 commercial aircraft construction programs, for which Pacific Aerospace is not currently a supplier. As a result, the Company expects that the Aeromet Acquisition will provide substantial opportunities to cross market to the Company's and Aeromet's respective customer bases. 11 Backlog The majority of the Company's sales are made pursuant to individual purchase orders and are subject to termination by the customer upon payment of the cost of work in process plus a related profit factor. Historically, the Company has experienced no significant order cancellations. As of May 31, 1998, the Company had purchase orders and contractual arrangements evidencing anticipated future deliveries ("backlog") through fiscal year 2000 of approximately $70.0 million. After giving pro forma effect to the Aeromet Acquisition as if it had occurred on June 1, 1997, the Company would have had pro forma revenue backlog of approximately $110.0 million through fiscal year 2000, of which approximately $80.0 million is expected to be delivered in fiscal year 1999. There is no assurance that backlog will be completed and booked as net sales. Cancellations of pending contracts or terminations or reductions of contracts in progress could have a material adverse effect on the Company and its financial performance. Competition The Company and Aeromet are subject to substantial competition in many of the markets that they serve. In the hot forming market, Aeromet's competitors include Die Barnes Group Inc. and GKN Westland Aerospace (North America). In the cold forming market, Aeromet competes with companies such as AHF and Pendle as well as the in-house cold forming capabilities of certain of its customers, including British Aerospace. In the sand casting market, the Company competes with a number of regional foundries, and Aeromet's competitors include SFU Naley, Hitchcock, and Teledyne Ryan Aeronautical. In the investment casting market, Aeromet's competitors include the Cercast Group, Tital and Tritech. In the precision machining market, the Company competes with a number of regional machine shops. In the assembled electronics markets, the Company's competitors include Amphenol Corporation, Hermetiz Seal Corporation, AVX Corporation, Spectrum Control, Inc. and Electronics Design and Communications Instruments. Many of these competitors have greater financial resources, broader experience, better name recognition and more substantial marketing operations than the Company or Aeromet, and represent substantial long-term competition for the Company. Components and products similar to those made by the Company and Aeromet can be made by competitors using a number of different manufacturing processes. Although the Company believes that its manufacturing processes, technology and experience provide advantages to the Company's customers, such as high quality, competitive prices and physical properties that often meet stringent demands, alternative forms of manufacturing can be used to produce many of the components and products made by the Company and Aeromet. Although the Company believes that its proprietary technology may give it a competitive advantage with respect to certain of its products, new developments by competitors are expected to continue. The Company's and Aeromet's competitors may develop products that are viewed by customers as more effective or more economic than the Company's product lines. The Company and Aeromet may not be able to compete successfully against current and future competitors, and the competitive pressures faced by the Company and Aeromet may have a material adverse effect on the Company and Aeromet and their financial performance. Raw Materials Aeromet obtains approximately 70% of its titanium from one supplier and is subject to a lead time of approximately 80 weeks in ordering and obtaining titanium. While Aeromet generally has managed the ordering process to obtain titanium when needed, any failure of Aeromet to obtain titanium when needed or any titanium cost increases imposed by that supplier could have a material adverse effect on the Company and its financial performance. The Company generally has readily 12 available sources of all raw materials and supplies it needs to manufacture its products and, where possible, the Company maintains alternate sources of supply. However, the Company does not have fixed price contracts or arrangements for all of the raw materials and other supplies it purchases. Shortages of, or price increases for, certain raw materials and supplies used by the Company have occurred in the past and may occur in the future. Future shortages or price fluctuations could have a material adverse effect on the Company's and Aeromet's ability to manufacture and sell their products in a timely and cost-effective manner. Proprietary Rights Significant aspects of the business of the Company and of Aeromet depend on proprietary processes, know-how and other technology that is not subject to patent protection. The Company and Aeromet each rely on a combination of trade secret, copyright and trademark laws, confidentiality procedures and other intellectual property protection to protect their proprietary technology. However, there is no assurance that the Company's competitors may not develop or utilize technology that is the same as or similar to such technology of the Company. The Company has 32 U.S. patents, four U.S. patent applications pending, one Canadian patent application pending and one European patent enforceable in the U.K., almost all of which apply to certain aspects of the Company's electronics business and not to its aerospace business. Aeromet currently holds no patents, but has one patent application pending in the U.K. and before the European Patent Office. There is no assurance that any of these patent applications will result in issued patents, that existing patents or any future patents will give the Company any competitive advantages for its products or technology, or that, if challenged, these patents will be held valid and enforceable. The Company's issued patents expire at various times over the next 17 years, with 14 patents expiring over the next five years. Although the Company believes that the manufacturing processes of much of its patented technology are sufficiently complex that competing products made with the same technology are unlikely, there is no assurance that the Company's competitors will not design competing products using the same or similar technology after these patents have expired. Despite the precautions taken by the Company, unauthorized parties may attempt to copy aspects of the Company's products or obtain and use information that the Company regards as proprietary. Existing intellectual property laws give only limited protection with respect to such actions and policing violations of such laws is difficult. The laws of certain countries in which the Company's products are or may be distributed do not protect products and intellectual property rights to the same extent as do the laws of the United States. The Company may be required to enter into costly litigation to enforce its intellectual property rights or to defend infringement claims by others. Such infringement claims could require the Company to license the intellectual property rights of third parties. There is no assurance that such licenses would be available on reasonable terms, or at all. Environmental Matters The Company's and Aeromet's facilities are subject to federal, state and local laws and regulations concerning solid waste disposal, hazardous materials generation, storage, use and disposal, air emissions, waste water discharge, employee health and other environmental matters (together, "Environmental Laws"). Proper waste disposal and environmental regulation are major considerations for the Company because a number of the metals, chemicals and other materials used in and resulting from its manufacturing processes are classified as hazardous substances and hazardous wastes. If permitting and other requirements of applicable Environmental Laws are not met, the Company could be liable for damages and for the costs of remedial actions and could also be subject to fines or other penalties, including revocation of permits needed to conduct its business. Any permit revocation could require the Company to cease or limit production at one or more of its facilities, which could have a material adverse effect on the Company and its financial performance. The Company has an 13 ongoing program of monitoring and addressing environmental matters and from time to time in the ordinary course of business is required to address minor issues of noncompliance at its operating sites. Recently the Company identified certain operations or processes that lacked required permits or otherwise are not in full compliance with applicable Environmental Laws that the Company believes are not material. The Company is taking steps to remedy this noncompliance. In connection with its evaluation of the Aeromet Acquisition, the Company obtained an environmental investigation of each of Aeromet's facilities. These environmental investigations identified certain issues related to potential permitting and remediation matters that the Company believes are not material. The Company intends to investigate further to determine whether any actions are required under applicable United Kingdom law. Environmental Laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with any violations. As a generator of hazardous materials, the Company is subject to financial exposure with regard to its properties even if it fully complies with these laws. In addition, certain of the Company's facilities are located in industrial areas and have lengthy operating histories. As a consequence, it is possible that historical or neighboring activities have affected properties currently owned by the Company and that, as a result, additional environmental issues may arise in the future, the precise nature of which the Company cannot now predict. There is no assurance that any present or future noncompliance with Environmental Laws or future discovery of contamination will not have a material adverse effect on the Company's results of operations or financial condition. Government Regulation Certain of the Company's products are manufactured and sold under United States government contracts or subcontracts. As with all companies that provide products or services to the federal government, the Company is directly and indirectly subject to various federal rules, regulations and orders applicable to government contractors. Some of these regulations relate specifically to the vendor-vendee relationship with the government, such as the bidding and pricing rules. Under regulations of this type, the Company must observe certain pricing restrictions, produce and maintain detailed accounting data, and meet various other requirements. The Company is also subject to many regulations affecting the conduct of its business generally. For example, the Company must adhere to federal acquisition requirements and standards established by the Occupational Safety and Health Act relating to labor practices and occupational safety standards. The Company is currently updating and implementing written policies and training programs relating to employee health and safety matters at several of its facilities. See "--Environmental Matters." Violation of applicable government rules and regulations could result in civil liability, in cancellation or suspension of existing contracts, or in ineligibility for future contracts or subcontracts funded in whole or in part with federal funds. Some of the Company's customers are in the defense industry, and loss of governmental certification by such customers could have a material adverse effect on their purchases from the Company and the Company's business and financial performance. Employees The Aeromet Acquisition nearly doubled the Company's workforce. As of May 31, 1998, the Company had a total of 748 employees, of whom approximately 679 were engaged in manufacturing functions, 19 in sales and marketing, 38 in administrative functions and 12 in executive functions. As of May 31, 1998, Aeromet had a total of 580 employees, of whom approximately 543 were engaged in manufacturing functions, 13 in sales and marketing, 16 in administrative functions and eight in executive functions. None of the Company's workforce is unionized. Certain of Aeromet's manufacturing and engineering employees are represented by labor unions, although all negotiations are carried out through employee work committees. Neither the Company nor Aeromet 14 have experienced any work stoppages and both believe that their relationships with their employees are good. Risk Factors Acquisition Risks. The Aeromet Acquisition has substantially expanded the Company's operations, and the performance of Aeromet will have a significant impact on the Company's future financial results. The Aeromet Acquisition more than doubled the Company's net sales on a pro forma basis, nearly doubled the Company's workforce, resulted in the Company having substantial foreign operations and imposed substantial debt service obligations on the Company. In fiscal 1998, the Company's net sales were $54.1 million, with less than 5% derived from foreign sales. After giving effect to the Aeromet Acquisition, pro forma net sales for fiscal 1998 would have been $115.5 million, with approximately 48% derived from sales outside the United States. The success of the Company's strategy to pursue acquisitions depends upon the Company's ability to manage the risks associated with acquisitions, including the risks of assessing the value, strengths and weaknesses of acquisition candidates, possible diversion of management attention from operating aspects of the Company's business, increased borrowings, disruption of product development cycles and dilution of earnings per share. The success of the Company's strategy to pursue acquisitions also depends on the ability of the Company to accurately assess problems and efficiently implement necessary changes at newly acquired subsidiaries. For example, the Company is currently in the process of instituting personnel and management changes and developing and implementing new business plans for ESC, which the Company acquired in the fourth quarter of fiscal 1998. There is no assurance that the Company's assessment of problems and implementation of changes will be successful. A failure to achieve or sustain the anticipated benefits of the Aeromet Acquisition or any other acquisition by the Company could have a material adverse effect on the Company and its financial performance. Foreign Operations. Aeromet subjects the Company to the risks of foreign operations, including foreign government policies and regulations; tariffs, taxes and other trade barriers; exchange controls and limitations on dividends or other payments; and devaluations and fluctuations in currency exchange rates. The Company has not previously engaged in foreign currency hedging transactions, and there is no assurance that any hedging transactions by the Company would offset unfavorable changes in foreign currency rates. Significant Leverage; Liquidity. As a result of the Offering, the Company has substantial indebtedness and significant debt service obligations. The level of the Company's indebtedness could have important consequences, including, but not limited to, the following: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, product development, general corporate purposes or other purposes may be materially limited or impaired; (ii) a significant portion of the Company's cash flow from operations will be dedicated to the payment of principal and interest on the Notes, thereby reducing the funds available to the Company for its operations and future business opportunities; (iii) the Company's borrowings from its primary bank lender bear interest at variable rates, which could result in higher interest expense in the event of increases in interest rates; (iv) the Company may be substantially more leveraged than certain of its competitors, which may place the Company at a competitive disadvantage; and (v) the Company's substantial degree of leverage may limit its flexibility to adjust to changing market conditions, reduce its ability to withstand competitive pressures and make it more vulnerable to a downturn in general economic conditions or in its business or may make the Company unable to make capital expenditures. The Company's ability to make scheduled payments on the Notes or to refinance its other debt obligations will depend upon its future financial and operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond its control. There is no assurance that the Company's operating results, cash flow and capital resources will be sufficient for payment of its indebtedness in the future, and if insufficient, the Company could face substantial liquidity problems and could be forced to reduce or 15 delay capital expenditures, dispose of material assets or operations, reduce, restructure or refinance its indebtedness or seek additional equity capital to meet its debt service and other obligations. There is no assurance that any of these actions could be effected on satisfactory terms, if at all. Restrictive Debt Covenants. The Indenture contains a number of significant covenants that, among other things, restrict the ability of the Company and its subsidiaries to dispose of assets, incur additional indebtedness, prepay other indebtedness (including the Notes), amend certain debt instruments (including the Indenture), pay dividends, create liens on assets, enter into sale and leaseback transactions, make investments, loans or advances, make acquisitions, engage in mergers or consolidations, make capital expenditures, change the business conducted by the Company or its subsidiaries, or engage in certain transactions with affiliates and otherwise restrict certain corporate activities. In addition, under some of the agreements governing its senior indebtedness, the Company is subject to similar covenants and certain additional restrictions. The Company's ability to comply with such covenants may be affected by events beyond its control, including prevailing economic, financial and industry conditions. The breach of any of such covenants or restrictions could result in a default, which would permit the senior lenders, or the holders of the Notes, or both, as the case may be, to declare all amounts owed them to be due and payable, together with accrued and unpaid interest. As a result, any commitments of the Company's senior lenders to make further extensions of credit could be terminated. If the Company is unable to repay its indebtedness to its senior lenders, such lenders could proceed against any collateral securing such indebtedness. Aerospace Industry Risks; Cyclicality; Asia Volatility. The Company and Aeromet operate in historically cyclical industries. The aerospace, defense and transportation industries are sensitive to general economic conditions and have been adversely affected by past recessions. For example, from 1990 to 1994 the aerospace industry experienced reduced demand for commercial aircraft, a decline in military spending and the postponement of overhaul and maintenance on existing aircraft. In past years, the aerospace industry has been adversely affected by a number of factors, including increased fuel and labor costs and intense price competition. Although the aerospace supply industry currently is enjoying favorable trends driven by strong growth in commercial aircraft demand, there is no assurance that such trends will continue or that general economic conditions will not lead to a downturn in demand for core components and products of the Company or Aeromet. Moreover, as of January 1998, Boeing and Airbus each had a 10% backlog of aircraft sales to customers in Asia. Current financial difficulties in Asia, including currency devaluations and volatile financial markets, are adversely affecting some Asian customers. These difficulties may result in cancellations or delays in aircraft orders. Boeing indicated that due to the Asian financial crisis, it expects worldwide requirements for commercial jets will be reduced over the five-year period of 1998 through 2002 from 4,150 to 4,000 aircraft. Any cancellations or delays in aircraft orders from customers of Boeing or Airbus could reduce demand for the Company's products and could have a material adverse effect on the Company and its financial performance. See "--Industry Overview." Management of Growth. The Company has experienced rapid growth that has placed and will continue to place significant demands on its managerial, administrative, financial and operational resources. The Company's total number of employees increased from approximately 748 to over 1,200 upon consummation of the Aeromet Acquisition, and the number of its operating sites increased from five in the United States to a total of ten in the United States and the United Kingdom. The Company has pursued an aggressive growth strategy and expects to continue to evaluate and pursue potential strategic acquisitions. To manage its growth effectively, the Company must continue to improve its operational, financial and other management processes and systems and continue to attract and retain highly skilled personnel. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Possible Need for Additional Capital. The Company believes that the net proceeds from the Offering together with cash from operations and other sources will be sufficient to meet the 16 Company's currently budgeted working capital requirements for at least the next 12 months. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company's actual capital needs, however, will depend on many factors, including the amount of revenue generated from operations, amounts required to pay principal and interest on the Notes, bank borrowings and other indebtedness, capital expenditures required to remain competitive, cash required for acquired companies and future acquisitions and acquisition and financing transaction costs, none of which can be predicted with certainty. As a result of these factors, the Company is unable to predict accurately the amount or timing of its future capital needs, if any. The inability to obtain additional capital if and when needed could have a material adverse effect on the Company and its financial performance. Dependence on Key Personnel. The Company's success depends significantly on Donald A. Wright, the Company's Chief Executive Officer and President, and on a number of other senior management and operational personnel. The loss of the services of any of these employees could have a material adverse effect on the Company's ability to achieve its business objectives. The Company has a key man life insurance policy on the life of Mr. Wright in the amount of $3 million. The Company's growth and future success will depend in large part on its ability to attract and retain additional senior managers and highly skilled personnel to provide management and technological depth and support, to enhance and market its existing products and to develop new products. Competition for skilled management, technical, marketing and sales personnel is intense. There is no assurance that the Company will be successful in attracting and retaining the key management, technical, marketing and sales personnel needed to support its business and its recent and future acquisitions, and failure to do so could have a material adverse effect on the Company and its financial performance. Technological Change; Development of New Products. The market for the Company's and Aeromet's products is characterized by evolving technology and industry standards, changes in customer needs, adaptation of products to customer needs and new product introductions. The Company's success will depend on its ability to enhance its current products and to develop new products that meet changing customer needs, advertise and market its products and respond to evolving industry standards and other technological changes on a timely and cost-effective basis. The Company may not succeed in developing new products or enhancing its existing products on a timely basis, and such new products or enhancements may not achieve market acceptance. Furthermore, from time to time the Company's competitors may announce new products, enhancements or technologies that have the potential to replace or render the Company's existing products obsolete. Any failure by the Company to anticipate or respond adequately to changes in technology and customer preferences or to product introductions or enhancements by others, or any significant delays in the development or introduction of new products or product enhancements by the Company could have a material adverse effect on the Company and its financial performance. See "--Business Strengths; --Strategy." Product Liability. The Company is subject to the risk of product liability claims and lawsuits for harm caused by products of the Company. The Company maintains product liability insurance with a maximum coverage of $2 million. However, there is no assurance that the Company's insurance will be sufficient to cover any claims that may arise. A successful product liability claim in excess of the Company's insurance coverage could have a material adverse effect on the Company and its financial performance. ITEM 2. DESCRIPTION OF PROPERTY The principal executive and administrative offices of the Company are located at 430 Olds Station Road, Wenatchee, Washington. The Company's headquarters building provides approximately 18,000 square feet of office space, and is owned by the Company. The Company also occupies leased office facilities in Bothell, Washington, of approximately 21,390 square feet, for base rent of $295,000 17 per year under a lease that expires in 2003. The Company subleases 95% of the Bothell facility to a third party and guarantees payment of the sublease. See "Certain Relationships and Related Transactions." The general location, use and approximate size of the Company's and Aeromet's principal owned and leased manufacturing properties are as follows:
Approx. Own/ Annual Lease Mortgage Segment Location Area Lease Rent Expiration Balance - --------------------------------------------------------------------------------------------------------------------------- Aerospace Wenatchee, Washington 42,000 Lease $199,000 2007 N/A ---------------------------------------------------------------------------------------------------------- Entiat, Washington 84,000 Own N/A N/A $1,107,000 ---------------------------------------------------------------------------------------------------------- Sittingbourne, Welwyn 157,000 Lease (pound)751,000 2018 N/A Garden City and Worcester ---------------------------------------------------------------------------------------------------------- Worcester 15,000 Lease (pound) 45,000 2003 N/A ---------------------------------------------------------------------------------------------------------- Rochester 34,000 Lease (pound)180,000 2001 N/A ---------------------------------------------------------------------------------------------------------- Birmingham 59,000 Lease (pound)236,000 2008 N/A ---------------------------------------------------------------------------------------------------------- Sittingbourne 7,000 Lease (pound) 45,000 2005 N/A - --------------------------------------------------------------------------------------------------------------------------- Electronics Wenatchee, Washington 49,000 Lease $200,000 2007 N/A ---------------------------------------------------------------------------------------------------------- Sequim, Washington 18,355 Own N/A N/A None ---------------------------------------------------------------------------------------------------------- Butler, New Jersey 22,400 Lease $192,000 1998 N/A ---------------------------------------------------------------------------------------------------------- Vancouver, Washington 50,000 Lease $336,000 2009 N/A - ---------------------------------------------------------------------------------------------------------------------------
In connection with the Aeromet Acquisition, the Company entered into a 12-month option to purchase the Sittingbourne, Worcester and Welwyn Garden City facilities that are being leased by Aeromet, for a purchase price of approximately $12.5 million in cash. The Company is also currently negotiating to purchase its Butler, New Jersey facility for $1.1 million in cash. That purchase is expected to close in September 1998, subject to satisfaction of certain closing conditions. The Company's lease on the Butler, New Jersey facility expired in July 1998, and the Company is currently renting the facility on a month-to-month basis. ITEM 3. LEGAL PROCEEDINGS From time to time the Company is involved in legal proceedings relating to claims arising out of operations in the normal course of business. The Company is not aware of any material legal proceedings pending or threatened against the Company or any of its properties. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. 18 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Market Information, Shareholders, and Dividends - ----------------------------------------------- Until March 13, 1995, there was no public market for the Company's Common Stock. From that date through September 14, 1995, the Common Stock was listed on the Nasdaq Electronic Bulletin Board. From September 15, 1995 through July 15, 1996, the Common Stock was traded on the Nasdaq - Small Cap Market System under the symbol "PCTH." Since July 16, 1996, the Company's Common Stock and Common Stock Purchase Warrants ("Warrants") have been traded on the Nasdaq National Market System under the symbols "PCTH" for the Common Stock and "PCTHW" for the Warrants. Each Warrant entitles the holder to purchase one share of Common Stock at an exercise price of $4.6875 per share. The Nasdaq National Market System reported the following range of high and low sales prices for the Common Stock and the Warrants for each calendar quarter within the Company's 1997 and 1998 fiscal years:
Common Stock Warrants -------------------- -------------------- Calendar Period High Low High Low --------------- ------- ------- ------- ------- 1996 First Quarter.................................. $4.38 $3.75 -- -- Second Quarter................................. 5.00 2.75 -- -- Third Quarter.................................. 5.0625 2.00 $ .75 $ .375 Fourth Quarter ................................ 3.125 1.9375 .6875 .28125 1997 First Quarter.................................. 4.75 2.75 1.40625 .5 Second Quarter ................................ 4.0625 2.6875 1.1875 .71875 Third Quarter.................................. 5.0625 3.7188 2.25 1.25 Fourth Quarter................................. 6.8750 4.00 2.75 1.50 1998 First Quarter.................................. 7.0313 4.1875 3.1250 1.1250 Second Quarter (April 1 - May 31, 1998)........ 6.9375 5.75 3.00 2.375
As of August 27, 1998, the closing sales price on the Nasdaq National Market System for the Common Stock was $3.00 per share and the closing sales price on the Nasdaq National Market System for the Warrants was $1.219 per Warrant. The Company has never declared or paid cash dividends on the Common Stock. The Company currently anticipates that it will retain all future earnings to fund the operation of its business and does not anticipate paying dividends on the Common Stock in the foreseeable future. The Company's agreement with its principal lender and the Indenture restrict the Company's ability to pay dividends. Common Stock As of August 27, 1998, there were 940 holders of record of 15,986,323 shares of fully paid and nonassessable Common Stock outstanding. Each share of outstanding Common Stock is entitled to participate equally in dividends as and when declared by the Board of Directors of the Company, out of funds legally available therefor, and is entitled to participate equally in any distribution of net assets made to the Company's shareholders in the event of liquidation of the Company after payment 19 to all creditors thereof. There are no preemptive rights or rights to convert Common Stock into any other securities. The holders of the Common Stock are entitled to one vote for each share held of record on all matters voted upon by the Company's shareholders and may not cumulate votes for the election of directors. Thus, the owners of a majority of the shares of the Common Stock outstanding may elect all of the directors of the Company and the owners of the balance of the shares of the Common Stock would not be able to elect any directors of the Company. Preferred Stock The Company's Board of Directors has the authority to issue shares of Preferred Stock in one or more series and to fix the powers, designations, preferences and relative, participating, optional or other rights of any series of preferred stock, including dividend rights, conversion rights, voting rights, redemption terms, liquidation preferences, sinking fund terms and the number of shares constituting any series, without shareholder approval, unless such approval is required by applicable law or by the rules of any stock exchange or automated quotation system on which securities of the Company may be listed or traded. Series A Preferred. In February 1997, the Board of Directors authorized the issuance of 50,000 shares of the Company's Series A Convertible Preferred Stock ("Series A Preferred"), which were sold to a limited number of institutional investors under Rule 506 of the Securities Act. Effective as of June 11, 1997, the Company registered for resale up to 1,948,541 shares of Common Stock underlying the Series A Preferred on a Form S-3 registration statement. As of May 14, 1998, the Series A Preferred had been fully converted into 1,494,593 shares of Common Stock. The Company is in the process of deregistering the remaining unissued 453,948 shares of Common Stock. Series B Preferred. In May 1998, the Company sold 100,000 shares of Series B Convertible Preferred Stock ("Series B Preferred"), and warrants to purchase 138,888 shares of Common Stock, in a private offering that generated $10.0 million in gross proceeds. In addition, the purchasers deposited $7.0 million into escrow. Upon the closing of the Aeromet Acquisition, the Company issued the purchasers 70,000 additional shares of Series B Preferred, and warrants to purchase an additional 97,221 shares of Common Stock, in exchange for delivery of the escrowed funds to the Company. The holders of the warrants issued in connection with the Series B Preferred may exercise those warrants after May 1999 for $7.20 per share of Common Stock. The Common Stock issuable upon conversion of the Series B Preferred and upon exercise of the related warrants is subject to a registration rights agreement that requires the Company to file a registration statement covering those shares by November 1998, and to use its best efforts to make that registration statement effective by January 1999. The registration rights agreement also grants certain piggyback registration rights with regard to the shares of Common Stock underlying the Series B Preferred and the related warrants. Upon conversion of a share of Series B Preferred, the holder will receive the number of shares of Common Stock equal to $100 divided by the then-applicable conversion price of the Series B Preferred. Up to $7,000,000 of the Common Stock underlying the Series B Preferred may be converted and sold at any time, if that Common Stock is included in an effective piggyback registration. Shares of Series B Preferred whose underlying shares of Common Stock are not included in a piggyback registration are not convertible until August 1998, and may not be sold until February 1999. At that time, the underlying Common Stock may be sold upon the effectiveness of a registration statement, or under any applicable exemption from registration. From August 1998 until February 1999, the conversion price of the Series B Preferred is $7.20 per share. After February 1999, the conversion price of the Series B Preferred is equal to the lower of (a) $7.20 per share, or (b) the average of the three lowest closing bid prices per share of the Common Stock over the 22 trading days before conversion, but not less than a floor price (the "Floor Price"), which is currently 20 $5.67, except in certain limited circumstances. No holder of Series B Preferred is entitled to voluntarily convert Series B Preferred that would cause the holder to own more than 9.9% of the Company's total outstanding Common Stock at any one time. Any Series B Preferred outstanding on May 2003 will automatically convert into Common Stock at the then-applicable conversion price. After the sale in a piggyback registration, if any, of any Common Stock issued upon conversion of Series B Preferred, the Floor Price would be recomputed to an amount that would allow the maximum number of shares of Common Stock to be issued, without shareholder approval, upon conversion of the remaining unconverted shares of Series B Preferred. If the average closing bid price of the Common Stock remains below the Floor Price for any 30 consecutive trading days occurring after August 13, 1998, and a conversion of the Series B Preferred into Common Stock is requested or required, then the Company must elect to do one of the following: (A) redeem any shares of Series B Preferred which would result upon conversion in the issuance of more than 3,000,000 shares of Common Stock (the maximum issuable without shareholder approval), or (B) obtain any shareholder approval necessary under its Nasdaq maintenance requirements to allow the conversion to occur. The Company may redeem the Series B Preferred at a redemption price of $115 per share upon 20-days notice to the holder if the holder does not elect to convert within 15 days of receiving a redemption notice. The Company must either redeem any Series B Preferred that it is not permitted to convert without shareholder approval under Nasdaq requirements or obtain shareholder approval for such conversion. So long as the Company's senior lender requires, any redemption price, or other cash payments due to the holders, shall be converted into promissory notes in favor of the holder until conversion or redemption is allowed to occur. Warrants As of August 27, 1998, the Company had outstanding warrants to purchase Common Stock as follows: (a) publicly traded Warrants to purchase 2,295,000 shares of Common Stock that were issued as part of the units sold in a July 1996 registered public offering, which have an exercise price of $4.6875 per share and expire in July 2001 ("Units"); (b) warrants to purchase Units consisting of 180,000 shares of registered Common Stock and 180,000 Warrants, which were issued to underwriters in the July 1996 public offering, and which have an exercise price of $3.75 per Unit and expire in July 2001; (c) warrants to purchase a total of 247,500 shares of Common Stock issued to several employees and consultants of the Company, which have exercise prices ranging from $2.00 to $4.80 per share, and expiration dates that range from December 2000 to February 2005; and (d) warrants to purchase 170,000 shares of Common Stock issued in connection with the Series B Preferred ("Series B warrants"), as discussed above. No holder of the warrants possesses any rights as a shareholder under such warrants until such holder exercises such warrant. Of the shares issuable upon exercise of the employee and consultant warrants, 160,000 shares have been registered by the Company under a Form S-8 registration statement (see "Executive Compensation") and 87,500 shares are registered for resale under a Form S-3 registration statement. Registration Rights As of August 27, 1998, up to $7,000,000 in value of the Common Stock issuable upon conversion of the Series B Preferred and Series B warrants (the "Conversion Shares") and 590,000 shares of unregistered Common Stock are entitled to exercise certain piggyback rights to register such shares for resale in certain public offerings of Common Stock by the Company for its own account or for the account of others, subject to certain conditions, including the right of the Company's underwriters to limit the number of such shares included in the registration. The Company has agreed to register for resale 21 any unregistered Conversion Shares by November 1998 and to use its best efforts to have such registration statement declared effective by January 1999. Anti-Takeover Laws The Company, as a Washington corporation, is subject to certain provisions of Washington law regarding significant business transactions and fair price restrictions. These provisions may have the effect of delaying or deterring a hostile takeover of the Company. Washington's "Significant Business Transactions" statute (Chapter 23B.19 of the Washington Business Corporation Act) applies to public companies that are incorporated under Washington law. The statute prohibits, subject to certain exceptions, a corporation from entering into any "significant business transactions" with an "Acquiring Person" (defined generally as a person who or an affiliated group that beneficially owns 10% or more of the outstanding voting securities of a corporation) for a period of five years after such person or affiliated group becomes an Acquiring Person unless the transaction or share acquisition made by the Acquiring Person is approved prior to the share acquisition by a majority of the target corporation's directors. In addition, this statute prohibits a corporation subject thereto from entering into a significant business transaction with an Acquiring Person unless the consideration to be received by the corporation's shareholders in connection with the proposed transaction satisfies the "fair price" provisions set forth in the statute. Transfer Agent and Registrar The Transfer Agent and Registrar for the Company's Common Stock and publicly traded Warrants is Interwest Transfer Co., Inc. 22 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data presents selected historical financial data of the Company as of and for the years ended May 31, 1994, 1995, 1996, 1997 and 1998, is derived from the Company's audited financial statements and contains no financial data of Aeromet. This data should be read in conjunction with the Company's Financial Statements and Notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations.
Years Ended May 31, -------------------------------------------------------- (in thousands, except percentage and per share data) 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- Statement of Operations Data: Net sales(1)....................... $ 2,940 $ 11,035 $20,725 $ 34,175 $ 54,099 Cost of sales...................... 2,860 9,092 16,439 25,969 39,487 -------- -------- -------- -------- -------- Gross profit....................... 80 1,943 4,286 8,206 14,612 Operating expenses................. 964 2,789 4,869 6,259 9,872 -------- -------- -------- -------- -------- Income (loss) from operations...... (884) (846) (583) 1,947 4,740 Net interest expense............... 203 282 498 384 755 Other income (expense)............. (11) (524) 15 169 (853) -------- -------- -------- -------- -------- Income (loss) before taxes......... (1,098) (1,652) (1,066) 1,732 3,132 Income taxes (benefit)............. -- (241) (67) 50 (482) -------- -------- -------- -------- -------- Net income (loss).................. $ (1,098) $ (1,411) $ (999) $ 1,682 $ 3,614 ======== ======== ======== ======== ======== Net income (loss) per share: Basic............................ (.60) (.41) (.16) .18 .29 Diluted.......................... (.60) (.41) (.16) .17 .27 Shares used in computation of income (loss) per share: Basic............................ 1,826 3,469 6,209 9,500 12,486 Diluted.......................... 1,826 3,469 6,209 10,036 13,606 Other Financial Data: EBITDA(2).......................... $ (739) $ (437) $ 288 $ 3,305 $ 6,944 EBITDA margin...................... -- -- 1.4% 9.7% 12.8% Depreciation and amortization...... $ 145 $ 409 $ 871 $ 1,358 $ 2,204 Capital expenditures(3)............ 81 959 1,293 2,739 10,290 At May 31, -------------------------------------------------------- 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- Balance Sheet Data: Cash and cash equivalents.......... $ 27 $ 1,079 $ 725 $ 3,048 $ 11,461 Working capital (deficit).......... (1,237) 1,758 952 13,090 25,599 Total assets....................... 7,894 11,630 27,649 35,752 78,580 Long-term debt (including current portion)........................ 3,662 3,902 6,304 4,233 11,233 Shareholders' equity............... 1,226 5,454 12,539 25,619 56,142 - -------------- (1) The increases in net sales are attributable to acquisitions by the Company and internal growth. See "Description of Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) "EBITDA" represents income from operations plus depreciation and amortization expense. EBITDA should not be construed as an alternative to (i) net income, as defined by generally accepted accounting principles, as an indicator of the Company's operating performance or (ii) cash flow, as defined by generally accepted accounting principles, as a measure of liquidity. 23 (3) Fiscal 1998 includes capital expenditures of approximately $1.3 million for a manufacturing building expansion, approximately $500,000 for capital equipment and approximately $400,000 of metal finishing expenditures associated with such manufacturing building expansion, approximately $2.0 million for a machining cell and approximately $2.7 million associated with the acquisition and construction of the Company's headquarters building.
24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Preliminary Note Regarding Forward-Looking Statements This report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is subject to the safe harbor created by those sections. Actual results could differ materially from those projected in the forward-looking statements set forth in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the captions "Overview" and "Liquidity and Capital Resources," and in "Description of Business" under each of the captions. Overview The Company has been an active consolidator of companies, and its results of operations have been substantially affected by acquisitions. As of May 31, 1998, the Company had acquired and integrated eight companies since 1990. See "Description of Business--Corporate History." These acquisitions, as well as internal growth in the Company's existing and acquired businesses, have resulted in substantial increases in net sales. The Company's operating expenses and margins and other expenses also have been affected by certain expenses directly associated with the acquisitions and related capital raising transactions. The Company has experienced substantial increases in all other expense categories as a result of the increases in its operations. A portion of these expenses is attributable to the assimilation of acquired operations into the Company's existing businesses. In July 1998, the Company completed the Aeromet Acquisition. The Aeromet Acquisition will have a significant effect on the Company's future operations and on comparisons of income, expense and balance sheet items in periods after fiscal 1998. Substantially all of the Company's revenues are generated by sales to customers in the commercial aerospace, defense, electronics and transportation industries, with commercial aerospace and defense industry sales being the most significant. Sales to commercial aerospace and defense industry customers comprised 42% and 20%, respectively, of total net sales in fiscal 1998. The commercial aerospace and defense industries are cyclical in nature and subject to changes based on general economic conditions and commercial airline industry, defense and government spending. See "Description of Business--Industry Overview" and "--Business Considerations--Aerospace Industry Risks; Cyclicality; Asia Volatility." The Company's operations are focused in development, manufacturing and marketing of high performance electronics and metal components and assemblies. The Company's electronics products are characterized by relatively low volumes and high margins. In comparison, volumes have historically been higher and margins lower for the Company's metals products. See "--Results of Operations." The Company believes that margins will remain higher for electronic and assembled products than for its metals products. Products incorporating both electronics and metal parts are expected to generate margins closer to electronics product margins. As a result of margin differences, changes in product mix among its electronics, assembled and metals products can be expected to affect overall margins for the Company. The Company's sales are not subject to significant seasonal fluctuations. However, production and resulting sales are subject to the number of working days in any given period. Results for various periods may vary materially due to the number of working days available in any period. 25 Results of Operations For an understanding of the significant factors that influenced the Company's performance during the past three fiscal years, the following discussion should be read in conjunction with the consolidated financial statements presented in this report. The following table sets forth for the periods indicated certain historical statement of operations data of the Company expressed in dollars (in thousands) and as a percentage of net sales.
Years Ended May 31, -------------------------------------------------------------------- 1996 1997 1998 -------------------- -------------------- -------------------- Net sales................................ $ 20,725 100.0% $ 34,175 100.0% $ 54,099 100.0% Cost of sales............................ 16,439 79.3 25,969 76.0 39,487 73.0 -------- -------- -------- -------- -------- -------- Gross profit............................. 4,286 20.7 8,206 24.0 14,612 27.0 Operating expenses....................... 4,869 23.5 6,259 18.3 9,872 18.2 -------- -------- -------- -------- -------- -------- Income (loss) from operations............ (583) (2.8) 1,947 5.7 4,740 8.8 Net interest expense..................... 498 2.4 384 1.1 755 1.4 Other income (expense)................... 15 -- 169 0.5 (853) (1.6) Income tax benefit (expense)............. 67 0.3 (50) (0.1) 482 0.9 -------- -------- -------- -------- -------- -------- Net income (loss)........................ $ (999) (4.8) $ 1,682 4.9 $ 3,614 6.7 ======== ======== ======== EBITDA................................... $ 288 1.4 $ 3,305 9.7 $ 6,944 12.8
Year Ended May 31, 1998 Compared to Year Ended May 31, 1997 Net Sales. Net sales increased by $19.9 million, or 58%, to $54.1 million for fiscal 1998 from $34.2 million in fiscal 1997. The significant increase in net sales for fiscal 1998 from fiscal 1997 included increases in both commercial aerospace industry net sales (an $11.3 million increase) and defense industry net sales (a $3.5 million increase). The commercial aerospace industry net sales increase was primarily attributable to increases in production at Boeing and the related increase in demand from that customer for the Company's precision cast and machined products. The defense industry net sales increase was primarily attributable to an increase in orders of aerospace, satellite and weapons systems electronics products. Of total net sales in fiscal 1998, commercial aerospace industry net sales comprised 42.6% of total net sales, up from 34.5% of net sales in fiscal 1997. Defense industry sales comprised 19.9% of total net sales in fiscal 1998, down from 21.3% of net sales in fiscal 1997. The Company completed its Balo acquisition in February 1998 and its ESC acquisition, effective as of March 1998. These acquisitions expanded production of hermetically sealed product offerings and added relay, solenoid and flat panel display product lines. See "Description of Business--Corporate History" and "--Products, Processes and Markets--Assembled Electronics Products." Accordingly, net sales for fiscal 1998 also included approximately four months of operations of Balo and three months of operations for ESC, contributing approximately $4.3 million to net sales in fiscal 1998. Gross Profit. Gross profit increased by $6.4 million, or 78.0%, to $14.6 million for fiscal 1998 from $8.2 million in fiscal 1997. As a percentage of net sales, gross profit increased to 27.0% in fiscal 1998 from 24.0% in fiscal 1997, which was primarily attributable to increased efficiencies gained in manufacturing processes and in-house production of processes that had previously been purchased from outside vendors. The Company also believes that capital investments in equipment and production processes contributed to the improvement in gross profit margins. 26 Operating Expenses. Operating expenses increased by $3.6 million, or 57.1%, to $9.9 million for fiscal 1998 from $6.3 million in fiscal 1997, partially due to the Balo and ESC acquisitions and increased levels of operations in fiscal 1998. As a percentage of net sales, operating expenses remained essentially unchanged. EBITDA. EBITDA increased by $3.6 million, or 109.1%, to $6.9 million for fiscal 1998 from $3.3 million in fiscal 1997. As a percentage of net sales, EBITDA increased to 12.8% in fiscal 1998 from 9.7% in fiscal 1997. The increase in EBITDA as a percentage of net sales during this period was primarily attributable to production efficiencies and improved capacity utilization. Net Interest Expense. Net interest expense increased $371,000, or 96.6%, to $755,000 for fiscal 1998 from $384,000 in fiscal 1997. This increase was primarily due to the Company's financing of capital equipment purchases and the debt incurred to finance the expansion of its Wenatchee facilities to support growth in net sales. Other Income (Expense). Other income (expense) represents non-recurring and non-operational income and expense for the period. Other expense increased to $853,000 in fiscal 1998 from income of $169,000 in fiscal 1997. This increase of $1,022,000 was due principally to a $1.0 million write-off of portions of notes receivable and associated debt restructuring and related expenses in connection with the termination of the Company's efforts during the third quarter of fiscal 1998 to form an information technology group. See "Certain Relationships and Related Transactions." Net Income. Net income increased $1.9 million, or 111.8% to $3.6 million for fiscal 1998 from $1.7 million in 1997, primarily as a result of the factors discussed above. Year Ended May 31, 1997 Compared to Year Ended May 31, 1996 Net Sales. Net sales increased by $13.5 million, or 65.2%, to $34.2 million for fiscal 1997 from $20.7 million in fiscal 1996. This increase was primarily attributable to larger order sizes for electronics products, due to broader market acceptance of the Company's electronics products and technologies, which increased sales of higher priced products and added new customers. The Company acquired NTI in April 1997, which added capabilities for explosive bonding of specialty metals. See "Business--Corporate History" and "--Products, Processes and Markets--Explosive Bonding." Accordingly, net sales for fiscal 1997 included one month of operations of NTI, which contributed $183,000 to total net sales for that year. Gross Profit. Gross profit increased by $3.9 million, or 90.7%, to $8.2 million for fiscal 1997, up from $4.3 million in fiscal 1996. As a percentage of net sales, gross profit increased to 24.0% in fiscal 1997 from 20.7% in fiscal 1996. The increase in gross profit as a percentage of net sales was primarily attributable to achieving revenue levels which allowed for production efficiencies and increased capacity utilization. The Company also believes that its investments in manufacturing equipment contributed to improvements in gross profit margins. Operating Expenses. Operating expenses increased by $1.4 million, or 28.6%, to $6.3 million for fiscal 1997, from $4.9 million for fiscal 1996. As a percentage of net sales, operating expenses decreased to 18.3% in fiscal 1997 from 23.5% in fiscal 1996. The substantial decrease in operating expenses as a percentage of net sales was primarily attributable to the Company's improved ability to leverage its operating costs and the consolidation of certain operations to the Company's Wenatchee manufacturing campus. Specifically, both CDI in the electronics segment and Cashmere in the aerospace segment were consolidated into the Company's Wenatchee manufacturing campus. See "Description of Business--Products, Processes and Markets--Assembled Electronics Products" and "--Precision Machining." 27 EBITDA. EBITDA increased by $3.0 million, or 1,000.0%, to $3.3 million for fiscal 1997, up from $300,000 for fiscal 1996. As a percentage of net sales, EBITDA increased to 9.7% in fiscal 1997, from 1.4% in fiscal 1996. The substantial increase in EBITDA as a percentage of net sales was primarily attributable to efficiencies gained in manufacturing processes, consolidation of certain operations to the Company's Wenatchee campus allowing for overhead efficiencies, and increases in net sales not requiring incremental increases in operating expenses. Net Interest Expense. Net interest expense decreased $114,000, or 22.9%, to $384,000 for fiscal 1997 from $498,000 in fiscal 1996, primarily as a result of the repayment of debt that was funded by proceeds from a July 1996 public and a February 1997 private offering of equity securities, and the reduction of bank line of credit balances throughout the year. Other Income (Expense). Other income increased to $169,000 in fiscal 1997 from income of $15,000 in fiscal 1996 primarily as a result of sale of scrap and recycling of excess materials in the manufacturing process. Net Income. Net income increased $2.7 million to $1.7 million for fiscal 1997 from a loss of $999,000 in fiscal 1996 primarily as a result of factors discussed above. Inflation Management believes that the Company's operations for the periods discussed have not been adversely affected by inflation. Liquidity and Capital Resources Cash generated from operating activities was $1.6 million for fiscal 1998 compared to cash used of $212,000 in fiscal 1997. The change in net cash from operations was primarily a result of 111.8% increase in net income from $1.7 million in fiscal 1997 to $3.6 million in fiscal 1998. The increase in net income was partially offset by increases in accounts receivable and inventories to support revenue growth. Increases in accounts payable, accrued liabilities and other liabilities also contributed to increased cash from operations. Cash used in investing activities increased from $2.0 million in fiscal 1997 to $16.7 million in fiscal 1998, an increase of $14.7 million. The change results primarily from the Company's increased investment in property and equipment of $6.5 million in fiscal 1998 compared to $2.1 million in fiscal 1997 and the issuance of $6.3 million in notes receivable in connection with the investment in a proposed information technology group. Of the total $6.3 million, a net of $4.6 million is represented by an investment in the common stock of a third party internet services provider. See "Certain Relationships and Related Transactions." Cash generated from financing activities increased by $19.0 million, to $23.5 million in fiscal 1998, from $4.5 million in fiscal 1997. During fiscal 1998, the Company completed several financing transactions, receiving net proceeds from long-term debt financing of $10.1 million (including net proceeds from convertible notes of $5.4 million); $2.2 million from the sale of Common Stock; net proceeds of $9.3 million from the sale of Series B Preferred, and $3.8 million from the proceeds from exercise of stock options and warrants. Cash generated by the equity financing transactions was offset to a certain degree by payments on long-term debt and capital leases of $1.5 million during the year. See "Market for Common Equity and Related Shareholder Matters." Capital expenditures were $10.3 million during fiscal 1998, which is higher than normal due to approximately $4.7 million for expansion of the Company's Wenatchee manufacturing facilities and acquisition and construction of its headquarters, with the balance of $5.6 million related primarily to 28 purchases of machinery and equipment. During fiscal 1998, the Company substantially completed an addition to its Wenatchee facilities consisting of approximately 12,000 square feet of production space. The cost of this expansion was approximately $1.3 million. The Company has entered into a term loan with its primary senior lender for approximately $712,000 of these expansion costs. The Company has also acquired certain property adjacent to its existing Wenatchee on which it built an office building to house the Company's executive, administrative and accounting personnel. This facility was occupied in August 1998. Total project costs for the office building are estimated at approximately $3.0 million and have been or will be funded from working capital. The Company is currently negotiating the purchase of the Balo facility for approximately $1.1 million. As of May 31, 1998, the Company had no material commitments outstanding for purchases of additional capital assets. The Company's working capital, as of May 31, 1998 and 1997 was $25.6 million and $13.1 million, respectively. The increase in working capital in fiscal 1998 over fiscal 1997 was primarily the result of the equity and financing activities discussed above and the Company's improved net income from operations. In July 1998, the Company completed an offering of $75,000,000 of 11 1/4% senior subordinated notes (the "Notes") to qualified institutional buyers to finance the Aeromet Acquisition. The Notes will mature on August 1, 2005, unless previously redeemed. The Notes will be redeemable at the option of the Company on or after August 1, 2003. In addition, on or before August 1, 2001, the Company may redeem up to 20% of the original aggregate principal amount of the Notes, subject to certain conditions. The Company believes that the net proceeds from this Offering plus cash from operations will be sufficient to meet the Company's cash requirements and to fund budgeted capital expenditures for fiscal 1999. See "Description of Business--Corporate History--Aeromet Acquisition" and "--Business Considerations--Significant Leverage; Liquidity; - --Possible Need for Additional Capital." The Company's banking relationships include a revolving line of credit up to $3.5 million, a non-revolving capital expenditures facility up to $2.0 million expiring September 30, 1998, and a term loan for approximately $700,000 for building improvements. The line of credit and capital expenditure facilities have no outstanding balance, and the term loan was funded during fiscal 1998. The Company has received a proposal from its bank to extend and increase the revolving line of credit to $7.5 million through September 1999, subject to final credit committee approval. The Company has also received a facility commitment letter from Aeromet's current lead bank in the United Kingdom to provide a revolving line of credit for 4.5 million pounds sterling, or approximately $7.5 million. The Company has net operating loss (NOLs) carryforwards for federal income tax purposes of approximately $4.9 million, the benefits of which expire in the tax year 2001 through the tax year 2011. The NOLs created by the Company's subsidiaries prior to their acquisition and the NOLs created as a consolidated group or groups subsequent to a qualifying tax free merger or acquisition, have limitations related to the amount of usage by each subsidiary or consolidated group as described in the Internal Revenue Code. As a result of these limitations, approximately $800,000 of the $4.9 million of NOLs will never become available. At May 31, 1997, the Company recorded a valuation allowance because management believed that it was uncertain that some portion or all of the deferred tax assets would be realized. At May 31, 1998, the Company eliminated the valuation allowance for deferred taxes due to management's assessment of improved probability of realization. The Company anticipates that its effective income tax rate will continue to approach the statutory rate in the future. 29 Year 2000 The Company (including Aeromet) is in the process of developing a plan to address the Year 2000 computer problem and to begin converting its computer systems to be Year 2000 compliant. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. The Company presently believes that with upgrades to existing software and possibly some replacement, the Year 2000 problem will not pose significant operational problems for the Company's computer systems. However, if such upgrades and replacements are not completed timely or effectively, the Year 2000 problem could have a material impact on the operations of the Company. The Company expects to incur internal staffing costs, as well as the cost of the software upgrades and replacement as a part of this effort. However, until the Company's plan is finalized, management is unable to reasonably estimate the costs of achieving Year 2000 compliance. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting and disclosure of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS No. 130, which is effective for fiscal years beginning after December 15, 1997, requires restatement of financial statements for earlier periods to be provided for comparative purposes. The Company anticipates that implementing the provisions of SFAS No. 130 will not have a significant impact on the Company's existing disclosures. The Company has not determined the manner in which it will present the information required by SFAS No. 130. In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. In the initial year of application, comparative information for earlier years must be restated. The Company anticipates that implementing the provisions of SFAS No. 131 will not have a significant impact on the Company's existing disclosures. The Company has not determined the manner in which it will present the information required by SFAS No. 131. In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures About Pensions and Other Postretirement Benefits. SFAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. It standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures. SFAS No. 132 is effective for fiscal years beginning after December 15, 1997. The Company has not determined the manner in which it will present the information required by SFAS No. 132. 30 ITEM 8. FINANCIAL STATEMENTS INDEPENDENT AUDITORS' REPORT The Board of Directors Pacific Aerospace & Electronics, Inc.: We have audited the accompanying consolidated balance sheet of Pacific Aerospace & Electronics, Inc. and subsidiaries as of May 31, 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pacific Aerospace & Electronics, Inc. and subsidiaries as of May 31, 1998, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP Seattle, Washington June 30, 1998 31 INDEPENDENT AUDITORS' REPORT The Board of Directors Pacific Aerospace & Electronics, Inc.: We have audited the accompanying consolidated balance sheet of Pacific Aerospace & Electronics, Inc. and subsidiaries as of May 31, 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the two-year period ended May 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pacific Aerospace & Electronics, Inc. and subsidiaries as of May 31, 1997, and the results of their operations and their cash flows for each of the years in the two-year period ended May 31, 1997 in conformity with generally accepted accounting principles. /s/ MOSS ADAMS LLP Everett, Washington July 2, 1997 32
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS May 31, 1997 and 1998 1997 1998 ------------ ------------ ASSETS Current assets: Cash and cash equivalents......................................................... $ 3,048,000 $ 11,461,000 Certificate of deposit............................................................ 1,000,000 -- Accounts receivable, net of allowance for doubtful accounts of $247,000 in 1997 and $130,000 in 1998...................................................... 5,455,000 9,375,000 Inventories....................................................................... 9,082,000 16,184,000 Deferred income taxes............................................................. -- 386,000 Prepaid expenses and other........................................................ 354,000 272,000 ------------ ------------ Total current assets......................................................... 18,939,000 37,678,000 ------------ ------------ Property, plant and equipment, net..................................................... 13,190,000 26,335,000 ------------ ------------ Other assets: Note receivable from related party................................................ 125,000 700,000 Investment........................................................................ -- 4,579,000 Costs in excess of net book value of acquired subsidiaries, net of accumulated amortization of $223,000 in 1997 and $439,000 in 1998.......................... 2,071,000 6,515,000 Patents, net of accumulated amortization of $205,000 in 1997 and $307,000 in 1998........................................................................ 1,331,000 1,229,000 Deferred income taxes............................................................. -- 222,000 Other............................................................................. 96,000 1,322,000 ------------ ------------ Total other assets........................................................... 3,623,000 14,567,000 ------------ ------------ $ 35,752,000 $ 78,580,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.................................................................. $ 3,736,000 $ 6,748,000 Accrued liabilities............................................................... 1,116,000 2,587,000 Current portion of long-term debt................................................. 855,000 1,027,000 Current portion of capital lease obligations...................................... 142,000 206,000 Line of credit.................................................................... -- 1,511,000 ------------ ------------ Total current liabilities.................................................... 5,849,000 12,079,000 Long-term liabilities: Long-term debt, net of current portion............................................ 2,899,000 9,059,000 Capital lease obligations, net of current portion................................. 337,000 941,000 Deferred income taxes............................................................. 592,000 -- Deferred rent and other........................................................... 456,000 359,000 ------------ ------------ Total liabilities............................................................ 10,133,000 22,438,000 ------------ ------------ Shareholders' equity: Convertible preferred stock, $0.001 par value, 5,000,000 shares authorized: Series A, 50,000 shares issued and outstanding at May 31, 1997 and none issued and outstanding at May 31, 1998.................................. -- -- Series B, none issued and outstanding at May 31, 1997 and 100,000 shares issued and outstanding at May 31, 1998........................ -- -- Common stock, $0.001 par value. 100,000,000 shares authorized, 10,220,249 and 15,395,723 issued and outstanding at May 31, 1997 and 1998, respectively......................................................... 10,000 15,000 Additional paid-in capital........................................................ 30,490,000 57,830,000 Cumulative unrealized loss on investment.......................................... -- (436,000) Accumulated deficit............................................................... (4,881,000) (1,267,000) ------------ ------------ Total shareholders' equity................................................... 25,619,000 56,142,000 Commitments, contingencies, and subsequent events...................................... -- -- ------------ ------------ $ 35,752,000 $ 78,580,000 ============ ============ See accompanying notes to consolidated financial statements.
33
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended May 31, 1996, 1997 and 1998 1996 1997 1998 ------------ ------------ ------------ Net sales............................................................. $ 20,725,000 $ 34,175,000 $ 54,099,000 Cost of sales......................................................... 16,439,000 25,969,000 39,487,000 ------------ ------------ ------------ Gross profit................................................ 4,286,000 8,206,000 14,612,000 Operating expenses.................................................... 4,869,000 6,259,000 9,872,000 ------------ ------------ ------------ Income (loss) from operations............................... (583,000) 1,947,000 4,740,000 ------------ ------------ ------------ Other income (expense): Interest income.................................................. 37,000 126,000 110,000 Interest expense................................................. (535,000) (510,000) (865,000) Other............................................................ 15,000 169,000 (853,000) ------------ ------------ ------------ (483,000) (215,000) (1,608,000) ------------ ------------ ------------ Income (loss) before income taxes........................... (1,066,000) 1,732,000 3,132,000 Income tax benefit (expense).......................................... 67,000 (50,000) 482,000 ------------ ------------ ------------ Net income (loss)........................................... $ (999,000) $ 1,682,000 $ 3,614,000 ============ ============ ============ Net income (loss) per share: Basic............................................................ $ (0.16) 0.18 0.29 Diluted.......................................................... (0.16) 0.17 0.27 Shares used in computation of net income (loss) per share: Basic............................................................ 6,209,000 9,499,980 12,486,077 Diluted.......................................................... 6,209,000 10,035,846 13,606,061 See accompanying notes to consolidated financial statements.
34
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years ended May 31, 1996, 1997 and 1998 Series A Series B convertible convertible preferred stock preferred stock Common stock Additional Cumulative Total ----------------- ----------------- ------------------- paid-in unrealized Accumulated shareholders' Shares Amount Shares Amount Shares Amount capital losses deficit equity -------- -------- -------- -------- ---------- -------- ---------- ---------- ---------- ------------- Balance at May 31, 1995 -- $ -- -- $ -- 5,196,008 $ 5,000 11,013,000 -- (5,564,000) 5,454,000 Sale of common stock -- -- -- -- 1,503,551 2,000 4,930,000 -- -- 4,932,000 Issuance of warrant -- -- -- -- -- -- 69,000 -- -- 69,000 Issuance of common stock in connection with acquisitions -- -- -- -- 778,750 1,000 3,082,000 -- -- 3,083,000 Net loss -- -- -- -- -- -- -- -- (999,000) (999,000) -------- -------- -------- -------- ---------- -------- ---------- ---------- ---------- ------------- Balance at May 31, 1996 -- -- -- -- 7,478,309 8,000 19,094,000 -- (6,563,000) 12,539,000 Sale of common stock -- -- -- -- 2,264,400 2,000 5,347,000 -- -- 5,349,000 Issuance of warrants -- -- -- -- -- -- 16,000 -- -- 16,000 Issuance of common stock in connection with an acquisition -- -- -- -- 477,540 -- 1,552,000 -- -- 1,552,000 Sale of preferred stock for cash 50,000 -- -- -- -- -- 4,481,000 -- -- 4,481,000 Net income -- -- -- -- -- -- -- -- 1,682,000 1,682,000 -------- -------- -------- -------- ---------- -------- ---------- ---------- ---------- ------------- Balance at May 31, 1997 50,000 -- -- -- 10,220,249 10,000 30,490,000 -- (4,881,000) 25,619,000 Issuance of common stock -- -- -- -- 8,559 -- 13,000 -- -- 13,000 Sale of common stock for cash -- -- -- -- 524,000 1,000 2,222,000 -- -- 2,223,000 Increase in preferred stock, net of issuance costs -- -- 100,000 -- -- -- 9,260,000 -- -- 9,260,000 Issuance of warrants -- -- -- -- -- -- 444,000 -- -- 444,000 Exercise of warrants for cash, net of tax effects of $99,000 -- -- -- -- 795,000 1,000 3,723,000 -- -- 3,724,000 Issuance of common stock on conversion of convertible notes and accrued interest of $154,000 -- -- -- -- 1,405,018 1,000 5,518,000 -- -- 5,519,000 Exercise of options for cash -- -- -- -- 25,000 -- 53,000 -- -- 53,000 Issuance of common stock on conversion of preferred stock (50,000) -- -- -- 1,494,593 1,000 (1,000) -- -- -- Unrealized losses on available for sale securities -- -- -- -- -- -- -- (436,000) -- (436,000) Issuance of common stock in connection with acquisition -- -- -- -- 923,304 1,000 6,108,000 -- -- 6,109,000 Net income -- -- -- -- -- -- -- -- 3,614,000 3,614,000 -------- -------- -------- -------- ---------- -------- ---------- ---------- ---------- ------------- Balance at May 31, 1998 -- $ -- 100,000 $ -- 15,395,723 $ 15,000 57,830,000 (436,000) (1,267,000) 56,142,000 ======== ======== ======== ======== ========== ======== ========== ========== ========== ============= See accompanying notes to consolidated financial statements.
35
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended May 31, 1996, 1997 and 1998 1996 1997 1998 ------------ ------------ ------------ Cash flow from operating activities: Net income (loss) ................................................ $ (999,000) 1,682,000 3,614,000 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization................................. 871,000 1,358,000 2,204,000 Allowance on note receivable.................................. -- -- 250,000 Loss on restructuring of note receivable...................... -- -- 1,038,000 Loss on sale of property, plant and equipment................. 8,000 -- -- Director compensation paid in common stock.................... 24,000 44,000 13,000 Consulting services paid through issuance of stock options and warrants............................................... -- 6,000 139,000 Federal income tax benefit.................................... (67,000) -- (1,200,000) Changes in operating assets and liabilities: Accounts receivable...................................... (1,018,000) (1,774,000) (2,286,000) Inventories.............................................. (1,303,000) (1,951,000) (3,387,000) Prepaid expenses and other current assets................ 8,000 (178,000) 474,000 Other assets............................................. (79,000) 44,000 (1,176,000) Accounts payable, accrued liabilities and other liabilities..................................... (216,000) 557,000 1,911,000 ------------ ------------ ------------ Net cash provided by (used in) operating activities. (2,771,000) (212,000) 1,594,000 ------------ ------------ ------------ Cash flow from investing activities: Sale (purchase) of certificate of deposit.......................... -- (1,000,000) 1,000,000 Proceeds from stock subscription receivable........................ -- 1,030,000 -- Acquisition of property, plant and equipment....................... (754,000) (2,100,000) (6,509,000) Proceeds from sale of property, plant and equipment................ 9,000 -- -- Acquisition of subsidiaries........................................ -- -- (3,289,000) Acquisition of patents............................................. (400,000) -- -- Acquisition of investment.......................................... -- -- (742,000) Issuance of notes receivable....................................... -- -- (6,261,000) Payments received on note receivable from related party............ 44,000 58,000 125,000 Purchase of goodwill............................................... -- -- (1,029,000) ------------ ------------ ------------ Net cash used in investing activities............... (1,101,000) (2,012,000) (16,705,000) ------------ ------------ ------------ Cash flow from financing activities: Net borrowings (repayments) under line of credit................... 308,000 (1,224,000) (358,000) Decrease (increase) in restricted cash............................. (1,000,000) 1,000,000 -- Proceeds from long-term debt and convertible notes................. 2,105,000 237,000 10,125,000 Payments on long-term debt and capital leases...................... (1,457,000) (5,686,000) (1,503,000) Proceeds from sale of common stock, net............................ 3,550,000 5,739,000 2,223,000 Proceeds from sale of preferred stock, net......................... -- 4,481,000 9,260,000 Proceeds from exercise of stock options and warrants............... -- -- 3,777,000 Proceeds from sale of warrants..................................... 12,000 -- -- ------------ ------------ ------------ Net cash provided by financing activities........... 3,518,000 4,547,000 23,524,000 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (354,000) 2,323,000 8,413,000 ------------ ------------ ------------ Cash and cash equivalents at beginning of year.......................... 1,079,000 725,000 3,048,000 ------------ ------------ ------------ Cash and cash equivalents at end of year................................ $ 725,000 $ 3,048,000 $ 11,461,000 ============ ============ ============
36
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued) Years ended May 31, 1996, 1997 and 1998 1996 1997 1998 ------------ ------------ ------------ Supplemental cash flow: Cash paid during the year for: Interest........................................................ $ 658,000 $ 613,000 $ 712,000 Federal income taxes............................................ -- 18,000 521,000 Acquisition of subsidiaries: Fair value of assets acquired and resulting goodwill, excluding cash................................................ 10,286,000 1,928,000 10,034,000 Liabilities assumed............................................. (7,203,000) (482,000) 3,925,000 Common stock issued............................................. 3,083,000 1,446,000 6,109,000 Noncash investing and financing activities: Seller financed acquisition of property, plant and equipment.... 539,000 639,000 3,336,000 Seller financed acquisition of patents.......................... 520,000 35,000 -- Stock subscriptions receivable for issuance of common stock .... 1,030,000 -- -- Conversion of notes and accrued interest to common stock........ -- -- 5,519,000 Restructuring of certain notes receivable for an investment in common stock............................................... -- -- 6,053,000 Property, plant and equipment included in accounts payable ..... -- -- 445,000 Deferred portion of common stock issued for consulting services. -- -- 305,000 Long-term debt retired through acquisition of subsidiary ....... -- -- 139,000 See accompanying notes to consolidated financial statements.
37 PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 1996, 1997 and 1998 (1) Description of Business and Basis of Presentation Description of Business Pacific Aerospace & Electronics, Inc., with headquarters in Wenatchee, Washington, develops, manufactures and markets high performance electronics and metal components and assemblies for the aerospace, defense, electronics and transportation industries. The consolidated financial statements include the accounts of Pacific Aerospace & Electronics, Inc. and its wholly-owned subsidiaries (collectively, the "Company"). Basis of Presentation These consolidated financial statements are prepared in accordance with generally accepted accounting principles (GAAP) in the United States (U.S.) and present the financial position, results of operations and changes in financial position of the Company. All material intercompany balances and transactions have been eliminated in consolidation. Certain 1996 and 1997 amounts have been reclassified to conform with the 1998 presentation. (2) Summary of Significant Accounting Principles Cash and Cash Equivalents Cash and cash equivalents consist of cash, demand deposits with banks and highly liquid investments with maturity dates at purchase of three months or less. Inventories Inventories are stated at the lower of cost, primarily determined by the first-in, first-out method, or market (replacement cost for raw materials and net realizable value for work in progress and finished goods). Property, Plant and Equipment Property, plant and equipment are stated at cost. Property, plant and equipment under capital leases are stated at the lower of the fair market value of the assets or the present value of minimum lease payments at the inception of the leases. Depreciation is calculated using the straight-line method over the estimated useful lives of the owned assets ranging from 5 years for certain machinery and equipment to 40 years for certain buildings. Property, plant and equipment held under capital leases are amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the lease terms, ranging from 7 to 10 years from the inception of the leases. Expenditures for maintenance and repairs are charged to expense as incurred. Upon sale or retirement, the cost and related accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is reflected in other income or expense. 38 PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Investments At May 31, 1998, the Company had an investment in the common stock, registered and unregistered shares, of a public company of approximately 19.5%. The investment is classified as an available-for-sale security in accordance with Statements of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, and is reported at fair value, with unrealized gains and losses excluded from the statements of operations and reported as a separate component of shareholders' equity. Unrealized losses which are determined to be other-than-temporary are included in the statements of operations. Fair value of the common stock is determined as the quoted value of the stock in the over-the-counter market, without any discounts for large blocks or unregistered shares. There is no assurance that such values will be realizable upon liquidation or sale. Intangible Assets Costs in excess of net book value of acquired subsidiaries is amortized using the straight-line method over 15 years from the date of acquisition. Purchased patents are recorded at cost. Developed patents are recorded at the value of related compensation awarded. Patents are amortized using the straight-line method over the estimated useful lives of the patents ranging from 10 to 17 years. Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Revenue Recognition Revenue is recognized when products are shipped to customers. Research and Development Research and development costs are expensed as incurred and are included in operating expenses. Income Taxes The Company follows the asset and liability method of accounting for income taxes. Under the asset and liability method of accounting for income taxes, deferred tax assets and liabilities are recognized based on the estimated future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 39 PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Stock-Based Compensation The Company follows the provisions of SFAS No. 123, Accounting for Stock-Based Compensation. This statement permits a company to choose either a new fair-value method or the Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, intrinsic-value based method of accounting for stock-based compensation arrangements. SFAS No. 123 requires pro forma disclosure of net income and earnings per share computed as if the fair-value based method had been applied in financial statements of companies that continue to account for such arrangements under APB Opinion No. 25. The Company has elected to continue to record stock-based compensation using the APB Opinion No. 25 intrinsic-value-based method and, therefore, the adoption of SFAS No. 123 has not impacted the Company's financial positions, results of operations, or liquidity. Net Income (Loss) Per Share In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, Earnings Per Share. SFAS No. 128 requires the presentation of basic earnings per share, and for companies with complex capital structures, diluted earnings per share. Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period using the treasury stock method. The Company has presented historical basic and diluted income (loss) per share in accordance with SFAS No. 128. As the Company had a net loss in the year ended May 31, 1996, basic and diluted net loss per share is the same. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. New Accounting Pronouncements In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting and disclosure of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS No. 130, which is effective for fiscal years beginning after December 15, 1997, requires restatement of financial statements for earlier periods to be provided for comparative purposes. The Company anticipates that implementing the provisions of SFAS No. 130 will not have a significant impact on the Company's existing disclosures. The Company has not determined the manner in which it will present the information required by SFAS No. 130. In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. In the initial year of application, comparative information for earlier years must be restated. The Company anticipates that implementing the provisions of SFAS No. 131 will not have a significant impact on the Company's existing disclosures. The Company has not determined the manner in which it will present the information required by SFAS No. 131. In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures About Pensions and Other Postretirement Benefits. SFAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. It standardizes the disclosure requirements for pensions and other postretirement benefits to the extent 40 PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures. SFAS No. 132 is effective for fiscal years beginning after December 15, 1997. The Company has not determined the manner in which it will present the information required by SFAS No. 132. (3) Segment Information and Concentration of Risk The Company conducts its business in two business segments, "Aerospace" and "Electronics." The Aerospace business segment primarily comprises machined and cast metal products operations. Net sales of the Aerospace business segment include sales to customers in the aerospace, defense and transportation industries. Net sales of the Electronics business segment also include sales to customers in the aerospace and defense industries. Historically, these segments have been cyclical and sensitive to general economic and industry specific conditions. In particular, the aerospace industry, in past years, has been adversely affected by a number of factors, including reduced demand for commercial aircraft, a decline in military spending, postponement of overhaul and maintenance of aircraft, increased fuel and labor costs, increased regulations, and intense price competition, among other factors. Although the aerospace supply industry currently is enjoying favorable trends, there is no assurance that such trends will continue. There is also no assurance that general economic conditions will not lead to a downturn in demand for core components and products of the Company, in each of its business segments. Presented below is the Company's business segment information. Identifiable assets are those assets used in the Company's operations in each business segment, and do not include advances or loans between the business segments. Corporate assets are identified below, and no allocations were necessary for assets used jointly by the business segments. Year ended May 31, 1996:
Corporate, other and Aerospace Electronics elimination Total ----------- ----------- ----------- ----------- Net sales to customers............................ $12,382,000 8,343,000 -- 20,725,000 Net sales between segments........................ 376,000 -- (376,000) -- Income (loss) from operations..................... (278,000) 405,000 (710,000) (583,000) Identifiable assets............................... 17,429,000 7,527,000 2,693,000 27,649,000 Capital expenditures.............................. 824,000 469,000 -- 1,293,000 Depreciation and amortization..................... 541,000 330,000 -- 871,000 Year ended May 31, 1997: Corporate, other and Aerospace Electronics eliminations Total ----------- ----------- ----------- ----------- Net sales to customers............................ $22,949,000 11,226,000 -- 34,175,000 Net sales between segments........................ 151,000 -- (151,000) -- Income (loss) from operations..................... 1,043,000 2,203,000 (1,299,000) 1,947,000 Identifiable assets............................... 21,011,000 11,419,000 3,322,000 35,752,000 Capital expenditures.............................. 1,961,000 778,000 -- 2,739,000 Depreciation and amortization..................... 897,000 461,000 -- 1,358,000
41 PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Year ended May 31, 1998:
Corporate, other and Aerospace Electronics elimination Total ----------- ----------- ----------- ----------- Net sales to customers............................ $34,146,000 19,953,000 -- 54,099,000 Net sales between segments........................ 162,000 5,000 (167,000) -- Income (loss) from operations..................... 4,665,000 2,454,000 (2,379,000) 4,740,000 Identifiable assets............................... 29,761,000 28,943,000 19,876,000 78,580,000 Capital expenditures.............................. 4,212,000 1,333,000 4,745,000 10,290,000 Depreciation and amortization..................... 1,301,000 855,000 48,000 2,204,000
The Company had two customers, each comprising greater than 10% of net sales, aggregating 65%, 43%, and 45% for the fiscal years ended May 31, 1996, 1997, and 1998, respectively. At May 31, 1997, the Company had one customer which represented 14% of accounts receivable. At May 31, 1998, the Company had two customers, aggregating 25%, each of which comprised greater than 10% of accounts receivable. Credit is extended to customers based on an evaluation of their financial condition and collateral is generally not required. The Company currently purchases aluminum and other raw materials from a limited number of suppliers. Although there are a limited number of potential suppliers of such raw materials, management believes that other suppliers could provide these raw materials on comparable terms. A change in suppliers, however, could cause a delay in manufacturing, increased costs, and a possible loss of sales, which could have a material adverse effect on the manufacturing and delivery of the Company's products. The Company purchased $1,762,000, $2,570,000, and $2,723,000 from one supplier during the years ended May 31, 1996, 1997, and 1998, respectively. The Company purchases other raw materials, of lesser significance, which are available from a limited number of suppliers. At May 31, 1998, the Company had purchase commitments for raw materials aggregating $4,064,000. (4) Business Acquisitions In November 1995, a wholly-owned subsidiary of the Company acquired all of the assets and assumed certain liabilities of Seismic Safety Products, Inc. The asset purchase price consisted of $70,000 in cash and 128,750 shares of the Company's common stock valued at $483,000, for a total of $553,000. In connection with the transaction, the Company acquired certain patents for total consideration of $520,000. Costs in excess of net book value of $535,000 were recorded as a result of this acquisition. Effective for accounting purposes in November 1995, a wholly-owned subsidiary of the Company merged with Morel Industries, Inc. The purchase price consisted of 650,000 shares of the Company's common stock valued at approximately $2.6 million. Costs in excess of net book value of $939,000 were recorded as a result of this acquisition. In April 1997, a wholly-owned subsidiary of the Company acquired all of the assets and assumed certain liabilities of Northwest Technical Industries, Inc. The asset purchase price consisted of 477,540 shares of the Company's common stock valued at $1,552,000. Costs in excess of net book value of $270,000 were recorded as a result of this acquisition. Effective for accounting purposes in February 1998, a wholly-owned subsidiary of the Company acquired substantially all of the assets and assumed certain liabilities of PCC Composites, Inc.'s 42 PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) operating unit, Balo Precision Parts. The purchase price consisted of $2.25 million in cash and resulted in costs in excess of net book value of $1,029,000. Effective for accounting purposes in March 1998, a wholly-owned subsidiary of the Company acquired substantially all assets and certain liabilities of Electronic Specialty Corporation and its wholly-owned subsidiary, Displays & Technologies, Inc. (collectively "ESC"). The purchase price consisted of $2.0 million in cash, 923,304 shares of the Company's common stock valued at $6,109,000, and acquisition costs of $77,000 for a total of $8,186,000. Costs in excess of net book value of $3,631,000 were recorded as a result of this acquisition. The business combinations described above have been accounted for using the purchase method. Accordingly, assets and liabilities have been recorded at their fair value at acquisition date. Operating results of these acquired companies are included in the Company's consolidated statements of operations from the respective acquisition dates. The following summary, prepared on a pro forma basis, presents the unaudited consolidated condensed results of operations of the Company, as if the aforementioned business acquisitions were made as of the first day of the immediately preceding fiscal year in which the entity was acquired. There are no material adjustments which impact the summary.
Year ended May 31 (unaudited) -------------------------------------------- 1996 1997 1998 ------------ ------------ ------------ Net sales....................................................... $ 26,801,000 $ 49,117,000 $ 64,968,000 Income (loss) from operations................................... (908,000) 444,000 4,384,000 Net income (loss)............................................... (1,660,000) 249,000 3,003,000 Net income (loss) per share: Basic...................................................... (0.25) 0.03 0.23 Diluted.................................................... (0.25) 0.02 0.21 Shares used in computation of net income (loss) per share: Basic...................................................... 6,687,000 9,936,962 13,287,961 Diluted.................................................... 6,687,000 10,027,762 14,407,945
The pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the transactions been consummated as of the date indicated nor are they intended to indicate results that may occur in the future. (5) Inventories Inventories at May 31 consist of the following: 1997 1998 ----------- ----------- Raw materials....................... $ 2,685,000 $ 5,789,000 Work in progress.................... 3,387,000 5,683,000 Finished goods...................... 3,010,000 4,712,000 ----------- ----------- $ 9,082,000 $16,184,000 43 PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (6) Property, Plant and Equipment Property, plant and equipment, including assets under capital lease arrangements, at May 31 consist of the following:
1997 1998 ------------ ------------ Land.............................................................. $ 895,000 $ 1,171,000 Buildings......................................................... 4,300,000 4,380,000 Leasehold improvements............................................ 401,000 1,738,000 Machinery and equipment........................................... 9,305,000 18,331,000 Furniture and fixtures............................................ 1,215,000 2,494,000 ------------ ------------ 16,116,000 28,114,000 Less accumulated depreciation and amortization .............. 3,309,000 5,108,000 ------------ ------------ 12,807,000 23,006,000 Construction and purchases in progress............................ 383,000 3,329,000 ------------ ------------ $ 13,190,000 $ 26,335,000
The Company recognized depreciation of property, plant and equipment of $696,000, $1,103,000 and $1,851,000 during the years ended May 31, 1996, 1997 and 1998, respectively. (7) Note Receivable From Related Party At May 31, 1997, the Company had a note receivable from a shareholder collectible in monthly principal and interest installments of $5,900, with the final principal balance due in March 1999. During the year ended May 31, 1998, the note receivable was repaid in full. Also see Note 8. (8) Investment At May 31, 1998, the Company held an interest in the common stock, registered and unregistered shares, of a public company of approximately 19.5%. The investment consists of shares which were purchased on the open market and shares which were obtained in conjunction with the settlement of certain outstanding notes receivable from the public company under a restructuring agreement, amounting to approximately $359,000 and $4,220,000, respectively, at May 31, 1998. The Company recorded an unrealized loss, included in shareholders' equity, on the shares of $436,000 as of May 31, 1998. Under the restructuring agreement, the public company converted notes, previously issued by the Company to the public company and its subsidiaries, into shares of the public company stock at $2.00 per share. In addition, the public company agreed to grant the Company demand registration rights for those shares and, in the event of an underwritten public offering, piggyback registration rights, which will be effective after the earliest of (a) the closing of the public company's third round of financing, or (b) the first anniversary of the closing of the restructuring agreement. The Company also agreed to continue guaranteeing the public company credit facility of $1.3 million and an equipment lease of $373,000. At May 31, 1998, the Company had a note receivable from the public company. The note accrues interest at 8% per annum, requires interest-only payments for the first year, and requires fully amortizing monthly payments of principal plus interest for the final four years of the note. In the restructuring agreement, the public company also agreed to purchase certain other notes and interests of the Company (including warrants and interests in a lawsuit and bankruptcy action) for a $950,000 promissory note from the public company. The note accrues interest at 8% per annum, requires interest-only payments for the first year, and requires fully-amortizing monthly payments of principal plus interest for the final four years of the note. In conjunction with the restructuring agreement, the Company recorded a nonrecurring charge during the year ended May 31, 1998 of $1,038,000 to reflect the restructuring of the debt and the difference between the Company's carrying amounts of the other notes and the interest in the lawsuit 44 PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) and bankruptcy and the public company promissory note. The amount has been included in other expense for the year ending May 31, 1998. Certain of the Company's directors were also directors of the public company through January 1998. In addition, certain officers of the Company were individual shareholders of the public company until such shares were sold in May 1998. The Company also subleases approximately 95% of the square footage of its Bothell, Washington office space to the public company for an amount equivalent to the percentage of the lease payment for that space. Certain directors and officers of the Company personally guarantee certain debt of the public company. (9) Credit Facility In May 1997, the Company executed a commitment letter with a bank for a credit facility consisting of (a) a revolving working capital line of credit of up to $3,500,000 that extends from June 1997 to September 1998 (the "Line of Credit"), (b) a seven-year capital equipment acquisition credit facility of up to $2,000,000 (the "Equipment Line"), and (c) a 10-year term loan of approximately $700,000, or approximately 80% of the cost of a recent addition to a subsidiary's building (the "Construction Loan"). The Company has executed the documents for the Line of Credit and the Construction Loan, but has not yet elected to close the Equipment Line. As of May 31, 1998, the Line of Credit had no outstanding balance and the Company had not yet requested funding of the Equipment Line. Borrowings will bear interest at variable rates, and will be secured by inventories, accounts receivable, and certain equipment and building improvements. The agreement contains restrictive covenants related to working capital, net worth and debt service coverage. Management believes the Company is in compliance with these covenants at May 31, 1998. In connection with the acquisition of ESC, the Company assumed a revolving working capital line of credit. Interest accrues at the 30-day commercial paper rate plus 3.25% (8.75% at May 31, 1998) and the outstanding balance was $1,511,000 at May 31, 1998. There are certain restrictive covenants related to tangible net worth and debt to tangible net worth ratios. Management believes the Company is in compliance with these covenants at May 31, 1998. Subsequent to May 31, 1998, the line of credit was reduced to $1,200,000. 45 PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (10) Long-Term Debt Long-term debt at May 31 consists of the following:
1997 1998 ---------- ---------- Industrial revenue bond payable to a bank in monthly installments of $19,200, including interest at 8.12%, through November 2009..................... $1,242,000 $1,108,000 Note payable to a bank in monthly installments of $7,000, including interest at 8.39% with the principal balance due in full in March 2008.......... -- 712,000 Subordinated note payable to the City of Entiat in monthly installments of $7,300, including interest at 8%, with the principal balance due in full in May 2001..................................................................... 551,000 505,000 Note payable to bank in monthly principal installments of $5,000 plus interest at the 30-day commercial paper rate plus 3.25% (8.75% at May 31, 1998) through October 2002.................................................. -- 265,000 Notes payable to a pension fund and others, with interest only payments at 6.75% due quarterly commencing January 1998 through October 2001, with the principal balance due in full in October 2001.......................... -- 4,050,000 Notes payable to a financing company for certain equipment in aggregate monthly installments of $58,000, including interest at 9% to 10.7%, with maturity dates ranging from April 2000 to May 2004......................... -- 2,685,000 Other notes payable for vehicles and certain equipment in aggregate monthly installments of $52,000, including interest at 5.9% to 10.9% with maturity dates ranging from November 1998 to July 2006..................... 1,216,000 761,000 Notes payable with interest ranging from 8% to 10.25%, repaid in full during the year ended May 31, 1998.............................................. 745,000 -- ---------- ---------- 3,754,000 10,086,000 Less current portion............................................................... 855,000 1,027,000 ---------- ---------- Long-term portion............................................................. $2,899,000 9,059,000 ========== ==========
The industrial revenue bond agreement requires, among other items, that the Company maintain minimum working capital, tangible net worth and debt to tangible net worth ratios. Management believes the Company is in compliance with these covenants at May 31, 1998. Scheduled principal maturities of long-term debt at May 31, 1998 are as follows for each of the following fiscal year-ends: 1999.................................................. $ 1,027,000 2000.................................................. 1,038,000 2001.................................................. 984,000 2002.................................................. 4,957,000 2003.................................................. 812,000 Thereafter............................................ 1,268,000 ------------ $ 10,086,000 ============ Long-term debt is secured by substantially all assets of the Company and, in certain circumstances, through personal guarantees of certain shareholders. 46 PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (11) Leasing Arrangements Capital Leases The Company leases certain property, plant and equipment under capital lease agreements that expire through September 2004. Aggregate minimum principal payments to be made under these agreements at May 31, 1998 are as follows for each of the following fiscal year-ends: 1999.................................................. $ 206,000 2000 ................................................. 218,000 2001 ................................................. 216,000 2002 ................................................. 186,000 2003 ................................................. 151,000 Thereafter ........................................... 170,000 ---------- $1,147,000 ========== Included in property, plant and equipment are costs of $551,000 and $1,402,000 and related accumulated amortization of $58,000 and $208,000 recorded under capital leases at May 31, 1997 and 1998, respectively. Operating Leases The Company leases certain property, plant and equipment under operating lease agreements that expire through June 2026. Aggregate minimum rental payments to be made under these agreements at May 31, 1998 are as follows for each of the following fiscal year-ends: 1999 ................................................ $ 1,252,000 2000 ................................................ 1,206,000 2001 ................................................ 1,194,000 2002 ................................................ 1,192,000 2003 ................................................ 1,090,000 Thereafter .......................................... 4,400,000 ------------ $ 10,334,000 ============ Total rent expense during the years ended May 31, 1996, 1997 and 1998 amounted to $516,000, $475,000 and $788,000, respectively. (12) Convertible Notes In August 1997, the Company closed a private offering of $5,800,000, before expenses of $435,000, in convertible promissory notes (the "Convertible Notes") to two accredited investors. The Company intends to use the proceeds of this offering primarily in connection with proposed and future acquisitions. The Company subsequently filed a registration statement, which was declared effective, registering for resale up to 1,720,690 shares of common stock issuable upon conversion of the Convertible Notes. As of May 31, 1998, all of the Convertible Notes had been converted into 1,405,018 shares of common stock. (13) Common Stock During the year ended May 31, 1996, the Company sold 1,429,470 shares of its common stock at an average of $3.43 per share, in a private offering to institutional investors. The Company incurred approximately $375,000 of costs related to the offering, which were charged against the proceeds of the offering in 1996. In July 1996, the Company conducted a public offering of 2,250,000 units, each unit composed of one share of the Company's common stock and a warrant to purchase one share of the Company's 47 PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) common stock at a price of $3.125 per unit in a public offering. The warrants entitled the holder to purchase one share of common stock at $4.6875 per share, exercisable any time through July 2001. In addition, the Company issued warrants to two underwriters for the purchase of an additional 225,000 units at $3.75 per unit. All of these warrants were outstanding at May 31, 1997 and 1998. During the years ended May 31, 1996 and 1997, the Company incurred $328,000 and $1,398,000, respectively, of costs related to the offering. The costs incurred during the year ended May 31, 1996 were deferred and were charged against the proceeds of the stock offering in the year ended May 31, 1997. During the year ended May 31, 1998, 45,000 of the underwriter's warrants were exercised for 45,000 units. In November 1997, the Company closed a private offering of $6,408,000, before expenses of $320,000, in common stock and notes payable to three accredited investors. The Company subsequently filed a registration statement, which was declared effective, registering for resale the 524,000 shares of common stock sold in the offering. The outstanding balance of the notes payable of $4,050,000 is included in long-term debt at May 31, 1998. In conjunction with the private offering, consulting fees of $320,000 were paid to a director and shareholder of the Company. (14) Convertible Preferred Stock Series A Convertible Preferred Stock In February 1997, the Company sold 50,000 shares of Series A convertible preferred stock (Series A) in a private placement for $5,000,000, and incurred related offering costs of $519,000, resulting in net proceeds of $4,481,000. Conversion provisions include conversion any time after June 12, 1997; conversion to common stock at a rate equal to $100 divided by the lower of $3.49 or 85% of the average closing common per share bid price over the five days before conversion; and total shares converted cannot exceed 20% of total common stock outstanding, or approximately 1,950,000 shares. At May 31, 1998, all of the shares of Series A were converted into 1,494,593 shares of common stock. Series B Convertible Preferred Stock In May 1998, the Company sold 100,000 shares of Series B convertible preferred stock (Series B) for $100 per share, and issued warrants to purchase 138,888 shares of Common Stock, in a private offering which resulted in gross proceeds of $10,000,000, less related offering costs of $740,000, for net proceeds of $9,260,000. In addition, the purchasers deposited $7,000,000 into escrow, and, upon the closing of the acquisition of Aeromet International plc (Aeromet), the Company will issue the purchasers 70,000 additional shares of Series B, and warrants to purchase an additional 97,221 shares of Common Stock, in exchange for the escrowed funds. If the Aeromet Acquisition fails to close, the purchasers may elect not to purchase the additional shares of Series B and related warrants, and to have the escrowed funds returned to them. The Common Stock issuable upon conversion of the Series B and upon exercise of the related warrants are subject to a registration rights agreement that requires the Company to file a registration statement covering those shares by November 1998, and to use its best efforts to make that registration statement effective by January 1999. The registration rights agreement also grants certain piggyback registration rights with regard to the shares of Common Stock underlying the Series B and the related warrants. Upon conversion of a share of Series B, the holder will receive the number of shares of Common Stock equal to $100 divided by the then applicable conversion price of the Series B. Up to $7,000,000 in value of the Common Stock underlying the Series B Preferred may be converted and sold at any time, if that Common Stock is included in an effective piggyback registration. Shares of Series B whose underlying shares of Common Stock are not included in a piggyback registration are not convertible until August 1998, and may not be sold until February 1999. At that time, the underlying Common Stock may be sold upon the effectiveness of a registration statement, or under any applicable 48 PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) exemption from registration. From August 1998 until February 1999, the conversion price of the Series B is $7.20 per share. After February 1999, the conversion price of the Series B is equal to the lower of (a) $7.20 per share, or (b) the average of the three lowest closing bid prices per share of the Common Stock over the 22 trading days before conversion, but not less than $5.67, except in certain limited circumstances. No holder of Series B is entitled to voluntarily convert Series B that would cause the holder to own more than 9.9% of the Company's total outstanding Common Stock at any one time. Any Series B outstanding on May 2003 will be automatically converted into Common Stock at the then-applicable conversion price. The Series B has no voting rights and certain preferences relating to dividends, liquidation, and in specific situations, redemption. (15) Warrants In connection with certain notes payable, in May 1996, the Company issued the lenders warrants to purchase 337,500 shares of common stock at an exercise price of $4.80 per share. The warrants expire in May 2001 and were valued at approximately $12,000. During the year ended May 31, 1997, there were no warrants exercised for shares of common stock. During the year ended May 31, 1998, there were 300,000 warrants exercised for shares of common stock. In June 1997, the Company issued warrants to purchase 125,000 shares of common stock for $3.45 per share in consideration for certain financial consulting services. The warrants, which expire in June 2002, were valued at $24,000. During the year ended May 31, 1998, 75,000 of the warrants were exercised for shares of common stock. In December 1997, the Company issued warrants to purchase 375,000 shares of common stock for $4.6875 per share in consideration for a financial consulting and services agreement. The warrants, which expire in June 1998, were valued at $60,000. During the year ended May 31, 1998, all of the warrants were exercised for shares of common stock. In February 1998, the Company issued warrants to purchase 1,290,000 shares of common stock at an exercise price of $4.62 per share in consideration for a financial consulting and services agreement. The warrants, which expire in February 2002, were valued at $360,000. During the year ended May 31, 1998, there were no warrants exercised for shares of common stock. In May 1998, the Company issued warrants to purchase 138,888 shares of common stock at an exercise price of $7.20 per share in conjunction with the Series B offering. The warrants, which expire in May 2003, were valued at $220,589 and included in additional paid in capital at May 31, 1998. A summary of the Company's warrants, excluding warrants issued in connection with the public offering in July 1996, is as follows:
Weighted average price Warrants of shares ---------- ---------- Balance at June 1, 1995........................... 160,000 $ 2.00 Granted........................................... 337,500 4.80 ---------- ---------- Balance at May 31, 1996 and 1997.................. 497,500 4.34 Granted........................................... 1,928,888 4.74 Exercised......................................... (750,000) 4.61 ---------- ---------- Balance at May 31, 1998........................... 1,676,388 $ 4.36 ========== ==========
49 PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following summarizes warrants outstanding, excluding warrants issued in connection with the public offering in July 1996, at May 31, 1998:
Weighted average Weighted Range of remaining average exercise Number contractual exercise Number prices outstanding life price exercisable ------------ ------------- ------------- ------------- ------------- $2.00 - 4.00 210,000 4.69 years $ 2.35 210,000 4.01 - 6.00 1,327,500 3.97 years 4.63 1,327,500 6.01 - 8.00 138,888 5.00 years 7.20 -- ---------- --------- 1,676,388 1,537,500 ========== =========
The 138,888 warrants issued in connection with the Series B are exercisable beginning in May 1999. All other warrants are fully exercisable at May 31, 1998. (16) Compensation Plans Long-Term Investment and Incentive Plan The Company has a long-term stock investment and incentive plan (Option Plan) under which directors, officers, key employees and other key individuals may be awarded stock options, stock appreciation rights, stock and cash bonuses, restricted stock, or performance units. Under the Option Plan, the exercise price of options issued is not less than fair-market value at the date of grant. Options expire ten years from the grant date. For the year ended May 31, 1998, the Company had not issued any stock appreciation rights, stock or cash bonuses, restricted stock, or performance units under the Option Plan. As the Company applies APB Opinion No. 25 and related interpretations in accounting for its Option Plan, no compensation costs have been recognized for stock options issued to employees. Had compensation costs for stock options been determined consistent with SFAS No. 123, the results of the Company would have been adjusted to the pro forma amounts indicated below:
1996 1997 1998 ----------- ----------- ----------- Net income (loss): As reported................................................... $ (999,000) $ 1,682,000 $ 3,614,000 Pro forma..................................................... (1,043,000) 75,000 2,478,000 Net income (loss) per share: As reported: Basic.................................................... (0.16) 0.18 0.29 Diluted.................................................. (0.16) 0.17 0.27 Pro forma: Basic.................................................... (0.17) 0.01 0.20 Diluted.................................................. (0.17) 0.01 0.18 Shares used in computation of net income (loss) per share: Basic ...................................................... 6,209,000 9,499,980 12,486,077 Diluted ..................................................... 6,209,000 10,035,846 13,606,061
The fair value of the options granted during 1996, 1997 and 1998 is estimated as $248,000, $1,853,000 and $3,007,000, respectively, using the Black-Scholes option-pricing model with the 50 PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) following assumptions on the date of grant: zero percent dividend yield, expected volatility from 24% to 73%, risk-free interest rate from 5.55% to 6.59%, and expected lives ranging from 5 to 10 years. A summary of the Company's Stock Option Plan is as follows:
Shares of common stock Weighted ---------------------------- average Available Options price options under plan of shares ----------- ----------- ----------- Balance at June 1, 1995....................................... 1,000,000 -- $ -- Granted....................................................... (145,283) 145,283 5.09 ----------- ----------- ----------- Balance at May 31, 1996....................................... 854,717 145,283 5.09 Authorized.................................................... 1,000,000 -- -- Granted....................................................... (998,333) 998,333 4.53 ----------- ----------- ----------- Balance at May 31, 1997....................................... 856,384 1,143,616 4.61 Authorized.................................................... 1,000,000 -- -- Granted....................................................... (1,112,500) 1,112,500 5.49 Exercised..................................................... -- (25,000) 2.11 ----------- ----------- ----------- Balance at May 31, 1998....................................... 743,884 2,231,116 $ 5.09 =========== =========== ===========
No options were exercised or lapsed during the years ended May 31, 1996 and 1997. The following summarizes options outstanding at May 31, 1998:
Options outstanding Options exercisable --------------------------------------------------- ----------------------------- Weighted average Weighted Weighted Range of Number remaining average Number average exercise prices outstanding contractual life exercise price exercisable exercise price --------------- ----------- ---------------- -------------- ----------- -------------- $2.00--4.00 248,333 8.68 years $ 3.05 248,333 $ 3.05 4.01--6.00 1,400,283 8.56 years 4.74 1,327,113 4.72 6.01--8.00 580,500 9.97 years 6.13 97,500 6.13 ---------- --------- 2,229,116 1,672,946 ========== =========
Independent Director Stock Plan The Company has an Independent Director Stock Plan under which nonemployee directors of the Company are awarded common stock of the Company for serving on its board of directors. The plan authorizes and reserves for issuance a maximum of 100,000 common shares. At May 31, 1998, 68,041 shares were available for future issuance. During the years ended May 31, 1996, 1997 and 1998, 9,000, 14,400 and 8,559 shares of the Company's common stock, respectively, were issued under the plan of which 27,009 were vested at May 31, 1998. Included in compensation expense is $24,000, $44,000 and $13,000 for the years ended May 31, 1996, 1997 and 1998, respectively, resulting from the shares issued. Retirement Plan The Company maintains a 401(k) plan covering all eligible employees who meet service requirements as provided in the plan. Company contributions to the profit-sharing plan are determined annually by the board of directors. No contributions were made by the Company to the plan during 51 PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) the years ended May 31, 1996 and 1997. The Company contributed $27,000 to the plan in the year ended May 31, 1998. Employee Stock Purchase Plan The Company has an Employee Stock Purchase Plan under which employees are eligible to purchase shares of the Company's common stock, through payroll deductions, at the lower of 85% of the Company's stock price on the first day of an offering period or 100% of the Company's stock price on the last day of an offering period. The first offering period is expected to begin in September 1998 and end approximately one year later. (17) Income Taxes Total income tax benefit (expense) is as follows:
1996 1997 1998 -------- -------- ----------- Current Federal............................................ $ -- $(50,000) $ (593,000) Deferred Federal........................................... 67,000 -- 1,075,000 -------- -------- ----------- Total................................................. $ 67,000 $(50,000) $ 482,000 ======== ======== ===========
A reconciliation of the Federal statutory tax rate of 34% and the Company's effective tax rates of 6%, 3% and 15% in the years ended May 31, 1996, 1997 and 1998, respectively, is as follows:
1996 1997 1998 --------- ---------- ------------ Computed expected income tax benefit (expense)............. $ 362,000 $ (588,000) $ (1,065,000) Change in valuation allowance.............................. (241,000) 558,000 1,717,000 Other...................................................... (54,000) (20,000) (170,000) --------- ---------- ------------ $ 67,000 $ (50,000) $ 482,000 ========= ========== ============
Significant components of the Company's deferred tax assets (liabilities) are as follows:
1997 1998 ----------- ----------- Deferred tax assets: NOL carryforward...................................... $ 2,135,000 $ 1,387,000 Other................................................. 290,000 641,000 Valuation allowances.................................. (1,717,000) -- ----------- ----------- 708,000 2,028,000 Deferred tax liabilities--depreciation................ (1,300,000) (1,420,000) ----------- ----------- Net deferred tax asset (liability)............... $ (592,000) $ 608,000 =========== ===========
The Company has net operating loss (NOLs) carryforwards for Federal income tax purposes of approximately $4,880,000, the benefits of which expire in the tax year 2001 through the tax year 2011. The NOLs created by the Company's subsidiaries prior to their acquisition and the NOLs created as a consolidated group or groups subsequent to a qualifying tax free merger or acquisition, have limitations related to the amount of usage by each subsidiary or consolidated group as described in the Internal Revenue Code. As a result of these limitations, approximately $800,000 of the $4,880,000 of NOLs will never become available. At May 31, 1997, the Company recorded a valuation allowance because management believed that it was uncertain that some portion or all of the deferred tax assets would not be realized. At May 31, 1998, the Company eliminated the valuation allowance for deferred taxes due to management's assessment of improved probability of realization. 52 PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (18) Fair Value of Financial Instruments The Company's financial instruments include cash, receivables, an investment, accounts payable and short- and long-term borrowings. The fair value of these financial instruments approximates their carrying amounts based on current market indicators, such as prevailing interest rates. (19) Contingencies Legal The Company is currently subject and party to various legal actions arising out of the normal course of business. Management believes the ultimate liability, if any, arising from such claims or contingencies is not likely to have a material adverse effect on the Company's results of operations or financial condition. In the normal course of business, the Company disposes of potentially hazardous material which could result in claims related to environmental cleanup. The Company has not been notified of any related claims. The Company is subject to various other environmental and governmental regulations. Although the extent of any noncompliance with those regulations, if any, is not completely ascertainable, management believes the ultimate liability is not likely to have a material adverse effect on the Company's results of operations or financial condition. Year 2000 The Company is in process of developing a plan to address the Year 2000 computer problem and to begin converting its computer systems to be Year 2000 compliant. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. The Company presently believes that with upgrades to existing software and possibly some replacement, the Year 2000 problem will not pose significant operational problems for the Company's computer systems. However, if such upgrades and replacements are not completed timely or effectively, the Year 2000 problem may have a material impact on the operations of the Company. The Company expects to incur internal staffing costs, as well as the cost of software upgrades and replacement as part of this effort. However, until the Company's plan is finalized, management is unable to reasonably estimate the costs of achieving Year 2000 compliance. (20) Subsequent Events In July 1998, the Company expects to complete the issuance of $75 million of notes and, subsequently, consummate the acquisition of Aeromet, a company headquartered in the United Kingdom. Aeromet is one of the leading suppliers of magnesium and aluminum precision sand and investment castings, and titanium and aluminum formed sheet products for the aerospace, defense, and transportation industries in the United Kingdom. For the year ended December 31, 1997, Aeromet had net sales of $48.7 million, income from operations of $1.6 million, and a net loss of approximately $30,000. The acquisition is expected to be accounted for using the purchase method. There is no assurance that the aforementioned transactions will be completed or that the aforementioned financial results will be indicative of future results. 53 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On April 17, 1998, the appointment of Moss Adams LLP, the Company's previous principal independent accountant, was terminated, and KPMG Peat Marwick LLP was engaged, as the Company's principal independent accountant. The decision to change principal independent accountants was approved by the finance and audit committee of the Company's Board of Directors. In connection with the audits for fiscal years ended May 31, 1996 and May 31, 1997, and the subsequent interim period through April 17, 1998: (a) the reports of Moss Adams LLP contained no adverse opinion or disclaimer of opinion, or modification as to uncertainty, audit scope or accounting principles; and (b) there were no disagreements with Moss Adams LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which, if not resolved to the satisfaction of Moss Adams LLP, would have caused it to make reference to the subject matter of the disagreement in connection with its reports. 54 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Directors and Executive Officers The following table sets forth information as of August 27, 1998 (unless otherwise noted), regarding the directors and executive officers of the Company.
Name Age Position with Company ----------------------------------------------------------------------------------------------- Donald A. Wright(1)................ 46 Chairman of the Board, Chief Executive Officer and President Nick A. Gerde...................... 53 Chief Financial Officer, Vice President Finance, Treasurer and Assistant Secretary Sheryl A. Symonds.................. 43 Vice President Administration, General Counsel and Secretary Allen W. Dahl, M.D.(2)(4).......... 70 Director Dr. Urs Diebold(1)(2)(3)........... 47 Director Werner Hafelfinger (5)............. 52 Director Dale L. Rasmussen(1)(3)(4)......... 48 Director William A. Wheeler(2)(3)(4)........ 64 Director - -------------- (1) Member of the Nominating Committee (2) Member of the Option Committee (3) Member of the Finance and Audit Committee (4) Member of the Compensation Committee (5) Director of the Company since August 17, 1998
Donald A. Wright. Donald A. Wright has been the Chairman of the Board, Chief Executive Officer and President of the Company since February 1995, and of its predecessors since 1990. Mr. Wright is also an officer and director of each of the Company's operating subsidiaries. Nick A. Gerde. Nick A. Gerde has been the Vice President Finance and Chief Financial Officer of the Company since February 1995. He has been the Treasurer of the Company since August 1996, and Assistant Secretary since November 1996. Mr. Gerde is also an officer and director of each of the Company's operating subsidiaries. Mr. Gerde served as Controller/CFO of Hydraulic Repair & Design, Inc., a regional hydraulic component repair and wholesale distribution company, from March 1990 through April 1993, as a Business Development Specialist with the Economic Development Council of North Central Washington from July 1993 to June 1994, and as Vice President of Televar Northwest, Inc. (a subsidiary of Orca Technologies, Inc.) from July 1994 to February 1995. See "Certain Relationships and Related Transactions." Mr. Gerde is a Certified Public Accountant. Sheryl A. Symonds. Sheryl A. Symonds has been the Vice President Administration and General Counsel of the Company since September 1997. Prior to joining the Company, Ms. Symonds was a partner at Stoel Rives LLP, currently the Company's primary outside legal counsel. Ms. Symonds joined Stoel Rives LLP in 1985 and became a partner in 1992. Ms. Symonds has been Secretary of the Company since August 1996 and is also Secretary of each of the Company's operating subsidiaries. Allen W. Dahl. Dr. Allen W. Dahl has been a director of the Company since February 1995, and of its predecessors since September 1994. Dr. Dahl is retired from practice as a physician in the Puget Sound region of Washington. 55 Urs Diebold. Dr. Urs Diebold has been a director of the Company since July 1997. Dr. Diebold has been a director of Lysys AG ("Lysys"), a Swiss financing and investment management company, since September 1990. Prior to joining Lysys in 1990, Dr. Diebold was an investment advisor at the Zurich office of Credit Suisse. Dr. Diebold is also a director of one of the Company's shareholders, Capital International Fund Limited. See "Certain Relationships and Related Transactions." Werner Hafelfinger. Werner Hafelfinger has been a director of the Company since August 17, 1998. Mr. Hafelfinger has been Vice President of Global Manufacturing of St. Jude Medical (Cardiac Rhythm Management Division), a manufacturer of implantable medical devices, since 1984. Dale L. Rasmussen. Dale L. Rasmussen has been a director of the Company since June 1997. Mr. Rasmussen has been employed as the Senior Vice President and Secretary of AirSensors, Inc., now IMPCO Technologies, Inc. since 1989. William A. Wheeler. William A. Wheeler has been a director of the Company since June 1997. Mr. Wheeler retired from Dowty Aerospace Yakima in May 1997, where he served as President, Chief Executive Officer and Chairman of the Board of Directors since 1979. Significant Employees Lewis L. Wear. Lewis L. Wear, 57, has been the Electronics Group President since August 1996, President of Pacific Coast since February 1996, and a director of Pacific Coast since November 1995. He also has been a director of Ceramic Devices since November 1995, President and a director of NTI since April 1997 and a director of Balo since February 1998. Prior to November 1995, Mr. Wear was Vice President of Operations for Vacuum Atmospheres, a division of WEMS, Inc. Garry R. Vandekieft. Garry R. Vandekieft, 57, has been the Aerospace Group President since October 1996, President of Cashmere since August 1996, a director of Cashmere since October 1996, and was General Manager of Cashmere from June 1996 to August 1996. Prior to being employed by Cashmere, Mr. Vandekieft served as Manufacturing Operations Manager of Advanced Wind Turbines during 1995 and 1996, and as Director of Manufacturing of Master-Halco from 1990 through 1994. Duncan Crighton. Duncan Crighton, 62, has been Chief Executive Officer of Aeromet since March 1997 and became President of the Company's Aerospace (U.K.) Group upon closing of the Aeromet Acquisition. Mr. Crighton served as Managing Director of Aeromet's predecessor, Kent Aerospace Castings plc, from 1990 through 1995, and as a management consultant to Aeromet from 1995 to February 1997. Committees of the Board of Directors; Tenure; Compensation The Option Committee of the Board of Directors administers the Company's Amended and Restated Stock Incentive Plan. Dr. Dahl, Dr. Diebold and Mr. Wheeler are the current members of the Option Committee. The Finance and Audit Committee of the Board of Directors reviews the Company's accounting policies, practices, internal accounting controls and financial reporting. The Finance and Audit Committee also oversees the engagement of the Company's independent auditors, reviews the audit findings and recommendations of the independent auditors and monitors the extent to which management has implemented the findings and recommendations of the independent auditors. Dr. Diebold, Mr. Rasmussen and Mr. Wheeler are the current members of the Finance and Audit Committee. The Compensation Committee of the Board of Directors establishes salaries, incentives and other forms of compensation for the chief executive officer, the chief financial officer, the general counsel, the subsidiary presidents and certain other key employees of the Company and its subsidiaries. The Compensation Committee also administers policies relating to compensation and benefits other than option grants, including the Director Plan and the Employee Stock Purchase Plan. Dr. Dahl, Mr. Rasmussen and Mr. Wheeler are the current members of the Compensation Committee. The Nominating Committee of the Board of Directors recommends individuals to be presented to the 56 shareholders for election or reelection to the Board of Directors. Mr. Wright, Dr. Diebold and Mr. Rasmussen are the current members of the Nominating Committee. Directors of the Company hold office until the next annual meeting of the Company's shareholders and until their successors have been elected and duly qualified. Under the terms of a 1995 agreement between Lysys and the Company, Lysys had the right to nominate one of the Company's Board members until July 1998. Dr. Diebold is the current designee of Lysys to the Board of Directors. See "Certain Relationships and Related Transactions." Executive officers are elected by the Board of Directors of the Company at the first Board meeting after each annual meeting of shareholders and hold office until their successors are elected and duly qualified. Pursuant to the Company's Independent Director Stock Plan as of May 31, 1998 (the "Director Plan"), each non-employee director of the Company receives an initial award of 500 shares of Common Stock, an annual award of $5,000 worth of Common Stock, $1,000 in cash per year for each committee on which the director serves, and an additional $500 in cash per year for serving as chairperson of a committee. The Board may elect to pay any of the cash fees in shares of Common Stock. See "Executive Compensation--Benefit Plans--Independent Director Stock Plan." All directors are reimbursed for reasonable travel and other out-of-pocket expenses incurred in attending meetings of the Board of Directors. On August 14, 1998, the Board of Directors approved an Amended and Restated Independent Director Plan, which will be submitted to the Company's shareholders for approval at the 1998 annual meeting of shareholders. See "Executive Compensation--Benefit Plans--Independent Director Stock Plan." Section 16(a) Beneficial Ownership Reporting Compliance Based solely on a review of Forms 3, 4 and 5 and amendments thereto furnished to the Company pursuant to Rule 16a-3(e) during its most recent fiscal year, and on written representations of the Company's officers, directors, or principal shareholders ("Reporting Persons") that no other reports were required, the Company believes that, during the fiscal year ended May 31, 1998, the Reporting Persons complied in all material respects with all applicable filing requirements under Section 16(a) of the Exchange Act, except that Mr. Wright filed a Form 5 that was two days late, and Mr. Gerde and Ms. Symonds each filed a Form 5 that was one day late, each of which was amended in August 1998. 57 ITEM 11. EXECUTIVE COMPENSATION Summary Compensation The following table sets forth in summary form the compensation paid by the Company to the Chief Executive Officer and to the Company's three most highly compensated executive officers (the "Named Executives") for services in all capacities to the Company for the last three fiscal years:
Long-Term Compensation Annual -------------- Compensation Securities Fiscal ------------ Underlying Other Annual Name and Principal Position Year Salary($) Options/SARs(#) Compensation($)(2) - --------------------------- ------ ------------ --------------- ------------------ Donald A. Wright...................................... 1998 192,000 275,000 4,800 CEO and President 1997 160,000 920,000 400 1996 110,577 15,000 400 Nick A. Gerde......................................... 1998 100,000 40,000 2,400 CFO, VP Finance, Treasurer 1997 84,160 38,333 -- and Assistant Secretary 1996 62,500 8,333 -- Sheryl A. Symonds(3).................................. 1998 105,000 125,000 -- VP Administration, General Counsel and Secretary - -------------- (1) Represents exercisable warrants and options to purchase shares of Common Stock. See "Aggregated Options and Fiscal Year-End Option Values." (2) Represents estimated value of the personal use of a company car and other miscellaneous benefits. (3) Represents the compensation received by Ms. Symonds during the nine months since she joined the Company. Under her employment agreement, Ms. Symonds received salary at an annual rate of $140,000 for fiscal year 1998.
Option Grants The following table sets forth information on grants of stock options by the Company during the year ended May 31, 1998 to the Named Executives:
Securities % of Total Underlying Options Granted Exercise or Market Price Options Granted to Employees in Base Price on Grant Date Name (#) Fiscal Year ($/Share) ($/Share) Expiration Date ---- --------------- --------------- ------------ -------------- -------------------- Donald A. Wright............. 650,000 58.4% 4.72 to 6.13 4.72 to 6.13 2/9/08 to 5/28/08 Nick A. Gerde................ 75,000 6.7% 3.00 to 6.13 3.00 to 6.13 6/2/07 to 5/28/08 Sheryl A. Symonds............ 160,000 14.4% 4.00 to 6.13 4.00 to 6.13 7/18/07 to 5/28/08
Aggregated Options and Fiscal Year-End Option Values The following table summarizes the aggregate stock options and warrants, and their market values at May 31, 1998, held by the Named Executives: 58
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Options at FY-end(#) at FY-end($) -------------------------- ----------------------------- Name Exercisable Unexercisable Exercisable(1) Unexercisable ---- ----------- ------------- -------------- ------------- Donald A. Wright....................................... 1,349,024 433,536 2,345,101 58,536 Nick A. Gerde.......................................... 121,422 49,634 344,880 14,634 Sheryl A. Symonds...................................... 125,000 35,000 229,625 -- - -------------- (1) Value of exercisable options and warrants having exercise prices of less than $6.125 per share, the closing price of the Common Stock on May 29, 1998.
Employment Agreements The Company has entered into employment agreements with each of the Named Executives. The employment agreements employ Mr. Wright through fiscal 2003, Mr. Gerde through fiscal 2000 and Ms. Symonds through fiscal 2002. The employment agreements provide for an annual salary in fiscal 1999 of $253,920, $130,000 and $163,300, for Mr. Wright, Mr. Gerde and Ms. Symonds, respectively. The employment agreements also provide for the annual grant to each of the Named Executives of options to purchase up to 275,000, 25,000 and 50,000 shares of Common Stock, respectively. The exercise price of such options shall be equal to the fair market value of the Common Stock on the date of grant. Each option will contain vesting and other terms as are approved by the Board of Directors, and will expire ten years after the date of grant. If a Named Executive's employment with the Company is terminated without cause, or if there is a change of control, as those terms are defined in their employment agreements, the Company will be required to make severance payments equal to, in the case of Mr. Wright, twice Mr. Wright's then-current annual base salary, in the case of Mr. Gerde, six months of Mr. Gerde's then-current annual base salary and, in the case of Ms. Symonds, eighteen months of Ms. Symonds' then-current annual base salary. Under these employment agreements, Mr. Wright and Mr. Gerde agree not to compete with the Company for two years following termination of employment. Certain Tax Considerations Related to Executive Compensation As a result of Section 162(m) of the Code, if the Company pays more that $1,000,000 in compensation to a "covered employee" (the chief executive officer and the next four highest paid employees) in a single year, then the Company's deduction for such compensation could be limited to $1,000,000. Benefit Plans Amended and Restated Stock Incentive Plan The Company's shareholders adopted the Company's Amended and Restated Stock Incentive Plan (the "Option Plan") in October 1996. The Company has reserved for issuance under the Option Plan a maximum of 3,000,000 shares of Common Stock, subject to certain adjustments. Under the Option Plan, the plan administrator may award incentive stock options ("ISOs") to key employees, and may award non-qualified stock options ("NSOs"), stock appreciation rights ("SARs"), stock and cash bonus awards, restricted stock, and performance units to employees and certain non-employees (other than non-employee directors) who have important relationships with the Company or its subsidiaries. However, no person may receive options to purchase more than 1,000,000 shares in any one year. As of May 31, 1998, options to purchase an aggregate of 2,256,116 shares of Common Stock had been granted under the Option Plan, of which options for 25,000 shares have been exercised, leaving 743,884 shares available for future grant under the Option Plan. No SARs, stock or cash bonus awards, restricted stock or performance units have been granted under the Option Plan. The Option Plan is administered by the Option Committee of the Board of Directors, which is comprised of disinterested directors in accordance with Rule 16b-3 under the Exchange Act, and of 59 outside directors under Section 162(m) of the Internal Revenue Code. However, only the Board of Directors may amend or terminate the Option Plan. Unless terminated sooner by the Board of Directors, the Option Plan expires in October 2006. In general, vested options and any related rights may only be exercised when (a) the recipient is employed by or in the service of the Company, (b) within 12 months following termination of employment by reason of death or disability, or (c) within three months following termination for any other reason except for cause. Options, SARs, cash and stock bonus awards and performance units are nonassignable and nontransferable except by will or by the laws of descent and distribution at the time of the recipient's death. On the date an ISO is granted, the aggregate fair market value of the Common Stock issuable under ISOs available for exercise during any calendar year, may not exceed $100,000. ISOs must expire ten years from the date of grant, and the exercise price must equal the fair market value of the underlying shares of Common Stock at the date of grant. ISOs may not be granted to employees holding more than 10% of the Company's total voting power unless (a) the exercise price is at least 110% of the Common Stock's fair market value on the date of grant, and (b) the option is not exercisable until five years after the date of grant. Independent Director Stock Plan The Company's shareholders adopted the Company's Independent Director Stock Plan (the "Director Plan") in November 1995. The Company has reserved for issuance under the Director Plan a maximum of 100,000 shares of Common Stock, subject to adjustments, to directors who are not employees of the Company or any of its subsidiaries. At May 31, 1998, 31,959 shares had been issued under the Director Plan, 27,009 of which are fully vested, and 68,041 remain available for future grant. The Director Plan is administered by the Compensation Committee of the Board of Directors in accordance with Rule 16b-3 adopted under the Exchange Act. No director may vote on any matter relating to an award held by such director. Only the Board of Directors may suspend, amend or terminate the Director Plan. Unless terminated sooner by the Board of Directors, the Director Plan expires on October 2005. Under the Director Plan each Independent Director receives 500 fully-vested shares of Common Stock upon election to the Board (the "Initial Award"). Each time an Independent Director is elected to the Board (or on the date of each annual shareholders' meeting during terms longer than one year), each Independent Director receives $5,000 worth of shares based on fair market value of the Common Stock on the award date (the "Annual Award"). Annual Awards vest in full on the first anniversary of grant (the "Vesting Period") only if the Independent Director has attended at least 75% of the regularly scheduled Board meetings during the Vesting Period. Otherwise the Annual Award is forfeited, unless the Board of Directors votes unanimously to waive or modify the vesting requirement. An unvested Annual Award will also be forfeited if the director ceases to be an Independent Director during the Vesting Period for any reason other than death or disability. However, unvested Annual Awards automatically vest (a) if the director is unable to continue due to disability or death, (b) upon the closing of any merger, consolidation or plan of exchange in which the Company does not survive or (c) upon sale of all or substantially all of the Company's assets. No Independent Director may transfer any interest in unvested Annual Awards to any person other than to the Company. On August 14, 1998, the Board of Directors of the Company approved the Amended and Restated Independent Director Plan (the "Amended Director Plan"), subject to shareholder approval at the 1998 Annual Meeting of Shareholders (the "Annual Meeting"). The proposed amendments to the Director Plan (1) increase the number of shares of Common Stock reserved for issuance under the Director Plan from 100,000 to 500,000 shares, (2) provide for the award of non-qualified stock options, instead of shares of the Company's Common Stock, to non-employee directors of the Company, and (3) change the formula for determining the fair market value of the shares of the Company's Common Stock. The Board of Directors believes that the grant of stock options instead of shares helps to provide non-employee directors with an incentive for continued service and to more closely align their interests with those of the shareholders. Under the Amended Director Plan each Independent Director would receive a fully-vested option to purchase 2,500 shares of Common Stock upon election to the Board. Each time an Independent Director is elected to the Board (or on the date of each annual shareholders' meeting during terms longer than one year), each Independent Director would receive an unvested option to purchase 10,000 shares of 60 Common Stock. Upon shareholder approval and unless terminated sooner by the Board of Directors, the Amended Director Plan would continue in effect until the earlier of: (i) ten years from the date on which the Director Plan was first adopted by the Board, and (ii) the date on which all shares of Common Stock available for issuance under the Amended Director Plan have been issued. Employee Stock Purchase Plan The Company's shareholders adopted the Company's 1997 Employee Stock Purchase Plan in October 1997 (the "Employee Stock Plan"). The Company has reserved for issuance under the Employee Stock Plan a maximum of 1,000,000 shares of Common Stock, subject to certain adjustments, for issuance to eligible employees of the Company and its subsidiaries. The Company pays all expenses relating to the Employee Stock Plan except expenses related to the resale of shares acquired by employees under the plan. The Employee Stock Plan is administered by the Compensation Committee of the Board of Directors. The plan administrator will designate a financial firm as the plan's custodian to vote the shares pursuant to the participants' instructions, keep the plan records, and provide periodic statements to participants. Under the Employee Stock Plan, eligible employees may purchase shares of the Company's Common Stock through payroll deductions ranging from a minimum of $20 bi-weekly, to a maximum of 15% of the employee's annual gross pay or $25,000. The purchase price per share will be the lower of (a) 85% of fair market value on the first day of the offering period, or (b) 100% of fair market value on the last day of the offering period. The Company currently anticipates that the first offering period will begin approximately November 1, 1998 and that offering periods will be one month each. Plan participants may sell their shares through the plan custodian for a discounted brokage fee. If a participant's employment terminates before the end of any offering period, no shares will be purchased for the participant during that period and the payroll deductions will be returned to the participant. 61 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PRINCIPAL SHAREHOLDERS The following table shows, to the best of the Company's knowledge based on the records of the Company's transfer agent and the Company's records on issuances of shares, as adjusted to reflect changes in ownership documented in filings with the Securities and Exchange Commission made by certain shareholders and provided to the Company pursuant to Section 16 of the Exchange Act, and statements provided to the Company by certain shareholders, the Common Stock owned as of August 27, 1998 by (1) each person known by the Company to own beneficially more than 5% of the outstanding Common Stock (each a "Principal Shareholder"); (2) each of the Company's directors; (3) the Named Executives and (4) all executive officers and directors of the Company as a group. Except as otherwise noted, the Company believes the persons listed below have sole investment and voting power with respect to the Common Stock owned by them.
Amount and Percentage Nature of of Beneficial Common Name and Address of Beneficial Owner: Ownership (1) Stock - ------------------------------------ ------------- ------------- Donald A. Wright 2,067,986(2) 11.66% c/o Pacific Aerospace & Electronics, Inc. 430 Olds Station Road Wenatchee, WA 98801 Allen W. Dahl, M.D. 32,401(3) * 7300 Madrona Drive NE Bainbridge Island, WA 98110 Dr. Urs Diebold 1,900(3) * c/o Lysys AG Gessnerallee 38 PO Box CH-8023 Zurich, Switzerland Werner Hafelfinger(4) 2,220(4) * 15900 Valley View Court Sylmar, CA 91342 William A. Wheeler 6,092(3) * 2011 Lombard Lane Yakima, WA 98902 Dale L. Rasmussen 2,092(3) * c/o IMPCO Technologies, Inc. 708 Industrial Dr. Tukwila, WA 98188 Nick A. Gerde 180,550(5) 1.12% c/o Pacific Aerospace & Electronics, Inc. 430 Olds Station Road Wenatchee, WA 98801 Sheryl A. Symonds 161,200(6) 1.00% c/o Pacific Aerospace & Electronics, Inc. 430 Olds Station Road Wenatchee, WA 98801 62 Deltec Holdings, Inc. 901,187 5.85% 14511 NE 13th Avenue Vancouver, Washington 98668-3501 All executive officers and directors as a group 2,454,441(7) 13.59% (8 persons) - -------------- * Less than 1%. (1) Shares that a person has the right to acquire within 60 days are treated as outstanding for determining the amount and percentage of Common Stock owned by such person but are not deemed to be outstanding as to any other person or group. (2) Includes (a) 32,666 shares held by Ragen MacKenzie, Incorporated, custodian for Donald A. Wright, in two IRA accounts, (b) 1,500 shares issuable upon exercise of Warrants, (c) 100,000 shares issuable upon exercise of another warrant and (d) 1,643,536 shares issuable upon exercise of vested stock options. Does not include 39,024 unvested stock options. (3) Includes 825 unvested shares issued pursuant to the Director Plan on October 8, 1997 which will vest at the next annual Board of Directors meeting if certain conditions have been satisfied. (4) Includes 600 shares issued on August 17, 1998 pursuant to the Director Plan, 100 shares of which will vest at the next annual Board of Directors meeting if certain conditions have been met. (5) Includes (a) 4,000 shares issuable upon exercise of Warrants, (b) 25,000 shares issuable upon exercise of another warrant, and (c) 136,300 shares issuable upon exercise of vested stock options. Does not include 9,756 unvested stock options. (6) Includes (a) 500 shares issuable upon exercise of Warrants and (b) 160,000 shares issuable upon exercise of vested stock options. (7) Includes currently exercisable Warrants, other warrants and options to purchase up to 2,070,836 shares of Common Stock.
63 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company has entered into employment agreements with Donald A. Wright, Nick A. Gerde and Sheryl A. Symonds. See "Executive Officers--Employment Agreements." Dr. Urs Diebold, a director of the Company, is also a director of Lysys and a director of Capital International Fund Limited (the "CI Fund"), a shareholder of the Company. Lysys provided placement agency services in connection with certain capital raising transactions in May 1996, November 1997 and May 1998. The May 1996 transaction involved the issuance by the Company of 838,470 shares of Common Stock to private investors for gross proceeds of approximately $3.4 million, from which Lysys was paid a commission of $235,000. The Company also issued 30,000 shares of Common Stock to a designee of Lysys as additional compensation in connection with that offering. The November 1997 transactions involved the issuance by the Company of 524,000 shares of Common Stock and $4,050,000 in principal amount of promissory notes to private investors, one of which was the CI Fund. Lysys received a $320,000 fee for its services in that transaction, of which $142,000 was paid directly to Dr. Diebold. The May 1998 transaction involved the issuance by the Company of 100,000 shares of its Series B Convertible Preferred Stock to third-party investors for gross proceeds to the Company of $10.0 million. Lysys received $425,000 in placement agency fees for its services in the May transaction, none of which was paid to Dr. Diebold. In June 1997, the Company announced a plan to form an Information Technology Group and to acquire six companies for that group. The Company entered into nonbinding letters of intent with six potential target companies for inclusion in that group, including Orca Technologies, Inc. ("Orca") and Brigadoon.com, Inc. ("Brigadoon"), two development stage internet service providers. In connection with the proposed acquisitions, the Company advanced operating funds to Brigadoon and Orca and guaranteed a $1.3 million bank line of credit and a $373,000 equipment lease to Orca. In December 1997, the Company announced that after completing due diligence investigations it had determined to terminate the letters of intent and related operating agreements. As a part of terminating its effort to develop an information technology group, in April 1998 the Company completed a debt restructuring arrangement with Orca under which (i) $4.2 million of indebtedness from Orca and its subsidiaries to the Company was converted into 2,109,709 shares of Orca common stock, (ii) Orca granted the Company certain demand and piggyback registration rights with regard to those shares and (iii) the Company agreed to continue guaranteeing Orca's credit facility and equipment lease, subject to certain time limitations. In addition, Orca delivered to the Company a $950,000 promissory note (the "Orca Note") in exchange for (i) $1.3 million in promissory notes made by Brigadoon to the Company, (ii) a common stock purchase warrant held by the Company to purchase a 12.5% fully diluted interest in Brigadoon common stock, (iii) the Company's collection lawsuit against Brigadoon and (iv) the Company's claim in an involuntary bankruptcy action against Brigadoon. The Orca Note matures in April 2003 and accrues interest at 8% per annum. Under the Orca Note, Orca is obligated to pay interest only for the first year and to then make fully-amortizing monthly payments of principal plus interest for the final four years of the note term. The Company currently owns 2,289,309 shares of Orca common stock, which the Company believes as of May 31, 1998 represents approximately 19.5% of Orca's outstanding common stock. The Company also subleases approximately 95% of the square footage of its Bothell, Washington office space to Orca for an equivalent percentage of the lease payment for that space. Roger Vallo and Donald Cotton, who were directors of the Company until January 1998, are directors, and Mr. Vallo is CEO, of Orca. Donald A. Wright, the Company's Chief Executive Officer and President, and Nick A. Gerde, the Company's Chief Financial Officer, Vice President Finance and Treasurer, were directors of Orca until June 1997 and shareholders of Orca until May 1998, and personally guaranteed or indemnified certain obligations of Orca. In May 1998, Mr. Wright and Mr. Gerde sold their shares in private transactions. Dr. Allen Dahl, a director of the Company, continues to be a shareholder of Orca. In June 1997, the Company entered into a financial services agreement with Liviakis Financial Communications, Inc. ("Liviakis") to provide financial and public relations services to the Company. In connection with that consulting agreement, the Company issued to Liviakis and Robert B. Prag, one of its principals, warrants to purchase an aggregate of 1,290,000 shares of Common Stock, which resulted in their beneficially owning more than 5% of the outstanding Common Stock as of May 31, 1998. In August 1998, the Company, Liviakis and Mr. Prag entered into an agreement in which (a) 64 a finder's fee claim by Liviakis was resolved in exchange for the Company's issuance of an aggregate of 590,000 shares of Common Stock to Liviakis and Mr. Prag, and (b) Liviakis and Mr. Prag transferred the warrants previously issued to them to the Company for cancellation. 65 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Description ------- ----------- 2.1 Share Acquisition Agreement dated July 1, 1998, by and between Charles Baynes plc, Westpark Limited, Pacific Aerospace and Electronics (U.K.) Limited, and Pacific Aerospace & Electronics, Inc.(18) 3.1 Articles of Incorporation of Pacific Aerospace & Electronics, Inc. as filed on September 20, 1996, with the Secretary of State of the State of Washington.(6) 3.2 Amendment to Articles of Incorporation containing Designation of Rights and Preferences of Series A Preferred, as corrected. (8) 3.3 Amendment to Articles of Incorporation containing Designation of Rights and Preferences of Series B Preferred. (20) 3.4 Bylaws of Pacific Aerospace & Electronics, Inc.(6) 4.1 Form of specimen certificate for Common Stock.(6) 4.2 Form of specimen certificate for Warrants.(6) 4.3 Form of specimen certificate for the Series A Preferred.(8) 4.4 Form of specimen certificate for the Series B Preferred.(20) 4.5 Form of Common Stock Purchase Warrant issued to holders of the Series B Preferred on May 15, 1998.(20) 4.6 Registration Rights Agreement, dated May 15, 1998 between Pacific Aerospace & Electronics, Inc. and the holders of the Series B Preferred.(20) 4.7 Warrant Agreement between Interwest Transfer Co., Inc. and PCT Holdings, Inc. dated July 1, 1996.(4) 4.8 Form of Stock Purchase Agreement for Fall 1997 Offering (14) 4.9 Purchase Warrant from Pacific Aerospace & Electronics, Inc. to Paulson Investment Company, Inc., dated September 30, 1997.(20) 4.10 Purchase Warrant from Pacific Aerospace & Electronics, Inc. to Chester L. Paulson, dated September 30, 1997.(20) 4.11 Purchase Warrant from Pacific Aerospace & Electronics, Inc. to M. Lorraine Maxfield dated September 30, 1997.(20) 4.12 Common Stock Purchase Warrant No. 001 from Pacific Aerospace & Electronics, Inc. to Donald A. Wright dated as of November 30, 1996.(10) 66 Exhibit Number Description ------- ----------- 4.13 Common Stock Purchase Warrant No. 002 from Pacific Aerospace & Electronics, Inc. to Nick A. Gerde dated as of November 30, 1996.(10) 4.14 Common Stock Purchase Warrant No. 003 from Pacific Aerospace & Electronics, Inc. to Edward A. Taylor dated as of November 30, 1996.(10) 4.15 Common Stock Purchase Warrant from PCT Holdings, Inc. to Robert L. Smith Unified Credit Trust dated as of February 5, 1998.(20) 4.16 Common Stock Purchase Warrant from Pacific Aerospace & Electronics, Inc. to David A. Noyes & Company dated June 3, 1997. (9) 4.17 Common Stock Purchase Warrant from Pacific Aerospace & Electronics, Inc. to Gregory K. Smith dated June 3, 1997. (9) 4.18 Common Stock Purchase Warrant from Pacific Aerospace & Electronics, Inc. to Nestor Wiegand dated June 3, 1997. (9) 4.19 Securities Purchase Agreement, dated May 15, 1998, between Pacific Aerospace & Electronics, Inc. and the purchasers of the Company's Series B Preferred. (20) 4.20 Purchase Agreement dated as of July 23, 1998, between Pacific Aerospace & Electronics, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Morel Industries, Inc., Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety Products, Inc., PA&E International, Inc. and Friedman, Billings, Ramsey & Co., Inc. and BancBoston Securities Inc.(18) 4.21 Indenture dated as of July 30, 1998, between Pacific Aerospace & Electronics, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Morel Industries, Inc., Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety Products, Inc., PA&E International, Inc. and IBJ Schroder Bank & Trust Company.(18) 4.22 Form of Global Note from Pacific Aerospace & Electronics, Inc.(18) 4.23 Registration Rights Agreement, dated as of July 30, 1998, between Pacific Aerospace & Electronics, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Morel Industries, Inc., Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety Products, Inc., PA&E International, Inc. and Friedman, Billings, Ramsey & Co., Inc. and BancBoston Securities Inc.(18) 10.1 Letter Agreement, dated January 3, 1995, between PCT Holdings, Inc. and Lysys Ltd.(1) 10.2 Placement Agreement, dated October 21, 1997, between Pacific Aerospace & Electronics, Inc. and Lysys Ltd. (12) 67 Exhibit Number Description ------- ----------- 10.3 Placement Agreement, dated March 25, 1998, as amended May 15, 1998, between Pacific Aerospace & Electronics, Inc. and Lysys Ltd. (20) 10.4 Amended and Restated Stock Incentive Plan.(5) 10.5 Amendment No. 1 to the Amended and Restated Stock Incentive Plan. (19) 10.6 Independent Director Stock Plan.(7) 10.7 1997 Employee Stock Purchase Plan (11) 10.8 Employment Agreement, dated June 1, 1997, between Pacific Aerospace & Electronics, Inc. and Donald A. Wright.(9) 10.9 Employment Agreement, dated June 1, 1997, between Pacific Aerospace & Electronics, Inc. and Nick A. Gerde.(9) 10.10 Employment Agreement, dated September 1, 1997, between Pacific Aerospace & Electronics, Inc. and Sheryl A. Symonds.(12) 10.11 Loan Agreement, dated June 30, 1997, between Key Bank National Association and Pacific Aerospace & Electronics, Inc.(9) 10.12 Revolving Note, dated June 30, 1997, from Pacific Aerospace & Electronics, Inc. to KeyBank National Association.(9) 10.13 Consulting Agreement, dated February 3, 1998, between Liviakis Financial Communications, Inc. and the Company.(15) 10.14 Debt Restructuring Agreement, dated April 6, 1998, between Pacific Aerospace & Electronics, Inc., Orca Technologies, Inc., Televar, Inc. and MONITRx, Inc.(15) 10.15 Commercial Guaranty, dated July 16, 1997, from Pacific Aerospace & Electronics, Inc. to KeyBank National Association.(13) 10.16 Promissory Note, dated March 18, 1998, from Pacific Aerospace & Electronics, Inc. to KeyBank National Association.(15) 10.17 Security Agreement, dated March 18, 1998, from Pacific Aerospace & Electronics Inc. to KeyBank National Association.(15) 10.18 Facility Letter, dated July 30, 1998, from Barclays Bank plc to Aeromet International plc.(20) 10.19 Asset Purchase Agreement, dated April 13, 1998, between Pacific Aerospace & Electronics, Inc. and Electronic Specialty, Inc.(17) 10.20 Sublease between Pacific Aerospace & Electronics, Inc. and Orca Technologies, Inc. dated April 27, 1998.(20) 68 Exhibit Number Description ------- ----------- 10.21 General Terms Agreement No. PLR-950 Relating to Boeing Model Aircraft between Cashmere Manufacturing Co., Inc. and Boeing Commercial Airplane Group, effective as of February 5, 1990, as amended.(2) 10.22 Special Business Provisions No. L-890821-8140N between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of December 18, 1992.(2)(3) 10.23 Special Business Provisions No. L-500660-8134N between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of December 31, 1991.(2)(3) 10.24 Special Business Provisions No. L-435579-8180N between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of August 11, 1994.(2)(3) 10.25 Special Business Provisions No. PLR-950A between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of February 5, 1990.(2)(3) 10.26 Administrative Agreement No. L-435579-8180N between Cashmere Manufacturing Co., Inc. and Boeing Commercial Airplane Group effective as of August 11, 1994.(2) 10.27 Special Business Provisions No. POP-65311-0047 between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of February 26, 1996.(2)(3) 10.28 General Terms Agreement No. BCA-65311-0044 between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of February 26, 1996.(2) 10.29 General Terms Agreement No. BCA-65311-0140 between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of June 11, 1997.(20) 10.30 Special Business Provisions No. POP-65311-0143 between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of June 11, 1997.(20)(3) 10.31 Long Term Agreement No. 0108098 between Northrop Grumman Corporation and Cashmere Manufacturing Co., Inc. effective as of April 6, 1998.(20)(3) 10.32 Agreement, dated as of August 27, 1998, between Pacific Aerospace & Electronics, Inc., Liviakis Financial Communications, Inc. and Robert B. Prag.(20) 16.1 Letter from accountant regarding a change of accountants.(16) 21.1 List of Subsidiaries.(20) 23.1 Consent of Moss Adams LLP.(20) 69 Exhibit Number Description ------- ----------- 23.2 Consent of KPMG Peat Marwick LLP.(20) 27.1 Financial Data Schedule.(20) - -------------- (1) Incorporated by reference to the Company's Annual Report on Form 10-KSB of the year ended May 31, 1995. (2) Incorporated by reference to Amendment No. 1 to the Company's Registration Statement on Form SB-2 filed on June 19, 1996. (3) Subject to confidential treatment. Omitted confidential information was filed separately with the Securities and Exchange Commission. (4) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended May 31, 1996. (5) Incorporated by reference to the Company's Current Report on Form 10-QSB for the quarterly period ended November 30, 1996. (6) Incorporated by reference to the Company's Current Report on Form 8-K filed on December 12, 1996, reporting the Reincorporation Merger. (7) Incorporated by reference to the Company's Registration Statement of Certain Successor Issuers on Form 8-B filed on February 6, 1997. (8) Incorporated by reference to the Company's Current Report on Form 8-K filed on March 12, 1997, reporting the Series A Preferred Stock offering. (9) Filed with the Company's Annual Report on Form 10-KSB for the fiscal year ending May 31, 1997. (10) Incorporated by reference to the Company's Registration Statement on Form S-8 filed on June 11, 1997. (11) Filed with the Company's Definitive Proxy Statement for its 1997 Annual Shareholders Meeting, on August 28, 1997. (12) Submitted with the Post-Effective Amendment No. 1 to Form SB-2, filed on October 31, 1997. (13) Filed with the Company's Quarterly Report on Form 10-QSB for the quarterly period ending November 30, 1997. (14) Incorporated by reference to the Company's Registration Statement on Form S-3 filed on December 3, 1997. (15) Filed with the Company's Quarterly Report on Form 10-QSB for the quarterly period ending February 28, 1998. (16) Filed with the Company's Current Report on Form 8-K, dated April 22, 1998. (17) Incorporated by reference to the Company's Current Report on Form 8-K filed on July 10, 1998. (18) Incorporated by reference to the Company's Current Report on Form 8-K filed on August 14, 1998. (19) Incorporated by reference to the Company's Registration Statement on Form S-8 filed on November 7, 1997. (20) Filed with this report. (b) Reports on Form 8-K. (i) The Company filed a Current Report on Form 8-K, dated April 22, 1998 and an amendment thereto dated May 1, 1998, reporting the changes in the Company's certifying accountant. 70 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: August 28, 1998 PACIFIC AEROSPACE & ELECTRONICS, INC. By /s/ DONALD A. WRIGHT -------------------------------------- DONALD A. WRIGHT President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the following capacities on August 28, 1998. Signatures Title - ---------- ----- /s/ DONALD A. WRIGHT President, Chief Executive Officer, and - ---------------------------------- Chairman of the Board DONALD A. WRIGHT (Principal Executive Officer) /s/ NICK A. GERDE Vice President, Finance, Chief Financial - ---------------------------------- Officer, Treasurer and Assistant NICK A. GERDE Secretary (Principal Financial and Accounting Officer) /s/ ALLEN W. DAHL Director - ---------------------------------- ALLEN W. DAHL /s/ DALE L. RASMUSSEN Director - ---------------------------------- DALE L. RASMUSSEN /s/ URS DIEBOLD Director - ---------------------------------- URS DIEBOLD /s/ WILLIAM A. WHEELER Director - ---------------------------------- WILLIAM A. WHEELER Director (since 8/17/98) - ---------------------------------- WERNER HAFELFINGER 71 EXHIBIT INDEX The following documents are filed herewith or have been included as exhibits to previous filings with the Securities and Exchange Commission and are incorporated by reference as indicated below. Exhibit Number Description ------- ----------- 2.1 Share Acquisition Agreement dated July 1, 1998, by and between Charles Baynes plc, Westpark Limited, Pacific Aerospace and Electronics (U.K.) Limited, and Pacific Aerospace & Electronics, Inc.(18) 3.1 Articles of Incorporation of Pacific Aerospace & Electronics, Inc. as filed on September 20, 1996, with the Secretary of State of the State of Washington.(6) 3.2 Amendment to Articles of Incorporation containing Designation of Rights and Preferences of Series A Preferred, as corrected. (8) 3.3 Amendment to Articles of Incorporation containing Designation of Rights and Preferences of Series B Preferred. (20) 3.4 Bylaws of Pacific Aerospace & Electronics, Inc.(6) 4.1 Form of specimen certificate for Common Stock.(6) 4.2 Form of specimen certificate for Warrants.(6) 4.3 Form of specimen certificate for the Series A Preferred.(8) 4.4 Form of specimen certificate for the Series B Preferred.(20) 4.5 Form of Common Stock Purchase Warrant issued to holders of the Series B Preferred on May 15, 1998.(20) 4.6 Registration Rights Agreement, dated May 15, 1998 between Pacific Aerospace & Electronics, Inc. and the holders of the Series B Preferred.(20) 4.7 Warrant Agreement between Interwest Transfer Co., Inc. and PCT Holdings, Inc. dated July 1, 1996.(4) 4.8 Form of Stock Purchase Agreement for Fall 1997 Offering (14) 4.9 Purchase Warrant from Pacific Aerospace & Electronics, Inc. to Paulson Investment Company, Inc., dated September 30, 1997.(20) 4.10 Purchase Warrant from Pacific Aerospace & Electronics, Inc. to Chester L. Paulson, dated September 30, 1997.(20) 4.11 Purchase Warrant from Pacific Aerospace & Electronics, Inc. to M. Lorraine Maxfield dated September 30, 1997.(20) 4.12 Common Stock Purchase Warrant No. 001 from Pacific Aerospace & Electronics, Inc. to Donald A. Wright dated as of November 30, 1996.(10) Exhibit Number Description ------- ----------- 4.13 Common Stock Purchase Warrant No. 002 from Pacific Aerospace & Electronics, Inc. to Nick A. Gerde dated as of November 30, 1996.(10) 4.14 Common Stock Purchase Warrant No. 003 from Pacific Aerospace & Electronics, Inc. to Edward A. Taylor dated as of November 30, 1996.(10) 4.15 Common Stock Purchase Warrant from PCT Holdings, Inc. to Robert L. Smith Unified Credit Trust dated as of February 5, 1998.(20) 4.16 Common Stock Purchase Warrant from Pacific Aerospace & Electronics, Inc. to David A. Noyes & Company dated June 3, 1997. (9) 4.17 Common Stock Purchase Warrant from Pacific Aerospace & Electronics, Inc. to Gregory K. Smith dated June 3, 1997. (9) 4.18 Common Stock Purchase Warrant from Pacific Aerospace & Electronics, Inc. to Nestor Wiegand dated June 3, 1997. (9) 4.19 Securities Purchase Agreement, dated May 15, 1998, between Pacific Aerospace & Electronics, Inc. and the purchasers of the Company's Series B Preferred. (20) 4.20 Purchase Agreement dated as of July 23, 1998, between Pacific Aerospace & Electronics, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Morel Industries, Inc., Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety Products, Inc., PA&E International, Inc. and Friedman, Billings, Ramsey & Co., Inc. and BancBoston Securities Inc.(18) 4.21 Indenture dated as of July 30, 1998, between Pacific Aerospace & Electronics, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Morel Industries, Inc., Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety Products, Inc., PA&E International, Inc. and IBJ Schroder Bank & Trust Company.(18) 4.22 Form of Global Note from Pacific Aerospace & Electronics, Inc.(18) 4.23 Registration Rights Agreement, dated as of July 30, 1998, between Pacific Aerospace & Electronics, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Morel Industries, Inc., Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety Products, Inc., PA&E International, Inc. and Friedman, Billings, Ramsey & Co., Inc. and BancBoston Securities Inc.(18) 10.1 Letter Agreement, dated January 3, 1995, between PCT Holdings, Inc. and Lysys Ltd.(1) 10.2 Placement Agreement, dated October 21, 1997, between Pacific Aerospace & Electronics, Inc. and Lysys Ltd. (12) Exhibit Number Description ------- ----------- 10.3 Placement Agreement, dated March 25, 1998, as amended May 15, 1998, between Pacific Aerospace & Electronics, Inc. and Lysys Ltd. (20) 10.4 Amended and Restated Stock Incentive Plan.(5) 10.5 Amendment No. 1 to the Amended and Restated Stock Incentive Plan. (19) 10.6 Independent Director Stock Plan.(7) 10.7 1997 Employee Stock Purchase Plan (11) 10.8 Employment Agreement, dated June 1, 1997, between Pacific Aerospace & Electronics, Inc. and Donald A. Wright.(9) 10.9 Employment Agreement, dated June 1, 1997, between Pacific Aerospace & Electronics, Inc. and Nick A. Gerde.(9) 10.10 Employment Agreement, dated September 1, 1997, between Pacific Aerospace & Electronics, Inc. and Sheryl A. Symonds.(12) 10.11 Loan Agreement, dated June 30, 1997, between Key Bank National Association and Pacific Aerospace & Electronics, Inc.(9) 10.12 Revolving Note, dated June 30, 1997, from Pacific Aerospace & Electronics, Inc. to KeyBank National Association.(9) 10.13 Consulting Agreement, dated February 3, 1998, between Liviakis Financial Communications, Inc. and the Company.(15) 10.14 Debt Restructuring Agreement, dated April 6, 1998, between Pacific Aerospace & Electronics, Inc., Orca Technologies, Inc., Televar, Inc. and MONITRx, Inc.(15) 10.15 Commercial Guaranty, dated July 16, 1997, from Pacific Aerospace & Electronics, Inc. to KeyBank National Association.(13) 10.16 Promissory Note, dated March 18, 1998, from Pacific Aerospace & Electronics, Inc. to KeyBank National Association.(15) 10.17 Security Agreement, dated March 18, 1998, from Pacific Aerospace & Electronics Inc. to KeyBank National Association.(15) 10.18 Facility Letter, dated July 30, 1998, from Barclays Bank plc to Aeromet International plc.(20) 10.19 Asset Purchase Agreement, dated April 13, 1998, between Pacific Aerospace & Electronics, Inc. and Electronic Specialty, Inc.(17) 10.20 Sublease between Pacific Aerospace & Electronics, Inc. and Orca Technologies, Inc. dated April 27, 1998.(20) Exhibit Number Description ------- ----------- 10.21 General Terms Agreement No. PLR-950 Relating to Boeing Model Aircraft between Cashmere Manufacturing Co., Inc. and Boeing Commercial Airplane Group, effective as of February 5, 1990, as amended.(2) 10.22 Special Business Provisions No. L-890821-8140N between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of December 18, 1992.(2)(3) 10.23 Special Business Provisions No. L-500660-8134N between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of December 31, 1991.(2)(3) 10.24 Special Business Provisions No. L-435579-8180N between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of August 11, 1994.(2)(3) 10.25 Special Business Provisions No. PLR-950A between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of February 5, 1990.(2)(3) 10.26 Administrative Agreement No. L-435579-8180N between Cashmere Manufacturing Co., Inc. and Boeing Commercial Airplane Group effective as of August 11, 1994.(2) 10.27 Special Business Provisions No. POP-65311-0047 between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of February 26, 1996.(2)(3) 10.28 General Terms Agreement No. BCA-65311-0044 between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of February 26, 1996.(2) 10.29 General Terms Agreement No. BCA-65311-0140 between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of June 11, 1997.(20) 10.30 Special Business Provisions No. POP-65311-0143 between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of June 11, 1997.(20)(3) 10.31 Long Term Agreement No. 0108098 between Northrop Grumman Corporation and Cashmere Manufacturing Co., Inc. effective as of April 6, 1998.(20)(3) 10.32 Agreement, dated as of August 27, 1998, between Pacific Aerospace & Electronics, Inc., Liviakis Financial Communications, Inc. and Robert B. Prag.(20) 16.1 Letter from accountant regarding a change of accountants.(16) 21.1 List of Subsidiaries.(20) 23.1 Consent of Moss Adams LLP.(20) Exhibit Number Description ------- ----------- 23.2 Consent of KPMG Peat Marwick LLP.(20) 27.1 Financial Data Schedule.(20) - -------------- (1) Incorporated by reference to the Company's Annual Report on Form 10-KSB of the year ended May 31, 1995. (2) Incorporated by reference to Amendment No. 1 to the Company's Registration Statement on Form SB-2 filed on June 19, 1996. (3) Subject to confidential treatment. Omitted confidential information was filed separately with the Securities and Exchange Commission. (4) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended May 31, 1996. (5) Incorporated by reference to the Company's Current Report on Form 10-QSB for the quarterly period ended November 30, 1996. (6) Incorporated by reference to the Company's Current Report on Form 8-K filed on December 12, 1996, reporting the Reincorporation Merger. (7) Incorporated by reference to the Company's Registration Statement of Certain Successor Issuers on Form 8-B filed on February 6, 1997. (8) Incorporated by reference to the Company's Current Report on Form 8-K filed on March 12, 1997, reporting the Series A Preferred Stock offering. (9) Filed with the Company's Annual Report on Form 10-KSB for the fiscal year ending May 31, 1997. (10) Incorporated by reference to the Company's Registration Statement on Form S-8 filed on June 11, 1997. (11) Filed with the Company's Definitive Proxy Statement for its 1997 Annual Shareholders Meeting, on August 28, 1997. (12) Submitted with the Post-Effective Amendment No. 1 to Form SB-2, filed on October 31, 1997. (13) Filed with the Company's Quarterly Report on Form 10-QSB for the quarterly period ending November 30, 1997. (14) Incorporated by reference to the Company's Registration Statement on Form S-3 filed on December 3, 1997. (15) Filed with the Company's Quarterly Report on Form 10-QSB for the quarterly period ending February 28, 1998. (16) Filed with the Company's Current Report on Form 8-K, dated April 22, 1998. (17) Incorporated by reference to the Company's Current Report on Form 8-K filed on July 10, 1998. (18) Incorporated by reference to the Company's Current Report on Form 8-K filed on August 14, 1998. (19) Incorporated by reference to the Company's Registration Statement on Form S-8 filed on November 7, 1997. (20) Filed with this report. EX-3.3 2 AMENDMENT TO ARTICLES OF INCORPORATION EXHIBIT 3.3 ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION OF PACIFIC AEROSPACE & ELECTRONICS, INC. Pursuant to RCW 23B.06.020, Pacific Aerospace & Electronics, Inc., a Washington corporation, by its undersigned officer, hereby delivers the following Articles of Amendment of Articles of Incorporation to the Secretary of State for filing: 1. The name of the corporation is Pacific Aerospace & Electronics, Inc. 2. The text of the amendment setting forth the rights and preferences of the Series B Convertible Preferred Stock of the corporation is attached hereto as Exhibit A. 3. The amendment was duly adopted by the Board of Directors on May 13, 1998, and shareholder action is not required. IN WITNESS WHEREOF, the undersigned has executed these Articles of Amendment in an official and authorized capacity under penalty of perjury this 14th day of May, 1998. PACIFIC AEROSPACE & ELECTRONICS, INC. By /s/ SHERYL A. SYMONDS -------------------------------------- Sheryl A. Symonds Its Vice President, Administration 1 DESIGNATION OF RIGHTS AND PREFERENCES OF SERIES B CONVERTIBLE PREFERRED STOCK OF PACIFIC AEROSPACE & ELECTRONICS, INC. 1. Designation. The Series B Convertible Preferred Stock of Pacific Aerospace & Electronics, Inc. (the "Corporation") shall consist of 200,000 shares, par value $0.001 per share, and shall be designated the "Series B Convertible Preferred Stock" (the "Series B Stock"). The Series B Stock shall have liquidation and dividend preferences on a parity with the Corporation's Series A Preferred Stock. 2. Dividends. Dividends shall be declared and set aside, out of funds or assets of the Corporation legally available therefor, for any shares of Series B Stock only on resolution of the Board of Directors in its sole discretion; provided, however: (a) no dividend may be declared or paid on shares of Common Stock if the net assets of the Corporation thereafter would be insufficient to make the liquidation payment described in Section 3(a) on all outstanding shares of Series B Stock; (b) if the Board of Directors declares a dividend payable on the outstanding shares of Common Stock, other than a dividend payable in shares of Common Stock, the holders of Series B Stock shall be entitled to a dividend per share of Series B Stock that would be payable on the number of shares of Common Stock into which a share of Series B Stock could be converted (as of the record date for the determination of holders of Common Stock entitled to receive such dividend) pursuant to Section 5 hereof; and (c) if the Board of Directors declares a dividend in respect of the outstanding Common Stock payable in shares of the Corporation's Common Stock, the number of shares of Common Stock to be received on the conversion of Series B Stock shall be adjusted as described in Section 5(d)(i). 3. Liquidation, Dissolution, or Winding Up. (a) Treatment at Liquidation, Dissolution, or Winding Up. (i) In the event of any liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, the holders of Series B Stock shall be entitled to be paid, before any sums are paid or any assets distributed among the holders of the shares of Common Stock or any junior series or class of preferred stock, out of the assets of the Corporation available for distribution to holders of the Corporation's capital stock, the sum of $100 (plus any 2 declared but unpaid dividends) per share of Series B Stock (which amount shall be subject to proportionate adjustment on any stock split, combination, reclassification, or other similar event involving the Series B Stock) or, if greater, the amount the holders of the Series B Preferred Stock would be entitled to receive as if all of the Series B Preferred Stock were converted into Common Stock. (ii) If the assets of the Corporation are insufficient to permit payment in full to the holders of Series B Stock as provided in this subsection (a), then the entire assets of the Corporation available for such distribution shall be distributed ratably among the holders of Series B Stock and any other class or series of capital stock having parity with the Series B Stock in respect of such distributions according to the respective amounts that would be payable in respect of the shares held by them on such distribution if all amounts payable on or with respect to said shares were paid in full. After payment is made in full to the holders of Series B Stock, or funds needed for such payments shall have been set aside by the Corporation in trust for the account of holders of Series B Stock so as to be available for such payments, all remaining assets available for distribution to shareholders shall be distributed ratably solely among holders of shares of other shares of capital stock of the Corporation to the exclusion of the holders of shares of Series B Stock. (b) Consolidations, Mergers, and Sales of Assets. (i) At least 20 days before the consolidation or merger of the Corporation into or with another corporation, as a result of which the holders of more than 50% of the shares of Common Stock receive cash, securities of another entity, or other property in exchange for their shares, or a sale of all or substantially all of the assets of the Corporation, the Corporation shall notify the holders of Series B Stock thereof in writing, and the closing of such event shall be regarded as a liquidation, dissolution, or winding up of the affairs of the Corporation within the meaning of Section 3(a); provided, however, that for 20 days after the date of such notice, each holder of Series B Stock shall have the right, exercisable by written notice to the Corporation, to elect the benefits of Section 3(b)(ii) hereof in lieu of receiving payment in liquidation, dissolution, or winding up of the Corporation pursuant to this Section 3(b)(i). (ii) As part of any consolidation, merger, or sale of assets described in Section 3(b)(i), provision shall be made so that each holder of Series B Stock shall be entitled to elect to receive in such 3 transaction for or in respect of the Series B Stock held by such holder, the number of shares of stock or other securities or property to which such holder would have been entitled if such holder had converted its shares of Series B Stock immediately before the closing of such consolidation, merger, or sale of assets. (c) Distribution Other Than Cash. If the distribution provided for in this Section 3 is to be paid in property other than cash, the value of such distribution shall be the fair market value of such property as determined in good faith by the Board of Directors of the Corporation. 4. Voting Rights. (a) Series Voting Rights. So long as any shares of the Series B Stock remain outstanding, the Corporation shall not, without the affirmative vote or consent of the holders of at least two-thirds of the shares of the Series B Stock outstanding at the time, given in person or by proxy, either in writing or at a meeting in which the holders of the Series B Stock vote separately as a voting group: (i) authorize, create, or issue or increase the authorized or issued amount of, any class or series of stock ranking prior to the Series B Stock, with respect to the payment of dividends or the distribution of assets on liquidation, dissolution, or winding up; (ii) amend, alter, or repeal the rights and preferences of the Series B Stock or the Articles of Incorporation or the Bylaws of the Corporation so as to affect materially and adversely any right, preference, privilege or voting power of the Series B Stock, provided, however, that any creation and issuance of other series of preferred stock having liquidation and dividend preferences on a parity with or subordinate to the Series B Stock shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers; (iii) effect any distribution with respect to any other class of the Corporation's capital stock of (1) shares of any class of its capital stock (other than a dividend or other distribution of Common Stock payable to the holders of Common Stock), (2) rights to purchase any class of its capital stock, or (3) other securities convertible into any class of its capital stock; or (iv) reclassify the Corporation's outstanding securities. (b) No General Voting Rights. Except with respect to transactions on which the Series B Stock is entitled to vote separately as a voting group pursuant to Section 4(a) above, or as otherwise required by Washington law, the holders of shares of Series B Stock shall not be entitled to vote. 5. Conversion. The holders of shares of Series B Stock shall have the following rights with respect to the conversion of shares of Series B Stock into shares of Common Stock ("Conversion Rights"): 4 (a) Voluntary Conversion. Subject to Sections 5(a)(i), 5(e) and 6(b), any holder of Series B Stock may elect to convert all or any portion of his or her shares of Series B Stock (a "Voluntary Conversion") into a number of fully paid and nonassessable shares of Common Stock equal to the quotient that results when $100 is divided by the Conversion Price (as defined in Section 5(c)(iii)) then in effect for each share of Series B Stock so converted. (i) Timing. Voluntary Conversions may be exercised at any time or from time to time beginning 90 days after the date that the Series B Stock is initially issued (the "Issuance Date"). Notwithstanding the above, if any shares of Common Stock issuable upon conversion of Series B Stock are registered within such 90-day period in connection with an underwritten public offering by the Company, then Voluntary Conversion as to such shares of Common Stock may be exercised when the registration statement for such offering is declared effective by the Securities and Exchange Commission (the "Commission"). (ii) Exercise Procedure. A Voluntary Conversion may be exercised by giving, at any time during normal business hours at the office of the Corporation or at such other place as the Company may designate in writing to the holders of the Series B Stock, written notice of the holder's election to convert, in a form required by the Corporation (a "Conversion Notice"), accompanied (or if the Conversion Notice is delivered by verifiable facsimile transmission, followed within 48 hours thereafter) by delivery of (1) the certificates evidencing the shares of Series B Stock to be converted, (2) if so required by the Corporation, instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or its duly authorized attorney, and (3) transfer tax stamps or funds therefor, if required pursuant to Section 5(h). The Conversion Notice shall also state the name or names (with address or addresses) in which the certificate or certificates for shares of Common Stock issuable on such conversion shall be issued. The "Voluntary Conversion Date" shall be the date indicated in the Conversion Notice. (b) Mandatory Conversion. (i) Subject to Section 6(b), on the fifth anniversary of the Issuance Date (the "Mandatory Conversion Date"), each share of then-unconverted Series B Stock shall automatically convert (the "Mandatory Conversion") into a number of fully paid and nonassessable shares of Common Stock equal to the quotient of $100 divided by the Conversion Price in effect on the Mandatory 5 Conversion Date, without any action on the part of the holder, and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent. (ii) Upon Mandatory Conversion, the holders of the Series B Stock shall surrender to the Corporation the certificates representing the then-unconverted shares of Series B Stock. The Corporation shall issue and deliver to each such holder within five trading days, in the name as shown on such surrendered certificate or certificates, a certificate or certificates for the number of shares of Common Stock into which the shares of Series B Stock surrendered were convertible on the Mandatory Conversion Date. However, the Corporation need not issue certificates evidencing the shares of Common Stock issuable on conversion of any shares of Series B Stock unless certificates evidencing such shares of Series B Stock are either delivered to the Corporation or the holder has notified the Corporation that such certificates have been lost, stolen, or destroyed and has executed an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection therewith. (c) Conversion Price. (i) The term "Average Share Price" shall mean the average of the three lowest closing bid prices for shares of Common Stock as (1) quoted on Nasdaq NMS, (2) otherwise quoted on the Nasdaq system, or (3) reported by the National Quotation Bureau, Inc. or quoted on the Electronic Bulletin or the "Pink Sheets", as the case may be, during the 22 consecutive trading days before the date of, as applicable, any Voluntary Conversion Date or the Mandatory Conversion Date. (ii) The term "Maximum Conversion Price" shall mean $7.20 per share. (iii) The term "Conversion Price" shall mean: (1) the Maximum Conversion Price with respect to any conversion of Series B Stock made on or before the 270th day following the Issuance Date; or (2) with respect to any conversion of Series B Stock made after the 270th day following the Issuance Date, the lesser of (A) the Maximum Conversion Price, or (B) the Average Share Price as of the Conversion Date, (as defined in Section 5(m)). However, no conversion at a Conversion Price 6 below the Floor Price (as defined in Section 5(c)(iv)) shall be allowed, except in compliance with Section 6(b)(i). (iv) The term "Floor Price" shall initially mean $5.67 per share. However, if any Common Stock issued upon conversion of Series B Stock is sold in connection with the exercise of piggyback registration rights under a Registration Rights Agreement between the holder of Series B Stock and the Corporation (an "Underwritten Offering"), then the Floor Price immediately after such sale shall be adjusted to an amount equal to: (A) (1) the original purchase price of all Series B Stock, less (2) the purchase price of the Series B Stock that was converted into the Common Stock sold in such offering; divided by (B) (1) 3,000,000, less (2) the number of shares of Common Stock issued upon conversion of Series B Stock and sold in the Underwritten Offering. (d) Adjustments of Conversion Price and Mandatory Conversion Threshold. (i) Adjustments for Stock Splits, Stock Dividends, and Combinations. If the Corporation shall, at any time or from time to time after the Issuance Date, effect a stock split of the outstanding Common Stock or issue additional shares of Common Stock as a dividend or other distribution on outstanding Common Stock of the Corporation, the Maximum Conversion Price and the Floor Price in effect immediately before such stock split, dividend, or distribution shall be proportionately decreased. If the Corporation shall at any time or from time to time after the Issuance Date combine the outstanding shares of Common Stock, then the Maximum Conversion Price and the Floor Price in effect immediately before the combination shall be proportionately increased. Any adjustments under this Section 5(d)(i) shall be effective at the close of business on the date of such stock split, dividend, distribution, or combination. (ii) Adjustments for Reclassification, Exchange, or Substitution. If the Common Stock is changed into the same or a different number of shares of any class or classes of stock at any time or from time to time after the Issuance Date, whether by reclassification, exchange, substitution, or otherwise (other than by way of a stock split or combination of shares or stock dividend provided for in Section 5(d)(i), or a reorganization, merger, consolidation, or sale of assets provided for in Section 5(d)(iii)), then, and in each event, 7 an appropriate revision , if any, to the Maximum Conversion Price and the Floor Price shall be made, and provisions shall be made (by adjustment of the Conversion Price or otherwise) so that the holder of each share of Series B Stock shall have the right thereafter to convert such share of Series B Stock into the kind and amount of shares of stock and other securities receivable on reclassification, exchange, substitution, or other change, by holders of the number of shares of Common Stock into which such share of Series B Stock might have been converted immediately before such reclassification, exchange, substitution, or other change, all subject to further adjustment as provided herein. (iii) Adjustments for Reorganization, Merger, Consolidation, or Sale of Assets. If at any time or from time to time after the Issuance Date there is a capital reorganization of the Corporation (other than by way of a stock split or combination of shares or stock dividends or distributions provided for in Section 5(d)(i), or a reclassification, exchange, or substitution of shares provided for in Section 5(d)(ii)), or a merger or consolidation of the Corporation with or into another corporation, or the sale of all or substantially all of the Corporation's properties or assets to any other person, then as a part of such reorganization, merger, consolidation, or sale, then an appropriate revision to the Maximum Conversion Price and the Floor Price shall be made, and provision shall be made (by adjustment of the Conversion Price or otherwise) so that the holder of each share of Series B Stock shall have the right thereafter to convert such share of Series B Stock into the kind and amount of shares of stock and other securities or property of the Corporation or any successor corporation resulting from such reorganization, merger, consolidation, or sale, to which a holder of Common Stock deliverable on conversion of such shares would have been entitled on such reorganization, merger, consolidation, or sale. In any such case, appropriate adjustment shall be made in the application of this Section 5(d)(iii) with respect to the rights of the holders of the Series B Stock after the reorganization, merger, consolidation, or sale to the end that the provisions of this Section 5(d)(iii) (including any adjustment in the applicable Conversion Price then in effect and the number of shares of stock or other securities deliverable on conversion of the Series B Stock) shall be applied after that event in as nearly an equivalent manner as may be practicable. (e) Restriction on Number of Shares Converted. No holder of Series B Stock shall be entitled to convert voluntarily more than the number of shares of Series B Stock that, when converted, would result in such holder owning at any one time 9.9 percent or more of the total number of the outstanding shares of Common Stock. 8 (f) No Impairment. The Corporation shall not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issuance or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the performance of all the provisions of this Section 5 and in the taking of all such action needed to protect the Conversion Rights of the holders of the Series B Stock against impairment. (g) Certificate as to Adjustments. On occurrence of each adjustment or readjustment of the Conversion Price or number of shares of Common Stock issuable on conversion of the Series B Stock pursuant to this Section 5, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof. At the request of any holder of Series B Stock, the Corporation shall give such holder a certificate from the Corporation's independent auditors setting forth such adjustment and readjustment, showing in detail the facts on which such adjustment or readjustment is based, the applicable Conversion Price in effect at the time and the number of shares of Common Stock and the amount, if any, of other securities or property that at the time would be received on the conversion of a share of such Series B Stock. Notwithstanding the foregoing, the Corporation need not deliver a certificate unless such certificate would reflect an increase or decrease of at least one percent of such adjusted number of shares or amount since the last request from such holder. (h) Issue Taxes. The Corporation shall pay any and all issue, stamp, documentary and other taxes, excluding federal, state, or local income taxes, that may be payable in respect of any issuance or delivery of shares of Common Stock on conversion of shares of Series B Stock pursuant hereto; provided, however that the Corporation need not pay any transfer taxes resulting from any transfer requested by any holder in connection with any such conversion. (i) Fractional Shares. The Corporation shall not be required to issue fractional shares of Common Stock on conversion of the Series B Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation may at its option pay cash equal to the product of such fraction multiplied by the Conversion Price on the Conversion Date. 9 (j) Reservation of Common Stock. The Corporation shall at all times reserve and keep available, out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Series B Stock, the full number of shares deliverable on conversion of all the shares of Series B Stock from time to time outstanding. (k) Regulatory Compliance. If any shares of Common Stock to be reserved for the purpose of conversion of Series B Stock require registration or listing with or approval of any governmental authority, stock exchange, or other regulatory body under any federal or state law or regulation or otherwise before such shares may be validly issued or delivered on conversion, the Corporation shall, at its sole cost and expense, in good faith and as expeditiously as possible, endeavor to secure such registration, listing, or approval, as the case may be. (l) Late Fee. If, for any reason other than the failure of a holder of Series B Stock to comply with its obligations or any applicable restrictions hereunder, the Corporation neither converts shares of Series B Stock to Common Stock nor redeems them pursuant to Section 6(b) within five trading days after receipt of a Conversion Notice in proper form and the related stock certificate and other items required by the Corporation for conversion from a holder of Series B Stock then entitled to convert such shares, the holder thereof shall be entitled to receive from the Corporation a payment equal to 2% of the liquidation preference of such shares for each month (or a ratable portion thereof for any fractional month) the conversion or redemption is delayed. (m) Effective Date of Conversion. Conversion of Series B Stock shall be deemed to have been effected on the applicable Voluntary Conversion Date or Mandatory Conversion Date, and such date is referred to herein as the "Conversion Date." The converting holder shall be deemed to have become a stockholder of record on the applicable Conversion Date of the Common Stock into which the Series B Stock is converted. 6. Redemption. Except as specifically described in this Section, the Corporation shall not be entitled to redeem or retire all or any part of the Series B Stock without the consent or affirmative vote of the holder of record of each share to be redeemed or retired. (a) Voluntary Redemption. The Corporation may elect to redeem all or any portion of any unconverted Series B Stock at any time (the "Redeemable Shares") upon 20-days prior written notice to the holder thereof ("Voluntary Redemption Notice"). In such case, the holder of such stock shall have the right to either: (1) exercise its Conversion Rights against the stock to be redeemed, or (2) accept the redemption. The holder of such stock shall notify the Corporation in writing of its election within 15 days after receiving the Voluntary Redemption Notice. Failure to respond 10 on a timely basis to the Voluntary Redemption Notice within such time period shall be deemed an acceptance of such redemption. (b) Mandatory Redemption and Shareholder Approval. (i) When Required. If the average closing bid price (1) quoted on Nasdaq NMS, (2) otherwise quoted on the Nasdaq system, or (3) reported by the National Quotation Bureau, Inc. or quoted on the Electronic Bulletin or the "Pink Sheets", as the case may be, for the Common Stock remains below the Floor Price for any 30 consecutive trading days occurring 90 days after the Issuance Date, and a Voluntary Conversion is properly requested or Mandatory Conversion is required, then the Corporation shall, at the Corporation's election, (A) redeem any Redeemable Shares in excess of the number of shares that would result in the issuance of 3,000,000 shares of Common Stock ("Mandatory Redemption"), or (B) obtain any shareholder approval necessary under its Nasdaq maintenance requirements to allow the Voluntary or Mandatory Conversion to occur. (ii) Redemption Period; Penalty. The Corporation shall complete any Mandatory Redemption or obtain any required shareholder approval, within 45 calendar days after the expiration of the relevant 30-day trading period (the "Redemption Period"). If the Corporation fails to complete such Mandatory Redemption or to obtain any required shareholder approval within the Redemption Period, then the Corporation shall pay a cash penalty to the holders of such shares of 2% of the liquidation preference of such shares per month until the Mandatory Redemption occurs or the required shareholder approval is obtained. (c) Redemption Price. The Corporation shall promptly pay to the redeeming holder $115 for each Redeemable Share (which amount shall be subject to proportionate adjustment on any stock split, combination, reclassification, or other similar event involving the Series B Stock) plus any declared but unpaid dividends (together, the "Redemption Price"). (d) Effective Date of Redemption. Redemption of Series B Stock shall be deemed to have been effected on the applicable Voluntary Redemption Date or Mandatory Redemption Date, and such date is referred to herein as the "Redemption Date." The redeeming holder shall cease to be a stockholder of record as to the Common Stock issued upon redemption of the Series B Stock on the applicable Redemption Date. 11 7. Bank Restrictions. If any cash payment, including any penalty, otherwise payable in connection with the Series B Stock or with the Common Stock issued upon conversion of such stock, is subject to approval by the Corporation's senior secured lender (the "Lender"), then the Corporation shall use its best efforts to obtain such approval before the payment is due. If the Lender does not approve any payment within 20 days after it is due, then the Corporation shall issue a subordinated debenture, in a principal amount equal to, and in full satisfaction of, each such payment, to the holders of the Series B Stock or of the Common Shares issued upon conversion of the Series B Stock, as the case may be, on a pro rata basis. However, the issuance of subordinated debentures in lieu of any penalty payment shall not effect the accrual of future penalties which may also be required to be converted into subordinated debentures under this Section 7. All of these subordinated debentures shall be subordinated to the Corporation's debt to the Lender, shall bear interest at 12% per annum, and shall be payable in full as soon the Lender no longer prohibits payment of such subordinated debentures. 8. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by verifiable facsimile, or three business days after being mailed by certified or registered mail, postage prepaid, return-receipt requested, addressed to the Corporation at its offices or to the holder of record at its address appearing on the books of the Corporation, as applicable. 9. Surrender and Replacement of Certificates. On conversion or redemption of only a portion of the number of shares of Series B Stock represented by a certificate surrendered for conversion or redemption, the Corporation shall issue and deliver to such holder, at the expense of the Corporation, a new certificate covering the number of shares of Series B Stock representing the unconverted and unredeemed portion of the certificate so surrendered. 10. No Preemptive Rights. Except as specifically provided herein, no holder of Series B Stock shall be entitled to subscribe for, purchase, or receive any part of any new or additional shares of any class, whether now or hereinafter authorized, or of bonds or debentures, or other evidences of indebtedness convertible into or exchangeable for shares of any class, but all such new or additional shares of any class or bond or debentures, or other evidences of indebtedness convertible into or exchangeable for shares, may be issued and disposed of by the Board of Directors on such terms and for such consideration (to the extent permitted by law), and to such person or persons as the Board of Directors in their absolute discretion may deem advisable. 11. Amendment; Waivers. Any provision of this Designation of Rights and Preferences may be amended or waived (i) by the holders of two-thirds of the Series B Stock at a meeting at which such amendment or waiver is presented and which is attended by a majority of the shares of the then-outstanding Series B Stock, in person or by proxy; or (ii) by the written consent of the holders of two-thirds of all outstanding shares of Series B Stock. 12 EX-4.4 3 FORM OF SPECIMEN CERTIFICATE - SERIES B PREFERRED EXHIBIT 4.4 Form of Specimen Certificate for the Series B Preferred PB-0 0 PACIFIC AEROSPACE & ELECTRONICS, INC. Organized under the Laws of the State of Washington Zero (0) --------------------------------------------------------- of the Series B Convertible Preferred Stock, $.001 Par Value, of Pacific Aerospace & Electronics, Inc. - ---------------------------------- ---------------------------------- President Secretary EX-4.5 4 FORM OF COMMON STOCK PURCHASE WARRANT EXHIBIT 4.5 THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN AND WILL NOT BE, AS OF THE TIME OF ISSUANCE, REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAW, AND MAY NOT BE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR ANY EXEMPTION THEREFROM UNDER THE SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAW OR UNLESS IN THE OPINION OF COUNSEL TO PACIFIC AEROSPACE & ELECTRONICS, INC., NO SUCH REGISTRATION IS REQUIRED. THIS WARRANT AND SUCH SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE CONDITIONS SPECIFIED IN THIS WARRANT. PACIFIC AEROSPACE & ELECTRONICS, INC. ------------------------------------- COMMON STOCK PURCHASE WARRANT No. __________ Expiring May 15, 2001 May 15, 1998 PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington corporation (the "Company"), for value received, hereby certifies that _________________ ("Holder"), is entitled to purchase ______________ (__________) shares of the Company's voting common stock, par value $.001 per share (the "Warrant Stock"), at the times and according to the terms set forth in this Warrant. 1. Terms of Warrant. This Warrant is being issued by the Company as additional consideration to the purchasers of its Series B Convertible Preferred Stock. This Warrant shall be exercisable at any time after one year from the date hereof. The exercise price (the "Exercise Price") of this Warrant shall be $7.20 per share of the Warrant Stock acquired upon any such exercise. 2. Exercise of Warrant. The holder of this Warrant may exercise it during normal business hours on any business day commencing on the first anniversary of the date hereof and expiring at 5:00 p.m., P.D.T., on May 15, 2001, or if such date is a day on which federal or state chartered banking institutions are authorized by federal law to close, then on the next succeeding day which shall not be such a day, by surrendering this Warrant to the Company at the Company's principal office or at such other place as the Company may designate in writing, accompanied by an executed subscription agreement in substantially the form annexed hereto as Exhibit "A" and by payment by wire transfer, in cash or by certified or official bank check payable to the order of the Company, or by any combination of such methods, in the amount obtained by multiplying (a) the number of shares of Warrant Stock designated in such subscription by (b) the Exercise Price, whereupon such holder shall be entitled to receive the number of duly authorized, validly issued, fully paid and nonassessable shares of Warrant Stock as is indicated in the subscription agreement. 3. Partial Exercise Allowed; Issuance of Substitute Warrant. This Warrant is exercisable in whole or in part by Holder. In the event Holder exercises this Warrant with respect to only a portion of the shares of Warrant Stock that could be acquired upon exercise, a replacement warrant ("Replacement Warrant") with identical terms except for a corresponding reduction in the number of shares of Warrant Stock receivable upon exercise of the Replacement Warrant shall be issued by the Company within five trading days after any such partial exercise. 4. When Exercise Effective. The exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the business day on which this Warrant shall have been surrendered to the Company as provided in Section 2, and at such time the person or persons in whose name or names any certificate or certificates for shares of Warrant Stock shall be issued upon such exercise shall be deemed for all corporate purposes to have become the holder of record thereof. 5. Delivery of Stock Certificates. As soon as practicable after the exercise of this Warrant, and in any event within five trading days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to Holder or to the person or entity such holder may direct (and upon payment by such holder of any applicable transfer taxes), a certificate or certificates for the number of duly authorized, validly issued, fully paid and nonassessable shares of Warrant Stock to which the holder or its designee shall be entitled upon such exercise. 6. Adjustment of Warrant Stock Issuable Upon Exercise. If the Company at any time or from time to time after the date of this Warrant but before expiration effects (a) a split or subdivision of the outstanding shares of its then outstanding common stock into a greater number of shares of common stock, (b) declares a dividend or other distribution on its common stock payable in shares of common stock or rights convertible into or exchangeable or exercisable for shares of common stock, or (c) effects a reverse split of the outstanding shares of its common stock into a lesser number of shares of common stock, (by reclassification or otherwise than by payment of a dividend in common stock), then, and in each such case, the number of shares called for on the face of this Warrant (or the face of any replacement Warrant issued upon partial exercise) shall be adjusted proportionally, and the exercise price with respect to such adjusted number of shares also shall be adjusted proportionally. On occurrence of each adjustment of the Exercise Price or the number of shares of Warrant Stock payable upon exercise of the Warrant, the Company at its expense, shall promptly compute such adjustment in accordance 2 with the terms hereof. At the request of the Holder, the Company shall give the Holder a certificate from the Company's independent auditors setting forth such adjustment, showing in detail the facts on which such adjustment is based, the applicable Exercise Price in effect at the time and the number of shares of Warrant Stock that would be received after giving effect to such adjustment. 7. Merger. If at any time after the date hereof there shall be a merger or consolidation of the Company with or into another entity or a transfer of all or substantially all of the assets of the Company to another entity, then before such transaction may be consummated and become effective, the Company shall notify the Holder at least 10 days prior to the consummation of such transaction, and the Holder shall be entitled to receive upon such transfer, merger or consolidation becoming effective, at the election of the Holder either (i) upon payment of the Exercise Price then in effect, the number of shares or other securities or property of the Company or of the successor corporation resulting from such merger or consolidation, which would have been received by Holder for the shares of stock subject to this Warrant had this Warrant been exercised just prior to such transfer, merger or consolidation becoming effective or to the applicable record date thereof as the case may be, or (ii) a warrant to acquire common stock or other securities of such other entity at an exercise price and upon such other terms as will provide the Holder with economic and other benefits and rights substantially equivalent to those provided herein. 8. Reservation of Shares. The Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of this Warrant, the number of shares of common stock that would be issuable upon the exercise, in whole, of this Warrant or any replacement Warrant. All such shares shall be duly authorized and, when issued upon such exercise, shall be validly issued, fully paid and nonassessable with no liability on the part of the holders thereof. 9. Ownership, Transfer and Substitution of Warrant. The Company will treat Holder as the owner and holder of this Warrant for all purposes, until the Company receives notice to the contrary. This Warrant shall be transferable by Holder, and the Company shall recognize on its books and records any lawful transfer of this Warrant upon receipt of notice of such transfer by Holder. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft of destruction of this Warrant, upon delivery of indemnity reasonably satisfactory to the Company in form and amount or, in the case of any such mutilation, upon surrender of such, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 10. No Rights or Liabilities as Stockholder. Nothing herein shall give or shall be construed to give Holder any of the rights of a shareholder of the Company including, without limitation, the right to vote on matters requiring the vote of shareholders, the right to receive any dividend declared and payable to the holders 3 of common stock, and the right to a pro-rata distribution upon the Company's dissolution. 11. Authorization; No Breach. The Company represents and warrants that (i) the Company is duly organized, validly existing, and in good standing under the laws of the State of Washington, and has the requisite power and authority to issue this Warrant and the Warrant Stock; (ii) the number of shares of Warrant Stock issuable upon the entire exercise of this Warrant are presently authorized but unissued; (iii) the issuance of this Warrant and the issuance of the Warrant Stock issuable upon exercise of this Warrant have been authorized and approved by all necessary corporate action; (iv) the execution, delivery and issuance of this Warrant and the issuance of the Warrant Stock underlying this Warrant will not violate any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on the Company or the provision or provisions of any agreement to which the Company is a party or is subject, or by which any of the Company's property is bound, or conflict with or constitute a material default thereunder, or result in the creation or imposition of any lien pursuant to the terms of any such agreement, or constitute a breach of any fiduciary duty owed by the Company to any third party, or require the approval of any third party pursuant to any contract, agreement, instrument, relationship or legal obligation to which the Company is subject or to which any of its properties may be subject; and (v) when issued, both this Warrant and the Warrant Stock issuable upon exercise of this Warrant shall be duly and validly issued, fully paid and nonassessable. 12. No Impairment. The Company will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder against impairment. 13. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of the Warrant and, in the case of any such loss, theft or destruction of the Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Company, upon receipt by it of a form of Warrant reflecting the terms of the new Warrant, at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 14. Notices. All notices and other communications provided for herein shall be delivered or mailed by first class mail, postage prepaid, addressed (a) if to any holder of any Warrant or Warrant Stock, at the registered address of such holder as set forth in the register kept at the principal office of the Company, or (b) if to the Company, at its principal office, or to such other location as the Company shall 4 have furnished to each holder of any Warrants or Warrant Stock in writing, provided that the exercise of any Warrants shall be effective only in the manner provided in Section 2. 15. Miscellaneous. This Warrant, and the Securities Purchase Agreement and Registration Rights Agreement, each of even date herewith, between the Company and the Holder embody the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings relating to the subject matter hereof. There are no unwritten oral agreements between the parties with respect to the subject matter hereof. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be governed by the laws of the State of Washington. The headings of this Warrant are inserted for convenience only and shall not be deemed to constitute a part hereof. PACIFIC AEROSPACE & ELECTRONICS, INC. By: ------------------------------------- Donald A. Wright, President 5 Exhibit A SUBSCRIPTION ------------ (To be executed by the holder of the Warrant to exercise the right to purchase common stock evidenced by the Warrant) To: Pacific Aerospace & Electronics, Inc. c/o Eugenie D. Mansfield Stoel Rives LLP One Union Square 600 University Street, Suite 3600 Seattle, Washington 98101-3197 Fax: (206) 386-7500 The undersigned hereby irrevocably subscribes for ___________shares of the common stock, par value $.001 per share, of Pacific Aerospace & Electronics, Inc., a Washington corporation, pursuant to and in accordance with the terms and conditions of a Warrant dated May 15, 1998 (the "Warrant"), and tenders with this Subscription Agreement (a) the Warrant and (b) payment of $_____________ as payment for the shares, and requests that a certificate for such shares be issued in the name of the undersigned and be delivered to the undersigned at the address stated below. ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- The undersigned agrees that, upon issuance of the shares, the undersigned will execute an investment letter in the form attached hereto as Exhibit 1, to reflect that the shares are being acquired for investment purposes and not with a view toward their resale or distribution to the public. - --------------------------------------- Signed - --------------------------------------- Dated Exhibit 1 --------- Pacific Aerospace & Electronics, Inc. 434 Olds Station Road Wenatchee, WA 98801 Re: ___________ shares of common stock, $.001 par value per share, of Pacific Aerospace & Electronics, Inc., a Washington corporation (the "Shares") Ladies and Gentlemen: This letter is given to you in connection with the undersigned's acquisition of the above described Shares. 1. The Shares are being acquired by the undersigned for investment for the undersigned's own account and not on behalf of any other persons, and not with a view to, or for resale or other distribution in connection with, any distribution of all or any part of the Shares, unless pursuant to an effective registration statement under the Acts (as defined below) or a transaction exempt from the registration and prospectus delivery requirements of state and federal securities laws. 2. You shall not be required to effect, permit or recognize any sale, offer for sale, exchange, transfer, assignment or pledge of any or all of the Shares unless the sale of the Shares is registered under the Securities Act of 1933, and any applicable state securities acts (collectively, the "Acts"), or unless in the opinion of your counsel, such registration is not required; and you shall be entitled to cause legends to this effect to be endorsed on any certificates evidencing the Shares. If you are provided with an opinion of counsel that such registration is not required, you shall permit the transfer of the Shares and within five trading days cause the issuance to the undersigned of certificates for the Shares without legends. Further, you shall have the right to place a stop-transfer order with your Secretary or transfer agent pursuant to which transfer of all or any portion of the Shares shall be prohibited except upon a proper showing of compliance with this letter. 3. The undersigned understands that it must bear the economic risk of this investment for an indefinite period of time because the Shares have not been registered under the Acts, and consequently cannot be sold or otherwise transferred unless they are subsequently registered under the Acts or exemptions from registration are available. 4. Notwithstanding anything to the contrary contained herein, the undersigned does not agree to hold the Shares for any minimum or other specific term and reserves the right to dispose of the Shares at any time in accordance with United States federal and state securities laws. Very truly yours, Dated: _______________ ----------------------------------------- EX-4.6 5 REGISTRATION RIGHTS AGREEMENT EXHIBIT 4.6 REGISTRATION RIGHTS AGREEMENT This REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made as of May 15, 1998, by and among PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington corporation (the "Company") and each of the purchasers of shares of Series B Convertible Preferred Stock and Warrants of the Company whose names are set forth on Exhibit A hereto (each individually, a "Purchaser" and collectively, the "Purchasers"). RECITALS A. The Purchasers and the Company have entered into a Securities Purchase Agreement dated as of May 15, 1998 (the "Securities Purchase Agreement"), pursuant to which the Purchasers are purchasing up to 170,000 shares of the Company's Series B Convertible Preferred Stock and are receiving Warrants to purchase 10% of the shares of Common Stock issuable upon conversion of the Preferred Stock. B. It is a condition precedent to the obligations of each Purchaser under the Securities Purchase Agreement that the Company grant registration rights with respect to the shares of the Company's Common Stock issuable upon conversion of the Series B Convertible Preferred Stock and the exercise of the Warrants, on the terms and conditions set forth in this Agreement. AGREEMENT The parties hereto agree as follows: 1. DEFINITIONS All capitalized terms not otherwise defined in this Agreement shall have the meaning set forth in the Rights and Preferences, as such term is defined in Section 1, below. The following terms, as used herein, have the following meanings: "Board" means the Board of Directors of the Company. "Business Day" means any day except a Saturday, Sunday or other day on which banks in Salt Lake City (or in such other city as may be the headquarters of the Company's transfer agent) are authorized by law to close. "Closing Date" shall mean the Closing Date determined pursuant to the Securities Purchase Agreement. "Commission" means the Securities and Exchange Commission. "Common Stock" means the common stock, par value $0.001 per share, of the Company. 1 "Company" means Pacific Aerospace & Electronics, Inc., a Washington corporation. "Effective Time" means the date of effectiveness of a Registration Statement. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Form S-3" means a Form S-3 Registration Statement of the Company relating to the registration for resale of Restricted Securities contemplated by Section 2, including the Prospectus included therein, all amendments and supplements thereto (including post-effective amendments) and all exhibits and material incorporated by reference therein. "Holders" has the meaning given to it in Section 2.1.2 hereof. "NASD" means the National Association of Securities Dealers, Inc. "Person" means an individual, corporation, partnership, association, trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Piggyback Registration Statement" means a Registration Statement of the Company registering the issuance of newly issued Common Stock in an underwritten registered public offering, including the Prospectus included therein, all amendments and supplements thereto (including post-effective amendments) and all exhibits and materials incorporated by reference therein. "Preferred Stock" means the Series B Convertible Preferred Stock, par value $0.001 per share, of the Company. "Prospectus" means the Prospectus included in a Registration Statement, as amended or supplemented by any Prospectus supplement and by all other amendments thereto, including post-effective amendments, and all material incorporated by reference into such Prospectus. "Registration Request" means a written notice from a Holder to the Company that such Holder is electing to exercise its Piggyback registration rights under Section 2.2. "Registration Statement" means either a Form S-3 or a Piggyback Registration Statement. "Restricted Securities" means the Preferred Stock, Warrants or any Securities until (i) with respect to Securities, a Registration Statement covering the resale of such Securities has been declared effective by the Commission and such Securities have been disposed of pursuant to such effective Registration Statement, (ii) such Preferred Stock, Warrants or Securities are permitted to be sold under circumstances in which all the applicable conditions of Rule 144 (or any similar provisions then in force) under the Securities Act are met, or such Preferred Stock, Warrants or Securities are permitted to be sold pursuant to Rule 144(k) (or any similar provision 2 then in force) under the Securities Act, and are freely tradeable after such sale by the transferee, (iii) such Preferred Stock, Warrants or Securities are otherwise transferred, the Company has delivered a new certificate or other evidence of ownership for such Preferred Stock, Warrants or Securities not bearing a legend restricting further transfer and such Preferred Stock, Warrants or Securities may be resold without registration under the Securities Act, or (iv) such Preferred Stock, Warrants or Securities shall have ceased to be outstanding. "Rights and Preferences" means the Designation of Rights and Preferences for the Preferred Stock contained in the Company's Articles of Incorporation, as amended. "Securities" means the Company's Common Stock issuable upon conversion of the Preferred Stock or exercise of the Warrants. "Securities Act" means the Securities Act of 1933, as amended. "Securities Purchase Agreement" has the meaning given to it in the recitals to this Agreement. "Underwriter" means the underwriter or underwriters selected by the Company in a public offering of Common Stock by the Company. "Warrants" means the Common Stock Purchase Warrants dated May 15, 1998, from the Company to the Purchasers. As used in this Agreement, words in the singular include the plural, and in the plural include the singular. 2. REGISTRATION RIGHTS 2.1 Applicability of Agreement. 2.1.1 The Securities are entitled to the benefits of this Agreement, but only as long as they remain Restricted Securities. 2.1.2 A Person is deemed to be a "Holder" whenever such Person is the registered Holder of Preferred Stock, Warrants or Securities. Notwithstanding the foregoing, each of the entities set forth on the signature pages hereto as to which a Purchaser is acting as nominee is deemed to be a "Holder" of Preferred Stock and Warrants and shall be deemed to be a "Holder" of Securities. 2.2 Piggyback Registration Rights. 2.2.1 Grant. The Company hereby grants the Holders registration rights to register up to $7,000,000 of the Securities for resale in a Piggyback Registration Statement, if: 3 (a) the Company files a Piggyback Registration Statement with the Commission by November 1, 1998; and (b) the average closing price of the Common Stock (as quoted on Nasdaq NMS, otherwise quoted on the Nasdaq system or reported by the National Quotation Bureau, Inc., or quoted on the Electronic Bulletin or the "Pink Sheets", as the case may be) reaches 20% over the Maximum Conversion Price for any consecutive 20- day trading period prior to written notice by the Company to the Holders of the anticipated filing of a Piggyback Registration Statement (a "Registration Notice"); and (c) the Holders agree to sell the Securities through the Underwriter, subject to the right of the managing Underwriter, in its sole discretion, to exclude some or all of the Securities from such public offering under Section 2.2.4. 2.2.2 Registration Notice. If the Company proposes to file a Piggyback Registration Statement, then it shall give the Holders a Registration Notice at least 20 days before the anticipated filing date of the Piggyback Registration Statement. The Registration Notice shall offer the Holder the opportunity to include up to $7,000,000 of the Securities in the Piggyback Registration Statement. 2.2.3 Registration Request. In order to exercise its rights under Section 2.2.1, the Holder must deliver a Registration Request to the Company within 15 days after receiving a Registration Notice. Each Registration Request must specify (a) the number of Securities requested to be included in the Piggyback Registration Statement, and (b) the intended method of disposing of such Securities. 2.2.4 Underwriting Requirements. The Company shall not be required to include any of the Securities in a Piggyback Registration Statement unless (a) the Underwriter in its sole discretion agrees to such inclusion, (b) the Holders accept the terms of the underwriting as agreed on between the Company and the Underwriters, and (c) the Holder completes and executes all reasonable questionnaires, powers of attorney, indemnities, underwriting agreements, lock-up letters (provided the terms of the lock-up periods contained therein do not exceed 180 days), and other documents required under the terms of the underwriting agreement. If the total number of such Securities exceeds the number of shares that the Underwriters allow for inclusion in the offering, then the Company shall include in the offering only the number of shares allowed by the Underwriters. If at any time the Holder disapproves of the terms of any offering in which it has elected to exercise its piggyback rights pursuant to Section 2.2 hereof, then the sole remedy of the Holder shall be to withdraw from that offering and the related Piggyback Registration Statement, by giving written notice to the Company and the Underwriter. Such withdrawal, however, shall not impair the Holder from 4 exercising its piggyback rights with regard to another or future Piggyback Registration Statement, subject to the conditions of Section 2.2.1. 2.2.5 Decision Not to File. If the Company decides not to file a Piggyback Registration Statement after sending a Registration Notice, then the Holders shall not be entitled to have the Securities registered at such time, except as may be required under Section 2.3. 2.3 Form S-3 Registration. 2.3.1 After Piggyback Registration. If the Company has filed a Piggyback Registration Statement by November 1, 1998, then the Company shall register for resale on a Form S-3, and pursuant to Rule 415 under the Securities Act, any of the Securities that were not registered for resale in the Piggyback Registration Statement. The Company shall use its best efforts to cause such Form S-3 to be declared effective by the Commission by the 270th day following the date of this Agreement. If the Securities are not registered by the 270th day following the date of this Agreement, the Company shall pay to the Holders in cash a penalty of 2% of the liquidation preference of the Preferred Stock per month (which shall be subject to adjustment in the event of stock splits, stock recombinations, stock dividends and the like) and shall be prorated for any partial months and distributed ratably according to the number of shares of Preferred Stock held by and previously converted by each Holder, for each 30-day period during which the Securities remain unregistered beyond such date. 2.3.2 No Piggyback Registration. If the Company does not file a Piggyback Registration Statement by November 1, 1998, then the Company shall: (a) cause to be filed by November 1, 1998, a Form S-3, and pursuant to Rule 415 under the Securities Act, which Form S-3 shall permit resales of all Securities; and (b) use its best efforts to cause such Registration Statement to be declared effective by the Commission by January 1, 1999. If the Securities are not registered by that date, then the Company shall pay a cash penalty of 2% of the liquidation preference of the Preferred Stock per month (which shall be subject to adjustment in the event of stock splits, stock recombinations, stock dividends and the like) and shall be prorated for any partial months and distributed ratably according to the number of shares of Preferred Stock held by and previously converted by each Holder for each 30-day period during which the Securities remain unregistered beyond January 1, 1999, but only until the Securities may be resold under Rule 144(k) of the Securities Act. 5 2.3.3 Other Form. The Company may elect to file the Registration Statement on a form other than Form S-3 if the Company determines that doing so would be in its best interests, so long as the Holders would receive at least the same rights of resale as would have been available if the Registration Statement were filed on Form S-3. 2.3.4 Selection of Underwriters. The Holders of Securities covered by any Form S-3 who desire to do so may sell such Securities in an underwritten offering. In any such underwritten offering, the investment banker or investment bankers and manager or managers that will administer the offering will be selected by the Holders of a majority of the Securities included in such offering and the terms of such offering shall be reasonably satisfactory to such Holders; provided, however, that such investment bankers and managers and the terms of the underwriting must be reasonably satisfactory to the Company. 2.3.5 Participation in Underwritten Registrations. No Holder may participate in any underwritten registration pursuant to Section 2.3.4 unless such Holder (a) agrees to sell such Holder's Securities on the basis provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements, and (b) completes and executes all reasonable questionnaires, powers of attorney, indemnities, underwriting agreements, lock-up letters and other documents required under the terms of such underwriting arrangements. 2.4 Restrictions on Resale. If and when Securities have been registered for resale under a Form S-3, the Holders (a) may not begin selling such Securities until the 271st day after the date of this Agreement, and (b) may not sell a number of such Securities that exceeds 12.5% of the number of Securities issuable and issued upon conversion of the Preferred Stock (the "Volume Restrictions"). Such percentage shall cumulate each month, commencing on the 271st day after the date of this Agreement, unless there is no Piggyback Registration Statement declared effective by the Commission by November 1, 1998, in which event such percentage shall cumulate commencing November 1, 1998 as set forth in Section 2.4.2. Notwithstanding the above: 2.4.1 Voluntary Redemption. If the Holders have converted Preferred Stock pursuant to Section 6(a)(1) of the Rights and Preferences after receiving notice of a Voluntary Redemption, then the Holders may immediately sell up to 50% of the Securities issued upon such conversion, and may sell the other 50% of such Securities beginning 30 days after the Voluntary Conversion Date. 2.4.2 No Piggyback Registration. Upon the effectiveness of a Form S-3 filed pursuant to Section 2.3.2, the Holders may sell the Securities, subject to the Volume Restrictions, provided that the 12.5% of the Securities permitted to be sold under the Volume Restrictions will begin to cumulate on November 1, 1998. 6 2.5 Registration Statement. In connection with any Registration Statement, the Company shall comply with all the provisions of Section 2.8 below and shall use its reasonable best efforts to effect such registration to permit the resale of the Securities in accordance with the intended method or methods of distribution thereof (as indicated in the information furnished to the Company pursuant to Section 2.6). Subject to Section 2.7, the Company shall use its reasonable best efforts to keep such Registration Statement continuously effective, supplemented and amended to the extent necessary to ensure that it is available for resales of Securities by the Holders, and to ensure that it conforms with the requirements of this Agreement, the Securities Act and the policies, rules and regulations of the Commission as announced from time to time, for a period of two (2) years after the Effective Time or such longer period as required by Section 2.7 or such shorter period that will terminate when all the Securities covered by the Registration Statement have been sold pursuant to the Registration Statement or otherwise cease to be Restricted Securities. The Company shall be obligated to effect only one registration pursuant to this Agreement, except as otherwise provided in Section 2.3.1. Upon the occurrence of any event that would cause the Registration Statement or the Prospectus contained therein (i) to contain a material misstatement or omission or (ii) not to be effective and usable for resale of Securities during the period required by this Agreement, the Company shall file promptly an appropriate amendment to such Registration Statement or the related Prospectus or any document incorporated therein by reference, in the case of clause (i), correcting any such misstatement or omission, and, in the case of either clause (i) or (ii), use its reasonable best efforts to cause such amendment to be declared effective and such Registration Statement and the related Prospectus to become usable for their intended purposes as soon as practicable thereafter. The Company shall give each Holder of Restricted Securities a copy of such amendment promptly after its filing. 2.6 Holder's Information. No Holder may include any of its Securities in a Registration Statement pursuant to this Agreement unless and until such Holder furnishes to the Company in writing, within five Business Days after receipt of a written request therefor, the information specified in Item 507 of Regulation S-K under the Securities Act and such other information as the Company may reasonably request for use in connection with the Registration Statement or Prospectus or preliminary Prospectus included therein and in any application to the NASD or Nasdaq. Each Holder as to which the Registration Statement is being effected agrees to furnish promptly to the Company all information required to be disclosed in order to make the information previously furnished to the Company by such Holder not materially misleading. 2.7 Blackout Provisions. Notwithstanding anything to the contrary contained herein, if (i) the Board determines in good faith that the registration and distribution of Securities (or the use of a Registration Statement or the Prospectus contained therein) would interfere with any proposed or pending material corporate transaction involving the Company or any of its subsidiaries or would require premature disclosure thereof or would require the Company to disclose information that the Company has not otherwise made public and that the Company reasonably determines is in the best interests of the Company not to disclose at such time, and (ii) the Company notifies the Holders in writing not later than five (5) business days after such 7 determination (such notice shall be a "Blackout Notice"), the Company may (a) postpone the filing of the Registration Statement, or (b) allow the Registration Statement to fail to be effective and usable or elect that the Registration Statement shall not be usable for a reasonable period of time, but not in excess of 90 days (a "Blackout Period"); provided, however, that the aggregate number of days included in all Blackout Periods shall not exceed 90 during any consecutive 12 months and shall not exceed 180 during the period specified in Section 2.8 of this Agreement; and provided, further, that the period referred to in Section 2.5 during which the Registration Statement is required to be effective and usable shall be extended by the aggregate number of days during which the Registration Statement was not effective or usable pursuant to the foregoing provisions. 2.8 Registration Procedures. In connection with any Registration Statement or Prospectus required by this Agreement to permit the resale of Securities, the Company shall: 2.8.1 Prepare and file with the Commission such amendments and post-effective amendments to the Registration Statement as may be necessary to keep the Registration Statement effective for the applicable period set forth in Section 2.5; cause the Prospectus to be supplemented by any required Prospectus supplement; and as so supplemented to be filed pursuant to Rule 424 under the Securities Act, and to comply fully with the applicable provisions of Rules 424 and 430, as applicable, under the Securities Act in a timely manner; and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the Holders set forth in such Registration Statement or supplement or the Prospectus; 2.8.2 Advise the Holders of Securities covered by such Registration Statement and, if requested by such Holders, confirm such advice in writing, (i) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and when the same has become effective, (ii) of any request by the Commission for post-effective amendments to such Registration Statement or post-effective amendments or supplements to the Prospectus or for additional information relating thereto, (iii) of the issuance by the Commission of any stop order suspending the effectiveness of any such Registration Statement under the Securities Act or of the suspension by any state securities Commission of the qualification of the securities for offering or sale in any jurisdiction, or the initiation of any proceeding for any of the preceding purposes, and (iv) of the existence of any fact or the happening of any event that makes any statement of a material fact made in any such Registration Statement, the related Prospectus, any amendment or supplement thereto, or any document incorporated by reference therein untrue, or that requires the making of any additions to or changes in any such Registration Statement or the related Prospectus to make the statements therein not materially misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of such Registration Statement, or any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption from qualification of the Securities under state 8 securities or blue sky laws, the Company shall use its reasonable efforts to obtain the withdrawal or lifting of such order at the earliest possible time; 2.8.3 Promptly furnish to each Holder whose Securities are covered by the Registration Statement, and each underwriter, if any, without charge, at least one conformed copy of any Registration Statement, as first filed with the Commission, and of each amendment thereto, including all documents incorporated by reference therein and all exhibits (including exhibits incorporated therein by reference) and such other documents as such Holder may reasonably request; 2.8.4 Deliver to each Holder whose Securities are covered by the Registration Statement, and each underwriter, if any, without charge, as many copies of the Prospectus (including each preliminary Prospectus) and any amendment or supplement thereto as such person reasonably may request; 2.8.5 Enter into such customary agreements and take all such other reasonable action in connection therewith (including those reasonably requested by the selling Holders or the underwriter(s), if any) required to expedite or facilitate the disposition of such Securities pursuant to such Registration Statement, including, but not limited to, dispositions pursuant to an underwritten registration, and in such connection: (i) make such representations and warranties to the selling Holders and underwriter(s), if any, in form, substance and scope as are customarily made by issuers in underwritten offerings (whether or not sales of securities pursuant to the Registration Statement are to be to an underwriter(s)) and confirm the same if and when requested; (ii) obtain opinions of counsel to the Company addressed to each selling Holder and underwriter, if any, covering the matters customarily covered in opinions requested in underwritten offerings (whether or not sales of securities pursuant to such Registration Statement are to be made to an underwriter(s)) and dated the date of effectiveness of the Registration Statement (and, in the case of any underwritten sale of securities pursuant to the Registration Statement, each closing date of sales to the underwriter(s) pursuant thereto); (iii) use its reasonable best efforts to obtain comfort letters dated the date of effectiveness of the Registration Statement (and, in the case of any underwritten sale of securities pursuant to the Registration Statement, each closing date of sales to the underwriter(s) pursuant thereto) from the independent certified public accountants of the Company addressed to each selling Holder and 9 underwriter, if any, such letters to be in customary form and covering matters of the type customarily covered in comfort letters in connection with underwritten offerings (whether or not sales of securities pursuant to such Registration Statement are to be made to an underwriter(s)); (iv) provide the indemnification provisions and procedures of Section 4 hereof with respect to selling Holders and the underwriter(s), if any; and (v) deliver such documents and certificates as may be reasonably requested by the selling Holders or the underwriter(s), if any, and which are customarily delivered in underwritten offerings (whether of not sales of securities pursuant to such Registration Statement are to be made to an underwriter(s)), such documents and certificates to be dated the date of effectiveness of the Registration Statement. The actions required by clauses (i) through (v) above shall be done at each closing under such underwriting or similar agreement, as and to the extent required thereunder; provided that the Company shall not be required to participate in more than one closing in any 180-day period; 2.8.6 Prior to any public offering of securities, cooperate with the selling Holders, the underwriter(s), if any, and their respective counsel in connection with the registration and qualification of the Securities under the securities or blue sky laws of such U.S. jurisdictions as the selling Holders or underwriter(s), if any, may reasonably request in writing by the time any Registration Statement is declared effective by the Commission, and do any and all other acts or filings necessary or advisable to allow the disposition in such U.S. jurisdictions of the Securities covered by the Registration Statement and to file such consents to service of process or other documents needed to effect such registration or qualification; provided, however, that the Company shall not be required to register or qualify as a foreign corporation in any jurisdiction where it is not then so qualified or as a dealer in securities in any jurisdiction where it would not otherwise be required to register or qualify but for this Section 2.8, or to take any action that would subject it to the service of process in suits or to taxation, in any jurisdiction where it is not then so subject; 2.8.7 In connection with any sale of Securities that will result in such Securities no longer being Restricted Securities, cooperate with the selling Holders and the underwriter(s), if any, to facilitate the timely preparation and delivery of certificates representing Securities to be sold and not bearing any restrictive legends; and enable such Securities to be in such denominations and registered in such names as the Holders or the underwriter(s), if any, may request at least two (2) business days prior to any sale of Securities made by such underwriters; 10 2.8.8 Use its reasonable best efforts to cause the disposition of the Securities covered by the Registration Statement to be registered with or approved by such other U.S. governmental agencies or authorities as may be necessary to enable the Holder thereof or the underwriter(s), if any, to consummate the disposition of such Securities, subject to the proviso contained in Section 2.8.6; 2.8.9 If any fact or event contemplated by Section 2.8.2 shall exist or have occurred, prepare a supplemental or post-effective amendment to any Registration Statement or related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of Securities, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statement therein not misleading; 2.8.10 Cooperate and assist in the performance of any due diligence investigation by any underwriter (including any "qualified independent underwriter") that is required to be retained in accordance with the rules and regulations of the NASD, and use its reasonable best efforts to cause the Registration Statement to become effective and approved by such U.S. governmental agencies or authorities as may be necessary to permit the Holders selling Securities to consummate the disposition of such Securities; 2.8.11 Otherwise use its reasonable best efforts to comply with all applicable rules and regulations of the Commission, and make generally available to its Holders with regard to the Registration Statement, as soon as practicable, a consolidated earnings statement meeting the requirements of Rule 158 (which need not be audited) for the twelve-month period (i) commencing at the end of any fiscal quarter in which Securities are sold to an underwriter in a firm or best efforts underwritten offering or (ii) if not sold to an underwriter in such an offering, beginning with the first month of the Company's first fiscal quarter commencing after the effective date of any Registration Statement; 2.8.12 Use its reasonable best efforts to list or have accepted for quotation, not later than the effective date of the Registration Statement, all Securities covered by the Registration Statement on the Nasdaq National Market System or any other trading market on which the Common Stock is then admitted or quoted for trading; and 2.8.13 Provide promptly to each Holder of Securities covered by the Registration Statement upon request each document filed with the Commission pursuant to the requirements of Section 12 and Section 14 of the Exchange Act. 2.9 Each Holder agrees by acquisition of a Restricted Security that, upon receipt of any notice from the Company of the existence of any fact of the kind described in Section 2.8 or the commencement of a Black-Out Period, such Holder will forthwith discontinue disposition 11 of Securities pursuant to the Registration Statement until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 2.8.9, or until it is advised in writing (in accordance with the notice provisions of Section 7.3) by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated by reference in the Prospectus. If so directed by the Company, each Holder will deliver to the Company all copies, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Securities that was current at the time of receipt of such notice. If the Company shall give any such notice, the time period regarding the effectiveness of the Registration Statement set forth in Section 2.8 shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to Section 2.8.2 or the commencement of a Black-Out Period until the date that the Company gives notice that the Registration Statement (as it may then have been amended or supplemented) is again effective or usable. 2.10 Preparation; Reasonable Investigation. In connection with preparation and filing of any Registration Statement, the Company will give the Holders of Securities registered under such Registration Statement, their underwriter, if any, and their respective counsel and accountants, the opportunity to participate at their own expense in the preparation of the Registration Statement, each Prospectus included therein or filed with the Commission, and each amendment thereof or supplement thereto, and will give each of them access to its books and records and such opportunities to discuss the business, finances and accounts of the Company and its subsidiaries with its officers, directors and the independent public accountants who have certified its financial statements as shall be reasonably necessary, in the opinion of such Holders and such underwriter's respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act. 2.11 Certain Rights of Holders. Except as otherwise required by applicable law or regulation, the Company will not file any Registration Statement under the Securities Act that refers to any Holder of Securities by name or otherwise without the prior written approval of such Holder, which may not be unreasonably withheld. 3. EXPENSES. 3.1 Registration Expenses. All expenses incidental to the Company's performance of or compliance with this Agreement will be borne by the Company, regardless of whether a Registration Statement becomes effective, including without limitation: (i) all registration and filing fees and expenses (including filings made with the NASD and Nasdaq and counsel fees in connection therewith); (ii) all fees and expenses of compliance with federal securities and state blue sky or securities laws (including all reasonable fees and expenses of one counsel to the underwriter(s) in any underwriting) in connection with compliance with state blue sky or securities laws; (iii) all expenses of printing, messenger and delivery services and telephone calls; (iv) all fees and disbursements of counsel for the Company; and (v) all fees and 12 disbursements of independent certified public accountants of the Company (including the expenses of any special audit and comfort letters required by or incident to such performance), but excluding from this Section, fees and expenses of any underwriters or counsel to the underwriter(s), if any, unless otherwise set forth herein. 3.2 Reimbursement. In addition, in connection with the filing of the Registration Statement required to be filed by this Agreement, the Company will reimburse the Holders of the Securities being registered pursuant to any Registration Statement, as a group, for the reasonable fees and disbursements of not more than one counsel to review such Registration Statement. 3.3 Other Costs. Notwithstanding the foregoing, the Company will not be responsible for any underwriting discounts, commissions or fees attributable to the sale of Securities or any legal fees or disbursements (other than any such fees or disbursements relating to blue sky compliance or otherwise as set forth under Section 3.1) incurred by any underwriter(s) in any underwritten offering if the underwriter(s) participate in such underwritten offering at the request of the Holders, or any transfer taxes that may be imposed in connection with a sale or transfer of Securities. The Company may withdraw a Form S-3 at the request of the Holders of two-thirds of the Securities covered thereby, and in such case shall not be required to pay any expenses of any registration proceedings begun pursuant to this Agreement, and Holders participating in the withdrawal request shall bear such expenses. 3.4 Internal Expenses. The Company shall, in any event, bear its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expenses of any annual audit and the fees and expenses of any person, including special experts, retained by the Company. 4. INDEMNIFICATION; CONTRIBUTION. 4.1 The Company agrees to indemnify and hold harmless (i) each Holder of Securities covered by the Registration Statement, (ii) each other person who participates as an underwriter in the offering or sale of Securities pursuant to the Registration Statement, (iii) each person, if any who controls (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) any such Holder or underwriter (any of the persons referred to in this clause (iii) being hereinafter referred to as a "Controlling Person"), and (iv) the respective officers, directors, partners, employees, representatives and agents of any such Holder or underwriter or any Controlling Person (any person referred to in clause (i), (ii), (iii) or (iv) may hereinafter be referred to as an "Indemnified Person"), from and against any and all losses, claims, damages, liabilities, judgments or expenses (including, without limitation, reasonable attorneys' fees and disbursements), joint or several (or actions or proceedings, whether commenced or threatened, in respect thereof) (collectively, "Claims"), to which such Indemnified Person may become subject under either Section 15 of the Securities Act or Section 20 of the Exchange Act, insofar 13 as such Claims arise out of or are based upon or caused by any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or Prospectus (or any amendment or supplement thereto), or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act or any state securities law, or any rule or regulation promulgated under the Securities Act or any state securities law, or any other law applicable to the Company relating to any such registration or qualification, except insofar as such losses, claims, damages, liabilities, judgments or expenses (including, without limitation, reasonable attorneys' fees and disbursements) of any such Indemnified Person: (x) are caused by any such untrue statement or omission or alleged untrue statement or omission that is based upon information relating to such Indemnified Person furnished in writing to the Company by or on behalf of any of such Indemnified Person expressly for use therein; (y) with respect to the preliminary Prospectus, result from the fact that such Holder sold securities or Restricted Securities to a person to whom there was not sent or given, at or prior to the written confirmation of such sale, a copy of the Prospectus, as amended or supplemented, if the Company shall have previously furnished copies thereof to such Holder in accordance with this Agreement and the Prospectus, as amended or supplemented; or (z) are a result of the use by an Indemnified Person of any Prospectus when, upon receipt of a Black-Out Notice or a notice from the Company of the existence of any fact of the kind described in Section 2.8.2(iv), the Indemnified Person or the related Holder was not permitted to do so. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of any Indemnified Person and shall survive the transfer of such Securities by such Holder. 4.2 If any action shall be brought or asserted against any Indemnified Person with respect to which indemnity may be sought against the Company, such Indemnified Person shall promptly notify the Company and the Company shall assume the defense thereof. Such Indemnified Person shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the Indemnified Person unless (i) the employment of such counsel shall have been specifically authorized in writing by the Company, (ii) the Company shall have failed to assume the defense and employ counsel, or (iii) the named parties to any such action include both the Indemnified Person and the Company and the Indemnified Person shall have been advised in writing by its counsel that there may be one or more legal defenses available to it that are different from or additional to those available to the Company (in which case the Company shall not have the right to assume the defense of such action on behalf of the Indemnified Person), it being understood, however, that the Company shall not, in connection with such action or similar or related actions or proceedings arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) at any time for all the Indemnified Persons, which firm shall be (a) designated by such Indemnified Persons and (b) reasonably satisfactory to the Company. The Company shall not be liable for any settlement of any such action or proceeding effected without the Company's prior written consent, which consent shall not be withheld unreasonably, and the Company agrees to indemnify and hold harmless any Indemnified Person from and against any loss, claim, damage, liability, judgment or expense by reason of any 14 settlement of any action effected with the written consent of the Company. The Company shall not, without the prior written consent of each Indemnified Person, settle or compromise or consent to the entry of judgment on or otherwise seek to terminate any pending or threatened action, claim, litigation or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not any Indemnified Person is a party thereto), unless such settlement, compromise, consent or termination includes an unconditional release of each Indemnified Person from all liability arising out of such action, claim, litigation or proceeding. 4.3 Each Holder of Securities covered by any Registration Statement agrees, severally and not jointly, to indemnify and hold harmless the Company and its directors, officers and any person controlling (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) the Company, its subsidiaries and their respective officers, directors, partners, employees, representatives and agents of each such person, to the same extent as the foregoing indemnity from the Company to each of the Indemnified Persons, but only with respect to actions based on Claims referred to in clauses (x), (y) or (z) of Section 4.1), and subject to the limitation that no Holder's liability for such indemnification shall be greater than an amount equal to the total original purchase price of the Preferred Stock purchased by such Holder pursuant to the Securities Purchase Agreement, as set forth on Exhibit A attached hereto. If any action or proceeding shall be brought against the Company, any of its subsidiaries or any of their respective directors or officers or any such Controlling Person in respect of which indemnity may be sought against a Holder of Securities covered by any Registration Statement, such Holder shall have the rights and duties given the Company in Section 4.1 (except that the Holder may but shall not be required to assume the defense thereof), and the Company or such subsidiary, its directors or officers or such Controlling Person shall have the rights and duties given to each Holder by Section 4.1. 5. LIQUIDATED DAMAGES Each of the Company and the Purchasers (on behalf of themselves and each subsequent Holder of Restricted Securities) agrees that each Holder of Restricted Securities will suffer damages if a Form S-3 is not filed with and declared effective by the Commission and maintained in the manner and within the time periods contemplated by Section 2.3 hereof and it would not be feasible to ascertain the extent of such damages with precision. Accordingly, subject to adjustment for any Blackout Period, if (i) a Form S-3 is not filed with the Commission and declared effective by the applicable time periods in Section 2.3, or (ii) a Form S-3 is filed and declared effective but shall thereafter cease to be effective (without being succeeded immediately by an additional Form S-3 filed and declared effective) for a period of time that shall exceed 90 days in the aggregate per year (defined as a period of 365 days commencing on the date the Form S-3 is declared effective) (each such event referred to in clauses (i) and (ii), a "Registration Default"), except as a result of extraordinary circumstances beyond the Company's control, then the Company shall pay as liquidated damages to each Holder of Restricted Securities who has complied with such Holder's obligations hereunder an amount equal to 2% per month of the liquidation preference of the Preferred Stock in cash (subject to 15 adjustment in the event of stock splits, stock recombinations, stock dividends and the like), ratably according to the number of shares of Preferred Stock held by such Holder or previously converted to Securities held by such Holder, immediately following the occurrence of such Registration Default and continuing until such Registration Default is cured. 6. RULE 144A The Company hereby agrees with each Holder of Restricted Securities, beginning 270 days from the Closing and for so long as a Registration Statement is not effective and any of the Restricted Securities remain outstanding and continue to be "Restricted Securities" within the meaning of Rule 144 under the Securities Act, and during any period in which the Company is not subject to Section 13 or 15(d) of the Exchange Act, to make available to the Holders of Restricted Securities the information required by Rule 144A(d)(4) under the Act in order to permit resales of such Restricted Securities pursuant to Rule 144A. 7. MISCELLANEOUS 7.1 Entire Agreement. This Agreement, together with the Securities Purchase Agreement (including the Exhibits and Schedules thereto) and Warrants, constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings, both oral and written, between the parties with respect to the subject matter hereof. 7.2 Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including without limitation, subsequent Holders of Restricted Securities; provided, however, that this Agreement shall not inure to the benefit of or be binding upon a successor or assign of a Holder unless and then only to the extent such successor or assign acquired Restricted Securities from such Holder at a time when such Holder could not transfer such Restricted Securities pursuant to any Registration Statement or pursuant to Rule 144 under the Securities Act as contemplated by clause (ii) of the definition of Restricted Securities. 7.3 Notices. All notices and other communications given or made pursuant hereto, unless otherwise specified, shall be in writing and shall be deemed to have been duly given or made if delivered personally, by confirmed facsimile transmission, or by overnight courier or sent by registered or certified mail (postage prepaid, return receipt requested) to the parties at the facsimile number, if any, or address set forth below or at such other numbers or addresses as shall be furnished by the parties by like notice. Notices sent by facsimile shall be effective when receipt is confirmed, notices delivered personally or by overnight courier shall be effective upon receipt and notices sent by registered or certified mail shall be effective three days after mailing: 16 If to a Holder: To such Holder at the address set forth in Exhibit A. In addition, copies of all such notices or other communications shall be concurrently delivered by the person giving the same to each person who has been identified to the Company by such Holder as a person who is to receive copies of such notice. If to the Company: Sheryl A. Symonds Vice President Administration and General Counsel Pacific Aerospace & Electronics, Inc. 24000 - 35th Ave. SE, Suite 200 Bothell, WA 98021 Facsimile: (425) 354-1632 with a copy to: Eugenie D. Mansfield Stoel Rives LLP One Union Square 600 University Street, Suite 3600 Seattle, Washington 98101-3197 Fax: (206) 386-7500 7.4 Headings. The headings contained in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement. 7.5 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. 7.6 Applicable law. This Agreement shall be governed by and construed in accordance with the internal laws of the state of Washington, without giving effect to principles of choice of law. 7.7 Rights and Preferences. The Preferred Stock and the Securities are subject to the terms and conditions of the Rights and Preferences which shall control if there is any conflict between the Rights and Preferences and this Agreement. The Holders acknowledge receiving a copy the Rights and Preferences. 7.8 Specific Enforcement. Each party hereto acknowledges that the remedies at law of the other parties for a breach or threatened breach of this Agreement would be inadequate, 17 and, in recognition of this fact, any party to this Agreement, without posting any bond, and in addition to all other remedies that may be available, shall be entitled to obtain equitable relief in the form of specific performance, a temporary restraining order, a temporary or permanent injunction or any other equitable remedy that may then be available. 7.9 Amendment and Waivers. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to or departures from the provisions hereof may not be given unless the Company has obtained the written consent of Holders of a majority in interest of the Restricted Securities. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. THE COMPANY: PACIFIC AEROSPACE & ELECTRONICS, INC. By: /s/ DONALD A. WRIGHT ----------------------------------- Donald A. Wright President and Chief Executive Officer 18 THE PURCHASERS: SILVER OAK CAPITAL, L.L.C., AGR HALIFAX FUND, LTD. as Nominee for the following entities: AG Arb Partners, L.P. AG Super Fund, L.P. AG Long Term Super Fund, L.P. Nutmeg Partners, L.P. Northern Trust Company, as Master By /s/ JEFFREY M. SOLOMON Trustee of the Teachers Retirement --------------------------------- System of the State of Illinois Name: Jeffrey M. Solomon, Managing PHS Bay Colony Fund, L.P. Officer of AG Ramius Partners, LLC PHS Patriot Fund, L.P. Its: Investment Advisor AG MM, L.P. Medici Partners, L.P. Triarc Companies, Inc. Ramius, L.P. Baldwin Enterprises, Inc. GAM Arbitrage Investments, Inc. AG Super Fund International Partners, L.P. Ramius Fund, Ltd. Leonardo, L.P. By: /s/ MICHAEL L. GORDON ----------------------------------- Michael L. Gordon, Manager 19 EX-4.9 6 PURCHASE WARANT - PAULSON INVESTMENT EXHIBIT 4.9 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND IS NOT TRANSFERABLE EXCEPT AS PROVIDED HEREIN PACIFIC AEROSPACE & ELECTRONICS, INC. (successor in interest to PCT Holdings, Inc.) PURCHASE WARRANT Issued to: PAULSON INVESTMENT COMPANY, INC. Exercisable to Purchase 155,700 Units of PACIFIC AEROSPACE & ELECTRONICS, INC. Void after July 15, 2001 This is to certify that, for value received and subject to the terms and conditions set forth below, the Warrantholder (hereinafter defined) is entitled to purchase, and the Company promises and agrees to sell and issue to the Warrantholder, at any time after the date of this Warrant, and on or before July 15, 2001, up to 155,700 Units (hereinafter defined) at the Exercise Price (hereinafter defined). This Warrant Certificate is issued subject to the following terms and conditions: 1. Definitions of Certain Terms. Except as may be otherwise clearly required by the context, the following terms have the following meanings: (a) "Act" means the Securities Act of 1933, as amended. (b) "Closing Date" means the date on which the Offering is closed. (c) "Commission" means the Securities and Exchange Commission. (d) "Common Stock" means the common stock, $0.001 par value, of the Company. (e) "Company" means Pacific Aerospace & Electronics, Inc., a Washington corporation (successor in interest to PCT Holdings, Inc., a Nevada corporation), and any successor corporation. (f) "Company's Expenses" means any and all expenses payable by the Company or the Warrantholder in connection with an offering described in Section 6 hereof, except Warrantholder's Expenses. (g) "Effective Date" means the date on which the Registration Statement is declared effective by the Commission. (h) "Exercise Price" means the price at which the Warrantholder may purchase one complete Unit (or Securities obtainable in lieu of one complete Unit) upon exercise of Warrants as determined from time to time pursuant to the provisions hereof. The initial Exercise Price is $3.75 per Unit. If a Warrant is exercised for a component of a Unit or Units, then the price payable in connection with such exercise shall be determined by allocating $0.001 to the Unit Warrant and the balance of the Exercise Price to the share of Common Stock, or, in each case, to any securities obtainable in addition to or in lieu of such share of Unit Warrant or Common Stock by virtue of the application of Section 3 of this Warrant. -1- (i) "Offering" means the public offering of Units made pursuant to the Registration Statement. (j) "Participating Underwriter" means any underwriter participating in the sale of the Securities pursuant to a registration under Section 6 of this Warrant Certificate. (k) "Registration Statement" means the Company's registration statement on Form SB-2 (Registration No. 333-5011) as amended on the Closing Date. (l) "Rules and Regulations" means the rules and regulations of the Commission adopted under the Act. (m) "Securities" means the securities obtained or obtainable upon exercise of the Warrant or securities obtained or obtainable upon exercise, exchange, or conversion of such securities. (n) "Unit" means, as the case may require, either one of the Units offered to the public pursuant to the Registration Statement or one of the Units obtainable on exercise of a Warrant. (o) "Unit Warrant" means a Common Stock purchase warrant included as a component of a Unit. (p) "Warrant Certificate" means a certificate evidencing the Warrant. (q) "Warrantholder" means a record holder of the Warrant or Securities. The initial Warrantholder is Paulson Investment Company, Inc. (r) "Warrantholder's Expenses" means the sum of (i) the aggregate amount of cash payments made to an underwriter, underwriting syndicate, or agent in connection with an offering described in Section 6 hereof multiplied by a fraction the numerator of which is the aggregate sales price of the Securities sold by such underwriter, underwriting syndicate, or agent in such offering and the denominator of which is the aggregate sales price of all of the securities sold by such underwriter, underwriting syndicate, or agent in such offering and (ii) all out-of-pocket expenses of the Warrantholder, except for the fees and disbursements of one firm retained as legal counsel for the Warrantholders that will be paid by the Company. (s) "Warrant" means the warrant evidenced by this certificate, any similar certificate issued in connection with the Offering, or any certificate obtained upon transfer or partial exercise of the Warrant evidenced by any such certificate. -2- 2. Exercise of Warrants. All or any part of the Warrant may be exercised commencing on the first anniversary of the Effective Date and ending at 5:00 p.m. Pacific Time on the fifth anniversary of the Effective Date by surrendering this Warrant Certificate, together with appropriate instructions, duly executed by the Warrantholder or by its duly authorized attorney, at the office of the Company, 434 Olds Station Road, Wenatchee, Washington 98801, attention: President, or at such other office or agency as the Company may designate. Upon receipt of notice of exercise, the Company shall immediately instruct its transfer agent to prepare certificates for the Securities to be received by the Warrantholder upon completion of the Warrant exercise. When such certificates are prepared, the Company shall notify the Warrantholder and deliver such certificates to the Warrantholder or as per the Warrantholder's instructions immediately upon payment in full by the Warrantholder, in lawful money of the United States, of the Exercise Price payable with respect to the Securities being purchased. If the Warrantholder shall represent and warrant that all applicable registration and prospectus delivery requirements for their sale have been complied with upon sale of the Securities received upon exercise of the Warrant, such certificates shall not bear a legend with respect to the Securities Act of 1933. If fewer than all the Securities purchasable under the Warrant are purchased, the Company will, upon such partial exercise, execute and deliver to the Warrantholder a new Warrant Certificate (dated the date hereof), in form and tenor similar to this Warrant Certificate, evidencing that portion of the Warrant not exercised. The Securities to be obtained on exercise of the Warrant will be deemed to have been issued, and any person exercising the Warrants will be deemed to have become a holder of record of those Securities, as of the date of the payment of the Exercise Price. 3. Adjustments in Certain Events. The number, class, and price of Securities for which this Warrant Certificate may be exercised are subject to adjustment from time to time upon the happening of certain events as follows: (a) If the outstanding shares of the Company's Common Stock are divided into a greater number of shares or a dividend in stock is paid on the Common Stock, the number of shares of Common Stock for which the Warrant is then exercisable will be proportionately increased and the Exercise Price will be proportionately reduced; and, conversely, if the outstanding shares of Common Stock are combined into a smaller number of shares of Common Stock, the number of shares of Common Stock for which the Warrant is then exercisable will be proportionately reduced and the Exercise Price will be proportionately increased. The increases and reductions provided for in this subsection 3(a) will be made with the intent and, as nearly as practicable, the effect that neither the percentage of the total equity of the Company obtainable on exercise of the Warrants nor the price payable for such percentage upon such exercise will be affected by any event described in this subsection 3(a). Upon the occurrence of any such event, the number of Unit Warrants for which the Warrant is then exercisable shall -3- not be adjusted, if such event results in an adjustment of the number of shares purchasable or the exercise price (or both) under the Unit Warrants. (b) In case of any change in the Common Stock through merger, consolidation, reclassification, reorganization, partial or complete liquidation, purchase of substantially all the assets of the Company, or other change in the capital structure of the Company, then, as a condition of such change, lawful and adequate provision will be made so that the holder of this Warrant Certificate will have the right thereafter to receive upon the exercise of the Warrant the kind and amount of shares of stock or other securities or property to which he would have been entitled if, immediately prior to such event, he had held the number of shares of Common Stock obtainable upon the exercise of the Warrant. In any such case, appropriate adjustment will be made in the application of the provisions set forth herein with respect to the rights and interest thereafter of the Warrantholder, to the end that the provisions set forth herein will thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the exercise of the Warrant. The Company will not permit any change in its capital structure to occur unless the issuer of the shares of stock or other securities to be received by the holder of this Warrant Certificate, if not the Company, agrees to be bound by and comply with the provisions of this Warrant Certificate. Upon the occurrence of any such event, the number of Unit Warrants for which the Warrant is then exercisable shall not be adjusted, if such event results in an adjustment of the number of shares purchasable or the exercise price (or both) under the Unit Warrants. (c) When any adjustment is required to be made in the number of shares of Common Stock, other securities, or the property purchasable upon exercise of the Warrant, the Company will promptly determine the new number of such shares or other securities or property purchasable upon exercise of the Warrant and (i) prepare and retain on file a statement describing in reasonable detail the method used in arriving at the new number of such shares or other securities or property purchasable upon exercise of the Warrant and (ii) cause a copy of such statement to be mailed to the Warrantholder within thirty (30) days after the date of the event giving rise to the adjustment. (d) No fractional shares of Common Stock and no fractional Units Warrants or other securities will be issued in connection with the exercise of the Warrant, but the Company will pay, in lieu of fractional shares or fractional Unit Warrants, a cash payment therefor on the basis of the mean between the bid and asked prices of the Common Stock, or Unit Warrants, as the case may be, in the over-the-counter market or the closing price on a national securities exchange on the day immediately prior to exercise. (e) If securities of the Company or securities of any subsidiary of the Company are distributed pro rata to holders of Common Stock, such number of securities will be distributed to the Warrantholder or his assignee upon exercise of his rights hereunder as such Warrantholder or assignee would have been entitled to if this Warrant Certificate had been -4- exercised prior to the record date for such distribution. The provisions with respect to adjustment of the Common Stock provided in this Section 3 will also apply to the securities to which the Warrantholder or his assignee is entitled under this subsection 3(e). (f) Notwithstanding anything herein to the contrary, there will be no adjustment made hereunder on account of the sale of the Units or other Securities purchasable upon exercise of the Warrant. 4. Reservation of Securities. The Company agrees that the number of shares of Common Stock, Unit Warrants or other Securities sufficient to provide for the exercise of the Warrant upon the basis set forth above will at all times during the term of the Warrant be reserved for exercise. 5. Validity of Securities. All Securities delivered upon the exercise of the Warrant will be duly and validly issued in accordance with their terms, and the Company will pay all documentary and transfer taxes, if any, in respect of the original issuance thereof upon exercise of the Warrant. 6. Registration of Securities Issuable on Exercise of Warrant Certificate. (a) The Company will register the Securities with the Commission pursuant to the Act so as to allow the unrestricted sale of the Securities to the public from time to time commencing on the first anniversary of the Effective Date and ending at 5:00 p.m. Pacific Time on the fifth anniversary of the Effective Date (the "Registration Period"). The Company will also file such applications and other documents necessary to permit the sale of the Securities to the public during the Registration Period in those states in which the Units were qualified for sale in the Offering or such other states as the Company and the Warrantholder agree to. In order to comply with the provisions of this Section 6(a), the Company is not required to file more than one registration statement at its expense. The Company will register the Securities on Form S-3 if the Company is eligible to use such form. No registration right of any kind, "piggyback" or otherwise, will last longer than five years from the Closing Date. (b) The Company will pay all of the Company's Expenses and each Warrantholder will pay its pro rata share of the Warrantholder's Expenses relating to the registration, offer, and sale of the Securities. (c) Except as specifically provided herein, the manner and conduct of the registration, including the contents of the registration, will be entirely in the control and at the discretion of the Company. The Company will file such post-effective amendments and supplements as may be necessary to maintain the currency of the registration statement during the period of its use. In addition, if the Warrantholder participating in the registration is advised by counsel that the registration statement, in their opinion, is deficient in any material respect, -5- the Company will use its best efforts to cause the registration statement to be amended to eliminate the concerns raised. (d) The Company will furnish to the Warrantholder the number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as it may reasonably request in order to facilitate the disposition of Securities owned by it. (e) The Company will, at the request of Warrantholders holding at least 50 percent of the then outstanding Warrants, (i) furnish an opinion of the counsel representing the Company for the purposes of the registration pursuant to this Section 6, addressed to the Warrantholders and any Participating Underwriter, (ii) furnish an appropriate letter from the independent public accountants of the Company, addressed to the Warrantholders and any Participating Underwriter, and (iii) make representations and warranties to the Warrantholders and any Participating Underwriter. A request pursuant to this subsection (e) may be made on three occasions. The documents required to be delivered pursuant to this subsection (e) will be dated within ten days of the request and will be, in form and substance, equivalent to similar documents furnished to the underwriters in connection with the Offering, with such changes as may be appropriate in light of changed circumstances. 7. Indemnification in Connection with Registration. (a) If any of the Securities are registered, the Company will indemnify and hold harmless each selling Warrantholder, any person who controls any selling Warrantholder within the meaning of the Act, and any Participating Underwriter against any losses, claims, damages, or liabilities, joint or several, to which any Warrantholder, controlling person, or Participating Underwriter may be subject under the Act or otherwise; and it will reimburse each Warrantholder, each controlling person, and each Participating Underwriter for any legal or other expenses reasonably incurred by the Warrantholder, controlling person, or Participating Underwriter in connection with investigating or defending any such loss, claim, damage, liability, or action, insofar as such losses, claims, damages, or liabilities, joint or several (or actions in respect thereof), arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained, on the effective date thereof, in any such registration statement or any preliminary prospectus or final prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any case to the extent that any loss, claim, damage, or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in any registration statement, preliminary prospectus, final prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with written information furnished by a Warrantholder for use in the preparation thereof. The indemnity agreement contained in this subparagraph (a) will not apply -6- to amounts paid to any claimant in settlement of any suit or claim unless such payment is first approved by the Company, such approval not to be unreasonably withheld. (b) Each selling Warrantholder, as a condition of the Company's registration obligation, will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed any registration statement or other filing or any amendment or supplement thereto, and any person who controls the Company within the meaning of the Act, against any losses, claims, damages, or liabilities to which the Company or any such director, officer, or controlling person may become subject under the Act or otherwise, and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, or controlling person in connection with investigating or defending any such loss, claim, damage, liability, or action, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in said registration statement, any preliminary or final prospectus, or other filing, or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in said registration statement, preliminary or final prospectus, or other filing, or amendment or supplement, in reliance upon and in conformity with written information furnished by such Warrantholder for use in the preparation thereof; provided, however, that the indemnity agreement contained in this subparagraph (b) will not apply to amounts paid to any claimant in settlement of any suit or claim unless such payment is first approved by the Warrantholder, such approval not to be unreasonably withheld. (c) Promptly after receipt by an indemnified party under subparagraphs (a) or (b) above of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, notify the indemnifying party of the commencement thereof; but the omission to notify the indemnifying party will not relieve it from any liability that it may have to any indemnified party otherwise than under subparagraphs (a) and (b). (d) If any such action is brought against any indemnified party and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; and after notice from the indemnifying party to such indemnified party of its election to assume the defense thereof, the indemnifying party will not be liable to such indemnified party for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. -7- 8. Restrictions on Transfer. This Warrant Certificate and the Warrant may not be sold, transferred, assigned or hypothecated for a one-year period after the Effective Date except to underwriters of the Offering or to individuals who are either a partner or an officer of such an underwriter or by will or by operation of law. The Warrant may be divided or combined, upon request to the Company by the Warrantholder, into a certificate or certificates evidencing the same aggregate number of Warrants. 9. No Rights as a Shareholder. Except as otherwise provided herein, the Warrantholder will not, by virtue of ownership of the Warrant, be entitled to any rights of a shareholder of the Company but will, upon written request to the Company, be entitled to receive such quarterly or annual reports as the Company distributes to its shareholders. 10. Notice. Any notices required or permitted to be given hereunder will be in writing and may be served personally or by mail; and if served will be addressed as follows: If to the Company: 434 Olds Station Road Wenatchee, Washington 98801 Attn: President If to the Warrantholder: at the address furnished by the Warrantholder to the Company for the purpose of notice. Any notice so given by mail will be deemed effectively given 48 hours after mailing when deposited in the United States mail, registered or certified mail, return receipt requested, postage prepaid and addressed as specified above. Any party may by written notice to the other specify a different address for notice purposes. 11. Applicable Law. This Warrant Certificate will be governed by and construed in accordance with the laws of the State of Oregon, without reference to conflict of laws principles thereunder. All disputes relating to this Warrant Certificate shall be tried before the courts of Oregon located in Multnomah County, Oregon to the exclusion of all other courts that might have jurisdiction. -8- Dated as of September 30, 1997. PACIFIC AEROSPACE & ELECTRONICS, INC. By: /s/ DONALD A. WRIGHT ----------------------------------- Donald A. Wright Its: President Agreed and Accepted as of September 30, 1997. PAULSON INVESTMENT COMPANY, INC. By: /s/ CHESTER PAULSON ----------------------------------- Chester Paulson Its: President -9- EX-4.10 7 PURCHASE WARRANT - CHESTER L. PAULSON EXHIBIT 4.10 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND IS NOT TRANSFERABLE EXCEPT AS PROVIDED HEREIN PACIFIC AEROSPACE & ELECTRONICS, INC. (successor in interest to PCT Holdings, Inc.) PURCHASE WARRANT Issued to: CHESTER L. PAULSON Exercisable to Purchase 16,200 Units of PACIFIC AEROSPACE & ELECTRONICS, INC. Void after July 15, 2001 This is to certify that, for value received and subject to the terms and conditions set forth below, the Warrantholder (hereinafter defined) is entitled to purchase, and the Company promises and agrees to sell and issue to the Warrantholder, at any time after the date of this Warrant, and on or before July 15, 2001, up to 16,200 Units (hereinafter defined) at the Exercise Price (hereinafter defined). This Warrant Certificate is issued subject to the following terms and conditions: 1. Definitions of Certain Terms. Except as may be otherwise clearly required by the context, the following terms have the following meanings: (a) "Act" means the Securities Act of 1933, as amended. (b) "Closing Date" means the date on which the Offering is closed. (c) "Commission" means the Securities and Exchange Commission. (d) "Common Stock" means the common stock, $0.001 par value, of the Company. (e) "Company" means Pacific Aerospace & Electronics, Inc., a Washington corporation (successor in interest to PCT Holdings, Inc., a Nevada corporation), and any successor corporation. (f) "Company's Expenses" means any and all expenses payable by the Company or the Warrantholder in connection with an offering described in Section 6 hereof, except Warrantholder's Expenses. (g) "Effective Date" means the date on which the Registration Statement is declared effective by the Commission. (h) "Exercise Price" means the price at which the Warrantholder may purchase one complete Unit (or Securities obtainable in lieu of one complete Unit) upon exercise of Warrants as determined from time to time pursuant to the provisions hereof. The initial Exercise Price is $3.75 per Unit. If a Warrant is exercised for a component of a Unit or Units, then the price payable in connection with such exercise shall be determined by allocating $0.001 to the Unit Warrant and the balance of the Exercise Price to the share of Common Stock, or, in each case, to any securities obtainable in addition to or in lieu of such share of Unit Warrant or Common Stock by virtue of the application of Section 3 of this Warrant. -1- (i) "Offering" means the public offering of Units made pursuant to the Registration Statement. (j) "Participating Underwriter" means any underwriter participating in the sale of the Securities pursuant to a registration under Section 6 of this Warrant Certificate. (k) "Registration Statement" means the Company's registration statement on Form SB-2 (Registration No. 333-5011) as amended on the Closing Date. (l) "Rules and Regulations" means the rules and regulations of the Commission adopted under the Act. (m) "Securities" means the securities obtained or obtainable upon exercise of the Warrant or securities obtained or obtainable upon exercise, exchange, or conversion of such securities. (n) "Unit" means, as the case may require, either one of the Units offered to the public pursuant to the Registration Statement or one of the Units obtainable on exercise of a Warrant. (o) "Unit Warrant" means a Common Stock purchase warrant included as a component of a Unit. (p) "Warrant Certificate" means a certificate evidencing the Warrant. (q) "Warrantholder" means a record holder of the Warrant or Securities. The initial Warrantholder is Paulson Investment Company, Inc. (r) "Warrantholder's Expenses" means the sum of (i) the aggregate amount of cash payments made to an underwriter, underwriting syndicate, or agent in connection with an offering described in Section 6 hereof multiplied by a fraction the numerator of which is the aggregate sales price of the Securities sold by such underwriter, underwriting syndicate, or agent in such offering and the denominator of which is the aggregate sales price of all of the securities sold by such underwriter, underwriting syndicate, or agent in such offering and (ii) all out-of-pocket expenses of the Warrantholder, except for the fees and disbursements of one firm retained as legal counsel for the Warrantholders that will be paid by the Company. (s) "Warrant" means the warrant evidenced by this certificate, any similar certificate issued in connection with the Offering, or any certificate obtained upon transfer or partial exercise of the Warrant evidenced by any such certificate. -2- 2. Exercise of Warrants. All or any part of the Warrant may be exercised commencing on the first anniversary of the Effective Date and ending at 5:00 p.m. Pacific Time on the fifth anniversary of the Effective Date by surrendering this Warrant Certificate, together with appropriate instructions, duly executed by the Warrantholder or by its duly authorized attorney, at the office of the Company, 434 Olds Station Road, Wenatchee, Washington 98801, attention: President, or at such other office or agency as the Company may designate. Upon receipt of notice of exercise, the Company shall immediately instruct its transfer agent to prepare certificates for the Securities to be received by the Warrantholder upon completion of the Warrant exercise. When such certificates are prepared, the Company shall notify the Warrantholder and deliver such certificates to the Warrantholder or as per the Warrantholder's instructions immediately upon payment in full by the Warrantholder, in lawful money of the United States, of the Exercise Price payable with respect to the Securities being purchased. If the Warrantholder shall represent and warrant that all applicable registration and prospectus delivery requirements for their sale have been complied with upon sale of the Securities received upon exercise of the Warrant, such certificates shall not bear a legend with respect to the Securities Act of 1933. If fewer than all the Securities purchasable under the Warrant are purchased, the Company will, upon such partial exercise, execute and deliver to the Warrantholder a new Warrant Certificate (dated the date hereof), in form and tenor similar to this Warrant Certificate, evidencing that portion of the Warrant not exercised. The Securities to be obtained on exercise of the Warrant will be deemed to have been issued, and any person exercising the Warrants will be deemed to have become a holder of record of those Securities, as of the date of the payment of the Exercise Price. 3. Adjustments in Certain Events. The number, class, and price of Securities for which this Warrant Certificate may be exercised are subject to adjustment from time to time upon the happening of certain events as follows: (a) If the outstanding shares of the Company's Common Stock are divided into a greater number of shares or a dividend in stock is paid on the Common Stock, the number of shares of Common Stock for which the Warrant is then exercisable will be proportionately increased and the Exercise Price will be proportionately reduced; and, conversely, if the outstanding shares of Common Stock are combined into a smaller number of shares of Common Stock, the number of shares of Common Stock for which the Warrant is then exercisable will be proportionately reduced and the Exercise Price will be proportionately increased. The increases and reductions provided for in this subsection 3(a) will be made with the intent and, as nearly as practicable, the effect that neither the percentage of the total equity of the Company obtainable on exercise of the Warrants nor the price payable for such percentage upon such exercise will be affected by any event described in this subsection 3(a). Upon the occurrence of any such event, the number of Unit Warrants for which the Warrant is then exercisable shall -3- not be adjusted, if such event results in an adjustment of the number of shares purchasable or the exercise price (or both) under the Unit Warrants. (b) In case of any change in the Common Stock through merger, consolidation, reclassification, reorganization, partial or complete liquidation, purchase of substantially all the assets of the Company, or other change in the capital structure of the Company, then, as a condition of such change, lawful and adequate provision will be made so that the holder of this Warrant Certificate will have the right thereafter to receive upon the exercise of the Warrant the kind and amount of shares of stock or other securities or property to which he would have been entitled if, immediately prior to such event, he had held the number of shares of Common Stock obtainable upon the exercise of the Warrant. In any such case, appropriate adjustment will be made in the application of the provisions set forth herein with respect to the rights and interest thereafter of the Warrantholder, to the end that the provisions set forth herein will thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the exercise of the Warrant. The Company will not permit any change in its capital structure to occur unless the issuer of the shares of stock or other securities to be received by the holder of this Warrant Certificate, if not the Company, agrees to be bound by and comply with the provisions of this Warrant Certificate. Upon the occurrence of any such event, the number of Unit Warrants for which the Warrant is then exercisable shall not be adjusted, if such event results in an adjustment of the number of shares purchasable or the exercise price (or both) under the Unit Warrants. (c) When any adjustment is required to be made in the number of shares of Common Stock, other securities, or the property purchasable upon exercise of the Warrant, the Company will promptly determine the new number of such shares or other securities or property purchasable upon exercise of the Warrant and (i) prepare and retain on file a statement describing in reasonable detail the method used in arriving at the new number of such shares or other securities or property purchasable upon exercise of the Warrant and (ii) cause a copy of such statement to be mailed to the Warrantholder within thirty (30) days after the date of the event giving rise to the adjustment. (d) No fractional shares of Common Stock and no fractional Units Warrants or other securities will be issued in connection with the exercise of the Warrant, but the Company will pay, in lieu of fractional shares or fractional Unit Warrants, a cash payment therefor on the basis of the mean between the bid and asked prices of the Common Stock, or Unit Warrants, as the case may be, in the over-the-counter market or the closing price on a national securities exchange on the day immediately prior to exercise. (e) If securities of the Company or securities of any subsidiary of the Company are distributed pro rata to holders of Common Stock, such number of securities will be distributed to the Warrantholder or his assignee upon exercise of his rights hereunder as such Warrantholder or assignee would have been entitled to if this Warrant Certificate had been -4- exercised prior to the record date for such distribution. The provisions with respect to adjustment of the Common Stock provided in this Section 3 will also apply to the securities to which the Warrantholder or his assignee is entitled under this subsection 3(e). (f) Notwithstanding anything herein to the contrary, there will be no adjustment made hereunder on account of the sale of the Units or other Securities purchasable upon exercise of the Warrant. 4. Reservation of Securities. The Company agrees that the number of shares of Common Stock, Unit Warrants or other Securities sufficient to provide for the exercise of the Warrant upon the basis set forth above will at all times during the term of the Warrant be reserved for exercise. 5. Validity of Securities. All Securities delivered upon the exercise of the Warrant will be duly and validly issued in accordance with their terms, and the Company will pay all documentary and transfer taxes, if any, in respect of the original issuance thereof upon exercise of the Warrant. 6. Registration of Securities Issuable on Exercise of Warrant Certificate. (a) The Company will register the Securities with the Commission pursuant to the Act so as to allow the unrestricted sale of the Securities to the public from time to time commencing on the first anniversary of the Effective Date and ending at 5:00 p.m. Pacific Time on the fifth anniversary of the Effective Date (the "Registration Period"). The Company will also file such applications and other documents necessary to permit the sale of the Securities to the public during the Registration Period in those states in which the Units were qualified for sale in the Offering or such other states as the Company and the Warrantholder agree to. In order to comply with the provisions of this Section 6(a), the Company is not required to file more than one registration statement at its expense. The Company will register the Securities on Form S-3 if the Company is eligible to use such form. No registration right of any kind, "piggyback" or otherwise, will last longer than five years from the Closing Date. (b) The Company will pay all of the Company's Expenses and each Warrantholder will pay its pro rata share of the Warrantholder's Expenses relating to the registration, offer, and sale of the Securities. (c) Except as specifically provided herein, the manner and conduct of the registration, including the contents of the registration, will be entirely in the control and at the discretion of the Company. The Company will file such post-effective amendments and supplements as may be necessary to maintain the currency of the registration statement during the period of its use. In addition, if the Warrantholder participating in the registration is advised by counsel that the registration statement, in their opinion, is deficient in any material respect, -5- the Company will use its best efforts to cause the registration statement to be amended to eliminate the concerns raised. (d) The Company will furnish to the Warrantholder the number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as it may reasonably request in order to facilitate the disposition of Securities owned by it. (e) The Company will, at the request of Warrantholders holding at least 50 percent of the then outstanding Warrants, (i) furnish an opinion of the counsel representing the Company for the purposes of the registration pursuant to this Section 6, addressed to the Warrantholders and any Participating Underwriter, (ii) furnish an appropriate letter from the independent public accountants of the Company, addressed to the Warrantholders and any Participating Underwriter, and (iii) make representations and warranties to the Warrantholders and any Participating Underwriter. A request pursuant to this subsection (e) may be made on three occasions. The documents required to be delivered pursuant to this subsection (e) will be dated within ten days of the request and will be, in form and substance, equivalent to similar documents furnished to the underwriters in connection with the Offering, with such changes as may be appropriate in light of changed circumstances. 7. Indemnification in Connection with Registration. (a) If any of the Securities are registered, the Company will indemnify and hold harmless each selling Warrantholder, any person who controls any selling Warrantholder within the meaning of the Act, and any Participating Underwriter against any losses, claims, damages, or liabilities, joint or several, to which any Warrantholder, controlling person, or Participating Underwriter may be subject under the Act or otherwise; and it will reimburse each Warrantholder, each controlling person, and each Participating Underwriter for any legal or other expenses reasonably incurred by the Warrantholder, controlling person, or Participating Underwriter in connection with investigating or defending any such loss, claim, damage, liability, or action, insofar as such losses, claims, damages, or liabilities, joint or several (or actions in respect thereof), arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained, on the effective date thereof, in any such registration statement or any preliminary prospectus or final prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any case to the extent that any loss, claim, damage, or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in any registration statement, preliminary prospectus, final prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with written information furnished by a Warrantholder for use in the preparation thereof. The indemnity agreement contained in this subparagraph (a) will not apply -6- to amounts paid to any claimant in settlement of any suit or claim unless such payment is first approved by the Company, such approval not to be unreasonably withheld. (b) Each selling Warrantholder, as a condition of the Company's registration obligation, will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed any registration statement or other filing or any amendment or supplement thereto, and any person who controls the Company within the meaning of the Act, against any losses, claims, damages, or liabilities to which the Company or any such director, officer, or controlling person may become subject under the Act or otherwise, and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, or controlling person in connection with investigating or defending any such loss, claim, damage, liability, or action, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in said registration statement, any preliminary or final prospectus, or other filing, or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in said registration statement, preliminary or final prospectus, or other filing, or amendment or supplement, in reliance upon and in conformity with written information furnished by such Warrantholder for use in the preparation thereof; provided, however, that the indemnity agreement contained in this subparagraph (b) will not apply to amounts paid to any claimant in settlement of any suit or claim unless such payment is first approved by the Warrantholder, such approval not to be unreasonably withheld. (c) Promptly after receipt by an indemnified party under subparagraphs (a) or (b) above of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, notify the indemnifying party of the commencement thereof; but the omission to notify the indemnifying party will not relieve it from any liability that it may have to any indemnified party otherwise than under subparagraphs (a) and (b). (d) If any such action is brought against any indemnified party and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; and after notice from the indemnifying party to such indemnified party of its election to assume the defense thereof, the indemnifying party will not be liable to such indemnified party for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. -7- 8. Restrictions on Transfer. This Warrant Certificate and the Warrant may not be sold, transferred, assigned or hypothecated for a one-year period after the Effective Date except to underwriters of the Offering or to individuals who are either a partner or an officer of such an underwriter or by will or by operation of law. The Warrant may be divided or combined, upon request to the Company by the Warrantholder, into a certificate or certificates evidencing the same aggregate number of Warrants. 9. No Rights as a Shareholder. Except as otherwise provided herein, the Warrantholder will not, by virtue of ownership of the Warrant, be entitled to any rights of a shareholder of the Company but will, upon written request to the Company, be entitled to receive such quarterly or annual reports as the Company distributes to its shareholders. 10. Notice. Any notices required or permitted to be given hereunder will be in writing and may be served personally or by mail; and if served will be addressed as follows: If to the Company: 434 Olds Station Road Wenatchee, Washington 98801 Attn: President If to the Warrantholder: at the address furnished by the Warrantholder to the Company for the purpose of notice. Any notice so given by mail will be deemed effectively given 48 hours after mailing when deposited in the United States mail, registered or certified mail, return receipt requested, postage prepaid and addressed as specified above. Any party may by written notice to the other specify a different address for notice purposes. 11. Applicable Law. This Warrant Certificate will be governed by and construed in accordance with the laws of the State of Oregon, without reference to conflict of laws principles thereunder. All disputes relating to this Warrant Certificate shall be tried before the courts of Oregon located in Multnomah County, Oregon to the exclusion of all other courts that might have jurisdiction. -8- Dated as of September 30, 1997. PACIFIC AEROSPACE & ELECTRONICS, INC. By: /s/ DONALD A. WRIGHT ----------------------------------- Donald A. Wright Its: President Agreed and Accepted as of September 30, 1997. By: /s/ CHESTER PAULSON ----------------------------------- Chester Paulson -9- EX-4.11 8 PURCHASE WARRANT - M. LORRAINE MAXFIELD EXHIBIT 4.11 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND IS NOT TRANSFERABLE EXCEPT AS PROVIDED HEREIN PACIFIC AEROSPACE & ELECTRONICS, INC. (successor in interest to PCT Holdings, Inc.) PURCHASE WARRANT Issued to: M. LORRAINE MAXFIELD Exercisable to Purchase 8,100 Units of PACIFIC AEROSPACE & ELECTRONICS, INC. Void after July 15, 2001 This is to certify that, for value received and subject to the terms and conditions set forth below, the Warrantholder (hereinafter defined) is entitled to purchase, and the Company promises and agrees to sell and issue to the Warrantholder, at any time after the date of this Warrant, and on or before July 15, 2001, up to 8,100 Units (hereinafter defined) at the Exercise Price (hereinafter defined). This Warrant Certificate is issued subject to the following terms and conditions: 1. Definitions of Certain Terms. Except as may be otherwise clearly required by the context, the following terms have the following meanings: (a) "Act" means the Securities Act of 1933, as amended. (b) "Closing Date" means the date on which the Offering is closed. (c) "Commission" means the Securities and Exchange Commission. (d) "Common Stock" means the common stock, $0.001 par value, of the Company. (e) "Company" means Pacific Aerospace & Electronics, Inc., a Washington corporation (successor in interest to PCT Holdings, Inc., a Nevada corporation), and any successor corporation. (f) "Company's Expenses" means any and all expenses payable by the Company or the Warrantholder in connection with an offering described in Section 6 hereof, except Warrantholder's Expenses. (g) "Effective Date" means the date on which the Registration Statement is declared effective by the Commission. (h) "Exercise Price" means the price at which the Warrantholder may purchase one complete Unit (or Securities obtainable in lieu of one complete Unit) upon exercise of Warrants as determined from time to time pursuant to the provisions hereof. The initial Exercise Price is $3.75 per Unit. If a Warrant is exercised for a component of a Unit or Units, then the price payable in connection with such exercise shall be determined by allocating $0.001 to the Unit Warrant and the balance of the Exercise Price to the share of Common Stock, or, in each case, to any securities obtainable in addition to or in lieu of such share of Unit Warrant or Common Stock by virtue of the application of Section 3 of this Warrant. -1- (i) "Offering" means the public offering of Units made pursuant to the Registration Statement. (j) "Participating Underwriter" means any underwriter participating in the sale of the Securities pursuant to a registration under Section 6 of this Warrant Certificate. (k) "Registration Statement" means the Company's registration statement on Form SB-2 (Registration No. 333-5011) as amended on the Closing Date. (l) "Rules and Regulations" means the rules and regulations of the Commission adopted under the Act. (m) "Securities" means the securities obtained or obtainable upon exercise of the Warrant or securities obtained or obtainable upon exercise, exchange, or conversion of such securities. (n) "Unit" means, as the case may require, either one of the Units offered to the public pursuant to the Registration Statement or one of the Units obtainable on exercise of a Warrant. (o) "Unit Warrant" means a Common Stock purchase warrant included as a component of a Unit. (p) "Warrant Certificate" means a certificate evidencing the Warrant. (q) "Warrantholder" means a record holder of the Warrant or Securities. The initial Warrantholder is Paulson Investment Company, Inc. (r) "Warrantholder's Expenses" means the sum of (i) the aggregate amount of cash payments made to an underwriter, underwriting syndicate, or agent in connection with an offering described in Section 6 hereof multiplied by a fraction the numerator of which is the aggregate sales price of the Securities sold by such underwriter, underwriting syndicate, or agent in such offering and the denominator of which is the aggregate sales price of all of the securities sold by such underwriter, underwriting syndicate, or agent in such offering and (ii) all out-of-pocket expenses of the Warrantholder, except for the fees and disbursements of one firm retained as legal counsel for the Warrantholders that will be paid by the Company. (s) "Warrant" means the warrant evidenced by this certificate, any similar certificate issued in connection with the Offering, or any certificate obtained upon transfer or partial exercise of the Warrant evidenced by any such certificate. -2- 2. Exercise of Warrants. All or any part of the Warrant may be exercised commencing on the first anniversary of the Effective Date and ending at 5:00 p.m. Pacific Time on the fifth anniversary of the Effective Date by surrendering this Warrant Certificate, together with appropriate instructions, duly executed by the Warrantholder or by its duly authorized attorney, at the office of the Company, 434 Olds Station Road, Wenatchee, Washington 98801, attention: President, or at such other office or agency as the Company may designate. Upon receipt of notice of exercise, the Company shall immediately instruct its transfer agent to prepare certificates for the Securities to be received by the Warrantholder upon completion of the Warrant exercise. When such certificates are prepared, the Company shall notify the Warrantholder and deliver such certificates to the Warrantholder or as per the Warrantholder's instructions immediately upon payment in full by the Warrantholder, in lawful money of the United States, of the Exercise Price payable with respect to the Securities being purchased. If the Warrantholder shall represent and warrant that all applicable registration and prospectus delivery requirements for their sale have been complied with upon sale of the Securities received upon exercise of the Warrant, such certificates shall not bear a legend with respect to the Securities Act of 1933. If fewer than all the Securities purchasable under the Warrant are purchased, the Company will, upon such partial exercise, execute and deliver to the Warrantholder a new Warrant Certificate (dated the date hereof), in form and tenor similar to this Warrant Certificate, evidencing that portion of the Warrant not exercised. The Securities to be obtained on exercise of the Warrant will be deemed to have been issued, and any person exercising the Warrants will be deemed to have become a holder of record of those Securities, as of the date of the payment of the Exercise Price. 3. Adjustments in Certain Events. The number, class, and price of Securities for which this Warrant Certificate may be exercised are subject to adjustment from time to time upon the happening of certain events as follows: (a) If the outstanding shares of the Company's Common Stock are divided into a greater number of shares or a dividend in stock is paid on the Common Stock, the number of shares of Common Stock for which the Warrant is then exercisable will be proportionately increased and the Exercise Price will be proportionately reduced; and, conversely, if the outstanding shares of Common Stock are combined into a smaller number of shares of Common Stock, the number of shares of Common Stock for which the Warrant is then exercisable will be proportionately reduced and the Exercise Price will be proportionately increased. The increases and reductions provided for in this subsection 3(a) will be made with the intent and, as nearly as practicable, the effect that neither the percentage of the total equity of the Company obtainable on exercise of the Warrants nor the price payable for such percentage upon such exercise will be affected by any event described in this subsection 3(a). Upon the occurrence of any such event, the number of Unit Warrants for which the Warrant is then exercisable shall -3- not be adjusted, if such event results in an adjustment of the number of shares purchasable or the exercise price (or both) under the Unit Warrants. (b) In case of any change in the Common Stock through merger, consolidation, reclassification, reorganization, partial or complete liquidation, purchase of substantially all the assets of the Company, or other change in the capital structure of the Company, then, as a condition of such change, lawful and adequate provision will be made so that the holder of this Warrant Certificate will have the right thereafter to receive upon the exercise of the Warrant the kind and amount of shares of stock or other securities or property to which he would have been entitled if, immediately prior to such event, he had held the number of shares of Common Stock obtainable upon the exercise of the Warrant. In any such case, appropriate adjustment will be made in the application of the provisions set forth herein with respect to the rights and interest thereafter of the Warrantholder, to the end that the provisions set forth herein will thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the exercise of the Warrant. The Company will not permit any change in its capital structure to occur unless the issuer of the shares of stock or other securities to be received by the holder of this Warrant Certificate, if not the Company, agrees to be bound by and comply with the provisions of this Warrant Certificate. Upon the occurrence of any such event, the number of Unit Warrants for which the Warrant is then exercisable shall not be adjusted, if such event results in an adjustment of the number of shares purchasable or the exercise price (or both) under the Unit Warrants. (c) When any adjustment is required to be made in the number of shares of Common Stock, other securities, or the property purchasable upon exercise of the Warrant, the Company will promptly determine the new number of such shares or other securities or property purchasable upon exercise of the Warrant and (i) prepare and retain on file a statement describing in reasonable detail the method used in arriving at the new number of such shares or other securities or property purchasable upon exercise of the Warrant and (ii) cause a copy of such statement to be mailed to the Warrantholder within thirty (30) days after the date of the event giving rise to the adjustment. (d) No fractional shares of Common Stock and no fractional Units Warrants or other securities will be issued in connection with the exercise of the Warrant, but the Company will pay, in lieu of fractional shares or fractional Unit Warrants, a cash payment therefor on the basis of the mean between the bid and asked prices of the Common Stock, or Unit Warrants, as the case may be, in the over-the-counter market or the closing price on a national securities exchange on the day immediately prior to exercise. (e) If securities of the Company or securities of any subsidiary of the Company are distributed pro rata to holders of Common Stock, such number of securities will be distributed to the Warrantholder or his assignee upon exercise of his rights hereunder as such Warrantholder or assignee would have been entitled to if this Warrant Certificate had been -4- exercised prior to the record date for such distribution. The provisions with respect to adjustment of the Common Stock provided in this Section 3 will also apply to the securities to which the Warrantholder or his assignee is entitled under this subsection 3(e). (f) Notwithstanding anything herein to the contrary, there will be no adjustment made hereunder on account of the sale of the Units or other Securities purchasable upon exercise of the Warrant. 4. Reservation of Securities. The Company agrees that the number of shares of Common Stock, Unit Warrants or other Securities sufficient to provide for the exercise of the Warrant upon the basis set forth above will at all times during the term of the Warrant be reserved for exercise. 5. Validity of Securities. All Securities delivered upon the exercise of the Warrant will be duly and validly issued in accordance with their terms, and the Company will pay all documentary and transfer taxes, if any, in respect of the original issuance thereof upon exercise of the Warrant. 6. Registration of Securities Issuable on Exercise of Warrant Certificate. (a) The Company will register the Securities with the Commission pursuant to the Act so as to allow the unrestricted sale of the Securities to the public from time to time commencing on the first anniversary of the Effective Date and ending at 5:00 p.m. Pacific Time on the fifth anniversary of the Effective Date (the "Registration Period"). The Company will also file such applications and other documents necessary to permit the sale of the Securities to the public during the Registration Period in those states in which the Units were qualified for sale in the Offering or such other states as the Company and the Warrantholder agree to. In order to comply with the provisions of this Section 6(a), the Company is not required to file more than one registration statement at its expense. The Company will register the Securities on Form S-3 if the Company is eligible to use such form. No registration right of any kind, "piggyback" or otherwise, will last longer than five years from the Closing Date. (b) The Company will pay all of the Company's Expenses and each Warrantholder will pay its pro rata share of the Warrantholder's Expenses relating to the registration, offer, and sale of the Securities. (c) Except as specifically provided herein, the manner and conduct of the registration, including the contents of the registration, will be entirely in the control and at the discretion of the Company. The Company will file such post-effective amendments and supplements as may be necessary to maintain the currency of the registration statement during the period of its use. In addition, if the Warrantholder participating in the registration is advised by counsel that the registration statement, in their opinion, is deficient in any material respect, -5- the Company will use its best efforts to cause the registration statement to be amended to eliminate the concerns raised. (d) The Company will furnish to the Warrantholder the number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as it may reasonably request in order to facilitate the disposition of Securities owned by it. (e) The Company will, at the request of Warrantholders holding at least 50 percent of the then outstanding Warrants, (i) furnish an opinion of the counsel representing the Company for the purposes of the registration pursuant to this Section 6, addressed to the Warrantholders and any Participating Underwriter, (ii) furnish an appropriate letter from the independent public accountants of the Company, addressed to the Warrantholders and any Participating Underwriter, and (iii) make representations and warranties to the Warrantholders and any Participating Underwriter. A request pursuant to this subsection (e) may be made on three occasions. The documents required to be delivered pursuant to this subsection (e) will be dated within ten days of the request and will be, in form and substance, equivalent to similar documents furnished to the underwriters in connection with the Offering, with such changes as may be appropriate in light of changed circumstances. 7. Indemnification in Connection with Registration. (a) If any of the Securities are registered, the Company will indemnify and hold harmless each selling Warrantholder, any person who controls any selling Warrantholder within the meaning of the Act, and any Participating Underwriter against any losses, claims, damages, or liabilities, joint or several, to which any Warrantholder, controlling person, or Participating Underwriter may be subject under the Act or otherwise; and it will reimburse each Warrantholder, each controlling person, and each Participating Underwriter for any legal or other expenses reasonably incurred by the Warrantholder, controlling person, or Participating Underwriter in connection with investigating or defending any such loss, claim, damage, liability, or action, insofar as such losses, claims, damages, or liabilities, joint or several (or actions in respect thereof), arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained, on the effective date thereof, in any such registration statement or any preliminary prospectus or final prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any case to the extent that any loss, claim, damage, or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in any registration statement, preliminary prospectus, final prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with written information furnished by a Warrantholder for use in the preparation thereof. The indemnity agreement contained in this subparagraph (a) will not apply -6- to amounts paid to any claimant in settlement of any suit or claim unless such payment is first approved by the Company, such approval not to be unreasonably withheld. (b) Each selling Warrantholder, as a condition of the Company's registration obligation, will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed any registration statement or other filing or any amendment or supplement thereto, and any person who controls the Company within the meaning of the Act, against any losses, claims, damages, or liabilities to which the Company or any such director, officer, or controlling person may become subject under the Act or otherwise, and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, or controlling person in connection with investigating or defending any such loss, claim, damage, liability, or action, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in said registration statement, any preliminary or final prospectus, or other filing, or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in said registration statement, preliminary or final prospectus, or other filing, or amendment or supplement, in reliance upon and in conformity with written information furnished by such Warrantholder for use in the preparation thereof; provided, however, that the indemnity agreement contained in this subparagraph (b) will not apply to amounts paid to any claimant in settlement of any suit or claim unless such payment is first approved by the Warrantholder, such approval not to be unreasonably withheld. (c) Promptly after receipt by an indemnified party under subparagraphs (a) or (b) above of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, notify the indemnifying party of the commencement thereof; but the omission to notify the indemnifying party will not relieve it from any liability that it may have to any indemnified party otherwise than under subparagraphs (a) and (b). (d) If any such action is brought against any indemnified party and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; and after notice from the indemnifying party to such indemnified party of its election to assume the defense thereof, the indemnifying party will not be liable to such indemnified party for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. -7- 8. Restrictions on Transfer. This Warrant Certificate and the Warrant may not be sold, transferred, assigned or hypothecated for a one-year period after the Effective Date except to underwriters of the Offering or to individuals who are either a partner or an officer of such an underwriter or by will or by operation of law. The Warrant may be divided or combined, upon request to the Company by the Warrantholder, into a certificate or certificates evidencing the same aggregate number of Warrants. 9. No Rights as a Shareholder. Except as otherwise provided herein, the Warrantholder will not, by virtue of ownership of the Warrant, be entitled to any rights of a shareholder of the Company but will, upon written request to the Company, be entitled to receive such quarterly or annual reports as the Company distributes to its shareholders. 10. Notice. Any notices required or permitted to be given hereunder will be in writing and may be served personally or by mail; and if served will be addressed as follows: If to the Company: 434 Olds Station Road Wenatchee, Washington 98801 Attn: President If to the Warrantholder: at the address furnished by the Warrantholder to the Company for the purpose of notice. Any notice so given by mail will be deemed effectively given 48 hours after mailing when deposited in the United States mail, registered or certified mail, return receipt requested, postage prepaid and addressed as specified above. Any party may by written notice to the other specify a different address for notice purposes. 11. Applicable Law. This Warrant Certificate will be governed by and construed in accordance with the laws of the State of Oregon, without reference to conflict of laws principles thereunder. All disputes relating to this Warrant Certificate shall be tried before the courts of Oregon located in Multnomah County, Oregon to the exclusion of all other courts that might have jurisdiction. -8- Dated as of September 30, 1997. PACIFIC AEROSPACE & ELECTRONICS, INC. By: /s/ DONALD A. WRIGHT ----------------------------------- Donald A. Wright Its: President Agreed and Accepted as of September 30, 1997. By: /s/ M. LORRAINE MAXFIELD ----------------------------------- M. Lorraine Maxfield -9- EX-4.15 9 PURCHASE WARRANT-ROBERT L. SMITH UNIFIED TRUST EXHIBIT 4.15 THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN AND WILL NOT BE, AS OF THE TIME OF ISSUANCE, REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAW, AND MAY NOT BE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR ANY EXEMPTION THEREFROM UNDER SUCH ACT. THIS WARRANT AND SUCH SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE CONDITIONS SPECIFIED IN THIS WARRANT. PACIFIC AEROSPACE & ELECTRONICS, INC. COMMON STOCK PURCHASE WARRANT Expiring May 22, 2001 February 5, 1998 PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington corporation (the "Company"), for value received, hereby certifies that ROBERT L. SMITH UNIFIED CREDIT TRUST ("Holder"), is entitled to purchase THIRTY-SEVEN THOUSAND FIVE HUNDRED (37,500) shares of the Company's voting common stock, par value $.001 per share (the "Warrant Stock"), at the times and according to the terms set forth in this Warrant. The Company's predecessor, PCT Holdings, Inc. ("PCTH") issued a Common Stock Purchase Warrant to Robert L. Smith on May 22, 1996, which entitled the holder to purchase 37,500 shares of PCTH's common stock for $4.80 per share (the "PCTH Warrant"). As a result of the reincorporation merger of the Company and PCTH on November 30, 1996, the right of the holder of the PCTH Warrant to purchase shares of PCTH's common stock was converted automatically into the right to purchase the same number of shares of the Company's common stock. This Common Stock Purchase Warrant (the "Warrant") is otherwise in all respects the same as the PCTH Warrant and is issued to replace the PCTH Warrant. Furthermore, this Warrant is issued, pursuant to Section 8 of the PCTH Warrant, to evidence the transfer of the PCTH Warrant from Robert L. Smith, who is now deceased, to the Holder. This Warrant supersedes and replaces the PCTH Warrant in its entirety, and the PCTH Warrant shall from the date hereof be null and void. 1. Terms of Warrant. This Warrant is being issued by the Company as a fee in connection with and pursuant to that certain Amended and Restated Promissory Note of even date herewith (the "Promissory Note") made by PCTH and payable to Holder. This Warrant shall be exercisable at any time after the date hereof. The exercise price (the "Exercise Price") of this Warrant shall be $4.80 per share of the Warrant Stock acquired upon any such exercise. 2. Exercise of Warrant. The holder of this Warrant may exercise it during normal business hours on any business day after the date hereof and before 5:00 p.m., P.S.T., on May -1- 22, 2001, or if such date is a day on which federal or state chartered banking institutions are authorized by law to close, then on the next succeeding day which shall not be such a day, by surrendering this Warrant to the Company at the Company's principal office, accompanied by an executed subscription agreement in substantially the form annexed hereto as Exhibit "A" and by payment, in cash or by certified or official bank check payable to the order of the Company, or by any combination of such methods, in the amount obtained by multiplying (a) the number of Warrant Stock designated in such subscription by (b) the Exercise Price, whereupon such holder shall be entitled to receive the number of duly authorized, validly issued, fully paid and nonassessable shares of Warrant Stock as is indicated on the subscription. 3. Partial Exercise Allowed; Issuance of Substitute Warrant. This Warrant is exercisable in whole or in part by Holder. In the event Holder exercises this Warrant with respect to only a portion of the Warrant Stock that could be acquired upon exercise, a replacement Warrant ("Replacement Warrant") with identical terms except for a corresponding reduction of the number of shares of Warrant Stock receivable upon exercise of the Replacement Warrant shall be issued by the Company within three (3) business days after any such partial exercise. 4. When Exercise Effective. The exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the business day on which this Warrant shall have been surrendered to the Company as provided in Section 2, and at such time the person or persons in whose name or names any certificate or certificates for shares of Warrant Stock shall be issued upon such exercise shall be deemed for all corporate purposes to have become the holder of record thereof. 5. Delivery of Stock Certificates. As soon as practicable after the exercise of this Warrant, and in any event within five (5) business days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to Holder or to the person or entity such holder may direct (and upon payment by such holder of any applicable transfer taxes), a certificate or certificates for the number of duly authorized, validly issued, fully paid and nonassessable shares of Warrant Stock to which the holder or its designee shall be entitled upon such exercise. 6. Adjustment of Warrant Stock Issuable Upon Exercise. If the Company at any time or from time to time after the date of this Warrant but before expiration effects a split or subdivision of the outstanding shares of its then outstanding common stock into a greater number of shares of common stock, or if the Company effects a reverse split of the outstanding shares of its common stock into a lesser number of shares of common stock, (by reclassification or otherwise than by payment of a dividend in common stock), then, and in each such case, the number of shares called for on the face of this Warrant (or the face of any replacement Warrant issued upon partial exercise) shall be adjusted proportionally, and the exercise price with respect to such adjusted number of shares also shall be adjusted proportionally. -2- 7. Reservation of Shares. The Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of this Warrant, the number of shares of common stock that would be issuable upon the exercise, in whole, of this Warrant or any replacement Warrant. All such shares shall be duly authorized and, when issued upon such exercise, shall be validly issued, fully paid and nonassessable with no liability on the part of the holders thereof. 8. Ownership, Transfer and Substitution of Warrant. The Company will treat Holder as the owner and holder of this Warrant for all purposes, until the Company receives notice to the contrary. This Warrant shall be transferable by Holder, and the Company shall recognize on its books and records any lawful transfer of this Warrant upon receipt of notice of such transfer by Holder. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft of destruction of this Warrant, upon delivery of indemnity reasonably satisfactory to the Company in form and amount or, in the case of any such mutilation, upon surrender of such, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 9. No Rights or Liabilities as Stockholder. Nothing herein shall give or shall be construed to give Holder any of the rights of a shareholder of the Company including, without limitation, the right to vote on matters requiring the vote of shareholders, the right to receive any dividend declared and payable to the holders of common stock, and the right to a pro-rata distribution upon the Company's dissolution. 10. Authorization; No Breach. The Company represents and warrants that (i) the Company is duly organized, validly existing, and in good standing under the laws of the State of Nevada, and has the requisite power and authority to issue this Warrant and the Warrant Stock; (ii) the number of shares of Warrant Stock issuable upon the entire exercise of this Warrant are presently authorized but unissued; (iii) the issuance of this Warrant and the issuance of the Warrant Stock issuable upon exercise of this Warrant have been authorized and approved by all necessary corporate action; (iv) the execution, delivery and issuance of this Warrant and the issuance of the Warrant Stock underlying this Warrant will not violate any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on the Company or the provision or provisions of any agreement to which the Company is a party or is subject, or by which any of the Company's property is bound, or conflict with or constitute a material default thereunder, or result in the creation or imposition of any lien pursuant to the terms of any such agreement, or constitute a breach of any fiduciary duty owed by the Company to any third party, or require the approval of any third party pursuant to any contract, agreement, instrument, relationship or legal obligation to which the Company is subject or to which any of its properties may be subject, except for the approvals set forth on Exhibit A to the Promissory Note from the Company to Holder of even date herewith; and (v) when issued, both this Warrant and the Warrant Stock issuable upon exercise of this Warrant shall be duly and validly issued, fully paid and nonassessable. -3- 11. Registration Right. If the Company shall determine to register any of its common stock either for its own account or the account of a security holder or holders, other than a registration relating solely to (i) employee benefit plans, or (ii) registration on any registration form that does not permit secondary sales, the Company will: (a) promptly give written notice of the proposed registration to the holder of any Warrant Stock issued or issuable upon the exercise of this Warrant (which shall include a list of the jurisdictions in which the Company intends to attempt to qualify such securities under applicable blue sky laws); and (b) include in such registration (and any related qualification or other compliance filing under applicable blue sky laws), and in any underwriting involved therein, all or any portion of the Warrant Stock then issued or issuable upon exercise of this Warrant as specified in a written request made by such holders within thirty (30) days after receipt of the written notice from the Company described in clause (a) above, provided, however, that if the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise such holders as part of the written notice described in clause (a) above. In such event, such holders' rights to registration pursuant to this Section 11 shall be conditioned upon participation in such underwriting and the inclusion of stock in the underwriting to the extent provided herein. Such holders and the Company (and any other security holders proposing to distribute their securities through such underwriting) shall enter into an underwriting agreement in customary form with the representatives of the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provisions of this Section 11, if the representatives of the underwriter or underwriters determine in good faith that marketing factors make it advisable to impose a limitation on the number of secondary shares to be underwritten, the number of such secondary shares, if any, that may be included in the registration and underwriting on behalf of such holders, and any other security holders proposing to distribute their securities of the Company through such underwriting shall be allocated in proportion, as nearly as practicable, to the respective amounts of securities that they had requested to be included in such registration at the time of filing the registration statement. If such holders disapprove of the terms of any such underwriting, they may elect to withdraw therefrom by written notice to the Company and the representatives of the underwriter or underwriters. 11.1 Lock-up Agreement. Notwithstanding any other provision of this Section 11, in the event that (A) the Company shall file any registration statement within one hundred twenty (120) calendar days after the date hereof, and (B) Holder otherwise would have the right to include securities in such registration under this Section 11, Holder hereby agrees that, notwithstanding the inclusion of any shares beneficially owned by Holder in such registration, Holder will not sell any such registered securities for a period of one hundred eighty (180) calendar days from the effective date of such registration statement. The Company agrees that, in such event, the Company will take all action necessary to cause such registration statement to remain effective for a period of at least ninety (90) calendar days after the date that Holder first becomes able to sell any securities included in the registration in light of the contractual restriction set forth in this Section 11.1 or until Holder has informed the Company in writing that the distribution of Holder's securities included in the registration has been completed, and shall prepare and file with the Securities and Exchange Commission such amendments and supplements, if any, to such registration statement and the prospectus used in connection -4- therewith as may be necessary to keep such registration statement effective for the period described in this Section 11.1. 12. Notices. All notices and other communications provided for herein shall be delivered or mailed by first class mail, postage prepaid, addressed (a) if to any holder of any Warrant or Warrant Stock, at the registered address of such holder as set forth in the register kept at the principal office of the Company, or (b) if to the Company, at its principal office, or to such other location as the Company shall have furnished to each holder of any Warrants or Warrant Stock in writing, provided that the exercise of any Warrants shall be effective only in the manner provided in Section 2. 13. Miscellaneous. This Warrant embodies the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings relating to the subject matter hereof. There are no unwritten oral agreements between the parties with respect to the subject matter hereof. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be governed by the laws of the State of Washington. The headings of this Warrant are inserted for convenience only and shall not be deemed to constitute a part hereof. PACIFIC AEROSPACE & ELECTRONICS, INC. By: /s/ DONALD A. WRIGHT ------------------------------------- Donald A. Wright, President -5- Exhibit A SUBSCRIPTION ------------ (To be executed by the holder of the Warrant to exercise the right to purchase common stock evidenced by the Warrant) To: Pacific Aerospace & Electronics, Inc. 434 Olds Station Road Wenatchee, Washington 98801 The undersigned hereby irrevocably subscribes for ___________shares of the common stock, par value $.001 per share, of Pacific Aerospace & Electronics, Inc., a Washington corporation, pursuant to and in accordance with the terms and conditions of a Warrant dated February 5, 1998 (the "Warrant"), and tenders with the Warrant and this Subscription Agreement payment of $______________ as payment for the shares, and requests that a certificate for such shares be issued in the name of the undersigned and be delivered to the undersigned at the address stated below. ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- The undersigned agrees that, upon issuance of the shares, the undersigned will execute an investment letter in the form attached hereto as Exhibit 1, to reflect that the shares are being acquired for investment purposes and not with a view toward their resale or distribution to the public. ---------------------------------------------- Signed ---------------------------------------------- Dated -6- Exhibit 1 --------- Pacific Aerospace & Electronics, Inc. 434 Olds Station Road Wenatchee, WA 98801 Re: ___________ shares of common stock, $.001 par value per share, of Pacific Aerospace & Electronics, Inc. , a Washington corporation (the "Shares") Ladies and Gentlemen: This letter is given to you in connection with the undersigned's acquisition of the above described Shares. 1. The Shares are being acquired by the undersigned for investment for the undersigned's own account and not on behalf of any other persons, and not with a view to, or for resale or other distribution in connection with, any distribution of all or any part of the Shares, unless pursuant to a transaction exempt from the registration and prospectus delivery requirements of state and federal securities laws. 2. You shall not be required to effect, permit or recognize any sale, offer for sale, exchange, transfer, assignment or pledge of any or all of the Shares unless they are registered under the Securities Act of 1933, and any applicable state securities acts (collectively, the "Acts"), or unless you are furnished with an attorney's opinion, reasonably acceptable to you, that such registration is not required; and you shall be entitled to cause legends to this effect to be endorsed on any certificates evidencing the Shares. Further, you shall have the right to place a stop-transfer order with your Secretary or transfer agent pursuant to which transfer of all or any portion of the Shares shall be prohibited except upon a proper showing of compliance with this letter. 3. Except as to the undersigned's registration rights set forth in the Common Stock Purchase Warrant dated February 5, 1998, the undersigned understands that it must bear the economic risk of this investment for an indefinite period of time because the Shares have not been registered under the Acts, and consequently cannot be sold or otherwise transferred unless they are subsequently registered under the Acts or exemptions from registration are available. Very truly yours, Dated: _______________, 199__ ----------------------------------------- -7- EX-4.19 10 SECURITIES PURCHASE AGREEMENT EXHIBIT 4.19 SECURITIES PURCHASE AGREEMENT This SECURITIES PURCHASE AGREEMENT (the "Agreement") is made as of May 15, 1998, by and among PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington corporation (the "Company"), and each of the purchasers of shares of Series B Convertible Preferred Stock and Warrants whose names are set forth on Exhibit A hereto (each individually, a "Purchaser" and collectively, the "Purchasers"). The parties hereto agree as follows: 1. PURCHASE AND SALE OF PREFERRED STOCK AND WARRANTS 1.1 Purchase and Sale of StockUpon and subject to the terms and conditions set forth in this Agreement, the Company agrees to issue and sell to the Purchasers, and each Purchaser severally agrees to purchase from the Company, the number of shares of the Company's Series B Convertible Preferred Stock, par value $0.001 per share (the "Preferred Shares") set forth with respect to such Purchaser on Exhibit A hereto, at a purchase price of $100 per share. The designation, rights, preferences and other terms and provisions of the Series B Convertible Preferred Stock, as of the Closing (as defined in Section 1.3), will be as set forth in the Designation of Rights and Preferences of the Series B Convertible Preferred Stock (the "Designation of Rights and Preferences") contained in Exhibit B hereto. 1.2 Warrants. As additional inducement to enter into this Agreement, the Company shall issue and deliver to the Purchasers Common Stock Purchase Warrants, in substantially the form attached as Exhibit C hereto (the "Warrants"), in an amount set forth with respect to such Purchaser on Exhibit A. The Warrants shall grant the Purchaser the right to purchase shares of the Company's common stock, par value $0.001 per share (the "Common Stock") equal to 10% of the shares issuable if the Preferred Shares converted into shares of Common Stock at $7.20 per share. The Warrants shall have an exercise price of $7.20 per share and shall be exercisable beginning one year, and expiring three years, from the date of this Agreement. 1.3 The Conversion Shares; Warrant Shares. Prior to the Closing, the Company shall have authorized and reserved, free of preemptive rights and other similar contractual rights of stockholders, a sufficient number of authorized but unissued shares of its Common Stock to satisfy the rights of (a) conversion of the Preferred Shares, and (b) exercise of the Warrants. Any shares of Common Stock issuable upon (i) conversion of the Preferred Shares (and such shares when issued) are herein referred to as the "Conversion Shares," and (ii) exercise of the Warrants (and such shares when issued) are herein referred to as the "Warrant Shares." The Preferred Shares, the Conversion Shares and the Warrant Shares are sometimes collectively referred to as the "Shares." 1.4 Closing. The closing of the purchase and sale of the Preferred Shares to be acquired by the Purchasers from the Company under this Agreement shall take place at the 1 offices of Stoel Rives LLP, 3600 One Union Square, 600 University Street, Seattle, WA 98101 at 10:00 a.m. P.D.T. on the date on which the last of the closing conditions set forth in Section 4 hereof have been fulfilled or waived, or at such other time, date and place as the Purchasers and the Company may agree (the "Closing Date"). 1.4.1 Deliveries. Subject to Section 1.4.2, on the Closing Date, the Company shall deliver to each Purchaser certificates for the number of Preferred Shares and the number of Warrants set forth opposite such Purchaser's name on Exhibit A hereto, registered in such Purchaser's name (or the name of its nominee), against delivery of a check or checks payable to the order of the Company, or a transfer of funds to an account designated in writing by the Company, representing the cash consideration set forth opposite each such Purchaser's name on Exhibit A. In addition, each party shall deliver all documents, instruments and writings required to be delivered by such party pursuant to this Agreement at or prior to the Closing. 1.4.2 Escrow. Notwithstanding Section 1.4.1, $7,000,000 of the purchase price of the Preferred Shares shall be deposited into escrow in an interest-bearing account with Stoel Rives LLP (the "Escrowed Funds"), and the certificates for the Preferred Shares purchased thereby, and the proportionate number of Warrants shall also be held in such escrow. Notwithstanding anything in this Agreement to the contrary, if the Company does not consummate the acquisition pending in the United Kingdom as of the date of this Agreement, then the Purchasers, at their sole election, may require the Company to return the Escrowed Funds and all interest thereon to the Purchasers, and the escrowed Preferred Shares and Warrants shall be cancelled. 2. REPRESENTATIONS AND WARRANTIES 2.1 Representation and Warranties of the Company. The Company hereby makes the following representations and warranties to the Purchasers: 2.1.1 Organization, Good Standing and Power. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of Washington and has the requisite corporate power to own, lease and operate its properties and assets and to conduct its business as it is now being conducted. The Company is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except for any jurisdiction in which the failure to be so qualified will not have a Material Adverse Effect (as defined in Section 2.1.6) on the Company's financial condition. 2.1.2 Authorization; . The Company has the requisite corporate power and authority to enter into this Agreement, the Warrants, and the Registration Rights Agreement attached hereto as Exhibit D (the "Registration Rights Agreement") and to perform its obligations hereunder and thereunder, including without limitation to issue and sell the Shares and to issue the Warrants in accordance with the terms of this Agreement. The execution and delivery of this Agreement, the Warrants, and the Registration Rights Agreement, and the 2 performance by the Company of its obligations hereunder and thereunder, including the consummation by it of the transactions contemplated hereby and thereby, have been duly authorized by all necessary corporate action, and no further consent or authorization of the Company or its Board of Directors or stockholders is required except as may be set forth in the Designation of Rights and Preferences. This Agreement has been duly executed and delivered by the Company. The Warrants and the Registration Rights Agreement will have been duly executed and delivered by the Company at the Closing. This Agreement constitutes, and the Registration Rights Agreement and the Warrants when executed and delivered shall constitute, the valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the foregoing may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium, or other similar laws relating to or affecting generally the rights of creditors, or by equitable principles, including those limiting the availability of specific performance, injunctive relief, and other equitable remedies. 2.1.3 . The authorized capital stock of the Company and the shares thereof issued and outstanding as of May 14, 1998, are set forth on Schedule 2.1.3 hereto. All of the outstanding shares of the Company's Common Stock have been duly and validly authorized. Except as required by this Agreement, the Registration Rights Agreement, the Warrants, or as described on Schedule 2.1.3 hereto, no shares of Common Stock are entitled to preemptive rights and there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character to issue, or securities or rights convertible into, any shares of capital stock of the Company, or contracts, commitments, understandings, or arrangements by which the Company is or may become bound to issue additional shares of capital stock of the Company or options, securities or rights convertible into shares of capital stock of the Company, or contracts, commitments, understandings, or arrangements by which the Company is or may become bound to issue additional shares of capital stock of the Company or options, warrants, scrip, rights to subscribe to, or commitments to purchase or acquire, any shares, or securities or rights convertible into shares, of capital stock of the Company. Except as described on Schedule 2.1.3 hereto, the Company is not a party to any agreement granting registration rights to any person with respect to any of its equity or debt securities. The Company has furnished or made available to the Purchasers true and correct copies of the Company's Articles of Incorporation, as in effect on the date hereof (the "Articles"), and the Company's Bylaws, as in effect on the date hereof (the "Bylaws"). 2.1.4 Issuance. The Preferred Shares and Warrants to be issued at the Closing have been duly authorized by all necessary corporate action and, when paid for, issued and delivered in accordance with the terms hereof, the Preferred Shares and Warrants shall be validly issued, fully paid and non-assessable and entitled to the rights and preferences set forth in the Designation of Rights and Preferences. When the Shares are issued, they will be duly authorized by all necessary corporate action and validly issued, fully paid and non-assessable, and the holders shall be entitled to all rights accorded to holders of Common Stock. 2.1.5 Subsidiaries. Schedule 2.1.5 contains a complete list of each subsidiary of the Company (the "Subsidiaries"). "Subsidiary" shall mean any corporation or other entity 3 of which at least a majority of the securities or other ownership interest having ordinary voting power (absolutely or contingently) for the election of directors or other persons performing similar functions are at the time owned directly or indirectly by the Company and/or any of its other Subsidiaries. All of the outstanding shares of capital stock of each Subsidiary have been duly authorized and validly issued, and are fully paid and non-assessable. There are no outstanding preemptive, conversion or other rights, options, warrants or agreements granted or issued by or binding upon any Subsidiary for the purchase or acquisition of any shares of capital stock of any Subsidiary or any other securities convertible into, exchangeable for or evidencing the rights to subscribe for any shares of such capital stock. Except as set forth on Schedule 2.1.5, neither the Company nor any Subsidiary is party to, or has any knowledge of, any agreement restricting the voting or transfer of any shares of the capital stock of any Subsidiary. 2.1.6 No Conflicts. Neither the execution or delivery of this Agreement, the Warrants or the Registration Rights Agreement by the Company, nor the performance by the Company of its obligations thereunder, will (a) result in a violation of the Company's Articles or Bylaws, (b) violate, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, mortgage, deed of trust, indenture, note, bond, license, lease agreement or instrument or obligation to which the Company is a party, (c) create or impose a lien, charge or encumbrance on any property of the Company under any agreement or any commitment to which the Company is a party or by which the Company or any of its properties or assets are bound, (iv) result in a violation of any federal, state, local or foreign statute, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations) applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or affected, except for violations, defaults, terminations, amendments, acceleration, and cancellations that would not, individually or in the aggregate, have a Material Adverse Effect. "Material Adverse Effect" means any adverse effect on the business, operations, properties, prospects, or condition (financial or otherwise) of the Company that is material to the Company and the Subsidiaries taken as a whole. The business of the Company and its Subsidiaries is not being conducted in violation of any law, ordinance, rule or regulation of any governmental entity, except for possible violations that singly or in the aggregate do not and will not have a Material Adverse Effect. The Company is not required under federal, state or local law, rule or regulation in the United States to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency for it to execute, deliver or perform any of its obligations under this Agreement and the Registration Rights Agreement or issue and sell the Shares in accordance with the terms hereof or thereof (other than the filing with or delivery to the Securities and Exchange Commission (the "Commission"), Nasdaq, NASD or state securities agencies of notices or filings that may be required to be made by the Company prior to or subsequent to the Closing, any registration statement that may be filed pursuant to the Registration Rights Agreement and the filing of the Designation of Rights and Preferences with the Secretary of State of the State of Washington); provided that, for purpose of the representation made in this sentence, the Company is assuming and relying upon the accuracy of the relevant representations and agreements of the Purchasers herein. 4 2.1.7 Commission Documents, Financial Statements. The Common Stock of the Company is registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company has timely filed all reports, schedules, forms, statements and other documents required to be filed by it with the Commission pursuant to the reporting requirements of the Exchange Act, including material filed pursuant to Section 13(a) or 15(b) for the period of at least twelve calendar months prior to the date of this Agreement (all of the foregoing, including filings incorporated by reference therein, being referred to herein as the "Commission Documents"). The Company has delivered or made available to each of the Purchasers true and complete copies of the Commission Documents filed with the Commission since June 1, 1996. As of their respective dates, the Company's Annual Report on Form 10-KSB for the year ended May 31, 1997 (the "Form 10-KSB") and its Quarterly Reports on Form 10-QSB for the periods ended August 31, 1997, November 30, 1997 and February 28, 1998 (the "Forms 10-QSB") complied in all material respects with the applicable requirements of the Exchange Act and the rules and regulations of the Commission promulgated thereunder and other federal and state laws, rules and regulations applicable thereto, and, as of their respective dates, none of the Form 10-KSB and the Forms 10-QSB contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the Form 10- KSB and the Forms 10-QSB comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the Commission. Such financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). 2.1.8 No Material Adverse Effect. Except as disclosed on Schedule 2.1.8, since February 28, 1998, the end of the last quarter for which the Company has prepared and filed a quarterly report on Form 10-QSB with the Commission, a copy of which is included in the Commission Documents, the Company has not experienced or suffered any Material Adverse Effect. 2.1.9 No Undisclosed Liabilities. Except as disclosed on Schedule 2.1.9 hereto, neither the Company nor any of its Subsidiaries has any liabilities, obligations, claims or losses (whether liquidated or unliquidated, secured or unsecured, absolute, accrued, contingent or otherwise) that would be required to be disclosed on a consolidated balance sheet of the Company and its Subsidiaries (including the notes thereto) prepared in conformity with GAAP that are not disclosed in the Commission Documents, other than those incurred in the ordinary course of business consistent with past practices since February 28, 1998 that, individually or 5 in the aggregate, would not reasonably be expected to have a Material Adverse Effect on the Company and its Subsidiaries taken as whole. 2.1.10 No Undisclosed Events or Circumstances. No event or circumstance has occurred or exists with respect to the Company or its Subsidiaries or their respective businesses, properties, prospects, operations or condition (financial or otherwise), that, under applicable law, rule or regulation, should have been publicly disclosed or announced by the Company before the date of this Agreement but that has not been so publicly announced or disclosed. 2.1.11 Indebtedness. Schedule 2.1.11 hereto sets forth as of the date hereof all outstanding secured and unsecured Indebtedness of the Company or any Subsidiary, or for which the Company or any Subsidiary has commitments that are not disclosed in the Form 10- KSB or the Forms 10-QSB. "Indebtedness" shall mean, in an amount in excess of $250,000, (i) any liability for borrowed money or evidenced by a promissory note or similar written obligation given in connection with the acquisition of any property or other assets (other than trade accounts payable incurred in the ordinary course of business), (ii) all guaranties, endorsements and other contingent obligations, in respect of Indebtedness of others, whether or not the same are or should be reflected in the Company's balance sheet (or the notes thereto), except guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business consistent with past practices, and (iii) the present value of any lease payments due under leases required to be capitalized in accordance with GAAP. Neither the Company nor any Subsidiary is in default in any material respect with respect to any Indebtedness. 2.1.12 Title to Assets. Each of the Company and the Subsidiaries has good and marketable title to all of the real and personal property owned by it, free of any mortgages, pledges, charges, liens, security interests or other encumbrances, except for those indicated on Schedule 2.1.12 hereto or in the Form 10-KSB or Forms 10-QSB or such that would not reasonably be expected to have a Material Adverse Effect. The Company and each of its Subsidiaries enjoy peaceful and undisturbed possession under all leases under which they are operating, and all said leases are valid and subsisting and in full force and effect. 2.1.13 Actions Pending. There is no action, suit, claim, investigation or proceeding pending or, to the knowledge of the Company threatened, against the Company or any Subsidiary that questions the validity of this Agreement or the Registration Rights Agreement or the transactions contemplated hereby or thereby or any action taken or to be taken pursuant hereto or thereto. Except as set forth on Schedule 2.1.13 hereto, there is no material action, suit, investigation or proceeding pending or, to the knowledge of the Company threatened, against or involving the Company, any Subsidiary or any of their respective properties or assets. There are no material outstanding orders, judgments, injunctions, awards or decrees of any court, arbitrator or governmental or regulatory body against the Company or any Subsidiary. 6 2.1.14 Compliance with Law. The business of the Company and the Subsidiaries has been and is presently being conducted in compliance with all applicable federal, state, and local governmental laws, rules, regulations and ordinances, except as would not reasonably be expected to have a Material Adverse Effect. Except as described on Schedule 2.1.14, the Company and each of its Subsidiaries have all franchises, permits, licenses, consents and other governmental or regulatory authorizations and approvals needed to conduct their respective businesses as now being conducted by them unless the failure to possess such franchises, permits, licenses, consents and other governmental or regulatory authorizations and approvals, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. 2.1.15 Taxes. The Company and, to the best of the Company's knowledge, each of the Subsidiaries have accurately prepared and filed all federal, state, local, foreign and other tax returns required by law to be filed by them and have paid or made provisions for the payment of all taxes shown to be due and all additional assessments, and adequate provisions have been and are reflected in the financial statements of the Company and the Subsidiaries for all current taxes to which the Company or any Subsidiary is subject and that are not currently due and payable. The Company has no knowledge of any assessments, adjustments or contingent tax liability (whether federal or state) pending or threatened against the Company or any Subsidiary for any period, nor of any reasonable basis for any such assessment, adjustment or contingency. 2.1.16 Certain Fees. Except with respect to fees payable by the Company to Pacific Continental Securities, Inc. and Lysys AG at the Closing, no brokers', finders' or financial advisory fees or commissions will be payable by the Company, any Subsidiary or, to the Company's knowledge any Purchaser, with respect to the transactions contemplated by this Agreement. 2.1.17 Disclosure. Neither this Agreement nor the Schedules hereto nor any other document, certificate or instrument furnished to the Purchasers by or on behalf of the Company or any Subsidiary in connection with the transactions contemplated by this Agreement, when all of the foregoing are considered together, contains any untrue statement of a material fact or omits to state a material fact needed to make the statements made herein or therein, in the light of the circumstances under which they were made, not misleading. 2.1.18 Operation of Business. The Company and the Subsidiaries own or possess all material patents, trademarks, service marks, trade names, copyrights, and licenses or all rights with respect to the foregoing, needed to conduct their respective businesses as they are now conducted. 2.1.19 Environmental Compliance. Except as disclosed on Schedule 2.1.19 hereto, the Company and each of its Subsidiaries have obtained all material approvals, certificates, consents, licenses, orders and permits or other similar authorizations of all federal, state, and local authorities that are required under any Environmental Laws. "Environmental 7 Laws" shall mean all applicable federal, state, and local laws relating to the protection of the environment including, without limitation, all requirements: (i) pertaining to reporting, licensing, permitting, controlling, investigating or remediating emissions, discharges, releases or threatened releases of hazardous substances, chemical substances pollutants, contaminants or toxic substances, materials or wastes, whether solid, liquid or gaseous in nature, into the air, surface water, groundwater or land; or (ii) relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of hazardous substances, chemical substances, pollutants, contaminants or toxic substances, material or wastes, whether solid, liquid or gaseous in nature. Except as described on Schedule 2.1.19 hereto, and except for such instances that would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect, the Company does not know of any past or present events, conditions, circumstances, incidents, actions or omissions relating to or in any way affecting the Company or its Subsidiaries that would cause a violation of any Environmental Law after the Closing or that may give rise to any material Environmental Liability, or otherwise form the basis of any claim, action, demand, suit, proceeding, hearing, study or investigation (i) under any Environmental Law, or (ii) based on or related to the manufacture, processing, distribution, use, treatment, storage (including without limitation underground storage tanks), disposal, transport or handling, or the emission, discharge, release or threatened release of any hazardous substance. "Environmental Liabilities" means all liabilities of the Company or any of its Subsidiaries (whether such liabilities are owed by such person to governmental authorities, third parties or otherwise), whether now in existence or arising hereafter, that arise under or relate to any Environmental Law. 2.1.20 Books and Records. The records and documents of the Company and the Subsidiaries accurately reflect in all material respects information relating to the business of the Company and the Subsidiaries, the location and collection of their assets, and the nature of all transactions giving rise to the obligations or accounts receivable of the Company or any Subsidiary. 2.1.21 Material Agreements. Except as disclosed in the Commission Documents (subject to any applicable confidential treatment granted by the Commission) or on Schedule 2.1.21 hereto, neither the Company nor any Subsidiary is a party to any written or oral contract, instrument, agreement, commitment, obligation, plan or arrangement, a copy of which would be required to be filed with the Commission as an exhibit to a registration statement on Form S-3 if the Company or any subsidiary were registering securities on such form under the Securities Act of 1933, as amended (the "Securities Act"). The Company, each Subsidiary and, to the best of the Company's knowledge, each other party thereto, have performed all the obligations required to be performed by them to date under any leases, contracts, or other agreements of the Company or its Subsidiaries, and the Company has not received any notice of default and is not in default under any lease, contract or agreement now in effect to which the Company or any Subsidiary is a party or by which it or its property may be bound, the result of any of which could reasonably be expected to cause a Material Adverse Effect. 8 2.1.22 Transactions with Affiliates. Except as set forth in the Commission Documents or on Schedule 2.1.22 hereto, there are no loans, leases, agreements (other than employment contracts, stock options, or warrant agreements), contracts, royalty agreements, management contracts or arrangements or other continuing transactions involving amounts exceeding $250,000 between (a) the Company, any Subsidiary or any of their respective customers or suppliers on the one hand, and (b) any officer, employee, consultant or director of the Company, or any member of the immediate family of any such officer, employee, consultant, or director or any corporation or other entity controlled by such officer, employee, consultant, or director or a member of their immediate family on the other hand. 2.1.23 Securities Act. Assuming the truthfulness of all representations made by the Purchasers in this Agreement, the Company has complied and will comply in all material respects with all applicable federal and state securities laws in connection with the offer, issuance and sale of the Shares hereunder. Neither the Company nor anyone acting on its behalf, directly or indirectly, has sold, offered to sell or solicited offers to buy, or will sell, offer to sell or solicit offers to buy the Shares or similar securities to any person, so as to require the registration of the Shares under the Securities Act and applicable state securities laws, except in accordance with the Registration Rights Agreement. None of the Company, nor any of its affiliates, nor any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with the offer or sale of the Shares. 2.1.24 Approvals. Except for the filing or delivery of any notices or other documents prior or subsequent to the Closing that may be required under applicable state or federal securities laws or by Nasdaq (which if required, shall be filed on a timely basis), the filing of the Designation of Rights and Preferences, or as set forth in Schedule 2.1.24, no authorization, consent, approval, license, filing or registration with any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or from any other third party, is or will be necessary for or in connection with the execution or delivery of the Shares, or for the performance by the Company of its obligations under this Agreement. 2.1.25 Employees. Neither the Company nor any Subsidiary has any collective bargaining agreements covering any of its employees. To the best of the Company's knowledge, no employee of the Company is in violation of any term of any employment contract, patent or other proprietary information agreement or any other contract or agreement relating to the right of any such employee to be employed by the Company because of the nature of the business conducted or proposed to be conducted by the Company or any other reason. Since November 30, 1996, no officer, consultant or key employee of the Company or any Subsidiary whose termination, either individually or in the aggregate, could have a Material Adverse Effect, has terminated or, to the knowledge of the Company has any present intention of terminating, his or her employment or engagement with the Company or any Subsidiary. 9 2.1.26 Absence of Certain Developments. Except as provided in Schedule 2.1.26 hereto or as disclosed in the Commission Documents, since February 28, 1998, neither the Company nor any Subsidiary has: (a) issued any stock, bonds or other corporate securities or any rights, options or warrants with respect thereto; (b) borrowed any amount in excess of $250,000 or incurred or become subject to any material liabilities (absolute or contingent) except liabilities incurred in the ordinary course of business consistent with past practices; (c) discharged or satisfied any material lien or encumbrance or paid any material obligation or liability (absolute or contingent), other than current liabilities paid in the ordinary course of business consistent with past practices; (d) declared or made any payment or distribution of cash or other property to stockholders with respect to its stock, or purchased or redeemed, or made any agreements to purchase or redeem, any shares of its capital stock; (e) sold, assigned or transferred any other tangible assets, or cancelled any debts or claims, except in the ordinary course of business consistent with past practices; (f) sold, assigned or transferred any patent rights, trademarks, trade names, copyrights, trade secrets or other intangible assets or intellectual property rights, except in the ordinary course of business consistent with past practices; (g) suffered any substantial losses or waived any rights of material value, whether or not in the ordinary course of business, or suffered the loss of any material amount of existing business; (h) made any changes in employee compensation except in the ordinary course of business and consistent with past practices; (i) made capital expenditures or commitments therefor that aggregate in excess of $250,000; (j) made charitable contributions or pledges in excess of $25,000 in total; (k) suffered any material damage, destruction or casualty loss, whether or not covered by insurance; or 10 (l) experienced any material problems with labor or management in connection with the terms and conditions of their employment. 2.1.27 Public Utility Holding Company Act and Investment Company Act Status. The Company is not a "holding company" or a "public utility company" as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. The Company is not, and as a result of and immediately after the Closing will not be, an "investment company," or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. 2.1.28 U.S. Real Property Holding Corporation. Neither the Company nor any of its Subsidiaries is now, nor will it be immediately after the Closing, a "United States Real Property Holding Corporation" as defined in section 897(c)(2) of the Internal Revenue Code of 1986, as amended (the "Code") and section 1.897-2(b) of the Treasury Regulations. 2.2 Representations and Warranties of the Purchasers. Each of the Purchasers hereby makes the following representations and warranties to the Company with respect solely to itself and not with respect to any other Purchaser: 2.2.1 Organization and Standing of the Purchasers. Such Purchaser is a corporation or partnership duly incorporated or organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization. 2.2.2 Authorization; Power. Such Purchaser has the requisite power and authority to enter into this Agreement and the Registration Rights Agreement and to perform its obligations hereunder and thereunder, including without limitation, to purchase the Shares being sold to it hereunder. The execution and delivery of this Agreement and the Registration Rights Agreement by such Purchaser, and the performance by the Purchaser of its obligations hereunder and thereunder, including the consummation by it of the transactions contemplated hereby and thereby, have been duly authorized by all necessary corporate or partnership action, and no further consent or authorization of such Purchaser or its Board of Directors, stockholders, or partners, as the case may be, is required. This Agreement has been duly executed and delivered by such Purchaser. The Registration Rights Agreement will have been duly executed and delivered by such Purchaser at the Closing. Assuming the due authorization, execution and delivery hereof and thereof by the other parties hereto and thereto, this Agreement constitutes, and the Registration Rights Agreement shall constitute when executed and delivered, a valid and binding obligation of the Purchaser enforceable against such Purchaser in accordance with its terms, except as the foregoing may be limited by applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium, or other similar laws relating to or affecting generally the rights of creditors or by other equitable principles including those limiting the availability of specific performance, injunctive relief, and other equitable remedies. 2.2.3 No Conflicts. Neither the execution or delivery of this Agreement or the Registration Rights Agreement by the Purchaser, nor the performance by such Purchaser of its 11 obligations hereunder and thereunder, will (i) result in a violation of such Purchaser's charter or other organizational documents or bylaws (ii) violate, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of any agreement, indenture, note, bond, license agreement, or instrument to which such Purchaser is a party, or (iii) result in a violation of any federal, state, local or foreign statute, rule, regulation, order, judgment or decree applicable to such Purchaser or its properties or by which any property or asset of such Purchaser is bound or affected (except in the case of each of clauses (i), (ii) and (iii) for conflicts, defaults and violations that would not, individually or in the aggregate have a Material Adverse Effect on such Purchaser). Such Purchaser is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency for it to execute, deliver or perform any of its obligations under this Agreement or the Registration Rights Agreement or purchase the Shares in accordance with the terms hereof, provided that for purposes of the representation made in this sentence, such Purchaser is assuming and relying upon the accuracy of the relevant representations and agreements of the Company herein. 2.2.4 Acquisition for Investment. Such Purchaser is purchasing the Preferred Shares and the Warrants solely for its own account for the purpose of investment or as a nominee or agent solely for the entities named on the signature pages hereto and not with a view to or for sale in connection with any distribution. Such Purchaser does not have a present intention to sell the Preferred Shares, the Warrants or the Shares, nor a present contract, undertaking, agreement or arrangement (whether or not legally binding) to any person, and the Purchaser, does not have any present intention to effect any distribution of the Preferred Shares, the Warrants or the Shares, to or through any person or entity other than the entities, if any, for which such Purchaser is acting as nominee as set forth on the signature pages hereto; provided, however, that by making the representations herein, such Purchaser does not agree to hold the Preferred Shares, the Warrants or the Shares for any minimum or other specific term and reserves the right to dispose of the Preferred Shares, the Warrants and the Shares at any time in accordance with federal and state securities laws applicable to such disposition. Such Purchaser is not a broker-dealer. Such Purchaser acknowledges that it is able to bear the financial risks associated with an investment in the Preferred Shares, the Warrants and the Shares, and that it can bear the loss of its entire investment. Such Purchaser represents that it was not organized solely for the purpose of making an investment in the Company. Such Purchaser acknowledges that it has been given full access to such records of the Company and the Subsidiaries and to the officers of the Company and the Subsidiaries as it has deemed necessary and appropriate to conduct and complete its due diligence investigation. 2.2.5 Accredited Purchasers. Such Purchaser, or each of the entities set forth on the signature pages hereto for which such Purchaser is acting as nominee, is an "accredited investor" as defined in Regulation D promulgated under the Securities Act. 2.2.6 Rule 144. Such Purchaser understands that the Shares must be held indefinitely unless such Shares are registered under the Securities Act or an exemption from 12 registration is available. Such Purchaser acknowledges that it is familiar with Rule 144 of the rules and regulations of the Commission, as amended, promulgated pursuant to the Securities Act ("Rule 144"), and that it has been advised that Rule 144 permits, only under certain circumstances, the resale of restricted securities such as the Preferred Shares, the Warrants and the Shares, but that Rule 144 is not now available to permit resales by such person of any of the Preferred Shares, the Warrants or the Shares. 2.2.7 Reliance. Each Purchaser understands that the Shares are being offered and sold in reliance on exemptions from the registration requirements of federal and state securities laws and that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of the Purchasers set forth herein to determine the applicability of such exemptions and the suitability of such Purchasers to acquire the Shares. 2.2.8 No Brokers. No brokers', finders' or financial advisory fees or commissions will be payable by the Purchaser with respect to the transactions contemplated by this Agreement. 2.2.9 Disclosure. Neither this Agreement nor any other document, certificate or instrument furnished to the Company by or on behalf of the Purchaser in connection with the transactions contemplated by this Agreement, contains any untrue statement of a material fact or omits to state a material fact needed to make the statements made herein or therein, in the light of the circumstances under which they were made, not misleading. 3. COVENANTS 3.1 By the Company. The Company covenants with each of the Purchasers as follows: 3.1.1 Securities Compliance. The Company shall notify the Commission and Nasdaq, if applicable, in accordance with their requirements, of the transactions contemplated by this Agreement and the Registration Rights Agreement, and shall take any other action required by applicable law, rule or regulation for the legal and valid issuance of the Shares to the Purchasers. 3.1.2 Conversion Notice. If the Company receives a Conversion Notice in the form attached as Exhibit E duly executed by a holder of Preferred Shares then entitled to convert such shares to Common Stock and accompanied by the certificate or certificates representing such Preferred Shares and such other documents as may be required by the Company in accordance with the Designation of Rights and Preferences, then, unless the Preferred Shares are redeemed by the Company pursuant to the Designation of Rights and Preferences, the Company shall cause its transfer agent to issue certificates for the Conversion Shares to the holder within five business days after such receipt. 13 3.1.3 Registration and Listing. The Company will cause its Common Stock to continue to be registered under Sections 12(b) or 12(g) of the Exchange Act, will comply in all respects with its reporting and filing obligations under the Exchange Act, will comply with all requirements related to any registration statement filed pursuant to the Registration Rights Agreement and will not take any action or file any document (whether or not permitted by the Securities Act or the rules promulgated thereunder) to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under said Acts, except as permitted herein. The Company will take all action necessary to continue the quotation or trading of its Common Stock on the Nasdaq system and will comply in all material respects with the Company's reporting, filing and other obligations under the bylaws or rules of the NASD and the Nasdaq system. 3.1.4 Inspection Rights. The Company shall permit, during normal business hours and upon no less than 5 days' written notice, each Purchaser or any employees, agents or representatives thereof, so long as such Purchaser shall be obliged hereunder to purchase the Preferred Shares or shall beneficially own Preferred Shares, Warrants or Shares that, in the aggregate, represent more than 5% of the total combined voting power of all voting securities then outstanding, to visit and inspect the properties, assets, operations and business of the Company and any Subsidiary, and to discuss the affairs, finances and accounts of the Company and any Subsidiary with any of its officers, consultants, directors, and key employees, subject to appropriate confidentiality obligations. 3.1.5 Reporting Requirements. The Company shall furnish the following to each Purchaser so long as such Purchaser shall be obliged hereunder to purchase the Preferred Shares or shall beneficially own Preferred Shares: (a) Quarterly Reports filed with the Commission on Form 10-Q or Form 10-QSB, as the case may be, as soon as available, and in any event within 50 days after the end of each of the first three fiscal quarters of the Company; and (b) Annual Reports filed with the Commission on Form 10-K or Form 10-KSB, as the case may be, as soon as available, and in any event within 95 days after the end of each fiscal year of the Company. 3.1.6 Other Agreements. The Company shall not enter into any agreement that would materially restrict or materially impair the rights of the Purchasers under this Agreement, the Registration Rights Agreement or the Articles, except as otherwise permitted in such agreements and the Articles. 3.1.7 Rule 144A. The Company covenants and agrees that if the Company fails to register the Conversion Shares by one year from the date of this Agreement under the terms and conditions of the Registration Rights Agreement that, for so long as any of the Shares remain outstanding and continue to be "restricted securities" within the meaning of Rule 144 under the Securities Act, the Company shall make available to any Purchaser, or entity set forth 14 on the signature pages hereto for which such Purchaser is acting as nominee, who is a "qualified institutional buyer" within the meaning set forth in Rule 144A(a) under the Securities Act, in connection with any sale thereof, the information required by Rule 144A(d)(4) under the Securities Act to permit resales of the Conversion Shares pursuant to Rule 144A. 3.1.8 Use of Proceeds. The proceeds from the sale of the Preferred Shares will be used by the Company and its Subsidiaries primarily for potential future acquisitions. 3.1.9 Right of First Refusal. The Company agrees that, for a period of one year from the date of this Agreement, it will not issue in any capital-raising transaction any series of preferred shares having rights senior to or equal to the Preferred Shares with respect to the distribution of assets on liquidation, dissolution, or winding up (including any shares of the Company's Series A Convertible Preferred Stock) without giving each Purchaser at least twenty days' prior notice of such issuance. For ten days after the receipt of such notice, each Purchaser shall have a right of first refusal, exercisable by written notice to the Company, to purchase in such offering that number of such shares, at a purchase price per share equal to the proposed purchase price in such offering, that have a total purchase price up to the purchase price paid by such Purchaser for the Preferred Shares purchased by it hereunder. This right of first refusal shall otherwise be subject to all of the same terms and conditions of such offering. If a Purchaser does not timely give notice of its intent to exercise such right of first refusal, the Purchaser's right of first refusal shall be deemed to have terminated and Company may proceed to issue all such shares to other purchasers, free and clear of such right of first refusal, at a price not less than that offered to the Purchaser. However, this right of first refusal shall not apply to the issuance by the Company in a public or private offering of shares of (i) common stock; (ii) nonconvertible debt securities; or (iii) the first issuance by the Company after the Closing of preferred stock in an amount yielding gross proceeds to the Company of at least $17,000,000. 3.1.10 U.S. Real Property Holding Corporation. The Company covenants that it will operate in a manner such that it will not become a "United States real property holding corporation" as that term is defined in section 897(c)(2) of the Code ("USRPHC"), and the regulations thereunder. The Company agrees to make determinations as to its status as a USRPHC, and will file statements concerning those determinations with the Internal Revenue Service, in a manner and at the times required under section 1.897-2(h) of the Treasury Regulations, or any supplementary or successor provision thereto. Within 30 days of a request from a holder, the Company will inform the requesting party, in the manner set forth in section 1.897-2(h) Treasury Regulations or any supplementary or successor provision thereto, whether that party's interest in the Company constitutes a United States real property interest (within the meaning of section 897(c)(1) of the Code and the regulations thereunder) and whether the Company has provided to the Internal Revenue Service all required notices as to its USRPHC status. 3.1.11 Structure of Voluntary Redemption. During the 20-day period after receiving notice of a Voluntary Redemption (as such term is defined in the Rights and Preferences), by the Company under Section 6(a) of the Rights and Preferences, the Company 15 shall, at any Holder's (as such term is defined in the Rights and Preferences) request, engage in good faith negotiations with such Holder, to structure the Voluntary Redemption so that such redemption will be characterized as a sale or exchange within the meaning of Section 1001 of the Code, and not as a distribution within the meaning of Section 302 of the Code. 3.2 By the Purchasers. The Purchasers each covenant with the Company that they shall not sell or agree to sell any Shares before they are the holder thereof. 3.3 By All Parties. The Company and the Purchasers each agree to treat the Preferred Stock as stock that is not "preferred stock" for all U.S. income tax purposes, including for purposes of Section 305 of the Code and the regulations thereunder, unless they are required to treat the Preferred Stock otherwise pursuant to a "determination" within the meaning of Section 1313(a) of the Code; provided that the Purchasers (x) have received prompt notice of any tax assessment, deficiency, audit or judicial proceeding that relates to the taxation of the Preferred Stock, (y) are given the opportunity to participate in all proceedings that affect the taxation of Preferred Stock, and (z) have consented to any closing or other agreement with or final disposition of a claim for refund by the IRS that affects the taxation of the Preferred Stock. In the event of a change of law regarding this treatment of the Preferred Stock, the Company and the Purchasers agree to determine a position in such regard that is reasonably acceptable to each of them. 4. CONDITIONS 4.1 Conditions Precedent to the Obligation of the Company to Sell the Preferred Shares. The obligation hereunder of the Company to issue and/or sell the Preferred Shares to the Purchasers is subject to the satisfaction or waiver, at or before the Closing, of each of the conditions set forth below. These conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion. 4.1.1 Accuracy of the Purchasers' Representations and Warranties. Each of the representations and warranties of the Purchasers shall be true and correct in all material respects as of the date made and as of the Closing as though made at that time, and the Company shall have received a certificate from each Purchaser to that effect. 4.1.2 Performance by the Purchasers. Each Purchaser shall have performed, satisfied and complied in all material respects with all material covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by such Purchaser at or prior to the Closing and the Company shall have received a certificate from each Purchaser to that effect. 4.1.3 No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction that prohibits the consummation of any of the transactions contemplated by this Agreement, the Warrants, or the Registration Rights Agreement. 16 4.1.4 No Proceedings or Litigation. No action, suit, investigation or proceeding before or by any arbitrator or any governmental authority shall have been commenced or threatened against the Company or any Subsidiary, or any of the officers, directors or affiliates of the Company or any Subsidiary, seeking to restrain, prevent or change the transactions contemplated by this Agreement, the Warrants, or the Registration Rights Agreement, or seeking damages in connection with such transactions. 4.1.5 Opinion of Counsel; Closing Documents. At the Closing, the Company shall have received an opinion of counsel to each of the Purchasers, in the form of Exhibit G hereto and such other certificates and documents as the Company and its counsel shall reasonably require incident to the Closing. 4.1.6 Purchase Price. At the Closing, the Company shall have received payment of the purchase price for the Preferred Shares. 4.1.7 Registration Rights Agreement. At the Closing, the Purchasers shall have executed and delivered the Registration Rights Agreement to the Company. 4.2 Conditions Precedent to the Obligation of the Purchasers to Purchase the Preferred Shares. The obligation hereunder of each Purchaser to acquire and pay for the Preferred Shares is subject to the satisfaction or waiver, at or before the Closing, of each of the conditions set forth below. These conditions are for each Purchaser's sole benefit and may be waived by such Purchaser at any time in its sole discretion. 4.2.1 Accuracy of the Company's Representations and Warranties. Each of the representations and warranties of the Company shall be true and correct in all material respects as of the date made and as of the Closing as though made at that time (except for representations and warranties that speak as of a particular date), and the Purchasers shall have received a certificate from the Company to that effect. 4.2.2 Performance by the Company. The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing, and the Purchasers shall have received a certificate from the Company to that effect. 4.2.3 No Suspension, etc. From the date hereof to the Closing Date, trading in the Company's Common Stock shall not have been suspended by the Commission or Nasdaq (except for any suspension of trading of limited duration agreed to by the Company, which suspension shall be terminated prior to Closing), and, at any time from the date hereof to the Closing, trading in securities generally as reported by Nasdaq shall not have been suspended or limited or minimum prices shall not have been established on securities whose trades are reported by Nasdaq, nor shall trading in securities on the New York Stock Exchange have been 17 suspended nor minimum prices established on the New York Stock Exchange, nor shall a banking moratorium have been declared either by the United States or New York State authorities, nor shall there have occurred any material outbreak or escalation of hostilities or other national or international calamity or crisis of such magnitude in its effect on, or any material adverse change in, any financial market that, in each case, in the reasonable judgment of such Purchaser, makes it impracticable or inadvisable to purchase the Shares. 4.2.4 No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction that prohibits the consummation of any of the transactions contemplated by this Agreement or the Registration Rights Agreement. 4.2.5 No Proceedings or Litigation. No action, suit, investigation or proceeding before or by any arbitrator or any governmental authority shall have been commenced or threatened against the Company or any Subsidiary, or any of the officers, directors or affiliates of the Company or any Subsidiary, seeking to restrain, prevent or change the transactions contemplated by this Agreement or the Registration Rights Agreement, or seeking damages in connection with such transactions. 4.2.6 Designation of Rights and Preferences. The Amendment to the Articles containing the Designation of Rights and Preferences shall have been filed with the Secretary of State of Washington. 4.2.7 Opinion of Counsel; Closing Documents. At the Closing, the Purchasers shall have received an opinion of Stoel Rives LLP, counsel to the Company, dated the date of Closing, in the form of Exhibit H hereto and such other certificates and documents as the Purchasers and their counsel shall reasonably require incident to the Closing. 4.2.8 Registration Rights Agreement. At the Closing the Company shall have executed and delivered the Registration Rights Agreement to each Purchaser. 5. [INTENTIONALLY OMITTED] 6. STOCK CERTIFICATE LEGEND Each certificate representing the Shares, and, if appropriate, any securities issued upon conversion thereof, shall be stamped or otherwise imprinted with a legend substantially in the following form (in addition to any legend required by applicable state securities or "blue sky" or other laws): THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE "SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS 18 REGISTERED UNDER THAT ACT AND UNDER APPLICABLE STATE SECURITIES LAWS, OR IN THE OPINION OF COUNSEL TO PACIFIC AEROSPACE & ELECTRONICS, INC. (THE "COMPANY") THAT REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED. The Company agrees to cause its transfer agent to reissue certificates representing the Shares, without the legend set forth above, if prior to making any transfer of any Shares, the holder thereof shall give written notice to the Company describing the manner and terms of the proposed transfer and providing the Company with such other information as the Company may reasonably request and: (a) the Company has notified such holder that either (i) in the opinion of Company counsel, the registration of such Shares under the Securities Act is not required in connection with such proposed transfer; or (ii) a registration statement under the Securities Act covering such proposed disposition has been filed by the Company with the Commission and has become effective under the Securities Act; and (b) the Company has notified such holder that either: (i) in the opinion of Company counsel, the registration or qualification under the securities of "blue sky" laws of any state is not required in connection with such proposed disposition; or (ii) compliance with applicable state securities or "blue sky" laws has been effected. The Company will use its best efforts to respond to any such notice from a holder within five (5) business days. In the case of any proposed transfer under this Article VI, the Company will use reasonable efforts to comply with any such applicable state securities or "blue sky" laws, but shall in no event be required, in connection therewith, to qualify to do business in any state where it is not then qualified or to take any action that would subject it to tax or to the general service of process in any state where it is not then subject. The restrictions on transfer contained in this Section 6 shall be in addition to, and not by way of limitation of, any other restrictions on transfer contained in any other section of this Agreement. 7. TERMINATION 7.1 Termination by Mutual Consent. This Agreement may be terminated at any time prior to the Closing by the mutual written consent of the Company and the Purchasers. 7.2 Other Termination. This Agreement may be terminated by the action of the Board of Directors of the Company or by any one or more of the Purchasers at any time, prior to the Closing if the Closing shall not have been consummated within 30 days after execution of this Agreement. 7.3 Effect of Termination. In the event of termination by the Company or any one or more of the Purchasers, written notice thereof shall forthwith be given to the other parties and the transactions contemplated by this Agreement and the Registration Rights Agreement shall be terminated, without further action by either party. If this Agreement is terminated as provided in Sections 7.1 or 7.2 this Agreement shall become void and of no further force and effect, except for Sections 9.1, 9.2 and Article 8. 19 8. INDEMNIFICATION 8.1 General Indemnity. The Company agrees to indemnify and hold harmless the Purchasers and each entity named on the signature pages hereto for which such Purchaser is acting as nominee (and their respective directors, officers, partners, affiliates, agents, successors and assigns) from and against any and all claims, losses, liabilities, deficiencies, costs, damages and expenses (including, without limitation, reasonable attorneys' fees, charges and disbursements) incurred by them as a result of any breach of the representations, warranties or covenants made by the Company herein. Each Purchaser severally but not jointly agrees to indemnify and hold harmless the Company and its directors, officers, affiliates, agents, successors and assigns from and against any and all losses, liabilities, deficiencies, costs, damages and expenses (including, without limitation, reasonable attorneys' fees, charges and disbursements) incurred by them as result of any material breach of the representations, warranties or covenants made by such Purchaser herein. 8.2 Indemnification Procedure. Any party entitled to indemnification under this Article 8 (an "indemnified party") will give written notice to the indemnifying party of any matters giving rise to a claim for indemnification; provided that the failure of any party entitled to indemnification hereunder to give notice as provided herein shall not relieve the indemnifying party of its obligations under this Article 8 except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. Notwithstanding anything else in this paragraph, no party shall have a claim for indemnification hereunder if the indemnifying party has not been given notice by the indemnified party of the claim by the date that is one year after the earlier of (i) the effective date of the registration statement filed by the Company pursuant to the Registration Rights Agreement or (ii) the date that the party seeking indemnification ceases to hold Preferred Shares or Conversion Shares. If any action, proceeding or claim is brought against an indemnified party in respect of which indemnification is sought hereunder, the indemnifying party shall be entitled to participate in and, unless in the reasonable judgment of the indemnified party a conflict of interest between it and the indemnifying party may exist in respect of such action, proceeding or claim, to assume the defense thereof, with counsel reasonably satisfactory to the indemnified party. If the indemnifying party advises an indemnified party that it will contest such a claim for indemnification hereunder, or fails, within thirty (30) days of receipt of any indemnification notice to notify, in writing, such person of its election to defend, settle or compromise, at its sole cost and expense, any action, proceeding or claim (or discontinues its defense at any time after it commences such defense), then the indemnified party may, at its option, defend, settle or otherwise compromise or pay such action or claim. In any event, unless and until the indemnifying party elects in writing to assume and does so assume the defense of any such claim, proceeding or action, the indemnified party's costs and expenses arising out of the defense, settlement or compromise of any such action, claim or proceeding shall be losses subject to indemnification hereunder. The indemnified party shall cooperate fully with the indemnifying party in connection with any negotiation or defense of any such action or claim. The indemnifying party shall furnish to the indemnifying party all information reasonably available to the indemnified party that relates to such action or claim. The indemnifying party shall keep the indemnified party fully apprised at all times as to the 20 status of the defense or any settlement negotiations with respect thereto. If the indemnifying party elects to defend any such action or claim, then the indemnified party shall be entitled to participate in such defense with counsel of its choice at its sole cost and expense. Notwithstanding anything in this Article 8 to the contrary, the indemnifying party shall not, without the indemnified party's prior written consent, settle or compromise any claim or consent to entry of any judgment in respect thereof that imposes any future obligation on the indemnified party or that does not include, as an unconditional term thereof, the giving by the claimant or the plaintiff to the indemnified party, a release from all liability in respect of such claim. The indemnification required by this Article 8 shall be made by periodic payments of the amount thereof during the course of investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred so long as the indemnified party irrevocably agrees to refund such moneys if it is ultimately determined by a court of competent jurisdiction that such party was not entitled to indemnification. The indemnity agreements contained herein shall be in addition to (a) any cause of action or similar rights of the indemnified party against the indemnifying party or others, and (b) any liabilities the indemnifying party may be subject to pursuant to the law. 9. MISCELLANEOUS 9.1 Fees and Expenses. Except as otherwise set forth in the Registration Rights Agreement or the Designation of Rights and Preferences, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement, provided that the Company shall pay, at the Closing, (a) all of the Purchasers out-of-pocket expenses associated with the offering of the Preferred Shares, whether or not the transactions contemplated under this Agreement are consummated, in an amount not to exceed $20,000. 9.2 Specific Enforcement, Consent to Jurisdiction. 9.2.1 The Company and the Purchasers acknowledge and agree that irreparable damage would occur if any of the provisions of this Agreement or the Registration Rights Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent or cure material breaches of the provisions of this Agreement or the Registration Rights Agreement and to enforce specifically the terms and provisions hereof or thereof, this being in addition to any other remedy to which any of them may be entitled by law or equity. 9.2.2 Each of the Company and the Purchasers (i) hereby irrevocably submits to the jurisdiction of the United States District Court and other courts of the United States sitting in King County, Washington for the purposes of any suit, action or proceeding arising out of or relating to this Agreement or the Registration Rights Agreement and (ii) hereby waives, and agrees not to assert in any such suit, action or proceeding, any claim that it is not personally 21 subject to the jurisdiction of such court, that the suit, action or proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper. 9.3 This Agreement (including the Exhibits and Schedules hereto) contains the entire understanding of the parties with respect to the matters covered hereby and, except as specifically set forth herein (including the Exhibits and Schedules hereto) or in the Registration Rights Agreement, the Designation of Rights and Preferences, or the Warrants, neither the Company nor any of the Purchasers makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by a written instrument signed by (i) the Company, if enforcement of any such amendment or waiver is sought against the Company; (ii) an individual Purchaser, if enforcement of an amendment or waiver is sought solely with respect to such Purchaser; or (iii) the Purchasers of two-thirds of all of the Preferred Stock, if enforcement of an amendment or waiver is sought with respect to all of the Purchasers. 9.4 Any notice, demand, request, waiver or other communication required to permitted to be given hereunder shall be in writing and shall be effective (a) upon hand delivery or by confirmed facsimile transmission at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received), or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur, or (c) three days after mailed by certified or registered U.S. mail. The addresses for such communications shall be: If to the Company: Sheryl A. Symonds Vice President Administration & General Counsel Pacific Aerospace & Electronics, Inc. 24000 - 35th Ave. SE, Suite 200 Bothell, WA 98021 Facsimile: (425) 354-1632 with copies to: Eugenie D. Mansfield Stoel Rives LLP One Union Square 600 University Street, Suite 3600 Seattle, Washington 98101-3197 Fax: (206) 386-7500 22 If to any Purchasers: Gary Wolf Angelo Gordon & Co. 245 Park Ave., 25th Floor New York, New York 10167 Facsimile: (212) 867-6449 With copies to: Stephen M. Vine Akin Gump Strauss Hauer & Feld 590 Madison Avenue New York, New York 10022 Facsimile: (212) 872-1002 Any party hereto may from time to time change its address for notices by giving at least five (5) days' written notice of such changed address to the other party hereto. 9.5 No waiver by either party of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. 9.6 The article, section and subsection headings in this Agreement are for convenience only and shall not constitute a part of this Agreement for any other purpose and shall not be deemed to limit or affect any of the provisions hereof. 9.7 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns. After Closing, the assignment by a party to this Agreement of any rights hereunder shall not affect the obligations of such party under this Agreement. 9.8 No Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by any other person. 9.9 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF WASHINGTON, WITHOUT GIVING EFFECT TO THE CHOICE OF LAW PROVISIONS. 9.10 Survival. The representations and warranties of the Company and the Purchasers contained in Section 2 shall survive the execution and delivery hereof and the Closing until the date that is one year from the earlier of (i) the effective date of the registration statement filed by the Company pursuant to the Registration Rights Agreement or (ii) the date that the party seeking indemnification ceases to hold Preferred Shares, Warrants or Shares. The agreements and covenants set forth in Sections 1, 3, 5 and 8 of this Agreement shall survive the execution 23 and delivery hereof and the Closing hereunder until any registration statement required by the Registration Rights Agreement is no longer required to be effective under its terms and conditions. 9.11 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and shall become effective when counterparts have been signed by each party and delivered to the other parties hereto, it being understood that all parties need not sign the same counterpart. If any signature is delivered by facsimile transmission, the party using such means of delivery shall cause four additional executed signature pages to be physically delivered to the other parties within five days after the execution and delivery hereof; provided that failure to transmit such original signature pages shall not invalidate that party's signature. 9.12 The Company agrees that, without the consent of each Purchaser, it will not disclose, and will not include in any public announcement, the name of such Purchaser, unless and until such disclosure is required by law or applicable regulation, and then only to the extent of such requirement. 9.13 Severability. The provisions of this Agreement, the Designation of Rights and Preferences and the Registration Rights Agreement are severable and, if any court of competent jurisdiction shall determine that any one or more of the provisions or part of a provision contained in this Agreement, the Designation of Rights and Preferences or the Registration Rights Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement, the Designation of Rights and Preferences or the Registration Rights Agreement shall be reformed and construed as if such invalid or illegal or unenforceable provision, or part of a provision, had never been contained herein, and such provisions or part reformed so that it would be valid, legal and enforceable to the maximum extent possible. 9.14 From and after the date of this Agreement, upon the request of any Purchaser or the Company, each of the Company and the Purchasers shall execute and deliver such instrument, documents and other writings as may be reasonably necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of this Agreement. 24 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officer or other agent as of the date hereof. THE COMPANY: PACIFIC AEROSPACE & ELECTRONICS, INC. By: /s/ DONALD A. WRIGHT ------------------------------ Donald A. Wright President THE PURCHASERS: AGR HALIFAX FUND, LTD. SILVER OAK CAPITAL, L.L.C. As Nominee for the following entities: AG Arb Partners, L.P. AG Super Fund, L.P. AG Long Term Super Fund, L.P. By: /s/ JEFFREY M. SOLOMON Nutmeg Partners, L.P. -------------------------------- Northern Trust Company as Master Name: Jeffrey M. Solomon, Trustee of the Teachers Retirement Managing Officer of Ag Ramius, LLC System of the State of Illinois Its: Investment Advisor PHS Bay Colony Fund, L.P. PHS Patriot Fund, L.P. AG MM, L.P. Medici Partners, L.P. Triarc Companies, Inc. Ramius, L.P. Baldwin Enterprises, Inc. GAM Arbitrage Investments, Inc. AG Super Fund International Partners, L.P. Ramius Fund, Ltd. Leonardo, L.P. By: /s/ MICHAEL L. GORDON ------------------------------ Michael L. Gordon Manager 25 EX-10.3 11 PLACEMENT AGREEMENT - LYSYS LTD. EXHIBIT 10.3 PLACEMENT AGREEMENT March 25, 1998 Re: Proposed Private Placement of Common Stock Pacific Aerospace & Electronics, Inc., a Washington corporation (the "Company"), proposes to offer to sell up to 2,750,000 shares (the "Shares") of its common stock, $.001 par value (the "Common Stock") to certain investors to be identified by Lysys Ltd. The Common Stock would be offered at a per share price (the "Purchase Price") that is 5% less than the average fair market value of the Common Stock on the Nasdaq National Market System, based on the average closing sale price of the Common Stock for the five trading days immediately preceding the closing date of the Offering. Based on the current market value of the Company's Common Stock, we estimate that the total Purchase Price would be approximately $18 million. The proposed offering of Common Stock (the "Offering") would be made only to institutional or other accredited investors, in reliance on Rule 506 under Regulation D ("Regulation D") promulgated under the United States Securities Act of 1933, as amended (the "Securities Act"). This Agreement sets forth the agreement between the Company and Lysys Ltd. with regard to the Offering. 1. THE OFFERING. (a) Appointment as Placement Agent. The Company appoints Lysys Ltd. as the Company's placement agent (the "Placement Agent") with regard to the Offering, and the Placement Agent accepts such appointment. The Company grants to the Placement Agent the non-exclusive right, on the Company's behalf, to solicit offers from Investors to purchase Shares, at the Purchase Price, or at such other price as may be satisfactory to the Company in its sole discretion, in compliance with the provisions of Regulation D. The Company expressly acknowledges and agrees that the execution of this Agreement is not a commitment by the Placement Agent to purchase any Shares and does not ensure the successful completion of the Offering or any portion thereof. (b) Placement of Shares. It shall be the Placement Agent's sole responsibility to ensure that offers are made only to accredited investors, as defined in Regulation D, and to ensure that all potential Investors receive copies of the Company's Annual Report on Form 10- KSB for the Company's fiscal year ended May 31, 1997, the Company's Quarterly Report on Form 1O-QSB for the quarter ended November 30, 1997 (or, if it becomes available prior to the time Shares are offered, the Company's Quarterly Report on Form 10-QSB for the quarter ended February 28, 1998), and any other disclosure documents deemed to be necessary or appropriate by the Company and its counsel (the "Offering Materials"). The Placement Agent shall promptly notify the Company as any and all commitments in the Offering are received. -1- The Offering shall be made directly by the Company under the terms of a subscription agreement, in a form to be provided by the Company (the "Purchase Agreement"). 2. COMPENSATION. As consideration for the Placement Agent's services under this Agreement, the Company shall pay to the Placement Agent a commission of 5% of fair market value of the Shares sold in the Offering, based on the average closing sale price of the Common Stock for the five trading days immediately preceding the closing date of the Offering. Payment of the commission shall be made within five business days after the closing of the Offering. 3. TERMINATION OF AGREEMENT. (a) Automatic Termination. This Agreement shall automatically terminate on the earlier of (i) the date on which the Company has sold 2,750,000 Shares in the Offering, or (ii) May 1, 1998, unless extended by mutual written agreement. (b) Voluntary Termination. Either party may voluntarily terminate this Agreement if (i) any of the other party's representations or warranties contained in this Agreement are found to be incorrect or misleading in any material respect, or (ii) the other party fails, refuses, or is unable to perform in any material respect any of its covenants or agreements under this Agreement, after notice and reasonable opportunity to cure. (c) Survival. Notwithstanding Sections 3(a) and 3(b), all of the representations, warranties, and agreements contained in this Agreement, including, without limitation, the provisions of Sections 2 and 5, shall remain operative and in fun force and effect regardless of any investigation made by or on behalf of the Placement Agent or the Company, and shall survive delivery of the Shares or termination of this Agreement. 4. REPRESENTATIONS, WARRANTIES AND COVENANTS. (a) By the Company. The Company represents, warrants and covenants to the Placement Agent as follows: i. Corporate Organization; Authorization. The Company is duly incorporated, validly existing and in good standing as a corporation under the laws of the State of Washington and has full corporate power and corporate authority to conduct all of the activities conducted by it as contemplated by this Agreement. This Agreement has been duly authorized, executed, and delivered by the Company and constitutes a valid and binding agreement of the Company enforceable in accordance with its terms. ii. Capital Stock. The Company has authorized capital stock consisting of 100,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. As of March 24, 1998, the Company had outstanding 14,390,566 shares of Common Stock and 1,000 shares of Series A Convertible Preferred Stock. The Shares, when issued, will be duly and validly issued, fully paid and nonassessable. -2- iii. Compliance with Securities Laws. The Company will not take any action that would cause the Offering to fail to be exempt from registration under Regulation D. The Company shall take (or shall refrain from taking) such actions as the Placement Agent may reasonably request in order to ensure the availability of such exemption. iv. Accuracy of Offering Materials. The Offering Materials fairly present the financial condition of the Company as of the dates of any financial statements contained therein, and did not or will not, as of their dates, contain any untrue statement of a material fact or omit to state any material fact required to be stated or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. However, this representation and warranty does not apply to any statements or omissions in the Offering Materials made in reliance upon, and in conformity with, information given to the Company by or on behalf of the Placement Agent. (b) By the Placement Agent. The Placement Agent represents, warrants, and covenants to the Company as follows: i. Corporate Organization; Authorization. The Placement Agent is a __________________ company, duly organized, validly existing, and in good standing under the laws of the jurisdiction in which it is organized, and has full power and authority to conduct all of the activities to be conducted by it as contemplated by this Agreement. This Agreement has been duly authorized, executed, and delivered by the Placement Agent and constitutes a valid and binding agreement of the Placement Agent enforceable in accordance with its terms. ii. Placement Agent Registration. The Placement Agent is duly licensed or qualified to do business, and in good standing as a foreign corporation and as a licensed or registered broker/dealer, in all jurisdictions in which the nature of the activities conducted or contemplated by it or the character of the assets owned or leased by it makes such license or registration necessary, or where the failure to be so licensed or registered would have a material adverse effect on its ability to carry out its obligations under this Agreement. iii. Compliance with Securities Laws. The Placement Agent will not take any action that would cause the Offering to fail to be exempt from registration under Regulation D. The Placement Agent shall take (or shall refrain from taking) such actions as the Company may reasonably request in order to ensure the availability of such exemption. Without limiting the foregoing, the Placement Agent will offer Shares only to accredited investors, as such term is defined in Regulation D, and will promptly notify the Company if the Placement Agent at any time before closing of the Offering no longer reasonably believes that an Investor is an accredited investor. The Placement Agent will advise each Investor prior to the sale of any Shares to that Investor that the Shares will not be registered under the Securities Act and that the Investor win not be entitled to sell or otherwise transfer the Shares unless the Shares are so registered or an exemption from registration is available. 5. INDEMNIFICATION AND CONTRIBUTION. (a) Indemnification by Company. -3- i. Scope of Indemnity. The Company agrees to indemnify, defend, and hold harmless the Placement Agent and its officers, directors, managers, agents, and employees against any losses, claims, damages or liabilities, joint or several, to which the Placement Agent may become subject under the Securities Act or otherwise, that arise out of or are based upon (a) any untrue statement or alleged untrue statement of any material fact made by the Company in this Agreement, the Offering Materials, or any reporting document filed subsequently by the Company with the SEC (each a "Report'), or (b) the omission or alleged omission of any material fact from the Offering Materials or any such Report which is required to be stated or necessary to make the statements therein not misleading. ii. Exclusions. Notwithstanding the above indemnity, the Company will not be liable under this Section 5(a) for any loss, claim, damage, or liability that: (a) arises out of statements or omissions made in the Offering Materials or any Report in reliance upon and in conformity with information given to the Company by the Placement Agent; (b) constitutes or arises out of a breach of any of the Placement Agent's representations, warranties, and agreements contained in this Agreement; (c) results directly from the Placement Agent's gross negligence or willful misconduct in the performance of its services under this Agreement; (d) relates directly to information provided by the Placement Agent to Investors that is not contained in the Offering Materials and has not been approved in writing for distribution by the Company; or (e) exceeds the amount of the compensation paid to the Placement Agent under this Agreement. (b) Indemnification by Placement Agent. The Placement Agent agrees to indemnify and hold harmless the Company, its officers, directors, managers, agents, and employees, against any losses, claims, damages, or liabilities, joint or several, to which the Company or any such person may become subject under the Securities Act or otherwise insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon: (i) the breach by the Placement Agent of its representations, warranties, or agreements contained in this Agreement; (ii) the gross negligence or willful misconduct of the Placement Agent; or (iii) information provided by the Placement Agent to Investors that is not contained in the Offering Materials and has not been approved in writing for distribution by the Company. 6. MISCELLANEOUS. (a) Notices. All communications under this Agreement shall be in writing and shall be delivered in person, by overnight courier, first-class postage prepaid mail, or by facsimile transmission, to such address as the parties shall designate in writing. Notices shall be deemed to have been given only upon receipt. (b) Assignment; Successors. This Agreement shall not be assigned by any party without the prior written consent of the other party. Subject to the above, this Agreement shall be binding upon, and shall inure solely to the benefit of, the parties and their respective successors-in-interest. No other person shall have or be construed to have any legal or equitable right, remedy, or claim under, or in respect or by virtue of, this Agreement. -4- (c) Translations. If this Agreement is translated into a language other than English and there are discrepancies or differences between the English language version of the text and the foreign language version, the English language version shall prevail. (d) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Washington, without giving effect to rules regarding conflicts of laws. (e) Entire Agreement; Severability. This Agreement constitutes the entire agreement of the parties, and supersedes all prior oral and written agreements, as to the subject matter hereof. This Agreement may not be modified except in writing signed by both parties. If any provision of this Agreement is found by a court of competent Jurisdiction not to be enforceable, the remainder of this Agreement shall continue in full force and effect to the extent possible. (f) Counterparts. This Agreement may be executed in counterparts, each of which shall be an original, and which together shall constitute but one and the same instrument. If the foregoing correctly sets forth the understanding between the Company and the Placement Agent, please sign the confirmation provided below for that purpose. Upon the Company's receipt of such confirmation, this Agreement shall constitute the binding agreement of the parties as of the date first above written. Very truly yours, PACIFIC AEROSPACE & ELECTRONICS, INC. By /s/ DONALD A. WRIGHT -------------------------------------- Donald A. Wright President & CEO Accepted and agreed to as of the date first above written: LYSYS LTD. By /s/ URS DIEBOLD ------------------------------- Its: -------------------------- -5- AMENDMENT OF PLACEMENT AGREEMENT This Amendment is entered as of May 15, 1998, between LYSYS LTD. ("Placement Agent") and PACIFIC AEROSPACE & ELECTRONICS, INC. (the "Company"), in order to amend the Placement Agreement (the "Agreement") executed by the parties on March 25, 1998. 1. Amendment. a. All references to the "Offering" in the Agreement shall be deemed to refer to the offering by the Company of up to 170,000 shares of its Series B Convertible Preferred Stock for $100 per share. b. Section 2 of the Agreement is deleted and replaced with the following: 2. COMPENSATION. As consideration for the Placement Agent's services under this Agreement, the Company shall pay to the Placement Agent a commission of 2.5% of gross sales price of the Shares sold in the Offering. Payment of the commission shall be made within five business days after the closing of the Offering. The Placement Agent consents to the payment of a 2.5% commission by the Company to Pacific Continental Securities, in connection with its services rendered in the Offering. 2. Scope.This Amendment amends the Agreement only to the extent specifically set forth herein. All other terms and conditions of the agreement remain in full force and effect as written. Executed as of the date first written above. PLACEMENT AGENT: COMPANY: Lysys Ltd. Pacific Aerospace & Electronics, Inc. By: By: /s/ DONALD A. WRIGHT ------------------------------ ------------------------------ Marcel Huber Donald A. Wright Its: President and CEO -6- EX-10.18 12 FACILITY LETTER EXHIBIT 10.18 BARCLAYS Sorting Code: BARCLAYS BANK PLC 20-00-00 International Corporate Team - North America P.O. Box 544, 54 Lombard Street, London EC3V 9EX Telephone: (0171) 699-5000 The Directors Your Ref: Aeromet International PLC Our Ref: Culff/NACT Eurolink Way Direct Line: 2361 Sittingbourne Kent ME10 3RN 30th July 1998 Dear Sirs We are pleased to advise you that Barclays Bank PLC ("the Bank") has agreed to provide aggregate short term facilities of up to Li.4,500,000 (Four Million Five Hundred Thousand Pounds Sterling) or its currency equivalent (the "Facility") to Aeromet International PLC ("the Borrower") as detailed below. The Bank is also prepared to make available a Bankers Automated Clearing System Facility (the "BACS") of up to Li.2,000,000 (Two Million). Utilisation of the BACS will be in accordance with the terms and conditions previously agreed. The Bank is also prepared to provide the Borrower with a Business Master II facility of up to Li.102,000 (One Hundred & Two Thousand Pounds Sterling) (the "BusinessMaster"). Utilisation under the BusinessMaster shall be in accordance with Schedule C attached hereto. The Schedules attached hereto form part of the terms and conditions of this letter. Following completion of the acceptance formalities detailed below, the Facility and the BACS and the BusinessMaster will be available for drawing by the Borrower, subject to the following terms and conditions: 1. Options Available Within and Utilisation of the Facility The Facility may be utilised by way of the following options and in accordance with the provisions of the Schedules related thereto: -1- Sterling Overdraft (see Schedule A) and/or Foreign Currency Overdraft (see Schedule A) and/or Ancillary Facilities (see Schedule B). Facsimile: (0171) 699 2298 Telex: 418139 Answerback: BARCGB G -2- Within the Facility the aggregate of the liabilities due, owing or incurred thereunder shall not at any time exceed US$7,500,000 (Seven Million Five Hundred Thousand United States Dollars) or its currency equivalent. The Dollar equivalent of the currencies utilised or available to be utilised under the Facility be calculated by the Bank at any time by reference to the Bank's spot rate of exchange in the London Exchange Market for the sale of the relevant currency or currencies for Sterling. 2. Availability All monies owing under the Facility and the BACS and the BusinessMaster are repayable upon written demand by the Bank and/or any undrawn portion of the Facility and the BACS and the BusinessMaster may be cancelled by the Bank, at any time. Following demand and/or cancellation, no further utilisation may be made under the Facility and the BACS and the BusinessMaster. The Bank may, at any time after such demand and/or cancellation call for payment of full cash cover for the full amount of all liabilities outstanding under the Ancillary Facilities, and/or The Bank may require the Borrower to give security over cash cover paid to the Bank (together with interest accruing thereon) in form and substance satisfactory to the Bank to secure the Borrower's liabilities to the Bank under the Facility and the BACS and the BusinessMaster. The Borrower shall indemnify the bank on demand against any loss, liability or expense which the Bank may reasonably sustain or incur as a consequence of making such demand or as a consequence of non-performance by the borrower of any obligation under this letter. Any monies not paid following a demand under this clause shall continue to bear interest and in respect of the Sterling Overdraft, the Foreign Currency Overdraft as calculated in the respective Schedules. Following any payments made by the Bank on behalf of the Borrower under the BACS and the BusinessMaster and the Ancillary Facilities, will, except for those amounts where cash cover has been made by the Borrower as for above, continue to bear interest at 2% per annum over the Bank's Base Rate current from time to time until payment is made. Interest shall, if unpaid, be compounded on the Bank's usual charging dates. Interest will continue to be charged and compounded on this basis after as well as before demand or judgment. The Bank reserves the right, at any time following a demand under this clause, to purchase with Sterling any currency necessary to convert any amounts outstanding under the Facility, together with interest accrued thereon, to Sterling, whereupon the Borrower shall then -3- become liable to pay the Bank forthwith the relevant Sterling amounts, together with all costs and expenses incurred by the bank. Interest will continue to be charged as detailed above. In the absence of demand or cancellation by the Bank, the Facility and the BACS and the BusinessMaster are available for utilisation until the 30th July 1999 and no liability or liabilities incurred may extend more than three months beyond the above mentioned expiry date. However, the Bank will be pleased to discuss the Borrower's future requirements shortly before that date. 3. Security and/or Guarantees The Borrowers obligations hereunder will be secured by a charge over debtors on the Bank's standard form. This security together with any other security which is now held, or hereafter may be held, by the Bank to secure all moneys and liabilities which shall from time to time be due, owing or incurred to the Bank by the Borrower, whether actually or contingently. 4. Fees A negotiation fee of Li.15,000 (plus VAT, if any) will be payable by the Borrower to the Bank on acceptance of this offer. 5. Information The Borrower undertakes to provide the Bank with copies of its audited Consolidated Profit and Loss account and Balance Sheet as soon as they are available and not later than 180 days from the end of each accounting reference period, together with monthly Management Accounts and debtor listing within 30 days of each month end. In addition the Borrower undertakes to provide the Bank with copies of Pacific Aerospace & Electronics, Inc (the "Parent") audited Consolidated Profit and Loss account and Balance Sheet and Form 10K as soon as they are available and not later than 180 days from the end of each accounting reference period, together with a copy of the Form 10Q within 60 days of the quarter end together with any other information which the Bank may reasonably request from time to time. 6. Change in Circumstances In the event of any change in applicable law or regulation or the existing requirements of, or any new requirements being imposed by, the Bank of England or other regulatory authority the result of which, in the sole opinion of the Bank, is to increase the cost of it of funding, maintaining or making available the Facility and the BACS and the BusinessMaster(or any -4- undrawn amount thereof) or to reduce the effective return to the Bank, then the Borrower shall pay to the Bank such sum as may be certified by the Bank to the Borrower as shall compensate the Bank for such increased cost or such reduction. 7. Set-Off Any sum of money at any time standing to the credit of the Borrower with the Bank in any currency upon any account or otherwise (whether or not any such account is held in the Borrower's name) or provided to the Bank as cash cover for any outstanding liabilities under the BACS and the BusinessMaster and the Ancillary Facilities, may be applied by the Bank at any time (without notice to the Borrower) in or towards the discharge of any money or liabilities now or hereafter due, owing or incurred to the Bank by the Borrower hereunder (whether presently payable or not). 8. Currency Indemnity If, for any reason, any amount payable to the Bank is received or recovered in a currency other than the contractual currency in which it is due, then, to the extent that the amount actually received or recovered by the Bank (when converted by the Bank into the contractual currency at the applicable rate of exchange) falls short of the amount due in the contractual currency, the Borrower shall, as a separate and independent obligation, reimburse the Bank on demand (on a full indemnity basis) for the amount of such shortfall. 9. Negative pledge Neither the borrower nor any of its subsidiaries will create or permit to subsist (other than in favour of the Bank) any lien (except a lien arising solely by operation of law), mortgage, guarantee or charge or other encumbrance, except encumbrances in existence at the date of this offer and full details of which were disclosed in writing to the Bank prior to that date provided that the amount secured by any such encumbrance is not at any time increased. 10. Default Clause If any indebtedness of the Parent or any of its Subsidiaries becomes immediately due and payable, or capable of being declared so due and payable, prior to its stated maturity, by reason of default on the part of any person, or the Parent or any of its Subsidiaries failing to discharge any indebtedness on its due date (other than a liability which the Parent or any of its Subsidiaries shall then be contesting in good faith) then the Bank's commitment to advance the Facility or any balance thereof shall cease and the whole amount of the outstanding Facility and all accrued interest and other amounts owing hereunder will become repayable forthwith on demand in writing made by the Bank at any time. -5- 11. Applicable Law This letter shall be governed by, construed and take effect in accordance with English Law. 12. Acceptance Prior to the Facility and the BACS and the BusinessMaster being utilised, the Borrower shall provide the 54 Lombard Street Branch of the Bank (the "Branch") with the following: (a) the enclosed duplicate of this letter duly signed on the Borrower's behalf as evidence of acceptance of the terms and conditions stated herein, (b) a certified true copy of a resolution of the Borrower's Board of Directors: (i) accepting the Facility and the BACS and the BusinessMaster on the terms and conditions stated herein, (ii) authorising, a specified person, or persons, to sign and return to the Bank the duplicate of this letter, (iii) authorising the Bank to accept instructions and confirmations in connection with the Facility and the BACS and the BusinessMaster signed in accordance with the Bank's signing mandate current from time to time. (c) confirmed specimens of the signature of those officers referred to in (b)(ii) above. (d) the executed charge over debtors. This offer will remain available for a period of one month from the date of this letter after which it will lapse if not accepted. Yours faithfully, for and on behalf of BARCLAYS BANK PLC /s/ W. J. BLACKLEDGE - ---------------------------------- W J Blackledge Associate Director -6- Accepted on the terms and conditions stated herein, pursuant to a resolution of the Board of Directors (a certified true copy of which is attached hereto). For and on behalf of AEROMET INTERNATIONAL PLC /s/ DON A. WRIGHT :DIRECTOR /s/ NICK A. GERDE :DIRECTOR - ----------------------------- --------------------------- DATE: 7-31-98 ----------- -7- SCHEDULE A Sterling Overdraft The sterling overdraft will be available on the Borrower's current account at this branch of the Bank (the "Branch") with interest charged at a rate of 2% per annum over the Bank's Base Rate current from time to time. Interest together with other charges will be debited to the Borrower's current account at the Branch quarterly in arrears in March, June, September and December each year or at such other times as may be determined by the Bank, and such interest will be calculated on the basis of actual days elapsed over 365 day year. Foreign Currency Overdraft The Foreign Currency Overdraft will be made available in any currency (other than sterling) as previously agreed by and arranged with the Bank, and which currency is freely transferable and available to the Bank in the normal course of business. The Foreign Currency Overdraft will be available in any currency account at the Branch with interest charged at 2% per annum over the Bank's call loan rate current from time to time. Interest together with other charges will be debited to the Borrower's foreign currency account at the Branch quarterly in arrears in March, June, September and December each year or at such other times as may be determined by the Bank, and such interest will be calculated on the basis of actual days elapsed over a 360 day year. SCHEDULE B ANCILLARY FACILITIES Documentary Letters of Credit The Bank is prepared to open Documentary Letters of Credit on instructions from the Borrower to provide for the purchase of commodities as may be agreed by the Bank from time to time. All Documentary Letters of Credit are issued subject to the terms and conditions set out in the Bank's standard form for opening Documentary Letters of Credit and are also subject to the "Uniform Customs and Practice for Documentary Credits 500", or any subsequent revision as issued by the International chamber of Commerce. Pricing will be decided on a case by case basis. Guarantees, Bonds and Indemnities The Bank is prepared to consider issuing guarantees, bonds and indemnities on behalf of the Borrower in respect of normally accepted and commercial transactions, subject to prior -8- agreement with the Bank and receipt of the necessary counter indemnities. Pricing will be decided on a case by case basis. Negotiation of Sterling/Foreign Currency Cheques and Bills of Exchange Payable Abroad The Bank will purchase, with recourse, suitable foreign currency and sterling cheques payable abroad and/or approved foreign currency or sterling bills of exchange payable abroad. The suitability of those cheques and bills of exchange which the Bank is prepared to purchase is entirely at the discretion of the Bank, and is subject to the Uniform Rules for the Collection of Commercial Paper (1995 Revision). Pricing will be decided on a case by case basis. SCHEDULE C The BusinessMaster II The BusinessMaster II shall be used in accordance with the terms and conditions that have already been agreed. -9- CHARGE OVER DEBTORS - ------------------- DEED OF CHARGE - -------------- 1. AEROMET INTERNATIONAL PLC (hereinafter called "the Company") whose registered office is at EUROLINK WAY, SITTINGBOURNE, KENT ME10 3RN will on demand in writing made to the Company pay or discharge to Barclays Bank PLC (hereinafter called "the Bank") all moneys and liabilities which shall for the time being (and whether on or at any time after such demand) be due owing or incurred to the Bank by the Company whether actually or contingently and whether solely or jointly with any other person and whether as principal or surety and including interest discount commission or other lawful charges and expenses which the Bank may in the course of its business charge in respect of any of the matters aforesaid or for keeping the Company's account and so that interest shall be computed and compounded according to the usual mode of the Bank as well after as before any demand made or judgement obtained hereunder. 2. A demand for payment or any other demand or notice under this security may be made or given by any manager or officer of the Bank or of any branch thereof by letter addressed to the Company and sent by post to or left at the registered office of the Company or its last known place of business and if sent by post shall be deemed to have been made or given at noon on the day following the day the letter was posted. 3. The Company with full title guarantee hereby charges with the payment or discharge of all moneys and liabilities hereby covenanted to be paid or discharged by the Company by way of first fixed charge all book debts and other debts now and from time to time due or owing to the Company. 4. This security shall be continuing security to the Bank notwithstanding any settlement of account or other matter or thing whatsoever and shall be without prejudice and in addition to any other security whether by way of mortgage equitable charge or otherwise howsoever which the Bank may now or any time hereafter hold on the property of the Company or any part thereof for or in respect of the moneys hereby secured or any of them or any part thereof respectively. 5. During the continuance of this security the Company:- (a) shall furnish to the Bank copies of the trading and profit and loss account and audited balance sheet in respect of each financial year of the Company and of every -10- subsidiary thereof forthwith upon the same becoming available and not in any event later than the expiration of three months from the end of such financial year and also from time to time such other financial statements and information respecting the assets and liabilities of the Company as the Bank may reasonably require; (b) shall maintain the aggregate value of the Company's book debts (excluding debts owing by any subsidiary of the Company) at a sum to be fixed by the Bank from time to time and whenever required by the Bank obtain from the Managing Director of the Company for the time being or if there shall be no Managing Director then from one of the Directors of the Company and furnish to the Bank a certificate showing the said aggregate value; c) shall pay into the Company's account with the Bank all moneys which it may receive in respect of the book debts and other debts hereby charged and shall not without the prior consent of the Bank in writing purport to charge or assign, the same in favour of any other person and shall if called upon to do so by the Bank execute a legal assignment of such book debts and other debts to the Bank. 6. (a) At any time after the Bank shall have demanded payment of any moneys hereby secured or if requested by the Company the Bank may appoint by writing any person or persons (whether an officer of the Bank or not) to be a receiver and manager or receivers and managers (hereinafter called "the Receiver" which expression shall where the context so admits include the plural and any substituted receiver and manager or receivers and managers) of all or any part of the property hereby charged; (b) Where two or more persons are appointed to be the Receiver any act required or authorised under any enactment, this Charge (including the power of attorney contained in Clause 7 hereof) or otherwise to be done by the Receiver may be done by any one or more of them unless the Bank shall in such appointment specify to the contrary; (c) The Bank may from time to time determine the remuneration of the Receiver and may remove the Receiver and appoint another in his place; (d) The Receiver shall be the agent of the Company (which subject to the provisions of the Insolvency Act 1986 shall alone be personally liable for his acts defaults and remuneration) and shall have-and be entitled to exercise all powers conferred by the Law of Property Act 1925 in the same way as if the Receiver had been duly appointed thereunder and in particular by way of addition to but without hereby limiting any general powers hereinbefore referred to (and without prejudice to -11- the Bank's Power of sale) the Receiver shall have power to do the following things namely:- (i) to take possession of collect and get in all or any part of the property hereby charged and for that purpose to take any proceedings in the name of the Company or otherwise as he shall think fit: (ii) to raise money from the Bank or others on the security of any debtor debts hereby charged: (iii) to factor or concur in factoring and to release any of the debts hereby charged in such manner and generally on such terms and conditions as he shall think fit and to carry any such transactions into effect in the name of and on behalf of the Company: (iv) to make any arrangement or compromise which the Bank or he shall think fit: (v) to appoint managers officers and agents for the aforesaid purposes at such salaries as he may determine: (vi) to do all such other acts and things as may be considered to be incidental or conducive to any of the matters or powers aforesaid and which he lawfully may or can do: (vii) to obtain access to and take copies of or extracts from any of the books and other records of the Company and for that purpose to go on or into any of the Company's land or buildings or any other land or buildings in or on which the Company's books and other records are for the time being held or deposited; (e) All powers of the Receiver hereunder may be exercised by the Bank whether as Attorney of the Company or otherwise. 7. The Company hereby irrevocably appoints the Bank and the Receiver jointly and also severally the Attorney and Attorneys of the Company for the Company and in its name and on its behalf and as its act and deed or otherwise to seal and deliver and otherwise perfect any deed assurance agreement instrument or act which may be required or may be deemed proper for any of the purposes aforesaid and to take any action or proceedings in connection with any, debt or debts hereby charged wheresoever situate. -12- 8. Any moneys received under the powers hereby conferred shall subject to the repayment of any claims having priority to this security be paid or applied in the following order of priority:- (a) in satisfaction of all costs charges and expenses properly incurred and payments properly made by the Bank or the Receiver and of the remuneration of the Receiver; (b) in or towards satisfaction of the moneys outstanding and secured by this security; (c) as to the surplus (if any) to the person or persons entitled thereto. 9. Section 103 of the Law of Property Act 1925 shall not apply to this security but the statutory power of sale shall as between the Bank and a purchaser from the Bank be exercisable at any time after the execution of this security provided that the Bank shall not exercise the said power of sale until payment of the moneys hereby secured has been demanded or the Receiver has been appointed but this proviso shall not affect a purchaser or put him upon inquiry whether such demand or appointment has been made. 10. All costs charges and expenses incurred hereunder by the Bank and all other moneys paid by the Bank or by the Receiver in perfecting or otherwise in connection with this security or in respect of the property hereby charged and all costs of the Bank of all proceedings for the enforcement of the security hereby constituted or for obtaining payment of the moneys hereby secured or arising out of or in connection with the acts authorised by Clause 6 hereof (and so that any taxation of the Bank's costs charges and expenses shall be on a full indemnity basis) shall be recoverable from the Company as a debt and may be debited to any account of the Company and shall bear interest accordingly and shall be charged on the premises comprised herein and the charge hereby conferred shall be in addition and without prejudice to any and every other remedy lien or security which the Bank may or but for the said charge would have for the moneys hereby secured or any part thereof. 11. In this security where the context so admits the expression "the bank" shall include persons deriving title under the Bank and any reference herein to any statute or any section of any statute shall be deemed to include reference to any statutory modification or re-enactment thereof for the time being in force. IN WITNESS WHEREOF the company has executed these presents as a deed this day of 199 . -13- Executed and delivered as a deed by AEROMET INTERNATIONAL PLC /s/ D.A. WRIGHT DIRECTOR - --------------------------------------- /s/ NICK A. GERDE DIRECTOR - --------------------------------------- Company's Registered Number 1626585 ------- -14- EX-10.20 13 SUBLEASE - ORCA TECHNOLOGIES, INC. EXHIBIT 10.20 SUBLEASE -------- THIS SUBLEASE is entered into as of April 27, 1998 by and between PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington corporation ("PA&E"), and ORCA TECHNOLOGIES, INC., a Utah corporation ("Orca"). RECITALS A. PA&E is the current lessee under that certain lease (the "Lease") dated October 7, 1997, with Creekside Building LLC, a Washington limited liability company ("Landlord"), for the real property commonly known as the Creekside Building, 24000 - 35th Ave. SE, Suite 200, Bothell, WA 98021 (together with all improvements on and appurtenances to such property, the "Leased Area"), which is located on the real property more particularly described as follows: Lot 6 of the Plat of Quadrant Monte Villa Center, recorded on Volume 54 of Plats, pages 165-169, inclusive, records of Snohomish County, Washington, under Auditors No. 9212225007 B. PA&E currently occupies the three offices and conference room located on the west side of the south window wall of the Premises, and the workroom across the hall to the north of such offices (the "PA&E Area"). PA&E desires to sublease to Orca the remainder of the Leased Area (the "Premises"), and Orca desires to sublease the Premises, subject to the Lease and on the terms and conditions set forth in this Sublease. C. All capitalized terms not otherwise defined in this Sublease shall have the meanings set forth in the Lease. AGREEMENT For good and valuable consideration, the receipt and sufficiency of which is acknowledged, the parties agree as follows: 1. Sublease. Effective as of November 15, 1997, PA&E hereby subleases the Premises to Orca, and Orca hereby subleases the Premises from PA&E, all subject to the terms, covenants and conditions contained in this Sublease and the Lease. However, PA&E reserves the right to use the conference room, reception area, lunch room, lavatories, hallways and other common areas located in the Premises. Orca acknowledges having received a complete copy of the Lease from PA&E. 2. Sublease Term. The term of this Sublease commenced as of November 15, 1997, and, subject to Section 19 of this Sublease, shall terminate upon earlier of (a) the date that the Lease terminates for any reason, or (b) upon 60-days written notice by either party. -1- 3. Rent. Orca shall pay all the Base Rent and Additional Rent ("Rent") due under the Lease, less the $2,000 per month paid by PA&E for the PA&E Area, directly to the Landlord on or before the date such Rent is due. Orca shall provide PA&E with evidence of all such payments immediately upon making any Rent payment. 4. Expansion of Premises. Orca agrees that if PA&E vacates the PA&E Area, then the Premises will automatically, without further action by the parties, be increased to 100% of the Leased Area and Orca shall pay 100% of all Rent due under the Lease. In such event, all references to the Premises contained in this Sublease shall refer to the entire Leased Area. 5. Reimbursements. Orca agrees that if PA&E incurs any cost or expense as a result of Orca's use of the Premises or any other portion of the Leased Area, including any additional charges for utilities and the like, Orca shall reimburse PA&E for the same immediately upon PA&E's demand. Any sums not paid within five days following such demand shall bear interest thereafter at the rate of 12% per annum until paid. 6. Condition of Premises. Orca accepts the Premises "as-is" in their current condition. Orca agrees to surrender the Premises to PA&E at the end of the term of this Sublease in substantially the same condition existing as of the first date of such term, ordinary wear and tear and damage due to casualty or condemnation excepted. 7. Alterations. Orca may not place any signs or other means of identification on or about the Premises or in any common areas of the building in which they are located (the "Building") without the prior written consent of the Landlord to the extent required by the Lease. Orca may not make any alterations, or additions or substitutions to the Premises or attach any fixtures thereto without the prior written consent of PA&E and the Landlord. 8. Use of Premises. Orca agrees that it shall use the Premises solely for general office purposes which are consistent with the permitted uses under the Lease. 9. Compliance with Laws. Orca shall comply with all statutes, laws and ordinances relating to the Premises and Orca's use thereof. 10. Compliance with Rules and Regulations. Orca shall comply with all rules and regulations which are currently or hereafter in effect with respect to the Building, including, without limitation, such rules and regulations as pertain to the use of lavatories, parking spaces and common areas, and all nonsmoking policies. 11. Security Requirements. Orca agrees to maintain the security of the Premises and Leased Area at all times, including locking the doors from the reception area when the Premises are not occupied by Orca. 12. Confidentiality. Orca and PA&E acknowledge that the their respective businesses require maintaining the confidentiality of information, correspondence and records pertaining to -2- such businesses. Orca and PA&E agree to cause their respective employees and persons visiting the Premises to respect such confidentiality at all times. 13. PA&E's Rights of Inspection. PA&E shall have the right to enter upon and inspect the Premises at all reasonable times. 14. Orca's Property. PA&E shall not be responsible for loss or damage to the personal property of Orca, its employees, agents or invitees. 15. Utilities. All utilities, including, without limitation, electrical, heating, water, sewer and trash removal services, shall be furnished in accordance with the terms of, and subject to the limitations contained in, the Lease. Orca shall have the right, at its expense, to install its own telephones and telephone lines to the extent conforming to the requirements of the Lease. 16. Destruction or Damage to Premises. In the event of any damage or destruction to the Premises by fire or other casualty, Orca's right to use the Premises shall be subject to the Landlord's rights under the Lease. 17. Insurance. Upon the request of PA&E, Orca shall carry and pay for public liability insurance in a responsible insurance company licensed to do business in Washington during the entire term of this Sublease, in the amounts of coverage set forth in Section 14.4 of the Lease, arising from any claim made against the Landlord, PA&E or Orca for injury to persons or damage to property and which is related to the Premises or their use. 18. Subrogation. As a part of the consideration of this Sublease, each of the parties releases the other and the Landlord from all liability for damage due to any act or neglect of the other party to property owned by said parties which is the result of fire or other casualty covered by insurance carried at the time of such casualty by either party or the Landlord. However, the releases contained in this section shall not apply to loss or damage resulting from the willful or premeditated acts of either of the parties, their agents or employees; and provided further, nothing in this paragraph shall be interpreted or have the effect of relieving or modifying any obligation of any insurance company. 19. Indemnity. Orca shall defend, indemnify and save PA&E harmless from and against all liability of, and claims and allegations asserted against, PA&E by the Landlord or any other person by reason of any failure of Orca to pay any Rent or other amounts due under the Lease when due, or any other action or failure to act by Orca, its agents, employees, invitees and licensees. 20. Default. If Orca defaults in the performance or observance of any covenant or condition applicable to it under the terms of this Sublease or the Lease, PA&E shall have the right to (a) cancel the tenancy created by this Sublease, (b) recover its damages caused by such default, and (c) pursue such other remedies as may be available to PA&E at law or in equity. PA&E `s waiver of any default by Orca under any covenant or condition contained in this -3- Sublease or the Lease shall not operate as a waiver of any subsequent breach of the same or any other covenant or condition. 21. General Provisions. (a) Assignment and Subleasing. Orca may not assign or transfer all or part of this Sublease, or further sublet any portion of the Premises, without the prior written consent of the Landlord and PA&E in each instance. Subject to the foregoing, this Sublease shall bind and benefit of the parties and their respective successors and permitted assigns. (b) Notices. Any and all notices given under this Sublease or the Lease shall be in writing and delivered to PA&E at the Premises and to Orca at the Premises, or at such other address as a party may specify in writing. Orca also agrees to promptly give PA&E true and correct copies of any notices received by Orca from the Landlord. (c) Legal Relationship of the Parties. This Sublease shall not be interpreted or construed as establishing a partnership or joint venture between PA&E and Orca, and neither party shall have the right to make any representations or incur any debts on behalf of the other. Orca further agrees that it may not use or refer to PA&E's name, business or any employee of PA&E with respect to any business or activity of Orca. (d) Further Assurances. Each of the parties shall execute such documents and other papers and take such further actions as may be reasonably required or desirable to carry out the provisions of this Sublease and the transactions contemplated hereby. (e) Attorneys' Fees. The prevailing party in any arbitration or litigation concerning this Sublease is entitled to reimbursement of its court costs and attorneys' fees by the non-prevailing party, including such costs and fees as may be incurred on appeal or in a bankruptcy proceeding. (f) Severability. If any portion of this Sublease is held to be invalid by a court of competent jurisdiction, the remaining terms of this Sublease shall remain in full force and effect to the extent possible. (g) Independent Counsel. Orca acknowledges that Stoel Rives LLP has represented PA&E in this transaction, not Orca, and that Orca has been represented by Durham Evans Jones and Pinegar. (h) Entire Agreement. This Sublease and the Lease contain the entire agreement between Orca and PA&E with regard to the Leased Area, and no modification of this Sublease shall be binding upon the parties unless evidenced by a subsequent written agreement signed by PA&E and Orca. -4- (i) Counterparts. This Agreement may be executed in two or more counterparts, all of which shall constitute but one and the same instrument. (j) Lease Controlling. This Sublease is subject to the terms, covenants and conditions of the Lease, and neither the Lease nor the rights of the Landlord shall be affected by this Sublease. This Sublease shall not become effective until executed by PA&E and Orca and approved by the Landlord as indicated below. Executed as of the first date written above. PACIFIC AEROSPACE & ELECTRONICS, INC. By /s/ DONALD A. WRIGHT -------------------------------------- Donald A. Wright Its President ORCA TECHNOLOGIES, INC. By /s/ ROGER VALLO ------------------------------- Roger Vallo Its President -5- PA&E'S ACKNOWLEDGMENT STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) On this April 29, 1998, before me personally appeared DONALD A. WRIGHT, to me known to be the PRESIDENT of PACIFIC AEROSPACE & ELECTRONICS, INC., the corporation that executed the within and foregoing instrument, and acknowledged said instru ment to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that he was authorized to execute said instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written. /s/ ARTHUR H. KEMBALL ----------------------------------------- Name (Printed):Arthur H. Kemball NOTARY PUBLIC in and for the State of Washington, residing at Wenatchee. My appointment expires: 1-23-29. ORCA'S ACKNOWLEDGMENT STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) On this June 3, 1998, before me personally appeared ROGER VALLO to me known to be the PRESIDENT of ORCA TECHNOLOGIES, INC., the corporation that executed the within and foregoing instrument, and acknowledged said instrument to be the free and volun tary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that he was authorized to execute said instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written. /s/ CAROLE A. WILSON ----------------------------------------- Name (Printed): Carole A. Wilson NOTARY PUBLIC in and for the State of Washington, residing at Marysville. My appointment expires: 4/1/02. -6- EX-10.29 14 GENERAL TERMS AGREEMENT EXHIBIT 10.29 GENERAL TERMS AGREEMENT between THE BOEING COMPANY and CASHMERE MANUFACTURING Number BCA-65311-0140 i GENERAL TERMS AGREEMENT TABLE OF CONTENTS SECTION TITLE - ------- ----- 1.0 DEFINITIONS 2.0 ISSUANCE OF PURCHASE ORDERS AND APPLICABLE TERMS 2.1 Issuance of Purchase Orders 2.2 Acceptance of Purchase Orders 2.3 Written Authorization to Proceed 2.4 Rejection of Purchase Orders 3.0 TITLE AND RISK OF LOSS 4.0 DELIVERY 4.1 Requirements 4.2 Delay 4.3 Notice of Labor Disputes 5.0 ON-SITE REVIEW AND RESIDENT REPRESENTATIVES 5.1 Review 5.2 Resident Representatives 6.0 INVOICE AND PAYMENT 7.0 PACKING AND SHIPPING 8.0 QUALITY ASSURANCE, INSPECTION REJECTION AND ACCEPTANCE 8.1 Controlling Document 8.2 Seller's Inspection 8.3 Boeing's Inspection and Rejection ii SECTION TITLE - ------- ----- 8.4 Federal Aviation Administration or Equivalent Government Agency Inspection 8.5 Retention of Records 8.6 Source Inspection 8.7 Language for Technical Information 9.0 EXAMINATION OF RECORDS 10.0 CHANGES 10.1 General 10.2 Model Mix 11.0 PRODUCT ASSURANCE 12.0 TERMINATION FOR CONVENIENCE 13.0 EVENTS OF DEFAULT AND REMEDIES 14.0 EXCUSABLE DELAY 15.0 SUSPENSION OF WORK 16.0 TERMINATION OR CANCELLATION: INDEMNITY AGAINST SUBCONTRACTOR'S CLAIMS 17.0 ASSURANCE OF PERFORMANCE 18.0 RESPONSIBILITY FOR PROPERTY 19.0 LIMITATION OF SELLER'S RIGHT TO ENCUMBER ASSETS 20.0 PROPRIETARY INFORMATION AND ITEMS 21.0 COMPLIANCE WITH LAWS 22.0 INTEGRITY IN PROCUREMENT 23.0 INFRINGEMENT 24.0 BOEING'S RIGHTS IN SELLER'S PATENTS, COPYRIGHTS, TRADE SECRETS AND TOOLING iii SECTION TITLE - ------- ----- 25.0 NOTICES 25.1 Addresses 25.2 Effective Date 25.3 Approval or Consent 26.0 PUBLICITY 27.0 PROPERTY INSURANCE 27.1 Insurance 27.2 Certificate of Insurance 27.3 Notice of Damage or Loss 28.0 RESPONSIBILITY FOR PERFORMANCE 28.1 Subcontracting 28.2 Reliance 28.3 Assignment 29.0 NON-WAIVER 30.0 HEADINGS 31.0 PARTIAL INVALIDITY 32.0 APPLICABLE LAW 33.0 AMENDMENT 34.0 LIMITATION 35.0 TAXES 35.1 Inclusion of Taxes in Price 35.2 Litigation 35.3 Rebates 36.0 FOREIGN PROCUREMENT OFFSET 37.0 ENTIRE AGREEMENT/ORDER OF PRECEDENCE iv SECTION TITLE - ------- ----- 37.1 Entire Agreement 37.2 Incorporated by Reference 37.3 Order of Precedence 37.4 Disclaimer v AMENDMENT AMEND NUMBER DESCRIPTION DATE APPROVAL, ------ ----------- ---- --------- 1 GENERAL TERMS AGREEMENT RELATING TO BOEING PRODUCTS THIS GENERAL TERMS AGREEMENT is entered into as of 06-11-97, by and between Cashmere Manufacturing, a (Washington) corporation, with its principal office in Wenatchee, Washington, STATE, ("Seller"), and The Boeing Company, a Delaware corporation with its principal office in Seattle, Washington acting by and through its division the Boeing Commercial Airplane Group ("Boeing"). RECITALS A. Boeing produces commercial airplanes. B. Seller manufactures and sells certain goods and services for use in the production and support of such aircraft. C. Seller desires to sell and Boeing desires to purchase certain of Seller's goods and services in accordance with the terms set forth in this Agreement. Now therefore, in consideration of the mutual covenants set forth herein, the parties agree as follows: 2 AGREEMENTS 1.0 DEFINITIONS The definitions set forth below shall apply to the following terms as they are used in this Agreements, any Order, or any related Special Business Provisions ("SBP"). Words importing the singular number shall also include the plural number and vice versa. (a) "Customer" means any owner, operator or user of Products and any other individual, partnership, corporation or entity which has or acquires any interest in the Products from, through or under Boeing. (b) "Derivative" means any new model airplane designated by Boeing as a derivative of an existing Model airplane and which: (1) has the same number of engines as the existing model airplane; (2) utilizes essentially the same aerodynamic and propulsion design, major assembly components, and systems as the existing model airplane and (3) achieves other payload/range combinations by changes in body length, engine thrust, or variations in certified gross weight. (c) "Drawing' means an automated or manual depiction of graphics or technical information representing a Product or any part thereof add which includes the parts list and specifications relating thereto. (d) "End Item Assembly" means any Product which is described by a single part number and which is comprised of more than one component part. (e) "FAA" means the United States Federal Aviation Administration or any successor agency thereto. (f) "FAR" means the Federal Acquisition Regulations in effect on the date of this Agreement. (g) "Materiel Representative" means the individual designated from time to time, by Boeing as being primarily responsible for interacting with Seller regarding this Agreement and any Order. (h) "Order" means each purchase order issued by Boeing and accepted by Seller under the terms of this Agreement. Each Order is a contract between Boeing and Seller. 3 (i) "Product" means goods, including components and parts thereof, services, documents, data, software, software documentation and other information or items furnished or to be furnished to Boeing under any Order, including Tooling except for Rotating Use Tools. (j) "Purchased on Assembly Production Detail Part (POA)" means a component part of an End Item Assembly. (k) "Shipset" means the total quantity of a given part number or material necessary for production of one airplane. (l) "Spare" means any Product, regardless of whether the Product is an End Item Assembly or a Purchased on Assembly Production Detail Part, which is intended for use or sale as a spare part or a production replacement. (m) "Tooling" means all tooling, as defined in Boeing Document M31-24, "Boeing Suppliers Tooling Manual," and/or described on any Order, including but not limited to Boeing-Use Tooling, Supplier-Use Tooling and Common-Use Tooling as defined in Boeing Document D6-49004, "Operations General Requirements for Suppliers," and Rotating-Use Tooling as defined in Boeing Document M31-13, "Accountability of Inplant/Outplant Special (Contract) Tools." For purposes of this Agreement, in the documents named in this subparagraph, the term "Supplier Use Tooling" shall be changed to Seller Use Tooling. 2.0 ISSUANCE OF ORDERS AND APPLICABLE TERMS 2.1 Issuance of Orders Boeing may issue Orders to Seller from time to time. Each Order shall contain a description of the Products ordered, a reference to the applicable specifications and Drawings, the quantities and prices, the delivery schedule, the terms and place of delivery and any special conditions. Each Order which incorporates this Agreement shall be governed by and be deemed to include the provisions of this Agreement. Purchase Order Terms and Conditions, Form D1-4100-4045, Form P252T and any other purchase order terms and conditions which may conflict with this Agreement, do not apply to the Orders. 2.2 Acceptance of Orders 4 Each Order is Boeing's offer to Seller and acceptance is strictly limited to its terms. Boeing will not be bound by and specifically objects to any term or condition which is different from or in addition to the provisions of the Order, whether or not such term or condition will materially alter the Order. Seller's commencement of performance or acceptance of the Order in any manner shall conclusively evidence Seller's acceptance of the Order as written. Boeing may revoke any Order prior to Boeing's receipt of Seller's written acceptance or Seller's commencement of performance. 2.3 Written Authorization to Proceed Boeing's Materiel Representative may give written authorization to Seller to commence performance before Boeing issues an Order. If Boeing in its written authorization specifies that an Order will be issued, Boeing and Seller shall proceed as if an Order had been issued. This Agreement, the applicable SBP and the terms stated in the written authorization shall be deemed to be a part of Boeing's offer and the parties shall promptly agree on any open Order terms. If Boeing does not specify in its written authorization that an Order shall be issued, Boeing's obligation is strictly limited to the terms of the written authorization. For purposes of this Section 2.3 only, written authorization includes electronic transmission chosen by Boeing. If Seller commences performance before an Order is issued or without receiving Boeing's prior authorization to proceed, such performance shall be at Seller's expense. 2.4 Rejection of Purchase Order Any rejection by Seller of an Order shall specify the reasons for rejection and any changes or additions that would make the Order acceptable to Seller; provided, however, that Seller may not reject any Order for reasons inconsistent with the provisions of this Agreement or the applicable SBP. 3.0 TITLE AND RISK OF LOSS Title to and risk of any loss of or damage to the Products shall pass from Seller to Boeing at the F.O.B. point as specified in the applicable Order, except for loss or damage thereto resulting from Seller's fault or negligence. Passage of title on delivery does not constitute Boeing's acceptance of Products. 4.0 DELIVERY 4.1 Requirements 5 Deliveries shall be strictly in accordance with the quantities, the schedule and other requirements specified in the applicable Order. Seller may not make early or partial deliveries without Boeing's prior written authorization. Deliveries which fail to meet Order requirements may be returned to Seller at Seller's expense. 4.2 Delay Seller shall notify Boeing immediately, of any circumstances that may cause a delay in delivery, stating the estimated period of delay and the reasons therefor. If requested by Boeing, Seller shall use additional effort, including premium effort, and shall ship via air or other expedited routing to avoid or minimize delay to the maximum extent possible. All additional costs resulting from such premium effort or premium transportation shall be borne by Seller with the exception of such costs attributable to delays caused directly by Boeing. Nothing herein shall prejudice any of the rights or remedies provided to Boeing in the applicable Order or by law. 4.3 Notice of Labor Disputes Seller shall immediately notify Boeing of any actual or potential labor dispute that may disrupt the timely performance of an Order. Seller shall include the substance of this Section 4.3, including this sentence, in any subcontract relating to an Order if a labor dispute involving the subcontractor would have the potential to delay the timely performance of such Order. Each subcontractor, however, shall only be required to give the necessary notice and information to its next higher-tier subcontractor. 5.0 ON-SITE REVIEW AND RESIDENT REPRESENTATIVES 5.1 Review At Boeing's request, Seller shall provide at Boeing's facility or at a place designated by Boeing, a review explaining the status of the Order, actions taken or planned relating to the Order and any other relevant information. Nothing herein may be construed as a waiver of Boeing's rights to proceed against Seller because of any delinquency. Boeing's authorized representatives may enter Seller's plant at all reasonable times to conduct preliminary inspections and tests of the Products and work-in-process. Seller shall include in its subcontracts issued in connection with an Order a like provision giving Boeing the right to enter the premises of Seller's subcontractors. When requested by Boeing, Seller shall accompany Boeing to Seller's subcontractors. 5.2 Resident Representatives 6 Boeing may in its discretion and for such periods as it deems necessary assign resident personnel at Seller's facilities. Seller shall furnish, free of charge, all office space, secretarial service and other Facilities and assistance reasonably required by Boeing's representatives at Seller's plant. The resident team will function under the guidance of Boeing's manager. The resident team will provide communication and coordination to ensure timely performance of the Order. Boeing's resident team shall be allowed access to all work areas, Order status reports and management review necessary to assure timely performance and conformance with the requirements of each Order. Notwithstanding such assistance, Seller remains solely responsible for performing in accordance with each Order. 6.0 INVOICE AND PAYMENT Unless otherwise provided in the applicable Order, invoicing and payment shall be in accordance with SBP Section 7.0. 7.0 PACKING AND SHIPPING Seller shall (a) prepare for shipment and suitably pack all Products to prevent damage or deterioration, (b) where Boeing has not identified a carrier, secure lowest transportation rates, (c) comply with the appropriate carrier tariff for the mode of transportation specified by Boeing and (d) comply with any special instructions stated in the applicable Order. Boeing shall pay no charges for preparation, packing, crating or cartage unless stated in the applicable Order. Unless otherwise directed by Boeing, all standard routing shipments forwarded on one day must be consolidated. Each container must be consecutively numbered and marked as set forth below. Container and Order numbers must be indicated on the applicable bill of lading. Two copies of the packing sheets must be attached to the No. 1 container of each shipment and one copy in each individual container. Each pack sheet must include as a minimum the following: a) Seller's name, address and phone number; b) Order and item number; c) ship date for the Products; d) total quantity shipped and quantity in each container, if applicable; e) legible pack slip number; f) nomenclature; g) unit of measure; h) slip to if other than Boeing; i) warranty data and certification, as applicable; j) rejection tag, if applicable; k) Seller's certification that Products comply with Order requirements; and, 1) identification of optional material used, if applicable. Products sold F.O.B. place of shipment must be forwarded collect. Seller may not make any declaration concerning the value of the Products shipped, except on Products where the tariff rating or rate depends on the released or declared value, and in such event the value shall be released or declared at the maximum value for the lowest tariff rating or rate. 7 The following markings shall be included on each unit container: a) Seller's name; b) Seller's part number, if applicable; c) Boeing part number, if applicable; d) part nomenclature; e) Order number; f) quantity of Products in container; g) unit of measure; h) serial number, if applicable; i) date (quarter/year) identified as assembly or rubber cure date, if applicable; j) precautionary handling instructions or marking as required. In addition, the following markings/labels shall be included on each shipping container: a) Name and address of consignee; b) Name and address of consigner; c) Order number; d) Part number as shown on the Order; e) Quantity of Products in container; f) Unit of measure; g) Box number; h) Total number of boxes in shipment; and, i) Precautionary handling, labeling or marking as required. 8.0 QUALITY ASSURANCE, INSPECTION, REJECTION, & ACCEPTANCE 8.1 Controlling Document The controlling quality assurance document for Orders shall be as set forth in the SBP Section 4.0. 8.2 Seller's Inspection Seller shall inspect or otherwise verify that all Products and components thereof, including those procured from or cashed by subcontractors or Boeing, comply with the requirements of the Order prior to shipment to Boeing or Customer. Seller shall be responsible for all tests and inspections of the Product and any component thereof during receiving, manufacture and Seller's final inspection. Seller shall include on each packing sheet a certification that the Products comply with the requirements of the Order. 8.2.1 Sellers Disclosure Seller will immediately notify Boeing when discrepancies in Seller's processes or Product are discovered or suspected for Products Seller has delivered. 8.3 Boeing's Inspection and Rejection Unless otherwise specified on an Order, Products shall be subject to final inspection and acceptance by Boeing at destination, notwithstanding any payment or prior inspection. Boeing may reject any Product which does not strictly conform to the requirements of the applicable Order. Boeing shall by notice, rejection tag or other communication notify Seller of such rejection. Whenever possible, Boeing may 8 coordinate with Seller prior to disposition of the rejected Product(s), however, Boeing shall retain final disposition authority with respect to all rejections. At Seller's risk and expense, all such Products will be returned to Seller for immediate repair, replacement or other correction and redelivery to Boeing; provided, however, that with respect to any or all of such Products and at Boeing's election and at Seller's risk and expense, Boeing may: (a) hold, retain, or return such Products without permitting any repair, replacement or other correction by Seller; (b) hold or retain such Products for repair by Seller or, at Boeing's election, for repair by Boeing with such assistance from Seller as Boeing may require; (c) hold such Products until Seller has delivered conforming replacements for such Products; (d) hold such Products until conforming replacements are obtained from a third party; (e) return such Products with instructions to Seller as to whether the Products shall be repaired or replaced and as to the manner of redelivery or (f) return such Products with instructions that they be scrapped. Upon final disposition by Boeing that the non-conforming Product(s) are not subject to repair and prior to the Products being scrapped, Seller shall render the Product(s) unusable. Seller shall also maintain, pursuant to their quality assurance system, records certifying destruction of the applicable Products. Said certification shall state the method and date of mutilation and destruction of the subject Product(s). Boeing shall have the right to review and inspect these records at any time it deems necessary. Failure to comply with these requirements shall be a material breach of this Agreement and grounds for default pursuant to GTA Section 13.0. All repair, replacement and other corrections and redelivery shall be completed within such time as Boeing may require. All costs and expenses, loss of value and any other damages incurred as a result of or in connection with nonconformance and repair, replacement or other correction may be recovered from Seller by an equitable price reduction, set-off or credit against any amounts that may be owed to Seller under the applicable Order or otherwise. Boeing may revoke its acceptance of any Products and have the same rights with regard to the Products involved as if it had originally rejected them. 8.4 Federal Aviation Administration or Equivalent Government Agency Inspection Representatives of Boeing, the FAA or any equivalent government agency may inspect and evaluate Seller's plant including but not limited to, Seller's and subcontractor's facilities, systems, data, equipment, inventory holding areas, procedures, personnel, testing and all work-in-process and completed Products. For purposes of this Section 8.4, equivalent government agency shall mean those governmental agencies so designated by the FAA or those agencies within individual countries which maintain responsibility for assuring aircraft airworthiness. 8.5 Retention of Records 9 Quality assurance records shall be maintained on file at Seller's facility and available to Boeing's authorized representatives. Seller shall retain such records for a period of not less than seven (7) years from the date of final payment under the applicable Order. 8.6 Source Inspection If an Order contains a notation that "100% Source Inspection" is required, the Products shall not be packed for shipment until they have been submitted to Boeing's quality assurance representative for inspection. Both the packing list and Seller's invoice must reflect evidence of this inspection. 8.7 Language for Technical Information All reports, drawings and other technical information submitted to Boeing for review or approval shall be in English and shall employ the units of measure customarily used by Boeing in the U.S.A. 9.0 EXAMINATION OF RECORDS Seller shall maintain complete and accurate records showing the sales volume of all Products. Such records shall support all services performed, allowances claimed and costs incurred by Seller in the performance of each Order, including but not limited to those factors which comprise or affect direct labor hours, direct labor rates, material costs, burden rates and subcontracts. Such records and other data shall be capable of verification through audit and analysis by Boeing and be available to Boeing at Seller's facility for Boeing's examination and audit at all reasonable times from the date of the applicable Order until three (3) years after final payment under such Order. Seller shall provide assistance to interpret such data if requested by Boeing. Such examination shall provide Boeing with complete information regarding Seller's performance for use in price negotiations with Seller relating to existing or future orders for Products, including but not limited to negotiation of equitable adjustments for changes and termination/obsolescence claims pursuant to GTA Section 10.0. Boeing shall treat all information disclosed under this Section as confidential. 10.0 CHANGES 10.1 General Boeing's Materiel Representative may at any time by written change order make changes within the general scope of an Order in any one or more of the following: drawings, designs, specifications, shipping, packing, place of inspection, place of 10 delivery place of acceptance, adjustments in quantities, adjustments in delivery schedules, or the amount of Boeing furnished material. Seller shall proceed immediately to perform the Order as changed. If any such change causes an increase or decrease in the cost of or the time required for the performance of any part of the work, whether changed or not changed by the change order, an equitable adjustment shall be made in the price of or the delivery schedule for those Products affected, and the applicable Order shall be modified in writing accordingly. Any claim by Seller for adjustment under this Section 10.1 must be received by Boeing in writing no later than (60) days from the date of receipt by Seller of the written change order or within such other time as the parties may agree in writing or such claim shall be deemed waived. Nothing in this Section 10.1 shall excuse Seller from proceeding with an Order as changed, including failure of the parties to agree on any adjustment to be made under this Section 10.1. If Seller considers that the conduct of any of Boeing's employees has constituted a change hereunder, Seller shall immediately notify Boeing's Materiel Representative in writing as to the nature of such conduct and its effect on Seller's performance. Pending direction from Boeing's Materiel Representative, Seller shall take no action to implement any such change. 10.2 Model Mix In the event any Derivative aircraft(s) is introduced by Boeing, Boeing may (but is not obligated to) direct Seller within the scope of the applicable Order and in accordance with the provisions of GTA Section 10.0 to supply Boeing's requirements for Products for such Derivative aircraft(s) which correspond to those Products being produced under the applicable Order. 11.0 PRODUCT ASSURANCE Boeing's acceptance of any Product does not alter or affect the obligations of Seller or the rights of Boeing and its customers under the document referenced in the SBP Section 6.0 or as provided by law. 12.0 TERMINATION FOR CONVENIENCE 12.1 Basis for Termination; Notice Boeing may, from time to time and at Boeing's sole discretion, terminate all or part of any Order issued hereunder, by written notice to Seller. Any such written notice of termination shall specify the effective date and the extent of any such termination. 11 12.2 Termination Instructions On receipt of a written notice of termination pursuant to GTA Section 12.1, unless otherwise directed by Boeing, Seller shall: A. Immediately stop work as specified in the notice; B. Immediately terminate its subcontracts and purchase orders relating to work terminated; C. Settle any termination claims made by its subcontractors or suppliers; provided, that Boeing shall have approved the amount of such termination claims prior to such settlement; D. Preserve and protect all terminated inventory and Products; E. At Boeing's request, transfer title (to the extent not previously transferred) and deliver to Boeing or Boeing's designee all supplies and materials, work-in-process, Tooling and manufacturing drawings and data produced or acquired by Seller for the performance of this Agreement and any Order, all in accordance with the terms of such request; F. Take all reasonable steps required to return, or at Boeing's option and with prior written approval to destroy, all Boeing Proprietary Information and Items in the possession, custody or control of Seller; G. Take such other action as, in Boeing's reasonable opinion, may be necessary, and as Boeing shall direct in writing, to facilitate termination of this Order; and H. Complete performance of the work not terminated. 12.3 Seller's Claim If Boeing terminates an Order in whole or in part pursuant to Section 12.1 above, Seller shall have the right to submit a written termination claim to Boeing in accordance with the terms of this Section 12.3. Such termination claim shall be submitted to Boeing not later than six (6) months after Seller's receipt of the termination notice and shall be in the form prescribed by Boeing. Such claim must contain sufficient detail to explain the amount claimed, including detailed inventory schedules and a detailed breakdown of all costs claimed separated into categories 12 (e.g., materials, purchased parts, finished components, labor, burden, general and administrative), and to explain the basis for allocation of all other costs. Seller shall be entitled to be compensated in accordance with and to the extent allowed under the terms of FAR 52-249-2(e)-(m) excluding (i), (as published in 48 CFR ss. 52.249-2) which is incorporated herein by this reference except "Government" and "Contracting Officer" shall mean Boeing, "Contractor" shall mean Seller and "Contract" shall mean Order. 12.4 Failure to Submit a Claim Notwithstanding any other provision of this Section 12.0, if Seller fails to submit a termination claim within the time period set forth above, Seller shall be barred from submitting a claim and Boeing shall have no obligation for payment to Seller under this Section 12.0 except for those Products previously delivered and accepted by Boeing. 12.5 Partial Termination Any partial termination of an Order shall not alter or affect the terms and conditions of the Order or any Order with respect to Products not terminated. 12.6 Product Price Termination under any of the above paragraphs shall not result in any change to unit prices for Products not terminated. 12.7 Exclusions or Deductions The following items shall be excluded or deducted from any claim submitted by Seller: A. All unliquidated advances or other payments made by Boeing to Seller pursuant to terminated Order; B. Any claim which Boeing has against Seller; C. The agreed price for scrap allowance; D. Except for normal spoilage and any risk of loss assumed by Boeing, the agreed fair value of property that is lost, destroyed, stolen or damaged. 13 12.8 Partial Payment/Payment Payment, if any, to be paid under this Section 12.0 shall be made thirty (30) days after settlement between the parties or as otherwise agreed to between the parties. Boeing may make partial payments and payments against costs incurred by Seller for the terminated portion of the Order, if the total of such payments does not exceed the amount to which Seller would be otherwise entitled. If the total payments exceed the final amount determined to be due, Seller shall repay the excess to Boeing upon demand. 12.9 Seller's Accounting Practices Boeing and Seller agree that Seller's "normal accounting practices" used in developing the price of the Product(s) shall also be used in determining the allocable costs at termination. For purposes of this Section 12.9, Seller's "normal accounting practices" refers to Seller's method of charging costs as either a direct charge, overhead expense, general administrative expense, etc. 12.10 Records Unless otherwise provided in this Agreement or by law, Seller shall maintain all records and documents relating to the terminated portion of the Order for three (3) years after final settlement of Seller's termination claim. 13.0 EVENTS OF DEFAULT AND REMEDIES 13.1 Events of Default The occurrence of any one or more of the following events shall constitute an "Event of Default": A. Any failure by Seller to deliver, when and as required by this Agreement or any Order, any Product, except as provided in GTA Section 14.0; or B. Any failure by Seller to provide an acceptable Assurance of Performance within the time specified in GTA Section 17.0, or otherwise in accordance with applicable law; or, C. Any failure by Seller to perform or comply with any obligation set forth in GTA Section 20.0; or 14 D. Seller is or has participated in the sale, purchase or manufacture of airplane parts without the required approval of the FAA. E. Any failure by Seller to perform or comply with any obligation (other than as described in the foregoing Sections 13.1.A, 13.1.B, 13.1.C and 13.1.D) set forth in this Agreement and such failure shall continue unremedied for a period of thirty (30) days or more following receipt by Seller of notice from Boeing specifying such failure; or F. (a) the suspension, dissolution or winding-up of Seller's business, (b) Seller's insolvency, or its inability to pay debts, or its nonpayment of debts, as they become due, (c) the institution of reorganization, liquidation or other such proceedings by or against Seller or the appointment of a custodian, trustee, receiver or similar person for Seller's properties or business, (d) an assignment by Seller for the benefit of its creditors, or (e) any action of Seller for the purpose of effecting or facilitating any of the foregoing. 13.2 Remedies If any Event of Default shall occur: A. Cancellation Boeing may, by giving written notice to Seller, immediately cancel this Agreement and/or any Order, in whole or in part, and Boeing shall not be required after such notice to accept the tender by Seller of any Products with respect to which Boeing has elected to cancel this Agreement. B. Cover Boeing may manufacture, produce or provide, or may engage any other persons to manufacture, produce or provide, any Products in substitution for the Products to be delivered or provided by Seller hereunder with respect to which this Agreement or any Order has been cancelled and, in addition to any other remedies or damages available to Boeing hereunder or at law or in equity, Boeing may recover from Seller the difference between the price for each such Product and the aggregate expense, including, without Stations administrative and other indirect costs, paid or incurred by Boeing to manufacture, produce or provide, or engage other persons to manufacture, produce or provide, each such Product. 15 C. Rework or Repair Boeing may rework or repair any Product in accordance with GTA Section 8.3. D. Setoff Boeing shall, at its option, have the right to set off against and apply to the payment or performance of any obligation sum or amount owing at any time to Boeing hereunder or under any Order, all deposits, amounts or balances held by Boeing for the account of Seller and any amounts owed by Boeing to Seller, regardless of whether any such deposit, amount, balance or other amount or payment is then due and owing. E. Tooling and Other Materials As compensation for the additional costs which Boeing will incur as a result of the actual physical transfer of production capabilities from Seller to Boeing or Boeing's designee, Seller shall upon the request of Boeing, transfer and deliver to Boeing or Boeing's designee title to any or all (i) Tooling, (ii) Boeing-furnished material, (iii) raw materials, parts, work-in-process, incomplete or completed assemblies, and all other Products or parts thereof in the possession or under the effective control of Seller or any of its subcontractors (iv) Proprietary Information and Materials of Boeing including without limitation planning data, drawings and other Proprietary Information and Materials relating to the design, production, maintenance, repair and use of Tooling, in the possession or under the effective control of Seller or any of its subcontractors, in each case free and clear of all liens, claims or other rights of any person. Seller shall be entitled to receive from Boeing reasonable compensation for any item accepted by Boeing which has been transferred to Boeing pursuant to this Section 13.2.E (except for any item the price of which shall have been paid to Seller prior to such transfer); provided, however, that such compensation shall not be paid directly to Seller, but shall be accounted for as a setoff against any damages payable by Seller to Boeing as a result of any Event of Default. F. Remedies Generally No failure on the part of Boeing in exercising any right or remedy hereunder, or as provided by law or in equity, shall impair, prejudice or constitute a waiver of any such right or remedy, or shall be construed as a waiver of any 16 Event of Default or as an acquiescence therein. No single or partial exercise of any such right or remedy shall preclude any other or further exercise thereof or the exercise of any other right or remedy. No acceptance of partial payment or performance of any of Seller's obligations hereunder shall constitute a waiver of any Event of Default or a waiver or release of payment or performance in full by Seller of any such obligation. All rights and remedies of Boeing hereunder and at law and in equity shall be cumulative and not mutually exclusive and the exercise of one shall not be deemed a waiver of the right to exercise any other. Nothing contained in this Agreement shall be construed to limit any right or remedy of Boeing now or hereafter existing at law or in equity. 14.0 EXCUSABLE DELAY If delivery of any Product is delayed by unforeseeable circumstances beyond the control and without the fault or negligence of Seller or of its suppliers or subcontractors (any such delay being hereinafter referred to as "Excusable Delay"), the delivery of such Product shall be extended for a period to be determined by Boeing after an assessment by Boeing of alternate work methods. Excusable Delays may include, but are not limited to, acts of God, war, riots, acts of government, fires, floods, epidemics, quarantine restrictions, freight embargoes, strikes or unusually severe weather, but shall exclude Seller's noncompliance with any rule, regulation or order promulgated by any governmental agency for or with respect to environmental protection. However, the above notwithstanding, Boeing expects Seller to continue production, recover lost time and support all schedules as established under this Agreement or any Order. Therefore, it is understood and agreed that (i) delays of less than two (2) days' duration shall not be considered to be Excusable Delays unless such delays shall occur within thirty (30) days preceding the scheduled delivery date of any Product and (ii) if delay in delivery of any Product is caused by the default of any of Seller's subcontractors or suppliers, such delay shall not be considered an Excusable Delay unless the supplies or services to be provided by such subcontractor or supplier are not obtainable from other sources in sufficient time to permit Seller to meet the applicable delivery schedules. If delivery of any Product is delayed by any Excusable Delay for more than three (3) months, Boeing may, without any additional extension, cancel all or part of any Order with respect to the delayed Products, and exercise any of its remedies in accordance with GTA Section 13.2 provided however, that Boeing shall not be entitled to monetary damages or specific performance to the extent Seller's breach is the result of an Excusable Delay. 17 15.0 SUSPENSION OF WORK Boeing may at any time, by written order to Seller, require Seller to stop all or any part of the work called for by this Agreement hereafter referred to as a "Stop Work Order" issued pursuant to this Section 15.0. On receipt of a Stop Work Order, Seller shall promptly comply with its terms and take all reasonable steps to minimize the occurrence of costs arising from the work covered by the Stop Work Order during the period of work stoppage. Within the period covered by the Stop Work Order (including any extension thereof) Boeing shall either (i) cancel the Stop Work Order or (ii) terminate or cancel the work covered by the Stop Work Order in accordance with the provisions of GTA Section 12.0 or 13.0. In the event the Stop Work Order is cancelled by Boeing or the period of the Stop Work Order (including any extension thereof) expires, Seller shall promptly resume work in accordance with the terms of this Agreement or any applicable Order. 16.0 TERMINATION OR CANCELLATION AND INDEMNITY AGAINST SUBCONTRACTOR CLAIMS Boeing shall not be liable for any loss or damage resulting from any termination pursuant to GTA Section 12.1, except as expressly provided in GTA Section 12.3 or any cancellation under GTA Section 13.0 except to the extent that such cancellation shall have been determined by Boeing and Seller to have been wrongful, in which case such wrongful cancellation shall be deemed a termination pursuant to GTA Section 12.1 and therefore shall be limited to the payment to Seller of the amount or amounts identified in GTA Section 12.3. As subcontractor claims are included in Seller's termination claim pursuant to GTA Section 12.3, Seller shall indemnify Boeing and hold Boeing harmless from and against (i) any and all claims, suits and proceedings against Boeing by any subcontractor or supplier of Seller in respect of any such termination and (ii) and any and all costs, expenses, losses and damages incurred by Boeing in connection with any such claim, suit or proceeding. 17.0 ASSURANCE OF PERFORMANCE A. Seller to Provide Assurance If Boeing determines, at any time or from time to time, that it is not sufficiently assured of Seller's full, timely and continuing performance hereunder, or if for any other reason Boeing has reasonable grounds for insecurity, Boeing may request, by notice to Seller, written assurance (hereafter an "Assurance of Performance") with respect to any specific matters affecting Seller's performance hereunder, that Seller is able to perform all of its respective obligations under this Agreement when and as specified herein. 18 Each Assurance of Performance shall be delivered by Seller to Boeing as promptly as possible, but in any event no later than 15 calendar days following Boeing's request therefore and each Assurance of Performance shall be accompanied by any information, reports or other materials, prepared by Seller, as Boeing may reasonably request. Boeing may suspend all or any part of Boeing's performance hereunder until Boeing receives an Assurance of Performance from Seller satisfactory in form and substance to Boeing. B. Meetings and Information Boeing may request one or more meetings with senior management or other employees of Seller for the purpose of discussing any request by Boeing for Assurance of Performance or any Assurance of Performance provided by Seller. Seller shall make such persons available to meet with representatives of Boeing as soon as may be practicable following a request for any such meeting by Boeing and Seller shall make available to Boeing any additional information, reports or other materials in connection therewith as Boeing may reasonably request. 18.0 RESPONSIBILITY FOR PROPERTY On delivery to Seller or manufacture or acquisition by it of any materials, parts, Tooling or other property, title to any of which is in Boeing, Seller shall assume the risk of and shall be responsible for any loss thereof or damage thereto. In accordance with the provisions of an Order, but in any event on completion thereof, Seller shall return such property to Boeing in the condition in which it was received except for reasonable wear and tear and except to the extent that such property has been incorporated in Products delivered under such Order or has been consumed in the normal performance of work under such Order. 19.0 LIMITATION OF SELLER'S RIGHT TO ENCUMBER ASSETS Seller warrants to Boeing that it has good title to all inventory, work-in-process, tooling and materials to be supplied by Seller in the performance of its obligations under any Order ("Inventory"), and that pursuant to the provisions of such Order, it will transfer to Boeing title to such Inventory, whether transferred separately or as part of any Product delivered under the Order, free of any liens, charges, encumbrances or rights of others. 19 20.0 PROPRIETARY INFORMATION AND ITEMS Boeing and Seller shall each keep confidential and protect from disclosure all (a) confidential proprietary, and/or trade secret information; (b) tangible items containing, conveying, or embodying such information; and (c) tooling obtained from and/or belonging to the other in connection with this Agreement or any Order (collectively referred to as "Proprietary Information and Materials"). Boeing and Seller shall each use Proprietary Information and Materials of the other only in the performance of and for the purpose of this Agreement and/or any Order. Provided, however, that despite any other obligations or restrictions imposed by this Section 20.0, Boeing shall have the right to use and disclose of Seller's Proprietary Information and Materials for the purposes of testing, certification, use, sale, or support of any item delivered under this Agreement, an Order, or any airplane including such an item; and any such disclosure by Boeing shall, whenever appropriate, include a restrictive legend suitable to the particular circumstances. The restrictions on disclosure or use of Proprietary Information and Materials by Seller shall apply to all materials derived by Seller or others from Boeing's Proprietary Information and Materials. Upon Boeing's request at any time, and in any event upon the completion, termination or cancellation of this Agreement, Seller shall return all of Boeing's Proprietary Information and Materials, and all materials derived from Boeing's Proprietary Information and Materials to Boeing unless specifically directed otherwise in writing by Boeing. Seller shall not, without the prior written authorization of Boeing, sell or otherwise dispose of (as scrap or otherwise) any parts or other materials containing, conveying, embodying, or made in accordance with or by reference to any Proprietary Information and Materials of Boeing. Prior to disposing of such parts or materials as scrap, Seller shall render them unusable. Boeing shall have the right to audit Seller's compliance with this Section 20.0. Seller may disclose Proprietary Information and Materials of Boeing to its subcontractors as required for the performance of an Order, provided that each such subcontractor first assumes, by written agreement, the same obligations imposed upon Seller under this Section 20.0 relating to Proprietary Information and Materials; and Seller shall be liable to Boeing for any breach of such obligation by such subcontractor. The provisions of this Section 20.0 are effective in lieu of, and will apply notwithstanding the absence of, any restrictive legends or notices applied to Proprietary Information and Materials; and the provisions of this Section 20.0 shall survive the performance, completion, termination or cancellation of this Agreement or any Order. This Section 20.0 supersedes and replaces any and all other prior agreements or understandings between the parties to the extent that such agreements or understandings relate to Boeing's obligations relative to confidential, proprietary, and/or trade secret information, or tangible items containing, conveying, or embodying such information, obtained from Seller and related to any Product, regardless of whether disclosed to the receiving party before or after the effective date of this Agreement. 20 21.0 COMPLIANCE WITH LAWS 21.1 Seller's Obligation Seller shall be responsible for complying with all laws, including, but not limited to, any statute, rule, regulation, judgment, decree, order, or permit applicable to its performance under this Agreement. Seller further agrees (1) to notify Boeing of any obligation under this Agreement which is prohibited under applicable environmental law, at the earliest opportunity but in all events sufficiently in advance of Seller's performance of such obligation so as to enable the identification of alternative methods of performance, and (2) to notify Boeing at the earliest possible opportunity of any aspect of its performance which becomes subject to additional environmental regulation or which Seller reasonably believes will become subject to additional regulation during the performance of this Agreement. 21.2 Government Requirements If any of the work to be performed under this Agreement is performed in the United States, Seller shall, via invoice or other form satisfactory to Boeing, certify that the Products covered by the Order were produced in compliance with Sections 6, 7, and 12 of the Fair Labor Standards Act (29 U. S. C. 201-291), as amended, and the regulations and orders of the U. S. Department of Labor issued thereunder. In addition, the following Federal Acquisition Regulations are incorporated herein by this reference except "Contractor" shall mean "Seller": FAR 52.222-26 "Equal Opportunity" FAR 52.222-35 "Affirmative Action for Special Disabled and Vietnam Era Veterans" FAR 52.222-36 "Affirmative Action for Handicapped Workers". 22.0 INTEGRITY IN PROCUREMENT Boeing's policy is to maintain high standards of integrity in procurement. Boeing's employees must ensure that no favorable treatment compromises their impartiality in the procurement process. Accordingly, Boeing's employees must strictly refrain from soliciting or accepting any payment, gift, favor or thing of value which could improperly influence their judgement with respect to either issuing a Order or administering this Agreement. Consistent with this policy, Seller agrees not to provide or offer to provide any employees of Boeing any payment, gift, favor or thing of value for the purposes of improperly obtaining or rewarding favorable treatment in connection with any Order or this Agreement. Seller shall conduct its own and shall ensure that its suppliers conduct their procurement these standards. If Seller has 21 reasonable grounds to believe been violated, Seller shall immediately report such possible violation to the appropriate Director of Materiel or Ethics Advisor of Boeing. 23.0 INFRINGEMENT Seller shall indemnify, defend, and save Boeing and Customers harmless from all claims, suits, actions, awards (including but not limited to awards based on intentional infringement of patents known to Seller at the time of such infringement, exceeding actual damages, and/or including attorneys' fees and/or costs), liabilities, damages, costs and attorneys' fees related to the actual or alleged infringement of any United States or foreign intellectual property right (including but not limited to any right in a patent, copyright, industrial design or semiconductor mask work, or based on misappropriation or wrongful use of information or documents) and arising out of the manufacture, sale or use of Products by Boeing or Customers. Boeing and/or Customers shall duly notify Seller of any such claim, suit or action; and Seller shall, at its own expense, fully defend such claim, suit or action on behalf of Boeing and/or Customers. Seller shall have no obligation under this Section 23.0 with regard to any infringement arising from: (i) Seller's compliance with formal specifications issued by Boeing where infringement could not be avoided in complying with such specifications or (ii) use or sale of Products in combination with other items when such infringement would not have occurred from the use or sale of those Products solely for the purpose for which they were designed or sold by Seller. For purposes of this Section 23.0 only, the term Customer shall not include the United States Government; and the term Boeing shall include The Boeing Company (Boeing) and all Boeing subsidiaries and all officers, agents, and employees of Boeing or any Boeing subsidiary. 24.0 BOEING'S RIGHTS IN SELLER'S PATENTS, COPYRIGHTS, TRADE SECRETS, AND TOOLING Seller hereby grants to Boeing an irrevocable, nonexclusive, paid-up worldwide license to practice and/or use, and license others to practice and/or use on Boeing's behalf, all of Seller's patents, copyrights, trade secrets (including, without limitation, designs, processes, drawings, technical data and tooling), industrial designs, semiconductor mask works, and tooling (collectively hereinafter referred to as "Licensed Property") related to the development, production, maintenance or repair of Products. Boeing hereafter retains all of the aforementioned license rights in Licensed Property, but Boeing hereby covenants not to exercise such rights except in connection with the making, having made, using and selling of Products or products of the same kind, and then only in the event of any of the following: 22 a. Seller discontinues or suspends business operations or the production of any or all of the Products; b. Seller is acquired by or transfers any or all of its rights to manufacture any product to any third party, whether or not related; c. Boeing cancels this Agreement or any Order for cause pursuant to GTA Section 13.0 herein; d. In Boeing's judgement it becomes necessary, in order for Seller to comply with the terms of this Agreement or any Order, for Boeing to provide support to Seller (in the form of design, manufacturing, or on-site personnel assistance) substantially in excess of that which Boeing normally provides to its suppliers; e. Seller's trustee in bankruptcy (or Seller as debtor in possession) fails to assume this Agreement and all Orders by formal entry of an order in the bankruptcy court within sixty (60) days after entry of an order for relief in a bankruptcy case of the Seller, or Boeing elects to retain its rights to Licensed Property under the bankruptcy laws; f. Seller is at any time insolvent (whether measured under a balance sheet test or by the failure to pay debts as they come due) or the subject of any insolvency or debt assignment proceeding under state or nonbankruptcy law; or g. Seller voluntarily becomes a debtor in. any case under bankruptcy law or, in the event an involuntary bankruptcy petition is filed against Seller, such petition is not dismissed within thirty (30) days. As a part of the license granted under this Section 24.0. Seller shall, at the written request of Boeing and at no additional cost to Boeing, promptly deliver to Boeing any and all Licensed Property considered by Boeing to be necessary to satisfy Boeing's requirements for Products and their substitutes. 25.0 NOTICES 25.1 Addresses Notices and other communications shall be given in writing by personal delivery, mail, telex, teletype, telegram, facsimile, cable or other electronic transmission addressed to the respective party as set forth in the SBP Section 9.0. 23 25.2 Effective Date The date on which any such communication is received by the addressee date of such communication. 25.3 Approval or Consent With respect to all matters subject to the approval or consent of either party, such approval or consent shall be requested in writing and is not effective until given in writing. With respect to Boeing, authority to grant approval or consent is limited to Boeing's Materiel Representative. 26.0 PUBLICITY Seller will not, and will require that its subcontractors and suppliers of any tier will not, (i) cause or permit to be released any publicity, advertisement, news release, public announcement, or denial or confirmation of the same, in whatever form, regarding any Order or Products, or the program to which they may pertain, or (ii) use, or cause or permit to be used, the Boeing name or any Boeing trademark in any form of promotion or publicity without Boeing's prior written approval. 27.0 PROPERTY INSURANCE 27.1 Insurance Seller shall maintain continuously in effect a property insurance policy covering loss or destruction of or damage to all property in which Boeing does or could have an insurable interest pursuant to this Agreement, including but not limited to Tooling, Boeing-furnished property, raw materials, parts, work-in process, incomplete or completed assemblies and all other products or parts thereof, and all drawings, specifications, data and other materials relating to any of the foregoing in each case to the extent in the possession or under the effective care, custody or control of Seller, in the amount of full replacement value thereof providing protection against all perils normally covered in an "all risk" property insurance policy (including without limitation fire, windstorm, explosion, riot, civil commotion, aircraft, earthquake, flood or other acts of God). Any such policy shall be in the form and with insurers acceptable to Boeing and shall (i) provide for payment of loss thereunder to Boeing, as loss payee, as its interests may appear and (ii) contain a waiver of any rights of subrogation against Boeing, its subsidiaries, and their respective directors, officers, employees and agents. 24 27.2 Certificate of Insurance Prior to commencement of this Agreement, Seller shall provide to Boeing's Materiel Representative, for Boeing's review and approval, certificates of insurance reflecting full compliance with the requirements set forth in GTA Section 27.1. Such certificates shall be kept current and in compliance throughout the period of this Agreement and shall provide for thirty (30) days advanced written notice to Boeing's Materiel Representative in the event of cancellation, non-renewal or material change adversely affecting the interests of Boeing. 27.3 Notice of Damage or Loss Seller shall give prompt written notice to Boeing's Materiel Representative of the occurrence of any damage or loss to any property required to be insured herein. If any such property shall be damaged or destroyed, in whole or in part, by an insured peril or otherwise, and if no Event of Default shall have occurred and be continuing, then Seller may, upon written notice to Boeing, settle, adjust, or compromise any and all such loss or damage not in excess of Two Hundred Fifty Thousand Dollars ($250,000) in any one occurrence and Five Hundred Thousand Dollars ($500,000) in the aggregate. Seller may settle, adjust or compromise any other claim by Seller only after Boeing has given written approval, which approval shall not be unreasonably withheld. 28.0 RESPONSIBILITY FOR PERFORMANCE Seller shall be responsible for the requirements of this Agreement and any Order referencing this Agreement. Seller shall bear all risks of providing adequate facilities and equipment to perform each Order in accordance with the terms thereof Seller shall include as part of its subcontracts those elements of the Agreement which protect Boeing's rights including but not limited to right of entry provisions, proprietary information and rights provisions and quality control provisions. In addition, Seller shall provide to its subcontractors sufficient information to clearly document that the work being performed by Seller's subcontractor is to facilitate performance under this Agreement or any Order. Sufficient information may include but is not limited to Order number, GTA number or the name of Boeing's Materiel Representative. No subcontracting by Seller shall relieve Seller of its obligation under the applicable Order. 25 28.1 Subcontracting Seller may not procure any Product, as defined in the applicable Order, from a third party in a completed or a substantially completed form without Boeing's prior written consent. Where required by the requirements of the Order, no raw material and/or material process may be incorporated in a Product unless: (a) Seller uses an approved source or (b) Boeing has surveyed and qualified Seller's receiving inspection personnel and laboratories to test the specified raw materials an/or material process. No waiver of survey and qualification requirements will be effective unless granted by Boeing's Engineering and Quality Control Departments. Utilization of a Boeing-approved raw material source does not constitute a waiver of Seller's responsibility to meet all specification requirements. 28.2 Reliance Boeing's entering into this Agreement is in part based upon Boeing's reliance on Seller's ability, expertise and awareness of the intended use of the Products. Seller agrees that Boeing and Boeing's customers may rely on Seller as an expert, and Seller will not deny any responsibility or obligation hereunder to Boeing or Boeing's customers on the grounds that Boeing or Boeing's customers provided recommendations or assistance in any phase of the work involved in producing or supporting the Products, including but not limited to Boeing's acceptance of specifications, test data or the Products. 28.3 Assignment Each Order shall inure to the benefit of and be binding on each of the parties hereto and their respective successors and assigns, provided however, that no assignment of any rights or delegation of any duties under such Order is binding on Boeing unless Boeing's written consent has first been obtained. Notwithstanding the above, Seller may assign claims for monies due or to become due under any Order provided that Boeing may recoup or setoff any amounts covered by any such assignment against any indebtedness of Seller to Boeing, whether arising before or after the date of the assignment or the date of this Agreement, and whether arising out of any such Order or any other agreement between the parties. Boeing may settle all claims arising out of any Order, including termination claims, directly with Seller. Boeing may unilaterally assign any rights or title to property under the Order to any wholly-owned subsidiary of The Boeing Company. 26 29.0 NON-WAIVER Boeing's failure at any time to enforce any provision of an Order does not constitute a waiver of such provision or prejudice Boeing's right to enforce such provision at any subsequent time. 30.0 HEADINGS Section headings used in this Agreement are for convenient reference only and do not affect the interpretation of the Agreement. 31.0 PARTIAL INVALIDITY If any provision of any Order is or becomes void or unenforceable by force or operation of law, the other provisions shall remain valid and enforceable. 32.0 APPLICABLE LAW; JURISDICTION Each Order, including all matters of construction, validity and performance, shall in all respects be governed by, and construed and enforced in accordance with, the law as set forth in SBP Section 5.0. 33.0 AMENDMENT Oral statements and understandings are not valid or binding. Except as otherwise provided in GTA Section 10.0 and SBP Section 12.0, no Order may be changed or modified except by a writing signed by Seller and Boeing's Materiel Representative. 34.0 LIMITATION Seller may not (except to provide an inventory of Products to support delivery acceleration and to satisfy reasonable replacement and Spares requirements) manufacture or fabricate Products or procure any goods in advance of the reasonable flow time required to comply with the delivery schedule in the applicable Order. Notwithstanding any other provision of an Order, Seller is not entitled to any equitable adjustment or other modification of such Order for any manufacture, fabrication, or procurement of Products not in conformity with the requirements of the Order, unless Boeing's written consent has first been obtained. Nothing in this Section 34.0 shall be construed as relieving Seller of any of its obligations under the Order. 27 35.0 TAXES 35.1 Inclusion of Taxes in Price All taxes, including but not limited to federal, state and local income taxes, value added taxes, gross receipt taxes, property taxes, and custom duties taxes are deemed to be included in the Order price, except applicable sales or use taxes on sales to Boeing ("Sales Taxes") for which Boeing has not supplied a valid exemption certificate or unless otherwise indicated on the applicable Order. 35.2 Litigation In the event that any taxing authority has claimed or does claim payment for Sales Taxes, Seller shall promptly notify Boeing, and Seller shall take such action as Boeing may direct to pay or protest such taxes or to defend against such claim. The actual and direct expenses, without the addition of profit and overhead, of such defense and the amount of such taxes as ultimately determined as due and payable shall be paid directly by Boeing or reimbursed to Seller. If Seller or Boeing is successful in defending such claim, the amount of such taxes recovered by Seller, which had previously been paid by Seller and reimbursed by Boeing or paid directly by Boeing, shall be immediately refunded to Boeing. 35.3 Rebates If any taxes paid by Boeing are subject to rebate or reimbursement, Seller shall take the necessary actions to secure such rebates or reimbursement and shall promptly refund to Boeing any amount recovered. 36.0 FOREIGN PROCUREMENT OFFSET With respect to work covered by the Order, Seller shall use its best efforts to cooperate with Boeing in the fulfillment of any foreign offset program obligation that Boeing may have accepted as a condition of the sale of Boeing's products. In the event that Seller solicits bids or proposals for, or procures or offers to procure any goods or services relating to the work covered by an Order from any source outside of the United States, Boeing shall be entitled, to the exclusion of all others, to all industrial benefits and other "offset" credits which may result from such solicitations, procurements or offers to procure. Seller agrees to take any actions that may be required on its part to assure that Boeing receives such credits. 28 37.0 ENTIRE AGREEMENT/ORDER OF PRECEDENCE 37.1 Entire Agreement The Order sets forth the entire agreement, and supersedes any and all other prior agreements, understandings and communications between Boeing and Seller related to the subject matter of an Order. The rights and remedies afforded to Boeing or Customers pursuant to any provisions of an Order are in addition to any other rights and remedies afforded by any other provisions of this Order, by law or otherwise. 37.2 Incorporated by Reference In addition to the documents previously incorporated herein by reference, the documents listed below are by this reference made a part of this Agreement: A. Engineering Drawing by Part Number and Related Outside Production Specification Plan (OPSP). B. Any other exhibits or documents agreed to by the parties to be a part of this Agreement. 37.3 Order of Precedence In the event of a conflict or inconsistency between any of the terms of the following documents, the following order of precedence shall control: A. SBP (excluding the Administrative Agreement identified in E below) B. This General Terms Agreement (excluding the documents identified in D and F below) C. Order (excluding the documents identified in A and B above) D. Engineering Drawing by Part Number and, if applicable, related Outside Production Specification Plan (OPSP) E. Administrative Agreement (If Applicable) F. Any other exhibits or documents the parties agree shall be part of the Agreement. 29 37.4 Disclaimer Unless otherwise specified on the face of the applicable Order, any CATIA Dataset or translation thereof (each or collectively "Data") furnished by Boeing is furnished as an accommodation to Seller. It is the Seller's responsibility to compare such Data to the comparable two dimensional computer aided design drawing to confirm the accuracy of the Data. BOEING HEREBY DISCLAIMS, AND SELLER HEREBY WAIVES, ALL WARRANTIES AND LIABILITIES OF BOEING AND ALL CLAIMS AND REMEDIES OF SELLER, EXPRESS OR IMPLIED, ARISING BY LAW OR OTHERWISE, WITH RESPECT TO ANY DEFECT IN ANY CATIA DATASET OR TRANSLATION THEREOF, INCLUDING, WITHOUT LIMITATION, ANY (A) IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR USE OR FOR A PARTICULAR PURPOSE, (B) ANY IMPLIED WARRANTY ARISING FROM COURSE OF DEALING OR PERFORMANCE OR USAGE OF TRADE, (C) RECOVERY BASED UPON TORT, WHETHER OR NOT ARISING FROM BOEING'S NEGLIGENCE, AND (D) ANY RECOVERY BASED UPON DAMAGED PROPERTY, OR OTHERWISE BASED UPON DAMAGED PROPERTY, OR OTHERWISE BASED UPON LOSS OF USE OR PROFIT OR OTHER INCIDENTAL OR CONSEQUENTIAL DAMAGES. EXECUTED in duplicate as of the date and year first written above by the duly authorized representatives of the parties. THE BOEING COMPANY CASHMERE MANUFACTURING AEROSPACE by and through its division Boeing Commercial Airplane Group Name: /s/ Name: /s/ GARRY VANDEKIEFT ---------------------------- ---------------------------- Title: Buyer Title: President --------------------------- --------------------------- Date: 6-12-97 Date: 6-12-97 ---------------------------- ---------------------------- EX-10.30 15 SPECIAL BUSINESS PROVISIONS EXHIBIT 10.30 POP SPECIAL BUSINESS PROVISIONS between THE BOEING COMPANY and CASHMERE MANUFACTURING 6-5311-0143 SPECIAL BUSINESS PROVISIONS TABLE OF CONTENTS 1.0 DEFINITIONS.............................................................1 2.0 PURCHASE ORDER NOTE.....................................................1 3.0 PRICES..................................................................2 3.1 Produce Pricing..................................................2 3.2 Manufacturing Configuration Baseline.............................2 3.3 Packaging........................................................2 4.0 GOVERNING QUALITY ASSURANCE REQUIREMENT.................................3 5.0 APPLICABLE LAW JURISDICTION.............................................3 6.0 PRODUCT ASSURANCE.......................................................3 6.1 Governing Document...............................................3 7.0 PAYMENT.................................................................4 7.1 Recurring Price..................................................4 7.2 Non-Recurring Price/Special Charges..............................4 8.0 ACCELERATION/DECELERATION AT NO COST....................................4 9.0 NOTICES.................................................................4 9.1 Addresses........................................................4 10.0 OBLIGATION TO PURCHASE AND SELL.........................................5 11.0 COST AND FINANCIAL PERFORMANCE VISIBILITY...............................6 11.1 Quarterly Reviews................................................6 11.2 Cost Performance Reviews (CPR)...................................6 12.0 CHANGES.................................................................7 12.1 Changes to the Statement of Work.................................7 12.2 Computation of Equitable Adjustment..............................7 12.3 Obsolescence.....................................................7 12.4 Change Absorption................................................7 -i- 12.5 Planning Schedule................................................8 12.6 Value Engineering................................................9 12.7 Reduction in Quantity to be Delivered...........................12 13.0 SPARES AND OTHER PRICING...............................................12 13.1 Spares..........................................................12 13.2 Short Flow Production Requirements..............................15 13.3 Tooling.........................................................15 13.4 Pricing of Boeing's Supporting Requirements.....................16 13.5 Pricing of Requirements for Modification or Retrofit............16 13.6 Similar Pricing.................................................16 14.0 STATUS REPORTS/REVIEW..................................................16 15.0 PROVISIONS FOR OFFSET/BUSINESS STRATEGIES FOREIGN PROCUREMENT REPORT.............................................16 16.0 BOEING FURNISHED MATERIAL..............................................17 17.0 ASSIGNMENT.............................................................17 18.0 INVENTORY AT CONTRACT COMPLETION.......................................18 19.0 OWNERSHIP OF INTELLECTUAL PROPERTY.....................................18 19.1 Technical Work Product..........................................18 19.2 Inventions and Patents..........................................18 19.3 Works of Authorship and Copyrights..............................18 19.4 Pre-Existing Inventions and Works of Authorship.................18 20.0 ADMINISTRATIVE AGREEMENTS..............................................18 21.0 GUARANTEED WEIGHT REQUIREMENTS.........................................18 22.0 SUPPLIER DATA REQUIREMENTS.............................................18 23.0 DEFERRED PAYMENT.......................................................18 24.0 SOFTWARE PROPRIETARY INFORMATION RIGHTS................................19 -ii- AMENDMENTS AMEND NUMBER DESCRIPTION DATE APPROVAL 1 Buyer Name Change 2-20-98 1 Addition of Paragraphs 2-20-98 11.1 and 11.2 (Qrtly Cost Performance Review) 1 Revised Rates & Factors 2-20-98 Attachmate 3 -iii- SPECIAL BUSINESS PROVISIONS THESE SPECIAL BUSINESS PROVISIONS are entered into as of 06-11-97, by and between Cashmere Manufacturing, a (Washington) corporation, with its principal office in Wenatchee, Washington ("Seller"), and The Boeing Company, a Delaware corporation with an office in Lynnwood, Washington acting by and through its division the Boeing Commercial Airplane Group ("Boeing"). RECITALS A. Boeing and Seller entered into a General Terms Agreement GTA # BCA-65311-0140 dated 06-11-97 (the "Agreement") which is incorporated herein and made a part hereof by this reference, for the sale by Seller and purchase by Boeing of Products. B. Boeing and Seller desire to include these Special Business Provisions ("SBP") relating to the sale by Seller and purchase by Boeing of Products. Now, therefore, in consideration of the mutual covenants set forth herein, the parties agree as follows: PROVISIONS 1.0 DEFINITIONS The definitions used herein shall be the same as used in the Agreement. 2.0 PURCHASE ORDER NOTE The following note shall be contained in any Order to which these SBP are applicable: This Order is subject to and incorporates by this reference SBP number 6-5311-0143 between The Boeing Company and Cashmere Manufacturing dated 06-11-97. Each Order bearing such note shall be governed by and be deemed to include the provisions of these SBP. -1- 3.0 PRICES 3.1 Produce Pricing The prices and applicable period of performance of Products scheduled for delivery under this SBP are set forth in Attachment 1. Prices are in United States dollars, F.O.B. Seller's Plant. 3.1.1 Option Pricing Seller irrevocably grants to Boeing the option to purchase additional quantities of Products on the terms and conditions set forth in this SBP at the prices set forth herein, increased or decreased by any equitable adjustments provided herein. 3.1.2 Exercise of Option Boeing may exercise such option by written notice to Seller at any time prior to the last delivery of the Product(s) to Boeing; provided however, that such option must be exercised in sufficient time to permit Seller to support Boeing's required deliveries. Seller agrees to provide Boeing with written notice at least sixty (60) days prior to the date when, in Seller's opinion, the option must be exercised. Boeing may extend the option exercise date by purchasing long lead materials, or authorizing Seller to purchase such materials on terms acceptable to Boeing, if such purchase would have the effect of extending the date for assuring production continuity. Boeing reserves the right to (a) not exercise the option and commence new negotiations with Seller for additional quantities of Products; or (b) purchase such additional quantities of Products from third parties. The purchase of such additional quantities of Products from third parties shall not abrogate any of Seller's obligations to Boeing pursuant to the Agreement. 3.2 Manufacturing Configuration Baseline Unit pricing for each Product or part number shown in Attachment 1 is based on the latest revisions of the engineering drawings or specifications at the time of the signing of this SBP. 3.3 Packaging The prices shown in Attachment 1 include packaging costs and all materials and labor required to package Products identified in Attachment 1. Packaging shall be -2- furnished by the Seller in accordance with Document M6-1025, Volume II, "Supplier Part Protection Guide" or Document D200-10038-2 "Supplier Packaging Requirements" as applicable. In the case of Products to be shipped directly to Customers, A.T.A. Specification 300 "Specification for Packaging of Airline Supplies" shall apply unless otherwise directed by Boeing. 4.0 GOVERNING QUALITY ASSURANCE REQUIREMENT All work performed under this SBP shall be in accordance with the following document which is incorporated herein and made a part hereof by this reference: Document D1-9000, Revision A. "Advanced Quality System for Boeing Suppliers," as amended from time to time. 5.0 APPLICABLE LAW JURISDICTION Each Order, including all matters of construction, validity and performance, shall in all respects be governed by, and construed and enforced in accordance only with the law of the State of Washington as applicable to contracts entered into and to be performed wholly within such State between citizens of such State, without reference to any rules governing conflicts of law. Seller hereby irrevocably consents to and submits itself exclusively to the jurisdiction of the applicable courts of the State and the federal courts therein for the purpose of any suit, action or other judicial proceeding arising out of or connected with any Order or the performance or subject matter thereof. Seller hereby waives and agrees not to assert by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that (a) Seller is not personally subject to the jurisdiction of the above-named courts, (b) the suit, action or proceeding is brought in an inconvenient forum or (c) the venue of the suit, action or proceeding is improper. 6.0 PRODUCT ASSURANCE 6.1 Governing Document Seller acknowledges that Boeing and Customers must be able to rely on each Product performing as specified and that Seller will provide all required support. Accordingly, the following provisions and document(s) are incorporated herein and made a part hereof: "Boeing Designed, Sub-Contracted Products Manufacturers Warranty" Boeing Document M6-1124-3. -3- 7.0 PAYMENT 7.1 Recurring Price Unless otherwise provided in the applicable Order, payment of the recurring price shall be made in accordance with Form X-27981 "Pay From Receipt - Additional Terms and Conditions Regarding Invoicing and Payment." Payment terms shall be net thirty (30) days except as otherwise agreed to by the parties. All payments are subject to adjustment for shortages, credits and rejections. 7.2 Non-Recurring Price/Special Charges Unless otherwise provided in the applicable Order, any non-recurring price payable by Boeing under Attachment 1 shall be paid within the term discount period or thirty (30) calendar days (whichever is later) after receipt by Boeing of both acceptable Products and a correct invoice. 8.0 ACCELERATION/DECELERATION AT NO COST Notwithstanding GTA Section 10.0, Boeing may make changes in the delivery schedule without additional cost or change to the unit price stated in the applicable Order if (a) the delivery date of the Product under such Order is on or before the last date of contract, if applicable, and (b) Boeing provides Seller with written notice of such changes. 9.0 NOTICES 9.0.1 Notification of Capacity/Raw Material Constraints Seller shall provide Boeing with written notification of potential delays to Seller's manufacturing start schedule, at least two weeks prior to Seller's manufacturing start schedule. Seller agrees to provide Boeing with weekly status/milestone charts tracking the progress to the Boeing load date. 9.1 Addresses Notices and other communications shall be given in writing by personal delivery, United States mail, telex, teletype, telegram, facsimile, cable or electronic transmission addressed to the respective party as follows: -4- To Boeing: Attention: Mark Kieffer, Buyer: M/S 38-LH BOEING COMMERCIAL AIRPLANE GROUP MATERIEL DIVISION P.O. Box 3707 Seattle, Washington 98124-2207 To Seller: Attention: Garry Vandekieft CASHMERE MANUFACTURING 432 Olds Station Road Wenatchee, Washington 98801 10.0 OBLIGATION TO PURCHASE AND SELL Boeing and Seller agree that in consideration of the prices set forth under Attachment 1, Boeing shall issue Orders for Products from time to time to Seller for Boeing's requirements. Such Products shall be shipped at any scheduled rate of delivery, as determined by Boeing, and Seller shall sell to Boeing Boeing's requirements of such Products, provided that, without limitation on Boeing's right to determine its requirements, Boeing shall not be obligated to issue any Orders for any given Product if: A. Any of Boeing's customers specify an alternate product; B. Such Product is, in Boeing's reasonable judgment, not technologically competitive at any time, for reasons including but not limited to the availability of significant changes in technology, design, materials, specifications, or manufacturing processes which result in a reduced price or weight or improved appearance, functionality, maintainability or reliability; C. Boeing gives reasonable notice to Seller of a change in any of Boeing's aircraft which will result in Boeing no longer requiring such Product for such aircraft; D. Seller has materially defaulted in any of its obligations under any Order, whether or not Boeing has issued a notice of default to Seller pursuant to GTA Section 13.0; or, E. Boeing reasonably determines that Seller cannot support Boeing's requirements for Products in the amounts and within the delivery schedules Boeing requires. -5- 11.0 COST AND FINANCIAL PERFORMANCE VISIBILITY Seller shall provide all necessary cost support data, source documents for direct and indirect costs, and assistance at the Seller's facility for cost performance reviews performed by Boeing pursuant to any Order. Furthermore, Seller shall provide financial data, on a quarterly basis, or as requested, to Boeing's Credit Office for credit and financial condition reviews. Said data shall include but not be limited to balance sheets, schedule of accounts payable and receivable, major lines of credit, creditors, income statements (profit and loss), cash flow statements, firm backlog, and headcounts. Copies of such data are to be made available within 72 hours of any written request by Boeing. This data is required in addition to the cost data provided pursuant to GTA Section 9.0. All such information shall be treated as confidential in accordance with GTA Section 20.0. 11.1 Quarterly Reviews Quarterly Program Reviews will be held between the parties, alternating between Boeing and supplier locations at a mutually agreed upon time. The topics of these reviews may include raw material and component part status, production status, Boeing supplied components inventory, Boeing requirements, changes, forecasts and other issues pertinent to the program. Reviews will allow formal presentation and discussion of Status Reports, as set forth above. In addition to the quarterly reviews, monthly conference calls will occur. These calls will take place on the first Wednesday of every month at a mutually agreeable time. Monthly Seller/Boeing teleconference minutes are to be supplied to Boeing by Seller no later than one week after the teleconference has taken place. 11.2 Cost Performance Reviews (CPR) Boeing/Seller will conduct Cost Performance Reviews as a part of the Quarterly Review. The purpose of the CPR is to identify and implement cost improvement initiatives pursuant to SBP Section 12.6. Areas of improvement of cost (hereafter "Work Packages") will be identified and agreed to by the parties. CPR meeting minutes and action items as part of the minutes are to be supplied to the Boeing Buyer by Seller no later than one week after a CPR has taken place. -6- 12.0 CHANGES 12.1 Changes to the Statement of Work Boeing may direct Seller within the scope of the applicable Order and in accordance with the provisions of GTA Section 10.0, to increase or decrease the work to be performed by the Seller in the manufacture of any Product. 12.2 Computation of Equitable Adjustment The Rates and Factors set forth in Attachment 3, which by this reference is incorporated herein, shall be used to determine the equitable adjustment, if any, (including equitable adjustments, if any, in the prices of Products to be incorporated in Derivative Aircraft), to be paid by Boeing pursuant to SBP Section 12.1 and GTA Section 10.0 for each individual change. 12.3 Obsolescence Claims for obsolete or surplus material and work-in-process created by change orders issued pursuant to this Section shall be subject to the procedures set forth in GTA Section 12.0, except that Seller may not submit a claim for obsolete or surplus material resulting from an individual change order that has a total claim value of Twenty Five Hundred Dollars ($2,500.00) or less. Payment for obsolete or surplus materials shall be made by check deposited as first class mail to the address designated by Seller in SBP Section 9.1. Payment will be made on the tenth (10th) day of the month following the month of the obsolescence claim settlement. 12.4 Change Absorption 12.4.1 Prior to 100% Engineering Release (Drawing Revision Level New) 12.4.1.1 Generally Notwithstanding the provisions of GTA Section 10.0 and SBP Section 12.1, no equitable adjustment in the prices or schedules of any Order shall be made for any change initiated by Boeing made prior to the date on which all engineering drawings that change the technical requirements, descriptions, specifications, statement of work, drawing or designs ("Technical Change(s)") have been released by Boeing ("100% Engineering Release") provided, that an equitable adjustment shall be made for: -7- a. Any Technical Change which is a change between raw material classifications such as a change from to steel or titanium to plastic. Included as a Technical Change for purposes of this Section are changes within any raw material classifications such as a change in alloy or temper. b. Any Technical Change which adds or deletes a process specification including but not limited to chem milling, chrome plating, anodizing, painting, priming and heat treating. 12.4.1.2 Claims Claims for equitable adjustment for Technical Changes shall be submitted in writing within thirty (30) days after 100% Engineering Release. 12.4.2 Subsequent to 100% Engineering Release 12.4.2.1 Generally Notwithstanding the provisions of GTA Section 10.0 and SBP Section 12.1, no equitable adjustment shall be made to the recurring or non-recurring prices after the date of 100% Engineering Release for any change initiated by Boeing unless the value of such change (debit or credit) is greater than or equal to two percent (2%) of the then current unit price for the Product (recurring) or is greater than or equal to two percent (2%) of the total then current nonrecurring price as set forth in Attachment 1. For purposes of this Section, the then current unit price or total nonrecurring price shall be the price identified in Attachment 1 plus any and all price adjustments agreed to previously by the parties. 12.4.2.2 Claims Claims shall be made individually for each Product and for each change. Each claim shall be considered separately for application of the two percent (2%) threshold. Changes may not be combined for the purposes of exceeding the two percent (2%) threshold set forth herein within reason. 12.5 Planning Schedule Any planning schedule or quantity estimate provided by Boeing shall be used solely for production planning. Boeing may purchase Products in different quantities and specify different delivery dates as necessary to meet Boeing's requirements. -8- Such planning schedule and quantity estimate shall be subject to adjustment from time to time. Any such adjustment is not a change under GTA Section 10.0. 12.6 Value Engineering Seller may from time to time submit proposals to Boeing to change drawings, designs, specifications or other requirements that: a. decrease Seller's performance costs; or b. produce a net reduction in the cost to Boeing of installation, operation, maintenance or production of the Product. Provided, that such change shall not impair any essential functions or characteristics of the Products or Tooling. 12.6.1 Submission of Proposal Proposals shall be submitted to Boeing's Materiel Representative. Boeing shall not be liable for any delay in acting upon a proposal. Boeing's decision to accept or reject any proposal shall be final. If there is a delay and the net result in savings no longer justifies the investment, Seller will not be obligated to proceed with the change. Seller has the right to withdraw, in whole or in part, any proposal not accepted by Boeing within the time period specified in the proposal. Seller shall submit, as a minimum, the following information with the proposal: a. description of the difference between the existing requirement and the proposed change, and the comparative advantages and disadvantages of each; b. the specific requirements which must be changed if the proposal is adopted; c. the cost savings and Seller's implementation costs; d. Each proposal shall include the need dates for engineering release and the time by which a proposal must be approved so as to obtain the maximum cost reduction. 12.6.2 Acceptance and Cost Sharing Boeing may accept, in whole or in part, any proposal by issuing a change order. Until such change has been issued, Seller shall remain obligated to perform in -9- accordance with the terms and requirements of the original Order as written. Boeing and Seller shall share the savings as follows: (50%) savings to Boeing; (50%) savings to Seller. Seller shall include with each proposal verifiable cost records and other data as required by Boeing for proposal review and analysis. Each party shall be responsible for its own implementation costs, including but not limited to non-recurring costs. 12.6.3 Cost Savings Computation A change order shall be issued by Boeing and the unit price shall be reduced in an amount equal to the savings portion attributable to Boeing as set forth above. The applicable unit price as set forth in Attachment 1 Statement of Work shall be amended to reflect such change. EXAMPLE Current Price: $600.00 Proposed Cost Savings: $100.00/unit Boeing's Percentage: 50.0% Seller's Percentage: 50.0% Step by Step Computation: 1. $100.00 unit savings x 50.0% Boeing's percentage of savings = $50.00 Boeing savings. 2. $100.00 unit savings x 50.0% Seller's percentage of savings = $50.00 Seller savings. 3. Net affect to the unit cost = $50.00 New Unit Price For Units = $550.00 -10- 12.6.4 Weight Reduction Proposals Seller is encouraged to submit proposals to Boeing that reduce the Product's weight without impairing any essential functions or characteristics of the Product. Seller shall submit such proposals in accordance with SBP Section 12.6.1 above. The amount of any costs or savings that result from a weight reduction proposal shall be agreed by Boeing and Seller. Seller shall include with each proposal verifiable cost records and other data as required by Boeing for proposal review and analysis. Boeing may accept in whole or in part, any such proposal by issuing a change order to the applicable Order. 12.6.5 Process Improvement Boeing and Seller agree to work together to identify areas of improvement which affect the manufacturing and assembly process at Seller's facility, Sellers's subcontractor's facilities and Boeing's Facilities. Manufacturing and assembly process improvements include but are not limited to inventory turn rates, lead time reductions, contracting strategies, set up reductions, and lot size reduction. Boeing and Seller agree to use the following metrics to evaluate improvement. 1. Inventory Turns Defined as: Annual costs of Goods Sold/Inventory Value 2. Productivity Defined as: Annual Sales/Average Employee Count 3. Asset Utilization Defined as: Total Assets/Annual Sales Additional metrics may be added and evaluated as agreed to by the parties. Where Boeing and Seller can identify areas of improvement, the parties will determine the amount of savings which will result from the improvements and share the savings as set forth in 12.6.2 above. Where savings are beyond any anticipated Lean Manufacturing improvements reflected in the current contract price, identified and documented, the parties agree to reduce the Product(s) unit price by the amount apportioned to Boeing as identified above. -11- 12.6.6 Raw Material Cost Improvements Boeing is currently in the process of reviewing raw material costs and the impacts on the subcontractor base. It is Boeing's intention of implementing a program or programs which will help address raw material issues affecting the subcontractor base. Seller agrees to support Boeing in its efforts to identify and address the issues affecting raw material. Where Boeing and Seller can identify areas of improvement, the parties will determine the amount of savings which will result from the improvement and reduce the product's unit price accordingly. 12.7 Reduction in Quantity to be Delivered NOT APPLICABLE 13.0 SPARES AND OTHER PRICING 13.0.1 Purchase orders released inside of normal lead time Purchase orders issued from Boeing to Seller within the normal lead time necessary to produce the product, will be reviewed after Seller notifies Boeing in writing of production delays. Seller may submit a proposal outlining costs for production parts in which lead times are less than mutually upon between Seller and Boeing. Seller and Boeing agree to coordinate activities to reduce or eliminate the need for special charges. 13.1 Spares For purposes of this Section, the following definitions shall apply: A. AIRCRAFT ON GROUND (AOG) - means the highest Spares priority. Seller will expend best efforts to provide the earliest possible delivery of any Spare designated AOG by Boeing. Such effort includes but is not limited to working twenty-four (24) hours a day, seven days a week and use of premium transportation. Seller shall specify the delivery date and time of any such AOG Spare within two (2) hours of receipt of an AOG Spare request. B. CRITICAL - means an imminent AOG work stoppage. Seller will expend best efforts to provide the earliest possible delivery of any Spare designated Critical by Boeing. Such effort includes but is not limited to working two (2) shifts a day, five (5) days a week and use of premium transportation. Seller shall -12- specify the delivery date and time of any such Critical Spare within the same working day of receipt of a Critical Spare request. C. EXPEDITE (CLASS I) - means a Spare required in less than Seller's normal lead time. Seller will expend best efforts to meet the requested delivery date. Such effort includes but is not limited to working overtime and use of premium transportation. D. ROUTINE (CLASS III) - means a Spare required in Seller's normal lead time. E. POA REQUIREMENT (POA) - means any detail component needed to replace a component on an End Item Assembly currently in Boeing's assembly line process. Seller shall expend best efforts feasible to provide the earliest possible delivery of any Spare designated as POA by Boeing. Such effort includes but is not limited to working twenty-four (24) hours a day, seven days a week and use of premium transportation. Seller shall specify the delivery date and time of any such POA within two (2) hours of an AOG Spare request. F. IN-PRODUCTION - means any Spare with a designation of AOG, Critical, Expedite, Routine, POA or End Item Assembly which is in the current engineering configuration for the Product and is used on a model aircraft currently being manufactured by Boeing. G. NON-PRODUCTION REQUIREMENTS - means any Spare with a designation of AOG, Critical, Expedite and Routine requirements which is used on model aircraft no longer being manufactured by Boeing (Post Production) or is in a non-current engineering configuration for the Product (Out of Production). H. BOEING PROPRIETARY SPARE - means any Spare which is manufactured (i) by Boeing or (ii) to Boeing's detailed designs with Boeing's authorization or (iii) in whole or in part using Boeing's Proprietary Materials. 13.1.1 Spares Support Seller shall provide Boeing with a written Spares support process describing Seller's plan for supporting AOG and Critical commitments and manufacturing support. The process must provide Boeing with the name and number of a twenty-four (24) hour contact for coordination of AOG and Critical requirements. Such contact shall be equivalent to the coverage provided by Boeing to its Customers as outlined in Attachment 4 "Boeing AOG Coverage" which is incorporated herein and made a part hereof by this reference. -13- Seller shall notify Boeing as soon as possible via fax, telecon, or as otherwise agreed to by the parties of each AOG and Critical requirement shipment using the form identified in Attachment 5 "Boeing AOG and Critical Shipping Notification." Such notification shall include time and date shipped, quantity shipped, Order, pack slip, method of transportation and air bill if applicable. Seller shall also notify Boeing immediately upon the discovery of any delays in shipment of any requirement and identify the earliest revised shipment possible. 13.1.2 Reclassification or Re-exercises Boeing may on occasion, instruct Seller to re-prioritize or reclassify an existing requirement in order to improve or otherwise change the established shipping schedule. Seller shall expend the effort required to meet the revised requirement as set forth above in the definitions of the requirements. Seller's commitment of a delivery schedule shall be given in accordance with that set forth above for the applicable classification but in no case shall it exceed twenty-four (24) hours from notification by Boeing. 13.1.3 Spare Pricing Except as set forth in subsections 13.1.3.1 and 13.1.3.2 below, the price for {{Boeing Proprietary}} Spare(s) shall be the same as the production price for the Products as listed on Attachment 1, in effect at the time the Spare(s) are ordered. POA parts shall be priced so that the sum of the prices for all POA parts of an End Item Assembly equals the applicable recurring portion of the End Item Assembly. 13.1.3.1 Aircraft On Ground (AOG), Critical Spares and POA Requirement The price for AOG and Critical Spares and POA requirements shall be the price for such Products listed on Attachment 1 in effect when such Spares are ordered multiplied by a factor of 1.07. 13.1.3.2 Expedite Spare (Class 1) The price for Expedite Spares shall be the price for such Products listed on Attachment 1 in effect when such Spares are ordered multiplied by a factor of 1.05. 13.1.4 Special Handling -14- The price for all effort associated with the handling and delivery of Spare(s) is deemed to be included in the price for such Spare(s). Provided, that if Boeing directs delivery of Spares to an F.O.B. point other than Seller's plant, Boeing shall reimburse Seller for shipping charges, including insurance, paid by Seller from the plant to the designated F.O.B. point. Such charges shall be shown separately on all invoices. 13.2 Short Flow Production Requirements Expedite charges, if any, to be paid for short flow production requirements shall not exceed the amount payable under SBP Section 13.1.3.1 above for that portion of the Order which is released short flow except as otherwise agreed to in writing by Boeing. In the event Boeing agrees to pay an amount in excess of that set forth in SBP Section 13.1.3.1 above, Seller shall provide data to verify expedite charges requested. For purposes of this Section, "Short Flow Production" shall be defined as any requirement released less than Seller's current Re-Order Lead time (ROLT). If Seller fails to meet the required delivery, Boeing shall not be obligated to pay the agreed upon amount. 13.3 Tooling 13.3.1 Responsible Party Where Boeing agrees to pay to Seller for Tooling to support the manufacture and delivery of applicable Product(s) identified herein, the amount shall be set forth in Attachment 1. The costs of necessary repair and maintenance to the Tooling is included in such amount. In addition to the requirements set forth in SBP Section 7.2 of this SBP, the Seller shall comply with the Terms and Conditions applicable to the Blanket Tooling Purchase Control Order established with Seller who possess or controls Tooling. Furthermore, Seller must include a properly prepared certified tool list, where applicable, as specified in the M31-24 Document, "Boeing Supplier Tooling Manual." Invoices received with incorrect, improperly prepared or incomplete certified tool lists will be returned for correction prior to payment. Invoices shall be dated concurrent with, or subsequent to, shipment of the Products. 13.3.2 Boeing Furnished Tooling In the event Boeing furnishes Tooling to Seller to support the delivery of Product(s), Seller shall comply with the Terms and Conditions applicable to the Blanket Tooling Purchase Control Order established with Seller who possess or controls Tooling. No repair, replacement or rework required shall be performed without Boeing's prior -15- written consent. Boeing shall notify Seller of, what if any, action shall be required for all discrepant Tooling. 13.4 Pricing of Boeing's Supporting Requirements Any Products required to assist Boeing's supporting requirements, including but not limited to requirements for color and appearance samples, Boeing-owned simulators, test requirements, factory support, flight test spares will be provided for not more than the applicable price as set forth in Attachment 1. 13.5 Pricing of Requirements for Modification or Retrofit Any Products required by Boeing to support a modification or retrofit program shall be provided for not more than the applicable price as set forth in Attachment 1. 13.6 Similar Pricing New Products ordered by Boeing that are similar to or within Product families of Products currently being manufactured by Seller shall be priced using the same methodology or basis as that used to price the existing Product(s). 14.0 STATUS REPORTS/REVIEW When requested by Boeing, Seller shall update and submit, as a minimum, monthly status reports on data requested by Boeing using a method mutually agreed upon by Boeing and Seller. When requested by Boeing, Seller shall provide to Boeing, a manufacturing milestone chart identifying the major purchasing, planning and manufacturing operations for the applicable Product(s). Upon request by Boeing, a program review may be held between the parties. The location agreed to by the parties. The purpose of the review is to improve communication and understanding between the parties to ensure program success. 15.0 PROVISIONS FOR OFFSET/BUSINESS STRATEGIES FOREIGN PROCUREMENT REPORT Seller agrees to cooperate with Boeing in identifying possible subcontractors for work under any Order that support Boeing's offset or business strategies. Prior to -16- releasing any request for proposal to a subcontractor to support Boeing's offset or business strategy, Seller shall coordinate with Boeing. Seller shall document on Attachment 2 all offers to contract and executed contracts with such subcontractors including the dollars contracted. Seller shall provide to Boeing with an updated copy of Attachment 2 for the six-month periods ending June 30 and December 31 of each year. The reports shall be submitted on the 1st of August and the 1st of February respectively. Furthermore, Boeing and Seller agree that in the event it becomes necessary for Boeing to purchase Products from a third party(s) to facilitate an offset commitment or business strategy, Boeing and Seller agree to work together to develop and implement a plan for the removal of such Product or Products from this SBP. Upon settlement of this plan, Boeing shall not be obligated to buy from Seller and Seller shall not be obligated to sell to Boeing the applicable Product(s) notwithstanding SBP Section 10.0. 16.0 BOEING FURNISHED MATERIAL Material, including but not limited to raw material, standards, detail components and assemblies, furnished to Seller by Boeing shall be administered in accordance with a bonded stores agreement between Boeing and Seller. Seller shall provide Boeing with required on-dock dates for all material. Seller's notice shall provide Boeing with required on dock dates for material within two (2) days after the issuance of the purchase order. 17.0 ASSIGNMENT Boeing and Seller agree that Boeing may, in its discretion, assign, in part or in whole, its purchasing obligations under the Agreement or any Order, as applicable, at the prices set forth in Attachment 1 thereof. Boeing reserves the right to rescind its assignment at anytime. Boeing's assignment of purchasing obligation includes scheduling, issuance of Order(s), receival and inspection of Products, acceptance or rejection of Products, payment for accepted Products, and ensuring conformance to the quality assurance system requirements. Boeing shall retain all other rights and obligations pursuant to the applicable terms and conditions. In addition, Boeing reserves the right, where necessary, to -17- coordinate with and mediate between Seller and any assignee regarding such assignment. 18.0 INVENTORY AT CONTRACT COMPLETION Subsequent to Seller's last delivery of Product(s), Products which contain, convey, embody or were manufactured in accordance with or by reference to Boeing's Proprietary Materials including but not limited to finished goods, work-in-process and detail components (hereafter "Inventory") which are in excess of Order quantity shall be made available to Boeing for purchase. In the event Boeing, in its sole discretion, elects not to purchase the Inventory, Seller may scrap the Inventory. Prior to scrapping the Inventory, Seller shall mutilate and/or render it unusable. Seller shall maintain, pursuant to their quality assurance system, records certifying destruction of the applicable Inventory. Said certification shall state the method and date of mutilation and destruction of the subject Inventory. Boeing shall have the right to review and inspect these records at any time it deems necessary. In the event Seller elects to maintain the Inventory, Seller shall not sell or provide the Inventory to any third party without prior specific written authorization from Boeing. Failure to comply with these requirements shall be a material breach and grounds for default pursuant to GTA Section 13.0. 19.0 OWNERSHIP OF INTELLECTUAL PROPERTY 19.1 Technical Work Product NOT APPLICABLE 19.2 Inventions and Patents NOT APPLICABLE 19.3 Works of Authorship and Copyrights NOT APPLICABLE 19.4 Pre-Existing Inventions and Works of Authorship NOT APPLICABLE 20.0 ADMINISTRATIVE AGREEMENTS NOT APPLICABLE 21.0 GUARANTEED WEIGHT REQUIREMENTS NOT APPLICABLE -18- 22.0 SUPPLIER DATA REQUIREMENTS NOT APPLICABLE 23.0 DEFERRED PAYMENT NOT APPLICABLE 24.0 SOFTWARE PROPRIETARY INFORMATION RIGHTS NOT APPLICABLE EXECUTED in duplicate as of the date and year first set forth above by the duly authorized representatives of the parties. THE BOEING COMPANY CASHMERE MANUFACTURING By and Through Its Division Boeing Commercial Airplane Group Name: /s/ Name: /s/ GARRY VANDEKIEFT ---------------------------- ---------------------------- Title: Buyer Title: President --------------------------- --------------------------- Date: 6-12-97 Date: 6-12-97 ---------------------------- ---------------------------- -19- AMENDMENT 1 EXECUTED in duplicate as of the date and year first set forth above by the duly authorized representatives of the parties. THE BOEING COMPANY CASHMERE MANUFACTURING CORPORATION By and Through Its Division Boeing Commercial Airplane Group /s/ BONNIE FREDERICK /s/ GARRY VANDEKIEFT - ---------------------------------- ---------------------------------- Boeing, Contract Administrator President February 20, 1998 February 20, 1998 - ---------------------------------- ---------------------------------- Date Date -20- ATTACHMENT 1 TO SPECIAL BUSINESS PROVISIONS WORK STATEMENT AND PRICING INTENTIONALLY OMITTED - CONFIDENTIAL TREATMENT REQUESTED -21- ATTACHMENT 2 TO SPECIAL BUSINESS PROVISIONS FOREIGN PROCUREMENT REPORT FORM (Seller to Submit) (Reference Section 15.0) COMMODITY/ BID CONTRACTED SUPPLIER NAME COUNTRY NOMENCLATURE DOLLARS DOLLARS - ------------- ------- ------------ ------- ---------- -22- ATTACHMENT 3 TO SPECIAL BUSINESS PROVISIONS RATES AND FACTORS INTENTIONALLY OMITTED - CONFIDENTIAL TREATMENT REQUESTED -23- ATTACHMENT 4 TO SPECIAL BUSINESS PROVISIONS BOEING AOG COVERAGE o NORMAL HOURS BOEING'S MATERIEL REPRESENTATIVE (MATERIEL DIVISION) Approximately 5:30 a.m. - 6:00 p.m. o Performs all functions of procurement process. o Manages formal communication with Seller. o SECOND SHIFT - AOG PROCUREMENT SUPPORT (MATERIEL DIVISION) 3:00 p.m. - 11:00 p.m. o May place order and assist with commitment and shipping information, working with several suppliers on a priority basis. o Provides a communication link between Seller and Boeing. o 24 HOUR AOG SERVICE - AOG CUSTOMER REPRESENTATIVE (CUSTOMER SERVICE DIVISION) 544-9000 o Support commitment information particularly with urgent orders. o Customer Service Representative needs (if available): o Part Number o Boeing Purchase Order o Airline Customer & customer purchase order number o Boeing S.I.S. # If Seller is unable to contact any of the above, please provide AOG/Critical shipping information notification via FAX using Boeing AOG/Critical shipping notification form (Attachment 5). -24- ATTACHMENT 5 TO SPECIAL BUSINESS PROVISIONS BOEING AOG/CRITICAL SHIPPING NOTIFICATION - -------------------------------------------------------------------------------- To: FAX: (206) 544-9261 or 544-9262 Phone: (206) 544-9296 ------------------------------ ------------------------- Buyer Name: Phone: ------------------------------ ------------------------- From: Today's Date: ------------------------------ ------------------ - -------------------------------------------------------------------------------- Part Number: Customer PO: ------------------------------ ------------------- Customer: Ship Date: --------------------------------- --------------------- Qty Shipped: *SIS Number: ------------------------------ ------------------- Boeing PO: Pack Sheet or -------------------------------- Invoice: ----------------------- *Airway Bill: *Flight #: ----------------------------- --------------------- Carrier: ---------------------------------- --------------------- Freight Forwarder: -------------------------------- *If Applicable: Shipped To: (Check One) Boeing ------------- Direct Ship to Customer ------------- Direct Ship to Supplier ------------- -25- Remarks: ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- IF UNABLE TO CONTACT BUYER, PLEASE USE THIS FORM TO FAX SHIPPING INFORMATION -26- EX-10.31 16 LONG TERM AGREEMENT - NORTHROP/CASHMERE EXHIBIT 10.31 LONG TERM AGREEMENT NUMBER 0108098 ------- THIS AGREEMENT is made and entered into as of the date last executed by and between NORTHROP GRUMMAN CORPORATION, a Delaware Corporation, as represented by it's Commercial Aircraft Division, with a place of business at One Northrop Avenue, Hawthorne, California, 90250 (hereinafter call "Buyer"), and CASHMERE MANUFACTURING COMPANY INC. with its principle place of business at 432 Olds Station Road, Wenatchee, WA, 98801 (hereinafter called "Supplier"). 1. DEFINITIONS AND EXPLANATIONS The following definitions shall apply to the following terms as they are used herein, (unless another meaning is clearly indicated by the context in which such term is used): "Purchase Order" or "Change Order" (hereinafter call "Order") means the instrument used by the Buyer in implementing the Long Term Agreement for the procurement from the Supplier of those products, services and data as described herein and to modify or amend such existing Order. "Day" shall mean a calendar day as opposed to working day or manufacturing calendar day unless otherwise specified. "Parties" shall mean the Buyer and Supplier collectively. "Products" shall mean all goods, supplies, material, raw or processed items, hardware, parts, systems, equipment, components, accessories, including spare products (Spares) and all property except data, real property and interests in real property. "Services" shall mean Supplier's time and effort as distinguished from the purchase of products and data. All dollar amounts specified in this Long Term Agreement and all Orders hereto are stated in then-year dollars unless otherwise indicated. -1- 2. IMPLEMENTING ORDERS Orders for the product to be purchased under this Agreement shall be issued at any time during the three (3) year term of this Long Term Agreement on Buyer's standard Purchase Order/ Change Order form. Each Purchase Order/Change Order form shall reference this agreement and itemize the quantities, descriptions, prices and delivery schedule. To be valid, any order must be in writing from the Buyer to the Supplier, to be followed by a Purchase Order/Change Order. An order placed electronically is deemed to be in writing for the purpose of this Agreement. 3. OBLIGATIONS This Agreement together with the Exhibits and Attachments referenced below (which by this reference are hereby incorporated into and are part of this Agreement, and the implementing orders) establish the respective rights and obligations of the parties. Exhibit 1.0 Statement of Work Exhibit 2.0 Pricing Exhibit 3.0 Schedule Exhibit 4.0 Terms and Conditions Exhibit 5.0 Special Provisions Exhibit 6.0 Quality Assurance Provisions Exhibit 7.0 Tooling Attachment A Conventional/AFA Parts Pricing Matrix 4. ORDER OF PRECEDENCE In the event of any inconsistency of conflict between any parts or sections of this Agreement, the inconsistency shall be resolved by giving precedence to the following order: 4.1 Implementing Order(s) issued by Buyer 4.2 Long Term Agreement 4.3 Terms and Conditions 4.4 Special Provisions 5. PERIOD OF PERFORMANCE The period of performance of this Agreement shall be from January 1, 1998 through December 31,1998 with two one year options of January 1, 1999 through December 31, 1999 and January 1, 2000 through December 31, 2000. Buyer shall have the right to exercise the options under this Agreement concurrently or consecutively by giving written notice to Seller of it's election to exercise such option(s) at least thirty (30) days prior to the -2- end of the performance period. Such exercise of option(s) may be transmitted by facsimile (FAX) or electronically. 6. PAYMENT TERMS Payment Terms shall be Net 30 days. 7. RELIANCE Supplier acknowledges that it is, and that Buyer relies upon Supplier as, an expert fully competent in furnishing and supporting the Products purchased hereunder. In this context, Supplier agrees that it will not deny responsibility or obligation to Buyer on the grounds that Buyer approved any specification, drawings, plan or other documentation prepared by Supplier, or that Buyer provided recommendations or assistance in furnishing or supporting the products. 8. SECTION AND PARAGRAPH HEADINGS The sections and paragraph heading herein are for convenience only, and shall not be interpreted to limit or effect in anyway, the meaning of the language contained in such paragraphs. EXHIBIT 1.0 STATEMENT OF WORK 1.1 Introduction Supplier to fabricate and deliver parts as specified in Attachment A and in accordance with the prices and leadtimes set forth herein with applicable drawings and processes. Attachment A lists Buyer's anticipated parts; however, Buyer does not guarantee, represent or warrant that Buyer's actual requirements will contain these parts. Buyer is making no firm commitment and assumes no liability, financial or otherwise, except for the parts actually ordered. 1.2 REVIEWS AND REPORTING The reviews and reporting requirements shall provide the Buyer opportunity to examine and analyze Supplier's progress and results to assure they are achieving the requirements of this procurement. -3- 1.2.1 STATUS REPORTING 1.2.2 PROGRAM REVIEWS Supplier shall assist the Buyer in the conduct of periodic program reviews through first article and initial production and as requested thereafter. The program review shall be conducted at the Supplier's or Buyer's facility. An agenda will be prepared by the Buyer. 1.2.3 FIELD REPRESENTATIVE/QUALITY SOURCE INSPECTOR Supplier shall provide access to Buyer's field and procurement representatives during normal business hours (unless special arrangements are made) to all administrative and manufacturing areas where work is being performed to verify/monitor work in process, review delivery schedule, expedite current orders, provide technical support and perform source inspection. Buyer's representatives to comply with Supplier's general company policy, rules and regulations. 1.3 TOOLING (NEW The Seller's manufactured tooling shall be capable of producing a minimum of 7 shipsets of parts per month, and must be capable of producing a total of 800-1000 shipsets. 1.4 BLUE STREAK OR DROP-INS PROVISIONS 1.4.1 DELIVERY - BLUE STREAK Supplier agrees to deliver any existing or new "similar" part number on a expedite basis ( $200.00 per part number) within three (3) calendar weeks after receipt of Buyer's order, C995 Notes (C-Notes) & Mylars, in sufficient quantity to support Buyer's shipset requirements during Supplier's transition to normal production. 1.4.2 DELIVERY - DROP-INS Supplier agrees to deliver any existing part numbers currently on contract on a expedite basis ( $200.00 per part number) within (3) calendar weeks after notification in writing and receipt of C995 (C-Notes) & Mylars, in sufficient quantity to support Buyer's shipset requirements. -4- 1.4.3 EMERGENCY DELIVERY When Buyer specifies a delivery as an emergency (i.e. line stop), Supplier shall expend all effort on a 24 hour basis to support Buyer's requirement. Charges will be negotiated with Buyer at time of requirement on a case by case basis. 1.5 AIRPLANE ON GROUND (AOG) ORDERS 1. Supplier will provide an "AOG" on call personnel list to be contacted on a 24 hour day basis, 365 days a year. 2. Supplier will provide "AOG" delivery commitments to Buyer within three (3) hours of receipt of requirement notification. Based on production support on a 24 hour day basis, 365 days a year. Charges will be negotiated with buyer at time of requirement on a case by case basis. 1.6 DELIVERY SCHEDULE CHANGES Note No. 11R (18 Mar 98) Adjustment of Schedules. 1. At its sole discretion, Buyer may from time to time change PO Shipping schedules and notify Supplier of shipping schedule changes using: a) Buyer's automated PO reschedule system on the Internet, or any other electronic notice mutually agreed to by Buyer and Supplier; and/or b) Written communications transmitted by Facsimile, Wire, U.S. Mail, Courier, or any other non-automated method. 2. Subject to subparagraph 3 below, upon receipt of a change in schedule, Supplier shall: a) Immediately adjust PO shipping schedules to conform with the changes received from Buyer at no increase in price to Buyer; b) Make all shipments strictly in accordance with the applicable shipping schedules as changed. c) Confirm its ability to meet a changed shipping schedule by: 1) Placing a "Y" for "Yes" in the Accept Flag Field prior to 4:00 p.m., central time, each Friday, for changes transmitted by Buyer's Automated PO Reschedule System; -5- 2. Notifying Buyer in writing (by Facsimile, Wire, U.S. Mail, Courier, or other method agreed to by the parties) within 96 hours (four days) for changes transmitted by any other method. d) Notify Buyer that although Supplier is taking actions required to proceed with the order as changed Supplier is unable to meet a shipping schedule change, as follows: 1. For changes transmitted by Buyer's Automated PO Reschedule System, send a response prior to 4:00 p.m., central time, Friday each week, by placing an "N" for "No" in the Accept Flag Field and an explanation, in the appropriate field, why Supplier is unable to support Buyer's need date; or 2. For changes in shipping schedule transmitted through any method other than the automated PO Reschedule System, notify Buyer, in writing (by Facsimile, Wire, U.S. Mail, Courier, or other method agreed to by the parties), within 96 hours (four days) of receipt of the notice, and provide a written explanation why seller is unable to support Buyer's need date. 3. Supplier may only request an equitable price adjustment pursuant to this clause when Supplier determines that compliance with the Shipping schedule change will require Supplier or any of Supplier's subtiers or subcontractors to remove any item from on-going production or assembly operations; or to use overtime hours or premium or expedited specific, prior written authorization for Supplier to take such action. 4. Nothing in this clause shall excuse Supplier from immediately proceeding with all reasonable actions to comply with the order as changed, including Supplier providing the notice specified in 2.D above and failure of the parties to agree upon any adjustment to be made under this clause." 1.7 MANUFACTURING LEADTIME Supplier's lead time for all H-clip material part numbers is eight (8) weeks. Lead-time for the majority of the UNC offload and other remaining part numbers is (10) weeks. Buyer and Supplier agree there will be a small percentage of items with longer leadtimes. Lead-times for all items will be referenced on pricing matrix Attachment A. All the above are ARO Buyer's order, mylars and C-notes provided material is available within four (4) weeks ARO Buyer's order. -6- EXHIBIT 2.0 PRICING 2.1 The prices set forth in Attachment A are firm fixed price for recurring unit cost only for the initial procurement and options 1 and 2. 2.2 Minimum quantity runs for all parts will be ten (10) pieces per purchase order line item. 2.3 Expedite pricing for Blue Streak and Drop-ins shall be recurring cost of $200.00 per part number per specific ship quantity. Expedite pricing to include Supplier's in-house administrative/ manufacturing disruption and expedite as well as all outside processing expedite. EXHIBIT 3.0 SCHEDULE -------- 3.1 IMPLEMENTING PURCHASE ORDERS 3.1.1 Buyer will issue implementing Purchase Order with scheduled delivery dates due during the Period of Performance of this agreement. 3.1.2 All parts and quantities are ordered pursuant to the implementation Purchase Order due in accordance with negotiated lead times for the initial procurement and options. EXHIBIT 4.0 TERMS AND CONDITIONS -------------------- All terms and conditions of this Agreement shall apply to each Buyer's implementing Purchase Order and amendment issued hereunder to the same extent as though set forth in full in each Buyer's purchase order and amendment. The Purchase Order shall be subject to T-2 (R. 11-95), and T-2 (R. 11-95) Exhibit B, and T 55 (R. 11-95), which are contained in the Northrop Corporation Terms and Conditions Booklet, dated April 1996, incorporated herein by reference. It is also agreed that Seller will accept any additions, changes, deletions, adjustments and modifications to the terms and conditions resulting from Buyer's customer. Any resulting cost impact will be subject to negotiation. -7- EXHIBIT 5.0 SPECIAL PROVISIONS ------------------ 5.1 Buyer is making no firm commitment and assumes no liability, financial or otherwise, except for the Product actually ordered. 5.2 All material will be supplied by the Supplier, unless the purchase order states otherwise and then cost will be negotiated. 5.3 Release by Buyer to Supplier of an implementing order is conditioned upon Supplier's maintenance of its quality system approval, maintaining 95% on time delivery and 98% hardware quality in accordance with Supplier Performance Rating System (SPRS), satisfactory financial rating and Buyer's sole satisfaction of all performance requirements specified in Buyer's order. 5.4 If Supplier is unable to deliver the quantities ordered, and/or meet the specified delivery schedule in the Purchase Order/Change Order, Buyer shall have the right to cancel the Order or any portion thereof without liability. 5.5 In the event of 5.4 (above), Buyer may also, at its election, purchase all or any part of the requirements specified in the Purchase Order from another source without any liability and/or termination of this Agreement. Buyer reserves its rights to any and all other remedies for such non-delivery. 5.6 If Supplier is unable to meet the performance requirements specified in 5.4 and 5.5 (above) or any conditions of Article 17 of Terms T-2 or if Buyer concludes, based on available data, that delivery of any product is delayed more than two (2) months from the date of schedule delivery by circumstances beyond Supplier's control, Force Majeure, Buyer has the right to terminate this Agreement, or any portion thereof in accordance with T-2 Termination for Cause. In such an event Supplier grants to Buyer an irrevocable, non-exclusive, free, paid up license to use and have others use to complete Supplier's obligation; hereunder, all Supplier's tools, dies, jig fixtures, shop aids and any other information to the products hereinafter involved. Additionally, Supplier grants the Buyer the right to purchase at a pro-rated value, any work-in process, parts or materials acquired by Supplier. Payment of complete parts shall be at the Agreement price. Supplier, upon request, shall deliver such data in a manner that will support Buyer's production. 5.7 Whenever the Supplier has knowledge that any present or potential labor dispute, or other matter or circumstances, is delaying or threatens to delay the timely performance of this Agreement, Supplier shall within 30 days give written notice -8- there of, including all information relevant there to the Buyer. The substance of this Article shall be inserted in any lower-tier purchase order issued by Supplier. 5.8 The FAA or its representatives shall, at no charge to Buyer, Boeing or to the FAA, be entitled to inspect and evaluate Supplier's plant, including, but not limited to, Supplier's facilities, systems data, equipment, personnel, testing and all work-in progress and completed products manufactured for installation on any Program Airplane. The costs and fees for such inspection and evaluation are included in the prices paid hereunder. 5.9 Upon receipt of notice from the FAA or Boeing that a conformity inspection shall be required with respect to any first Production Article or any other Production Article following a change in the configuration thereof, Contractor shall coordinate with regional FAA personnel to develop and implement a plan to bring such Production Article into compliance with FAA requirements prior to the delivery. 5.10 TERMINATION Buyer may terminate all or part of this Agreement including any Order issued hereunder, by written notice for Buyer's convenience at any time. Any such written notice of termination shall specify the effective date and the extent of any such termination. On receipt of a written notice of termination Supplier shall immediately: 1. Stop work on any undelivered products. 2. Terminate its subcontracts and purchase orders relating to undelivered Products. 3. Settle any termination claims made by its subcontracts or suppliers, (provided Buyer shall have approved the amount of such termination claims prior to such settlement of undelivered products). 4. Transfer title (to the extent not previously transferred) and deliver to Buyer all supplies and materials, work-in-process, tooling and manufacturing drawings and data produced or acquired by supplier for the performance of this Master Agreement and any implementing order hereunder. 5. Take such other action, in Buyer's reasonable opinion, as may be necessary, and as Buyer shall direct in writing to facilitate termination of this Agreement. -9- If Buyer terminates this Agreement in whole or in part, Supplier shall be paid for parts completed at time of notice of such termination's and a pro rated amount for parts partially completed so long as such parts have not been fabricated in advanced of the stated leadtime. If Buyer terminates this Agreement in whole or in part, Supplier shall have a right to submit a termination claim and entitled to be compensated in the manner set forth in Article 13 of the Terms T-2. However, the agreed amount, may not exceed the total amount payable under any terminated implementing order(s) to this Agreement reduced by (1) the amount of payments previously made and (2) the price of work not terminated. If Supplier and Buyer fail to agree on the whole amount to be paid because of the termination of work, Buyer shall pay Supplier the amounts determined by Buyer as follows, but without duplication of any amounts previously agreed upon: - The price for completed supplier services accepted by Buyer not previously paid for, adjusted for any saving of freight and other charges. The total of: a. The costs incurred in the performance of the work terminated. b. The cost of settling and paying termination settlement proposals under terminated subcontracts that are properly chargeable to the terminated portion of this Agreement. c. A sum, as profit on paragraph (a) above, determined to be fair and reasonable. The reasonable costs of settlement of the work terminated, including: a. Accounting, legal, clerical, and other expenses reasonable necessary for the preparation of the termination clause and supporting data. b. The termination and settlement of subcontracts (excluding the amounts of such settlements); and c. Storage, transportation, and other costs incurred, reasonable necessary for the preservation, protection, or disposition of the terminated inventory. -10- EXHIBIT 6.0 QUALITY ASSURANCE PROVISIONS ---------------------------- 6.1 Supplier is responsible for performing inspection to ensure all parts are in compliance with Purchase Order requirements. Northrop Source Inspection is required. 6.2 Supplier is responsible for compliance to applicable Quality Assurance Documents which are listed below and are hereby incorporated into and made a part of this Agreement: DOCUMENT TITLE SQR-001 "Supplier Quality System Requirements" Dated November 1996 SQR-002 "Supplier Advanced Quality Dated May 1996 Requirements" SQR-003 "Non conformance Reference Dated November 1996 Handbook for Suppliers SQR-004 "Supplier Quality Requirements- Dated June 1996 Control and use of Digital Datasets" SQR-006 "Forms Control Requirements Supplier Dated November 1996 Documentation" 6.3 Supplier is responsible for compliance with Drawing No. 233000, Revision "C" for the storage, maintenance and inspection of mylars. 6.4 Supplier shall implement and maintain a Statistical Process Control (SPC) program that meets the intent of Dl-9000, Advanced Quality System for Boeing Suppliers and satisfy the following minimum requirements; (Verification of Supplier's SPC program shall be performed by Buyer's Quality personnel): 6.4.1 Demonstrate process/part control and capability. 6.4.2 Calculation of capability ratios (CPK's) for key process parameters and/or part key characteristics and charting of the CPK's on a monthly basis. 6.4.3 Make all SPC data and charts available for review by Northrop Quality Assurance personnel. -11- 6.4.4 Preparation of process flow diagrams which identify key process operations, inspection points and data collection points for key process parameters and and/or part key characteristics on manufacturing shop paperwork. Plans and/or diagrams must address the following: - What are the quality requirements? - How are the quality requirements satisfied? - What is the verification that quality requirements were met? 6.5 First Article verification will be required on all parts and following a major design change. 6.5.1 Prepare and obtain Buyer concurrence on a schedule for verification. 6.5.2 Provide required surface table and set-up and inspection tools. 6.5.3 Have a Buyer Quality Representative present during the verification process. - One part complete, less processing, that has been fabricated utilizing the Supplier's planned production process. - "Should be" and "actual" dimension on first article verification sheet. - Applicable blueprints and specification. - Application Mylars. - Purchase Orders. - Shop Paperwork. - Any other relevant data. 6.6 Supplier shall utilize approved process sources as listed in Dl-4426, Boeing Approved Process Sources. Supplier shall submit a certification of compliance form in accordance with SQR 001 on each shipment of parts. 6.7 The Inspection Notes shall be incorporated in the implementing order. FAI is the responsibility of the supplier. One piece from the first production lot shall be designated as first article. The fabrication of the First Article part must utilize the equipment and complete complement of planned tools and processes and in the same sequence as will be used in production. Supplier must prepare, and obtain concurrence from Supplier Quality Support, a schedule for First Article verification. -12- NOTE: First Article verification of parts to undimensioned drawings will require overlay of the part to a PCM (Photo Contact Master) commonly referred to as a full size mylar. It should be noted that the center of the lines defining parts as drawn on the PCM are considered nominal. When using PCM'S for First Article verification it is important to check the accuracy of the PCM using the grid lines. PCM grid accuracy shall be in accordance with BDS-1090. PCM'S not meeting the Grid accuracy may not be used for part acceptance and should be returned for replacement. FAI reports provided by supplier to Northrop Quality representative should reference PCM accuracy as a dimensional callout, part acceptance for undimensioned characteristics can be recorded as attribute data (i.e., Periphery measured by overlay to PCM). A detailed First Article Inspection report signed by the supplier's Quality Assurance representative shall be provided to Northrop Grumman Quality Assurance representative for review. The report, as a minimum, shall contain the following items, and shall be kept at supplier's facility as a part of permanent records for seven years: 1. Purchase Order Number, drawing revision, process specification including revision and PSD (Process Spec Departure) used. 2. Verification of each dimension/characteristics to the engineering/specification and recording of actual measurement/results. 3. Verification of manufacturing plan, tooling and processes. 4. Inspection and calibration of check fixture, if applicable. Acceptance of First Article does not relieve supplier of its obligation to manufacture all subsequent products in accordance with applicable descriptions, specifications, drawings and work statements. Part requiring "Production Prove" shall be noted on purchase order and will require, in addition to normal identification required by drawing, the work "Production Prove" applied to all parts. Manufacturing Plan - Supplier shall develop a manufacturing plan and inspection plan which includes all sequential operations and processes needed to manufacture, assemble, and inspect parts called out on the purchase order. The plan shall include references to process specifications, inspection steps, measurement points for key characteristics and major manufacturing process. The plan shall contain sufficient detail for Supplier to be able to provide adequate objective evidence of purchase order compliance and shall be reviewed by Northrop Grumman Quality field representative on an audit basis. Supplier Certification - Supplier must certify to all material and process requirements designated by reference in specification noted on the engineering drawing. Processes for -13- specification designated in Boeing document Dl-4426 shall be performed by suppliers or sources approved in accordance with Dl-4426. When required by specification, quantitative test reports will be traceable to the lot(s) being manufactured. All quality records will be maintained for a minimum of seven years at supplier's facility and will be subject to examination by Northrop. Certificate of Conformance form (previously 31-500 now superseded by CD-4020) is not required with each shipment after First Article approval. Reference Cashmere MFG. CO exemption memorandum 56OM/95/QS/034 dated 21 February 1995 from Buyer's Quality Assurance Representative. Buyer may reincorporate this requirement if Supplier's system to maintain certification for traceability is deemed to be undisciplined. Also, the supplier shall assure that all personnel/equipment meet qualification/certifications as required by process specification. Purchase Order Review - Supplier shall, after receipt of an order and prior to beginning work, contact the Northrop quality assurance representative to review the requirements of the purchase order, if necessary. This review is intended to develop communication with the QA representative and the Supplier to facilitate the understanding of purchase order quality requirements. Drawing Revision - Drawings and ADCN'S listed on the purchase order and the attached planing sheet are updated only when there is a change to the configuration of the noted part number. Part configuration is defined by the C995 notes on the planning control sheet. Supplier is authorized to work to the drawing revision level noted on the purchase order or to a higher revision drawing supplied by Northrop. If any ADCN'S or drawing revisions change the configuration of the part and are not called out on purchase order or planning control sheet, the Buyer should be notified immediately for written authorization. Synthetic Part Numbers per C995 Notes - Any basic number -XXX-01 is the same as the basic number -XXX, Except as noted in the C995 manufacturing notes. The basic number -XXX-01 is a NGCAD internal planning control number, which is not shown on the engineering drawing parts list. Note No. 50A (2 Jul 97) 2 Supplier's Quality System shall comply with Buyer's Supplier Quality System requirements documents as identified below: Supplier Type Applicable Requirements Document ------------- -------------------------------- Value Added Distributor SQR-001 Manufacturer SQR-001 -14- Note No. 50B (1 Apr 96) 2 (G471) Buyer Source Inspection/Acceptance is required prior to shipment. Supplier's quality organization shall contact Buyer's supplier quality regional office to coordinate scheduling of source support. Supplier shall contact Buyer's office at least 48 hours in advance of shipment. Note: Documents required with Source Inspected/Accepted Shipments: Shipping Document; Certificate of Compliance; and first page of First Article report (first shipment only). Note No. 51J (14 Sep 96) 2 Note 50B (Source Inspection) Referenced herein is hereby suspended except when one or more of the following apply: 1. First Article Inspection is required. 2. Items are being shipped directly to Buyer's customer; and/or 3. Order is for "Critical" Parts (i.e. Fracture Critical, Boeing Designated Parts) Otherwise, Supplier is authorized to perform delegated acceptance and use Buyer furnished stamps as directed. (DAP approved Supplier's) Note No. 50C (10 Feb 97) 2 First Article inspection shall be performed in accordance with Buyer's form 2-42706, or equivalent. This First Article inspection shall be performed on the first production lot of a specific part number prior to shipment. Any changes to the process which affect the original First Article inspection, including a break in production of eighteen (18) months or more, require a new/revised First Article inspection. The First Article inspection report shall accompany the first shipment. Note No. 50D (28 Nov 95) 2 (G525) A Certificate of Compliance in accordance with the requirements of CD-4020 or equivalent shall be provided. This Certificate of Compliance shall accompany all shipments. Note No. 5OF (22 Sep 97)2 The original mill or foundry chemical and mechanical test reports for material used in fulfilling orders must be maintained on file for the period specified in SQR-001. The heat -15- lot number of each test report must be traceable to the raw material. Any reprocessed raw material must be traceable to the original mill test report and must include objective evidence (e.g., mechanical test results) of compliance to the material's reprocessed condition. Two copies of the above test reports must be submitted with each shipment except as noted below: 1. Do not include copies of test reports with shipments when Source Inspection is performed (STD. Note 50B). However, these test repots must be available for review by the Source Representative. 2. Do not include copies of test reports with Delegated Acceptance Program (DAP) shipments (STD Note 51J). 3. When material is provided by Buyer, Supplier must ensure the material release document number is included on the shipment Certificate of Conformance, Form CD-4020, in place of the test reports. Note No. 50E (10 Feb 97) 2 Manufacturing and inspection shall be performed to the latest engineering and/or planning requirements specified or provided herein. Drawings revisions and advance drawing change notices listed on the purchase order and/or the attached planning are updated only when there is a change to the configuration of the noted part number. Part configuration is defined by the notes on the planning. Supplier is authorized to work to the drawing revision level noted on the planning or to a higher revision drawing supplied by Buyer. If any advance drawing change notices or drawings revisions change the configuration of the part and are not called out on the purchase order or planning control sheet; Buyer should be notified immediately for written authorization. Any conflicting provisions of these requirements shall be identified to Buyer for clarification. Note No. 50H (25 Jun 96) 2 Boeing - Special processes specified on Boeing prints must be performed by sources listed in the Boeing approved Process Source document Dl-4426. McDonnell Douglas - Special processes specified on Douglas Aircraft Company (DC) prints as identified in McDonnell Douglas CQAR-5 must be performed by sources listed in Buyer's Approved Processor List (APL-1), C-17 Section, for the specific process being performed, subject to the conditions listed in APL-1. -16- Buyer - Special processes specified on Buyer prints must be performed by sources listed in the Approved Processor List (APL-1). Note No. 50K (3 Oct 96) 2 This order includes requirements to control key characteristics in compliance with Buyer's SQR-002 document (Supplier Advanced Quality Requirements). Key characteristics are identified in the attached flowdown document and/or in subcontract planning, drawings, and specifications. Packaging to be in accordance with P7000. Alteration of Material is prohibited unless specifically noted in this purchase order. Your packing sheet must be placed on the outside of the container and must reflect Northrop Purchase Order Number. Note No. 71U (2 Sep 97)2 Supplier Requested Information - Form 31-99 Supplier Information Request (SIR) is the document used to provide information in response to inquires from suppliers. Supplier requests concerning clarification/interpretation of drawings, tooling, processing, manufacturing/planning, materials, parts, and any other types of technical questions are submitted through procurement buyer using the SIR. SIR forms are available by contacting your buyer or follow-up personnel. EXHIBIT 7.0 TOOLING 7.1 All tools furnished by Buyer are accountable in accordance with T-55 and Boeing Documents M31-24. 7.2 Buyer furnished tools made available to the Supplier for use under this Agreement are supplied in a "where is" "as is" condition. It is the Suppliers responsibility to perform tooling verification to ensure that Buyer furnished tools will produce parts which conform to the engineering drawings and specifications called out in the Purchase Order/Change Order. 7.3 Control, transfer, storage, routine maintenance and replacement of all contract and reference tooling (fabricated, purchase or Buyer supplied) will be the responsibility of the Supplier and will be performed per Purchase Order terms and conditions T-55. -17- 7.4 Supplier shall be responsible to perform tooling verification of Buyer furnished tools to Engineering drawings and purchase order requirements prior to fabrication of parts. 7.5 All tooling rework or new tools, determined to be Buyer responsibility will be negotiated on a separate purchase order. ENTIRE AGREEMENT - ---------------- This Agreement including all Purchase Orders/Change Orders and exhibits/attachments hereto shall constitute the entire Agreement between the Parties with respect to the subject matter hereof and supersedes any prior or written agreements, commitments, drafts of agreements, understandings, memorandum, or other communications with respect to the subject matter of this Agreement. Effective for Buyer and Supplier as of the date in paragraph 5, (Period of Performance) signed by respective representatives who are duly authorized to execute this Agreement. NORTHROP GRUMMAN CORPORATION CASHMERE MANUFACTURING COMMERCIAL AIRCRAFT DIVISION COMPANY INCORPORATED NAME: /s/ NAME: /s/ GARRY VANDEKIEFT ---------------------------- ---------------------------- TITLE: Sr. Buyer TITLE: President --------------------------- --------------------------- DATE: 4/6/98 DATE: 4/8/98 ---------------------------- ---------------------------- -18- ATTACHMENT A ------------ NORTHROP GRUMMAN CONTRACT PRICE LIST (1998-2000) INTENTIONALLY OMITTED - CONFIDENTIAL TREATMENT REQUESTED -19- EX-10.32 17 AGREEMENT - LIVIAKIS FINANCIAL/ROBERT B. PRAG EXHIBIT 10.32 AGREEMENT This Agreement is entered into as of August 27, 1998, among PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington corporation (the "Company"), LIVIAKIS FINANCIAL COMMUNICATIONS, INC., a California corporation (the "Liviakis"), and Robert B. Prag, an individual ("Mr. Prag"). Liviakis and Mr. Prag are sometimes referred to together as the "Consultants." RECITALS A. The Company and Liviakis are parties to a Consulting Agreement dated as of February 3, 1998, relating to the provision of financial consulting services to the Company by Liviakis (the "Consulting Agreement"). Mr. Prag is a principal of Liviakis. B. In Section 5 of the Consulting Agreement, the Company agreed to pay a finder's fee to Liviakis under certain specified circumstances. The parties have differing opinions as to whether such a finder's fee may be currently due in connection with the Company's engagement of Friedman, Billings & Ramsey Co., Inc. in the Company's recent offering of senior subordinated notes, and desire to enter into this Agreement in order to amicably resolve the issue. AGREEMENT For good and valuable consideration, the receipt and sufficiency of which is acknowledged, the parties agree as follows: 1. Consideration. In order to resolve the Finder's Fee Claim (as defined herein), relating to events occurring prior to the date of this Agreement, the parties agree as follows: 1.1 Issuance of Shares. In consideration of the release contained in Section 1.2, the Company shall issue and deliver 590,000 shares of the Company's newly-issued common stock (the "Shares"), allocated as follows: (a) 395,000 of the Shares to Liviakis, and (b) 195,000 of the Shares to Mr. Prag. The Shares shall be subject to the following agreements, representations and warranties: 1.1.1 Liviakis and Mr. Prag shall not transfer their respective Shares to any person until the expiration of the term of the Consulting Agreement, including any extension of such term (the "Lock-up Period"). Upon expiration of the Lock-up Period, the Shares may be transferred only in compliance with Rule 144 of the Securities Act of 1933, as amended (the "Act"), or any other available exemption, unless registered for resale pursuant to Section 1.1.7. 1.1.2 The Shares, when issued and delivered, shall be fully paid and non-assessable. If the Company decides to terminate the Consulting Agreement prior to February 3, 1999 for any reason whatsoever, it is agreed and understood that neither Liviakis nor Mr. Prag will be requested or demanded by the Company to return any of the Shares. 1 1.1.3 Liviakis and Mr. Prag each acknowledge that the Shares have not been registered under the Act, and accordingly are "restricted securities" within the meaning of Rule 144 of the Act. As such, the Shares may not be resold or transferred unless (a) the Company receives, should it so require, an opinion of counsel reasonably satisfactory to the Company that such resale or transfer is exempt from the registration requirements of the Act, or (b) the Shares have been registered for resale pursuant to Section 1.1.7. 1.1.4 In connection with the acquisition of the Shares, Liviakis and Mr. Prag represent and warrant to the Company as follows: (a) Liviakis and Mr. Prag each acknowledge that Liviakis and Mr. Prag have each been afforded the opportunity to ask questions of and receive answers from duly authorized officers or other representatives of the Company concerning an investment in the Shares, and have received any additional information requested by either of them. (b) Liviakis' and Mr. Prag's investment in the Shares is reasonable in relation to their respective net worths, which are in excess of ten (10) times their respective cost basis in the Shares. Liviakis and Mr. Prag have had experience in investments in restricted and publicly traded securities, and have had experience in investments in speculative securities and other investments which involve the risk of loss of investment. Liviakis and Mr. Prag acknowledge that an investment in the Shares is speculative and involves the risk of loss. Liviakis and Mr. Prag have the requisite knowledge to assess the relative merits and risks of this investment without the necessity of relying upon other advisors, and Liviakis and Mr. Prag can afford the risk of loss of their entire investment in the Shares. Liviakis and Mr. Prag are (i) accredited investors, as that term is defined in Regulation D promulgated under the Act, and (ii) purchasers as described in Section 25102(f)(2) of the California Corporate Securities Law of 1968, as amended. (c) Liviakis and Mr. Prag are acquiring the Shares for their own account for long-term investment and not with a view toward resale or distribution thereof except in accordance with applicable securities laws. 1.1.5 Upon receipt of the original Warrants pursuant to Section 2, the Company shall direct its transfer agent to issue and deliver certificates representing the Shares to Liviakis and Mr. Prag, as allocated pursuant to this Section 1. 1.1.6 Liviakis and Mr. Prag acknowledge that the certificates representing the Shares will bear substantially the following legend unless the Shares are registered pursuant to Section 1.1.7, or such legend can be removed under applicable securities laws: 2 THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND WERE OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENT OF THE ACT AND SUCH LAWS. THESE SECURITIES HAVE NOT BEEN APPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THESE SECURITIES. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. THESE SECURITIES CANNOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF TO ANY PERSON OR ENTITY UNLESS SUBSEQUENTLY REGISTERED UNDER THE ACT, AND/OR THE LAWS OF CERTAIN STATES, OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE AND, IF REQUIRED BY THE COMPANY, THE HOLDER HAS PROVIDED THE COMPANY WITH A LEGAL OPINION ACCEPTABLE TO THE COMPANY TO THAT EFFECT. While registered pursuant to Section 1.1.7, Liviakis and Mr. Prag acknowledge that the certificates representing the Shares will bear substantially the following legend until the Shares are sold to a third party, and the Company has been provided confirmation of sale and prospectus delivery in a form reasonably acceptable to the Company: THE SHARES REPRESENTED BY THIS CERTIFICATE ARE THE SUBJECT OF A REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933. SUCH SHARES MAY BE TRANSFERRED ONLY: (A) (1) IF SUCH REGISTRATION IS EFFECTIVE AS OF THE DATE OF TRANSFER, AND (2) UPON DELIVERY OF CONFIRMATION TO THE COMPANY, IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT SUCH SALE WAS MADE IN COMPLIANCE WITH THE PROSPECTUS DELIVERY REQUIREMENTS OF RULES PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION; OR (B) UPON THE COMPANY'S RECEIPT OF AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION AND/OR PROSPECTUS DELIVERY IS NOT REQUIRED. 1.1.7 If the Company shall determine to register any of its common stock either for its own account or for the account of a security holder or holders prior to August 21, 2000, other than a registration relating solely to employee benefit plans, or registration on any registration form that does not permit secondary sales, the Company will (a) promptly give written notice of the proposed registration to each of the Consultants (the "Registration Notice"); and (b) include in such registration (and any related qualification or other compliance filing under applicable blue sky laws), and in any underwriting involved therein, all or any portion of the Shares for resale, as specified in a written request by either of the Consultants, which is received by the Company within 30 days after delivery of the Registration Notice to the Consultants. (a) If the registration described in the Registration Notice involves an underwriting, the Company shall so state in the Registration Notice. In such event, the Consultants' rights to registration pursuant to this Section 1.1.7 shall be conditioned upon their participation in the underwriting and the inclusion of Shares in the underwriting to the extent provided herein. The Consultants and the Company (and any other security holders proposing to distribute their securities through the underwriting) shall enter into an underwriting agreement in customary form with the representatives of the underwriter or underwriters selected for such underwriting by the Company. 3 (b) Notwithstanding any other provisions of this Section 1.1.7, if the representatives of the underwriter or underwriters determine in good faith that marketing factors make it advisable to impose a limitation on the number of secondary shares to be included in the registration, the number of such secondary shares, if any, that may be included in the registration and underwriting on behalf of such holders, and any other security holders proposing to distribute their securities of the Company through such underwriting shall be allocated in proportion, as nearly as practicable, to the respective amounts of securities that they had requested to be included in such registration at the time of filing the registration statement. If the Consultants disapprove of the terms of any such underwriting, they may elect to withdraw therefrom by written notice to the Company and the representatives of the underwriter or underwriters. (c) If representatives of the underwriter or underwriters exclude any of the Shares from the underwritten offering, then the Consultants shall not offer or sell any of the Shares for the earlier of (i) a period ending 180 days following the effective date of such registered public offering, or (ii) the date that the underwriter agrees that an offering or sale of the Shares by the Consultants may proceed. (d) The Company agrees to indemnify and hold harmless the Consultants from and against any and all losses, claims, damages, liabilities, judgments or expenses (including reasonable attorneys' fees and costs) actually incurred by them, arising under either Section 15 of the Securities Act or Section 20 of the Exchange Act as the result of (i) any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus in which Shares are included (or any amendment or supplement thereto), except as is furnished in writing to the Company by or on behalf of the Consultants, or (ii) any omission or alleged omission by the Company to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading. (e) The Consultants agree to indemnify and hold harmless the Company from and against any and all losses, claims, damages, liabilities, judgments or expenses (including reasonable attorneys' fees and costs) actually incurred by it, arising under either Section 15 of the Securities Act or Section 20 of the Exchange Act as the result of (i) any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus in which Shares are included (or any amendment or supplement thereto), which was furnished in writing to the Company by or on behalf of the Consultants, or (ii) any omission or alleged omission by the Consultants to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading. 1.2 Release. In exchange for issuance of the Shares, Liviakis and Mr. Prag forever release and discharge the Company from any and all claims, causes of action, rights and damages (including attorneys fees and costs) (individually and collectively, "Claims"), (a) that either Liviakis or Mr. Prag have or may have, whether known or unknown, with regard to any finder's fee claims that either arise under Section 5 of the Consulting Agreement or arising in any other manner, (i) based on events prior to the date of this Agreement, including but not limited to those Claims relating in any way to the Company's issuance of senior subordinated 4 notes in July 1998 (the "Finder's Fee Claim"), or any Claims relating to the Company's acquisition of Aeromet International plc, or (ii) that Liviakis or Mr. Prag now or hereafter may have with respect to any financing or any acquisition candidate that in the past or in the future is provided directly or indirectly to the Company by Friedman, Billings, Ramsey & Co., Inc. or by BancBoston Securities Inc., or (b) that either Liviakis or Mr. Prag have or may have, whether known or unknown, in any way arising out of or in connection with the Warrants ("Warrant Claims"). Liviakis and Mr. Prag agree to indemnify, defend and hold the Company harmless against all Claims released in this Section 1.2 that any third party may assert against the Company. Liviakis and Mr. Prag each covenant not to bring or voluntarily aid in any claim, suit, civil action, complaint, arbitration, or administrative action in any court, agency or arbitration with respect to any such released Claims. 1.3 No Admissions. This Agreement and all documents executed in order to effect its terms shall not be construed as an admission or evidence of liability by the Company with respect to any Claims released in Section 1.2. 2. Cancellation of Warrants. Liviakis and Mr. Prag shall return to the Company for cancellation as soon as possible after the execution of this Agreement, the originals of the Common Stock Purchase Warrants, dated as of February 10, 1998 and covering an aggregate of 1,290,000 shares of the Company's common stock, which were issued in connection with the Consulting Agreement (the "Warrants"). The Warrants were issued as follows: (1) to Liviakis for 967,500 shares of the Company's common stock (the "Liviakis Warrant"), and (2) to Mr. Prag for 322,500 shares of the Company's common stock (the "Prag Warrant"). Liviakis and Mr. Prag agree and acknowledge that immediately upon execution of this Agreement, (a) the Warrants shall be null and void, and of no further effect, without further action by the Company, and (b) neither Liviakis nor Mr. Prag shall have any further rights, and the Company shall have no further obligations, under the Warrants or under Section 4.1 of the Consulting Agreement. Each of Liviakis and Mr. Prag represent and warrant to the Company as follows: 2.1 Liviakis Warrant. Liviakis (a) owns the Liviakis Warrant as its sole property, (b) has and is conveying to the Company good, clear and marketable title to the Liviakis Warrant, free and clear of any liens, restrictions, claims or other encumbrances, (c) owns no other shares of the Company's capital stock, and (d) other than as set forth in this Agreement, has no outstanding options, warrants, rights, conversion privileges or other agreements or instruments obligating the Company to issue Liviakis any additional shares of capital stock or any other security of the Company. 2.2 Prag Warrant. Mr. Prag (a) owns the Prag Warrants as his separate personal property, (b) has and is conveying to the Company good, clear and marketable title to the Prag Warrant, free and clear of any interest of Mr. Prag's marital community, liens, restrictions, claims or other encumbrances, (c) owns no other shares of the Company's capital stock, and (d) other than as set forth in this Agreement, has no outstanding options, warrants, rights, conversion privileges or other agreements or instruments obligating the Company to issue any additional shares of capital stock or any other security of the Company. 5 3. Authority and Validity. The parties each represent and warrant that they have all requisite power and authority to (a) execute and deliver this Agreement and all other documents to be executed and delivered by them in connection with this Agreement, and (b) to consummate the transactions contemplated by this Agreement. This Agreement has been duly executed and delivered by the parties, and constitutes the valid and binding obligation of each of them enforceable in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally. The execution and delivery of this Agreement will not conflict with, result in a violation of, or constitute a default under any agreement, note, lease, instrument, permit, license, judgment, order, decree, statute, law, rule or regulation applicable to the parties or their respective properties or assets. 4. Scope. This Agreement modifies the Consulting Agreement only to the extent specifically set forth in this Agreement. All other terms and conditions of the Consulting Agreement remain in full force and effect as written. Executed as of the first date written above. Company: PACIFIC AEROSPACE & ELECTRONICS , INC. By: /s/ DONALD W. WRIGHT ------------------------------------- Donald A. Wright President and Chief Executive Officer Liviakis: LIVIAKIS FINANCIAL COMMUNICATIONS, INC. By: /s/ JOHN M. LIVIAKIS ------------------------------------- John M. Liviakis President Mr. Prag: By: /s/ ROBERT B. PRAG ------------------------------------- Robert B. Prag 6 EX-21.1 18 LIST OF SUBSIDIARIES EXHIBIT 21.1 List of Subsidiaries Electronics Group 1. Pacific Coast Technologies, Inc. 2. Ceramic Devices, Inc. 3. Northwest Technical Industries, Inc. 4. Balo Precision Parts, Inc. 5. Electronic Specialty Corporation Aerospace Group 1. Cashmere Manufacturing Co., Inc. 2. Morel Industries, Inc. 3. Seismic Safety Products, Inc. Aeromet Group 1. PA&E International, Inc. Subsidiary: Pacific A&E Limited Subsidiary: Pacific Aerospace & Electronics (UK) Limited Subsidiary: Aeromet International plc Frank Ford (Aircraft Components) Limited Kent Aerospace Limited TKR Aerospace Limited TKR Group Limited TKR International Limited Truflo Gas Turbines Limited EX-23.1 19 CONSENT OF MOSS ADAMS LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the inclusion in this Annual Report on Form 10-K of Pacific Aerospace and Electronics, Inc. for the year ended May 31, 1998 and to the incorporation by reference in Registration Statement Numbers 333-29007 and 333-39799 of Pacific Aerospace and Electronics, Inc. on Forms S-8, and 333-25177 and 333-41407 of Pacific Aerospace and Electronics, Inc. on Forms S-3, of our report dated July 2, 1997. /s/ MOSS ADAMS LLP Seattle, Washington August 28, 1998 EX-23.2 20 CONSENT OF KPMG PEAT MARWICK EXHIBIT 23.2 Board of Directors Pacific Aerospace & Electronics, Inc. August 28, 1998 We consent to incorporation by reference in registration statement numbers 333-29007 and 333-39799 on Forms S-8 and registration statement numbers 333-25177 and 333-41407 on Forms S-3 of Pacific Aerospace & Electronics, Inc. of our report dated June 30, 1998, relating to the consolidated balance sheet of Pacific Aerospace and Electronics, Inc. as of May 31, 1998 and the related consolidated statements of earnings, shareholders' equity, and cash flows for the year then ended, which report appears in the May 31, 1998 annual report on Form 10-K of Pacific Aerospace & Electronics, Inc. /s/ KPMG PEAT MARWICK LLP EX-27.1 21 FINANCIAL DATA SCHEDULE
5 YEAR YEAR MAY-31-1997 MAY-31-1998 MAY-31-1997 MAY-31-1998 3,048,000 11,461,000 0 0 5,702,000 9,505,000 247,000 130,000 9,082,000 16,184,000 18,939,000 37,678,000 16,499,000 31,443,000 3,309,000 5,108,000 35,752,000 75,580,000 5,849,000 12,079,000 3,236,000 10,000,000 0 0 0 0 10,000 15,000 25,609,000 56,127,000 35,752,000 78,580,000 34,175,000 54,099,000 34,175,000 54,099,000 25,969,000 39,487,000 32,228,000 49,359,000 215,000 1,608,000 0 0 0 0 1,732,000 3,132,000 50,000 (482,000) 1,682,000 3,614,000 0 0 0 0 0 0 1,682,000 3,614,000 0.18 0.29 0.17 0.27
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