Pacific Aerospace & Electronics Inc. Form 10-Q

-----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, Mb69a1N6yr+FT1BQydUASzazpvRrnmqnHmIH2vakh6bK6Dqzq0QSPgur3TToeY/s MKv2vSvgDor6UDWPeS/usA== 0000891618-03-001839.txt : 20030505 0000891618-03-001839.hdr.sgml : 20030505 20030415151910 ACCESSION NUMBER: 0000891618-03-001839 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20030228 FILED AS OF DATE: 20030414 DATE AS OF CHANGE: 20030505 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26088 FILM NUMBER: 03650465 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-Q 1 f89244e10vq.htm FORM 10-Q Pacific Aerospace & Electronics Inc. Form 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2003

[ ]		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 (State or other jurisdiction of incorporation or organization)		91-1744587 (I.R.S. Employer Identification No.)

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

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

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X

Applicable only to issuers involved in bankruptcy proceedings during the preceding five years:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to distribution of securities under a plan confirmed by court. Yes No

Applicable only to corporate issuers:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of April 4, 2003, there were 24,779,209 shares outstanding of the Company’s Common Stock, par value $0.001 per share.

PART 1
FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets – February 28, 2003 and May 31, 2002

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) – Third Quarters and Nine Months Ended February 28, 2003 and 2002.

Condensed Consolidated Statements of Cash Flows – Nine Months Ended February 28, 2003 and 2002

Management’s Statement and Notes to Unaudited Condensed Consolidated Financial Statements – Third Quarter and Nine Months Ended February 28, 2003

PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
February 28, 2003 and May 31, 2002
(Unaudited)


			February 28,			May 31,
			2003			2002

Assets
Current assets:
	Cash		$	2,270,000			5,619,000
	Accounts receivable, net			11,302,000			12,226,000
	Inventories			19,107,000			19,606,000
	Deferred income taxes			—			118,000
	Prepaid expense and other current assets			1,458,000			463,000

		Total current assets		34,137,000			38,032,000

Property, plant and equipment, net				21,343,000			23,315,000

Other assets:
	Goodwill, net			351,000			351,000
	Patents, net			1,505,000			1,598,000
	Deferred financing costs, net			990,000			1,147,000
	Other assets			156,000			226,000

		Total other assets		3,002,000			3,322,000

			$	58,482,000			64,669,000

Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
	Accounts payable		$	8,503,000			8,065,000
	Accrued liabilities			1,723,000			4,254,000
	Accrued interest			846,000			150,000
	Current portion of long-term debt			451,000			799,000
	Current portion of capital lease obligations			156,000			184,000

		Total current liabilities		11,679,000			13,452,000
Long-term liabilities:
	Long-term debt, net of current portion			25,883,000			24,831,000
	Capital lease obligations, net of current portion			172,000			367,000
	Senior subordinated notes payable			25,739,000			25,739,000
	Deferred income taxes			743,000			872,000
	Deferred rent and other			14,000			301,000

		Total liabilities		64,230,000			65,562,000

Series C convertible preferred stock				—			18,715,000

Stockholders’ equity (deficit):
	Common stock			25,000			91,000
	Additional paid-in capital			105,845,000			87,070,000
	Accumulated other comprehensive loss			(6,497,000	)		(8,389,000	)
	Accumulated deficit			(105,121,000	)		(98,380,000	)

		Total stockholders’ equity (deficit)		(5,748,000	)		(19,608,000	)

			$	58,482,000			64,669,000

See accompanying notes to unaudited condensed consolidated financial statements.

PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
Third Quarters and Nine Months Ended February 28, 2003 and 2002
(Unaudited)


			Quarters Ended						Nine Months Ended

			February 28,			February 28,			February 28,			February 28,
			2003			2002			2003			2002

Net sales			$	15,663,000			18,322,000			48,172,000			63,330,000
Cost of sales				14,547,000			14,705,000			42,789,000			51,339,000

		Gross profit		1,116,000			3,617,000			5,383,000			11,991,000
Operating expenses				3,304,000			3,569,000			8,922,000			11,483,000

Income (loss) from operations				(2,188,000	)		48,000			(3,539,000	)		508,000

Other income (expense):
	Interest income			24,000			19,000			88,000			60,000
	Interest expense			(1,349,000	)		(3,887,000	)		(3,323,000	)		(11,415,000	)
	Other			(316,000	)		241,000			(244,000	)		160,000

		Total other income (expense)		(1,641,000	)		(3,627,000	)		(3,479,000	)		(11,195,000	)

Net loss before income tax benefit (expense)				(3,829,000	)		(3,579,000	)		(7,018,000	)		(10,687,000	)
Income tax benefit (expense)				—			(23,000	)		277,000			(871,000	)

Net loss				(3,829,000	)		(3,602,000	)		(6,741,000	)		(11,558,000	)
Other comprehensive income (loss):
	Foreign currency translation			293,000			(219,000	)		1,892,000			(81,000	)

Comprehensive loss			$	(3,536,000	)		(3,821,000	)		(4,849,000	)		(11,639,000	)

Net loss per share
	Basic		$	(0.42	)		(18.38	)		(2.05	)		(58.97	)
	Diluted			(0.42	)		(18.38	)		(2.05	)		(58.97	)
Shares used in computation of net loss per share:
	Basic			9,100,000			196,000			3,291,000			196,000
	Diluted			9,100,000			196,000			3,291,000			196,000

See accompanying notes to unaudited condensed consolidated financial statements.

PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine Months Ended February 28, 2003 and 2002
(Unaudited)


			Nine Months Ended

			February 28,			February 28,
			2003			2002

Cash flow from operating activities:
		Net cash (used in) provided by operating activities	$	(2,310,000	)		2,727,000

Cash flow from investing activities:
	Acquisition of property, plant and equipment			(1,148,000	)		(2,429,000	)
	Proceeds from sale of property, plant and equipment			492,000			423,000

		Net cash used in investing activities		(656,000	)		(2,006,000	)

Cash flow from financing activities:
	Proceeds from issuance of long-term debt			143,000			57,000
	Payments on long term debt and capital leases			(965,000	)		(778,000	)
	Redemption of common stock			(7,000	)		—
	Sale of common stock, net of issuance costs			—			68,000

		Net cash used in financing activities		(829,000	)		(653,000	)

Net (decrease) increase in cash				(3,795,000	)		68,000
Effect of exchange rates on cash				446,000			55,000
Cash at beginning of period				5,619,000			4,095,000

Cash at end of period			$	2,270,000			4,218,000

See accompanying notes to unaudited condensed consolidated financial statements.

PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
MANAGEMENT’S STATEMENT AND
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Third Quarter and Nine Months Ended February 28, 2003

Management’s Statement

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Form 10-Q instructions and, in the opinion of management, contain all adjustments necessary to fairly present the information therein. All significant intercompany transactions have been eliminated in consolidation. These results have been determined on the basis of accounting principles generally accepted in the United States of America applied consistently with those used in the preparation of the Company’s annual financial statements.

Certain information and footnote disclosures normally included in audited annual financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K/A for the year ended May 31, 2002.

The results of operations for the quarter and nine months ended February 28, 2003 are not necessarily indicative of the results to be expected or anticipated for the full fiscal year.

(1) Net Loss Per Share

Basic loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed on the basis of the weighted average number of common shares outstanding, using the “if-converted” method for convertible preferred stock, and for outstanding stock options and warrants, using the “treasury stock” method. As the Company had a net loss for the periods ended February 28, 2003 and 2002, basic and diluted net loss per share are the same.

The total number of anti-dilutive common stock equivalents related to options, warrants and convertible preferred stock as of February 28, 2003 and 2002 were 445,165 and 54,002, respectively.

All share and per share information has been retroactively adjusted for the effect of the reverse stock split described in note 5 to these unaudited condensed consolidated financial statements.

(2) Inventories

Components of inventories are as follows:


				May 31,
		February 28, 2003		2002

Raw materials		$	3,358,000	$	3,927,000
Work in progress			10,998,000		10,085,000
Finished goods			4,751,000		5,594,000

	Total	$	19,107,000	$	19,606,000

(3) Going Concern

The Company’s condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern.

During the nine months ended February 28, 2003, cash used by operating activities was $2,310,000, and at February 28, 2003, the Company’s cash on hand totaled $2,270,000. The Company’s future success will depend heavily on its ability to generate cash from operating activities and to meet its obligations as they become due. The Company is focusing on initiatives that specifically address the need to increase cash provided by operating activities. These initiatives include, but are not limited to, staff reductions, reductions in product line offerings, sale of excess inventory, and general and administrative cost controls. In previous periods, the Company has also downsized, closed, or sold certain of its operations that had consistently produced negative cash flow. If the Company is not sufficiently successful in increasing cash provided by operating activities, it may need to sell additional common stock or other securities, or sell assets outside of the ordinary course of business in order to meet its obligations. There is no assurance that the Company will be able to achieve sufficient cash from operations, to sell additional common stock or other securities, or to sell its assets for amounts in excess of book value.

We were notified by certain of our secured lenders that we are not in compliance with certain covenants of loans that are secured by a deed of trust on our headquarters building and substantially all of our other assets. Pursuant to forbearance agreements, our secured lenders have agreed to forbear from declaring covenant defaults until the earlier of the date on which we regain compliance (thereby curing such covenant violations) or March 1, 2004.

The Company’s ability to obtain additional cash if and when needed could have a material adverse effect on its financial position, results of operations and its ability to continue in existence. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

(4) Segment Information and Concentration of Risk

The Company operates in two segments, U.S. Operations and European Operations. The Company’s chief operating decision maker, the Company’s chief executive officer, regularly reviews operating results, assesses performance and makes decisions about resources to be allocated at this level (U.S. Operations and European Operations) and not on any of the underlying divisions or business units that comprise these two segments. Presented below is the Company’s operational segment information. All operational segments identified as “U.S. Operations” and “Corporate” are located within the U.S. while the operations and assets of the “European Operations” segment are located within the United Kingdom. Identifiable assets are those assets used in the Company’s operations in each 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 segments. For ease of comparison, discontinued or sold business units within the operational segments have been separated and identified as “Discontinued Divisions.” There are no significant inter-segment sales.

Third quarter ended February 28, 2003


								Corporate,
	U.S.		European			Discontinued		other and
	Operations		Operations			Divisions		eliminations			Total

Net sales to customers	$	6,380,000		9,283,000			—		—			15,663,000
Income (loss) from operations		455,000		(1,167,000	)		—		(1,476,000	)		(2,188,000	)
Identifiable assets		21,484,000		30,365,000			—		6,633,000			58,482,000
Capital expenditures		217,000		390,000			—		—			607,000
Depreciation and amortization		390,000		505,000			—		106,000			1,001,000
Interest income		—		7,000			—		17,000			24,000
Interest expense		49,000		300,000			—		1,000,000			1,349,000

Third quarter ended February 28, 2002


								Corporate,
	U.S.		European		Discontinued			other and
	Operations		Operations		Divisions			eliminations			Total

Net sales to customers	$	8,132,000		9,953,000		237,000			—			18,322,000
Income (loss) from operations		1,999,000		29,000		(296,000	)		(1,684,000	)		48,000
Identifiable assets		29,920,000		33,092,000		39,000			9,001,000			72,052,000
Capital expenditures		131,000		184,000		—			83,000			398,000
Depreciation and amortization		426,000		491,000		—			152,000			1,069,000
Interest income		—		—		—			19,000			19,000
Interest expense		51,000		960,000		43,000			2,833,000			3,887,000

Nine months ended February 28, 2003


								Corporate,
	U.S.		European			Discontinued		other and
	Operations		Operations			Divisions		eliminations			Total

Net sales to customers	$	19,889,000		28,283,000			—		—			48,172,000
Income (loss) from operations		2,450,000		(2,236,000	)		—		(3,753,000	)		(3,539,000	)
Identifiable assets		21,484,000		30,365,000			—		6,633,000			58,482,000
Capital expenditures		323,000		757,000			—		68,000			1,148,000
Depreciation and amortization		1,190,000		1,485,000			—		345,000			3,020,000
Interest income		—		27,000			—		61,000			88,000
Interest expense		150,000		900,000			—		2,273,000			3,323,000

Nine months ended February 28, 2002


								Corporate,
	U.S.		European		Discontinued			other and
	Operations		Operations		Divisions			eliminations			Total

Net sales to customers	$	26,131,000		35,707,000		1,492,000			—			63,330,000
Income (loss) from operations		5,675,000		2,740,000		(3,361,000	)		(4,546,000	)		508,000
Identifiable assets		29,920,000		33,092,000		39,000			9,001,000			72,052,000
Capital expenditures		339,000		1,840,000		—			250,000			2,429,000
Depreciation and amortization		1,313,000		1,487,000		99,000			446,000			3,345,000
Interest income		—		21,000		—			39,000			60,000
Interest expense		257,000		2,890,000		48,000			8,220,000			11,415,000

(5) Conversion of Series C Convertible Preferred Stock and Reverse Stock Split

On January 27, 2003, following approval by a majority of our shareholders, we increased the number of our authorized shares of common stock from 100,000,000 to 20,000,000,000 shares without affecting per share par value. Upon the increase in authorized shares the holders of all of our Series C Convertible Preferred Stock converted their preferred shares into 4,865,819,000 shares of common stock. On the same day, following approval by a majority of our shareholders, we completed a 1 for 200 reverse split of our outstanding shares of common stock, as well as a proportionate reduction in our shares of authorized but un-issued common stock. At February 28, 2003, as a result of the reverse split, we had 100,000,000 authorized shares of common stock with 24,779,209 common shares outstanding.

(6) Revolving Invoice Funding Facility

In February 2003, the Company entered into a revolving invoice funding facility with a national bank. Under the facility the Company may borrow up to 80% of acceptable domestic United States accounts receivable, up to a maximum amount of $3,000,000. The facility is secured by all domestic United States accounts receivable and all domestic United States inventories. The facility bears interest at the bank’s prime rate plus 5.5% and expires in February 2004. There were no amounts borrowed under this facility at February 28, 2003.

(7) Consolidating Condensed Financial Statements

The following financial statements present consolidating condensed financial information of the Company for the indicated periods. The Company’s senior subordinated notes have been guaranteed by all of the Company’s wholly owned U.S. subsidiaries. The guarantor subsidiaries have fully and unconditionally guaranteed this debt on a joint and several basis. This debt is not guaranteed by the Company’s foreign subsidiaries, which consist of Aeromet and two related holding companies. There are no significant contractual restrictions on the distribution of funds from the guarantor subsidiaries to the parent corporation. The consolidating condensed financial information is presented in lieu of separate financial statements and other disclosures of the guarantor subsidiaries, as management has determined that such information is not material to investors.

Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Balance Sheet
February 28, 2003


						GUARANTOR			NON-GUARANTOR
			PARENT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

Assets
Current assets:
	Cash		$	790,000		$	1,000		$	1,479,000		$	—		$	2,270,000
	Accounts receivable, net			—			3,278,000			8,053,000			(29,000	)		11,302,000
	Inventories			—			9,279,000			9,828,000			—			19,107,000
	Other			3,232,000			84,000			1,133,000			(2,991,000	)		1,458,000

		Total current assets		4,022,000			12,642,000			20,493,000			(3,020,000	)		34,137,000
Property, plant and equipment, net				4,614,000			6,857,000			9,872,000			—			21,343,000
Other assets:
	Goodwill			—			351,000			—			—			351,000
	Investment in and loans to subsidiaries			38,879,000			72,618,000			—			(111,497,000	)		—
	Other			990,000			1,661,000			—			—			2,651,000

		Total other assets		39,869,000			74,630,000			—			(111,497,000	)		3,002,000

		Total assets	$	48,505,000		$	94,129,000		$	30,365,000		$	(114,517,000	)	$	58,482,000

Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
	Accounts payable		$	2,566,000		$	1,082,000		$	4,884,000		$	(29,000	)	$	8,503,000
	Current portion of long-term debt			72,000			379,000			—			—			451,000
	Other			1,138,000			779,000			3,799,000			(2,991,000	)		2,725,000

		Total current liabilities		3,776,000			2,240,000			8,683,000			(3,020,000	)		11,679,000
Long-term liabilities:
	Long-term debt, net of current portion			50,477,000			1,145,000			—			—			51,622,000
	Intercompany note and loan payable			—			71,903,000			36,957,000			(108,860,000	)		—
	Other			—			186,000			743,000			—			929,000

		Total long-term liabilities		50,477,000			73,234,000			37,700,000			(108,860,000	)		52,551,000
Series C convertible preferred stock				—			—			—			—			—
Stockholders’ equity (deficit):
	Common stock			25,000			56,139,000			33,709,000			(89,848,000	)		25,000
	Additional paid-in capital			105,845,000			—			—			—			105,845,000
	Accumulated other comprehensive loss			(6,497,000	)		—			(6,497,000	)		6,497,000			(6,497,000	)
	Accumulated deficit			(105,121,000	)		(37,484,000	)		(43,230,000	)		80,714,000			(105,121,000	)

		Total stockholders’ equity (deficit)		(5,748,000	)		18,655,000			(16,018,000	)		(2,637,000	)		(5,748,000	)

		Total liabilities and stockholders’ equity (deficit)	$	48,505,000		$	94,129,000		$	30,365,000		$	(114,517,000	)	$	58,482,000

Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Balance Sheet
May 31, 2002


						GUARANTOR			NON-GUARANTOR
			PARENT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

Assets
Current assets:
	Cash		$	803,000		$	3,000		$	4,813,000		$	—		$	5,619,000
	Accounts receivable, net			—			3,298,000			9,022,000			(94,000	)		12,226,000
	Inventories			—			11,249,000			8,357,000			—			19,606,000
	Other			3,717,000			159,000			298,000			(3,593,000	)		581,000

		Total current assets		4,520,000			14,709,000			22,490,000			(3,687,000	)		38,032,000
Property, plant and equipment, net				4,899,000			8,554,000			9,862,000			—			23,315,000
Other assets:
	Goodwill			—			351,000			—			—			351,000
	Investment in and loans to subsidiaries			40,907,000			72,618,000			—			(113,525,000	)		—
	Other			1,147,000			1,824,000			—			—			2,971,000

		Total other assets		42,054,000			74,793,000			—			(113,525,000	)		3,322,000

		Total assets	$	51,473,000		$	98,056,000		$	32,352,000		$	(117,212,000	)	$	64,669,000

Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
	Accounts payable		$	1,849,000		$	1,844,000		$	4,466,000		$	(94,000	)	$	8,065,000
	Current portion of long-term debt			65,000			734,000			—			—			799,000
	Other			941,000			2,105,000			5,135,000			(3,593,000	)		4,588,000

		Total current liabilities		2,855,000			4,683,000			9,601,000			(3,687,000	)		13,452,000
Long-term liabilities:
	Long-term debt, net of current portion			49,223,000			1,347,000			—			—			50,570,000
	Intercompany note and loan payable			—			72,223,000			36,957,000			(109,180,000	)		—
	Other			288,000			380,000			872,000			—			1,540,000

		Total long-term liabilities		49,511,000			73,950,000			37,829,000			(109,180,000	)		52,110,000
Series C convertible preferred stock				18,715,000			—			—			—			18,715,000
Stockholders’ equity (deficit):
	Common stock			91,000			56,139,000			33,709,000			(89,848,000	)		91,000
	Additional paid-in capital			87,070,000			—			—			—			87,070,000
	Accumulated other comprehensive loss			(8,389,000	)		—			(8,389,000	)		8,389,000			(8,389,000	)
	Accumulated deficit			(98,380,000	)		(36,716,000	)		(40,398,000	)		77,114,000			(98,380,000	)

		Total stockholders’ equity (deficit)		(19,608,000	)		19,423,000			(15,078,000	)		(4,345,000	)		(19,608,000	)

		Total liabilities and stockholders’ equity (deficit)	$	51,473,000		$	98,056,000		$	32,352,000		$	(117,212,000	)	$	64,669,000

Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Operations and Comprehensive Income (Loss)
For the Quarter Ended February 28, 2003


						GUARANTOR			NON-GUARANTOR
			PARENT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

Net Sales			$	—		$	6,460,000		$	9,283,000		$	(80,000	)	$	15,663,000
Cost of Sales				—			5,361,000			9,266,000			(80,000	)		14,547,000

	Gross profit			—			1,099,000			17,000			—			1,116,000
Operating expenses				1,476,000			1,550,000			1,184,000			(906,000	)		3,304,000

	Loss from operations			(1,476,000	)		(451,000	)		(1,167,000	)		906,000			(2,188,000	)
Other income (expense):
	Parent’s share of subsidiaries net loss			(2,337,000	)		—			—			2,337,000			—
	Interest expense			(1,300,000	)		(349,000	)		(300,000	)		600,000			(1,349,000	)
	Other			1,284,000			(77,000	)		7,000			(1,506,000	)		(292,000	)

		Total other income (expense)		(2,353,000	)		(426,000	)		(293,000	)		1,431,000			(1,641,000	)

	Loss before income taxes			(3,829,000	)		(877,000	)		(1,460,000	)		2,337,000			(3,829,000	)
Income tax benefit (expense)				—			—			—			—			—

	Net loss			(3,829,000	)		(877,000	)		(1,460,000	)		2,337,000			(3,829,000	)
Other comprehensive income (loss)
	Foreign currency translation			293,000			—			293,000			(293,000	)		293,000

	Comprehensive income (loss)		$	(3,536,000	)	$	(877,000	)	$	(1,167,000	)	$	2,044,000		$	(3,536,000	)

Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Operations and Comprehensive Income (Loss)
For the Quarter Ended February 28, 2002


					GUARANTOR			NON-GUARANTOR
		PARENT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

Net Sales		$	—		$	8,710,000		$	9,953,000		$	(341,000	)	$	18,322,000
Cost of Sales			—			5,938,000			9,108,000			(341,000	)		14,705,000

	Gross profit		—			2,772,000			845,000			—			3,617,000
Operating expenses			1,629,000			2,124,000			816,000			(1,000,000	)		3,569,000

	Income (loss) from operations		(1,629,000	)		648,000			29,000			1,000,000			48,000
Other income (expense)
	Parent’s share of subsidiaries net loss		(169,000	)		—			—			169,000			—
	Interest expense		(3,786,000	)		(1,049,000	)		(960,000	)		1,908,000			(3,887,000	)
	Other		1,985,000			1,183,000			—			(2,908,000	)		260,000

	Total other income (expense)		(1,970,000	)		134,000			(960,000	)		(831,000	)		(3,627,000	)

	Income (loss) before income taxes		(3,599,000	)		782,000			(931,000	)		169,000			(3,579,000	)
Provision for income taxes			—			—			(23,000	)		—			(23,000	)

	Net income (loss)		(3,599,000	)		782,000			(954,000	)		169,000			(3,602,000	)
Other comprehensive income (loss)
	Foreign currency translation		(219,000	)		—			(219,000	)		219,000			(219,000	)

	Comprehensive income (loss)	$	(3,818,000	)	$	782,000		$	(1,173,000	)	$	388,000		$	(3,821,000	)

Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Operations and Comprehensive Income (Loss)
For the Nine Months Ended February 28, 2003


						GUARANTOR			NON-GUARANTOR
			PARENT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

Net Sales			$	—		$	20,267,000		$	28,283,000		$	(378,000	)	$	48,172,000
Cost of Sales				—			15,810,000			27,357,000			(378,000	)		42,789,000

	Gross profit			—			4,457,000			926,000			—			5,383,000
Operating expenses				3,753,000			4,724,000			3,162,000			(2,717,000	)		8,922,000

	Loss from operations			(3,753,000	)		(267,000	)		(2,236,000	)		2,717,000			(3,539,000	)
Other income (expense):
	Parent’s share of subsidiaries net loss			(3,600,000	)		—			—			3,600,000			—
	Interest expense			(3,173,000	)		(1,050,000	)		(900,000	)		1,800,000			(3,323,000	)
	Other			3,785,000			549,000			27,000			(4,517,000	)		(156,000	)

		Total other income (expense)		(2,988,000	)		(501,000	)		(873,000	)		883,000			(3,479,000	)

	Loss before income taxes			(6,741,000	)		(768,000	)		(3,109,000	)		3,600,000			(7,018,000	)
Income tax benefit (expense)				—			—			277,000			—			277,000

	Net loss			(6,741,000	)		(768,000	)		(2,832,000	)		3,600,000			(6,741,000	)
Other comprehensive income (loss)
	Foreign currency translation			1,892,000			—			1,892,000			(1,892,000	)		1,892,000

	Comprehensive income (loss)		$	(4,849,000	)	$	(768,000	)	$	(940,000	)	$	1,708,000		$	(4,849,000	)

Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Operations and Comprehensive Income (Loss)
For the Nine Months Ended February 28, 2002


					GUARANTOR			NON-GUARANTOR
		PARENT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

Net Sales		$	—		$	28,322,000		$	35,707,000		$	(699,000	)	$	63,330,000
Cost of Sales			—			21,563,000			30,475,000			(699,000	)		51,339,000

	Gross profit		—			6,759,000			5,232,000			—			11,991,000
Operating expenses			4,450,000			7,991,000			2,492,000			(3,450,000	)		11,483,000

	Income (loss) from operations		(4,450,000	)		(1,232,000	)		2,740,000			3,450,000			508,000
Other income (expense)
	Parent’s share of subsidiaries net loss		(2,258,000	)		—			—			2,258,000			—
	Interest expense		(11,084,000	)		(3,169,000	)		(2,890,000	)		5,728,000			(11,415,000	)
	Other		6,234,000			3,143,000			21,000			(9,178,000	)		220,000

	Total other income (expense)		(7,108,000	)		(26,000	)		(2,869,000	)		(1,192,000	)		(11,195,000	)

	Loss before income taxes		(11,558,000	)		(1,258,000	)		(129,000	)		2,258,000			(10,687,000	)
Provision for income taxes			—			—			(871,000	)		—			(871,000	)

	Net loss		(11,558,000	)		(1,258,000	)		(1,000,000	)		2,258,000			(11,558,000	)
Other comprehensive income (loss)
	Foreign currency translation		(81,000	)		—			(81,000	)		81,000			(81,000	)

	Comprehensive income (loss)	$	(11,639,000	)	$	(1,258,000	)	$	(1,081,000	)	$	2,339,000		$	(11,639,000	)

Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Cash Flows
For the Nine Months Ended February 28, 2003


							GUARANTOR			NON-GUARANTOR
				PARENT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

Cash flow from operating activities:
	Net cash provided by (used in) operating activities			$	(618,000	)	$	1,331,000		$	(3,023,000	)	$	—		$	(2,310,000	)
Cash flow from investing activities:
		Acquisition of property, plant and equipment			(68,000	)		(323,000	)		(757,000	)		—			(1,148,000	)
		Proceeds from sale of property, plant and equipment			25,000			467,000			—			—			492,000
		Investment in and loans to subsidiaries			715,000			(715,000	)		—			—			—

			Net cash provided by (used in) investing activities		672,000			(571,000	)		(757,000	)		—			(656,000	)
Cash flow from financing activities:
		Payments on long-term debt and capital leases			(60,000	)		(905,000	)		—			—			(965,000	)
		Other changes, net			(7,000	)		143,000			—			—			136,000

			Net cash used in financing activities		(67,000	)		(762,000	)		—			—			(829,000	)
		Net change in cash and cash equivalents			(13,000	)		(2,000	)		(3,780,000	)		—			(3,795,000	)
Effect of exchange rates on cash					—			—			446,000			—			446,000
Cash at beginning of period					803,000			3,000			4,813,000			—			5,619,000

Cash at end of period				$	790,000		$	1,000		$	1,479,000		$	—		$	2,270,000

Supplemental cash flow:
		Noncash operating expenses related to:
			Depreciation	$	345,000		$	1,097,000		$	1,485,000		$	—		$	2,927,000
			Amortization		—			93,000			—			—			93,000
		Cash paid during the period for:
			Interest	$	1,016,000		$	150,000		$	1,500,000		$	(1,500,000	)	$	1,166,000
			Income taxes		—			—			198,000			—			198,000

Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Cash Flows
For the Nine Months Ended February 28, 2002


						GUARANTOR			NON-GUARANTOR
			PARENT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

Cash flow from operating activities:
		Net cash provided by (used in) operating activities	$	(722,000	)	$	373,000		$	3,076,000		$	—		$	2,727,000
Cash flow from investing activities:
	Acquisition of property, plant and equipment			(250,000	)		(339,000	)		(1,840,000	)		—			(2,429,000	)
	Proceeds from sale of property, plant and equipment			52,000			371,000			—			—			423,000
	Investment in and loans to subsidiaries			(144,000	)		—			—			144,000			—

		Net cash provided by (used in) investing activities		(342,000	)		32,000			(1,840,000	)		144,000			(2,006,000	)
Cash flow from financing activities:
	Payments on long-term debt and capital leases			(120,000	)		(549,000	)		(109,000	)		—			(778,000	)
	Sale of common stock, net of issuance costs			68,000			—			—			—			68,000
	Other changes, net			57,000			144,000			—			(144,000	)		57,000

		Net cash provided by (used in) financing activities		5,000			(405,000	)		(109,000	)		(144,000	)		(653,000	)
	Net change in cash and cash equivalents			(1,059,000	)		—			1,127,000			—			68,000
Effect of exchange rates on cash				—			—			55,000			—			55,000
Cash at beginning of period				1,134,000			3,000			2,958,000			—			4,095,000

Cash at end of period			$	75,000		$	3,000		$	4,140,000		$	—		$	4,218,000

Supplemental cash flow:
	Noncash operating expenses related to:
		Depreciation	$	446,000		$	1,356,000		$	1,487,000		$	—		$	3,289,000
		Amortization		—			56,000			—			—			56,000
	Noncash investing activities:
		Seller financed acquisition of patent	$	—		$	950,000		$	—		$	—		$	950,000
	Cash paid during the period for:
		Interest	$	902,000		$	258,000		$	1,227,000		$	(1,201,000	)	$	1,186,000
		Income taxes		—			—			490,000			—			490,000

Inventories consist of the following:


		February 28,		May 31,
		2003		2002

Guarantor subsidiaries
	Raw materials	$	2,088,000	$	2,796,000
	Work in progress		2,684,000		3,122,000
	Finished goods		4,507,000		5,331,000

		$	9,279,000	$	11,249,000

Non-guarantor subsidiaries
	Raw materials	$	1,270,000	$	1,131,000
	Work in progress		8,314,000		6,963,000
	Finished goods		244,000		263,000

		$	9,828,000	$	8,357,000

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Preliminary Note Regarding Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is subject to the safe harbor created by those sections. Actual results could differ materially from those projected in the forward-looking statements set forth in this report. Some of the factors that may cause results to differ materially from those projected include the overall economic decline in the aerospace industry due to both the recent economic downturn and the September 11 attacks, and the Company’s dependence on the success of its European Operations. Additional factors may also cause results to differ materially from those projected. We have included a more complete list of additional factors that could adversely impact our results of operations and our financial condition in our most recent Amended Annual Report on Form 10-K/A filed via Edgar with the Securities and Exchange Commission on December 6, 2002, under the heading entitled “Risk Factors.” We urge you to read such information and the Company’s other recent filings with the Commission in detail; those filings are available at the Commission’s website, http;//www.sec.gov. Information contained in this quarterly report was prepared by management based on the best information available to it as of the date of filing of this report, and management does not plan to update forward-looking statements to reflect new events or changing circumstances occurring after this report was filed.

Overview

Pacific Aerospace & Electronics, Inc., is an engineering and manufacturing company with operations in the United States and the United Kingdom. We design, manufacture and sell components and subassemblies used in technically demanding environments. For the defense, electronics, telecommunications, energy and medical industries we produce such components as hermetically sealed electrical and fiber optic connectors and instrument packages as well as ceramic capacitors, filters and feed-throughs. We also produce machined, cast, and formed metal parts and subassemblies, using aluminum, titanium, magnesium, and other metals for the aerospace, transportation and medical device industries. Our customers include global leaders in all of these industries. We are organized into two operational groups: U.S. Operations and European Operations.

Critical Accounting Estimates and Policies

The discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates including revenue recognition, the allowance for doubtful accounts, sales returns and allowances, the salability and recoverability of inventory, impairment of long-lived assets, income taxes and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions and conditions, and such variations may be adverse.

We recognize revenue primarily when products are shipped to customers and when services are performed.

We must make estimates of the collectability of accounts receivable. We analyze historical sales returns, allowances, write-offs, changes in our internal credit policies and customer concentrations when evaluating the adequacy of our allowance for doubtful accounts, sales returns and allowances. Differences may result in the amount and timing of expenses for any period if we make different judgments or use different estimates.

We value inventories 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). We regularly review inventory detail to determine whether a write-down is necessary. We consider various factors in making this determination, including recent sales history and predicted trends, as well as industry and general economic conditions. Differences could result in the amount or timing of write-downs for any period if we make different judgments or use different estimates.

We review long-lived assets and certain identifiable intangibles 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. Cash flows expected to be generated by an asset are estimated based upon historical cash flows from the asset, current and expected market conditions related to products produced by the asset and the asset’s disposal value. Those estimates may not be accurate if actual market conditions or disposal values are different than expected. 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 exceeds the fair value of the assets. Fair value of an asset is estimated to be the present value of its expected future cash flows. Present value of expected future cash flows is dependent upon identifying the appropriate interest rate to use in the calculation commensurate with the risks involved. We determine the appropriate interest rate for the calculation based upon the rate that would be required for a similar investment with like risks for the assets being evaluated. We report assets to be disposed of at the lower of the carrying amount or fair value less costs to sell. Differences could result in the amount or timing of write-downs for any period if we make different judgments or use different estimates.

We follow 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 and operating loss and tax credit carry forwards. 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 the period that includes the enactment date. Differences could result in the amount of our provision for income taxes for any period if we make different judgments or use different estimates.

The Company operates in two segments, U.S. Operations and European Operations. This is based on the fact that the Company’s chief operating decision maker, the Company’s chief executive officer, regularly reviews operating results, assesses performance and makes decisions about resources to be allocated at this level (U.S. Operations and European Operations) and not on any of the underlying divisions or business units that comprise these two segments.

Results of Operations

Quarter Ended February 28, 2003 Compared to Quarter Ended February 28, 2002

Net Sales. Net sales decreased by $2.6 million, or 14.2%, to $15.7 million for the quarter ended February 28, 2003, from $18.3 million for the quarter ended February 28, 2002. This decrease was due to a number of factors including the effects of our operational restructuring plan and various events that

affected our markets. The European Operations contributed $9.3 million of net sales during the quarter ended February 28, 2003, down $0.7 million, or 7.0%, from the $10.0 million contributed during the quarter ended February 28, 2002. Following the tragic events of September 11, the commercial aerospace market in the U.S. and Europe saw a significant decline. Boeing and Airbus have announced substantial cuts in their planned commercial aircraft build rates and domestic and foreign air carriers have cut aircraft orders and flight schedules in efforts to reduce their costs. The decrease in net sales contributed by our European Aerospace Group is largely attributable to reduced, postponed, or cancelled orders from commercial aircraft manufacturers. All of these trends are likely to have an adverse long-term and short-term impact on our commercial aerospace revenues.

The U.S. Operations contributed $6.4 million to net sales during the quarter ended February 28, 2003, down $1.7 million from $8.1 million contributed during the quarter ended February 28, 2002. This decrease was primarily due to the reduction in orders from commercial aircraft manufacturers which was caused by the same market conditions experienced by the European Operations. We also experienced decreases in net sales because of our operational restructuring, in which we discontinued some operations that previously had been unprofitable or that had contributed only nominal profits. Those divisions collectively had contributed $0.2 million to net sales for the quarter ended February 28, 2002, but did not contribute any net sales during the quarter ended February 28, 2003.

Receivable collection periods, as calculated by dividing ending accounts receivable balances by annualized sales for the quarter multiplied by 360 days, decreased to 64.9 days for the quarter ended February 28, 2003, from 70.0 days for the quarter ended February 28, 2002. This decrease was primarily due to a concerted focus by management to increase collection efforts, primarily within the European Operations.

Gross Profit. Gross profit decreased by $2.5 million, or 69.4%, to $1.1 million for the quarter ended February 28, 2003, from $3.6 million for the quarter ended February 28, 2002. As a percentage of net sales, gross profit decreased to 7.1% for the quarter ended February 28, 2003, from 19.7% for the quarter ended February 28, 2002. This decrease was due to the reduction in revenue associated with the commercial aerospace industry, while many of our costs are fixed. We also increased our inventory reserves by $400,000 during the quarter related to certain inventory that, based upon our current estimates of usage, would not be utilized. The increase in slow moving inventory during the quarter was due primarily to reduced sales volumes. Without the increase in inventory reserves our gross profit as a percentage of sales would have been 9.7% for the quarter ended February 28, 2003. In an effort to increase our gross profit, we have significantly reduced staffing levels at our operating facilities in the United States and in the United Kingdom. We are also in the process of consolidating our manufacturing sites and have sold or are in process of selling excess machinery. We are also outsourcing certain operating functions along with implementing production processes which we expect to be more efficient.

Inventory turnover, as calculated by dividing annualized sales for the quarter by ending inventory, remained relatively unchanged at 3.3 turns for the quarter ended February 28, 2003 compared to 3.4 turns for the quarter ended February 28, 2002.

Operating Expenses. Operating expenses decreased by $0.3 million, to $3.3 million for the quarter ended February 28, 2003, from $3.6 million for the quarter ended February 28, 2002. This decrease was primarily due to the 2002 disposition of our Engineering & Fabrication and Display Divisions. In an effort to reduce operating expenses further, we have significantly reduced our corporate overhead by reducing corporate executive salaries, eliminating several executive positions, and other headcount reductions. Interest Expense. Interest expense decreased by $2.6 million, or 66.7%, to $1.3 million for the quarter ended February 28, 2003, from $3.9 million for the quarter ended February 28, 2002. This decrease was due to our March 2002 debt restructuring, which is detailed in our Current Reports on Form 8-K dated March 27, 2002 and April 3, 2002 as filed with the Securities and Exchange Commission.

Other Income (Expense). Other income represents non-operational income and expense for the quarter ended February 28, 2003.

Income Tax Benefit (Expense). No income tax benefit was recorded during the quarter ended February 28, 2003 due to uncertainties related to realization of the tax benefit.

Net Loss. Net loss increased to $3.8 million for the quarter ended February 28, 2003 primarily due to the lower gross profit percentages offset by lower interest expense.

Nine Months Ended February 28, 2003 Compared to Nine Months Ended February 28, 2002

Net Sales. Net sales decreased by $15.1 million, or 23.9%, to $48.2 million for the nine months ended February 28, 2003, from $63.3 million for the nine months ended February 28, 2002. This decrease was due to a number of factors including the effects of our operational restructuring plan and various events that affected our markets. The European Operations contributed $28.3 million of net sales during the nine months ended February 28, 2003, down $7.4 million, or 20.7%, from the $35.7 million contributed during the nine months ended February 28, 2002. Following the tragic events of September 11, the commercial aerospace market in the United States and Europe saw a significant decline, and those markets have continued to decline owing in part to continuing uncertainties about the global economy and international political tensions. Boeing and Airbus have announced substantial cuts in their planned commercial aircraft build rates, and domestic and foreign air carriers have cut aircraft orders and flight schedules in efforts to reduce their costs. The decrease in net sales contributed by our European Aerospace Group is largely attributable to reduced, postponed, or cancelled orders from commercial aircraft manufacturers. All of these trends are likely to have an adverse long-term and short-term impact on our commercial aerospace revenues.

The U.S. Operations contributed $19.9 million to net sales during the nine months ended February 28, 2003, down $6.2 million from $26.1 million contributed during the nine months ended February 28, 2002. This decrease was primarily due to the reduction in orders from commercial aircraft manufacturers which was caused by the same market conditions experienced by the European Operations. Some of the decrease in net sales also relates to divisions that have been discontinued. Those divisions collectively had contributed $1.5 million to net sales for the nine months ended February 28, 2002, but did not contribute any net sales during the nine months ended February 28, 2003.

Receivable collection periods, as calculated by dividing ending accounts receivable balances by annualized sales for the nine months multiplied by 360 days, increased to 63.3 days for the nine months ended February 28, 2003, from 60.8 days for the nine months ended February 28, 2002. This increase was due to slightly slower payments from some of our larger customers, primarily commercial aerospace customers.

Gross Profit. Gross profit decreased by $6.6 million, or 55.0%, to $5.4 million for the nine months ended February 28, 2003, from $12.0 million for the nine months ended February 28, 2002. As a percentage of net sales, gross profit decreased to 11.2% for the nine months ended February 28, 2002, from 18.9% for the nine months ended February 28, 2002. This decrease was due to the reduction in revenue associated with the commercial aerospace industry, while many of our costs are fixed.

Inventory turnover, as calculated by dividing annualized sales for the nine months by ending inventory, decreased to 3.4 turns for the nine months ended February 28, 2003 from 3.9 turns for the nine months ended February 28, 2002. The decrease was due to lower average sales volumes without a significant decrease in inventory levels.

Operating Expenses. Operating expenses decreased by $2.6 million, to $8.9 million for the nine months ended February 28, 2003, from $11.5 million for the nine months ended February 28, 2002. This decrease was primarily due to the disposition of our Engineering & Fabrication and Display Divisions. In

a further effort to reduce operating expenses, as well as increasing our gross profit, we have significantly reduced our corporate overhead including reduction in corporate executive salaries, elimination of several executive positions, and other headcount reductions. We have also reduced headcount at our operating facilities in the United States and in the United Kingdom. We are in the process of consolidating our manufacturing sites and have sold or are in process of selling excess machinery. We are also outsourcing certain operating functions along with implementing production processes which we believe will be more efficient.

Interest Expense. Interest expense decreased by $8.1 million, or 71.1%, to $3.3 million for the nine months ended February 28, 2003, from $11.4 million for the nine months ended February 28, 2002. This decrease was primarily due to our March 2002 debt restructuring.

Other Income (Expense). Other income represents non-operational income and expense for the nine months ended February 28, 2003.

Income Tax Benefit (Expense). Income tax benefit for the nine months ended February 28, 2003 was derived from taxable losses in our foreign subsidiaries.

Net Loss. Net loss decreased by $4.9 million to a net loss of $6.7 million for the nine months ended February 28, 2003, from a net loss of $11.6 million for the nine months ended February 28, 2002, due to the factors listed above, primarily lower interest expense due to our March 2002 debt restructuring.

Liquidity and Capital Resources

Our consolidated financial statements have been prepared assuming that we will continue as a going concern. However, our independent auditors in their report accompanying our May 31, 2002 audited consolidated financial statements stated that we have suffered recurring losses from operations and have a net capital deficiency that raise substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty. If we are not sufficiently successful in generating cash from operating activities, we may need to sell additional common stock or other securities, or we may need to sell assets outside the ordinary course of business. Current market conditions, coupled with our current stock price, may pose difficulties in closing a securities offering on acceptable terms, or at all. Moreover, if we need to dispose of assets outside of the ordinary course of business to generate cash, we may not be able to realize the carrying value of those assets upon liquidation. If we are unable to generate the necessary cash, we could be unable to continue in existence.

At February 28, 2003 our total cash on hand was $2.3 million, compared with cash on hand of $5.6 million at May 31, 2002. Cash used by operating activities was $2.3 million during the nine months ended February 28, 2003 compared to cash flows from operating activities of $2.7 million during the nine months ended February 28, 2002. The change in cash flows from operating activities was primarily due to our loss from operations and cash used to pay down accrued liabilities. Our future success as a company will depend heavily on our ability to generate cash from operating activities. We are continuing to focus on cost reduction initiatives that specifically address the need to increase cash provided by operating activities. Some of these initiatives include staff reductions, reduction of product line offerings, sale of excess inventory, and general and administrative cost controls.

Cash used in investing activities decreased from $2.0 million during the nine months ended February 28, 2002 to $0.7 million during the nine months ended February 28, 2003. This decrease was due to lower amounts of investment in manufacturing equipment and manufacturing facility improvements. We currently do not have any material commitments for capital equipment purchases.

Cash used in financing activities increased from $0.7 million during the nine months ended February 28, 2002 to $0.8 million during the nine months ended February 28, 2003. Cash used in financing activities was used primarily for debt payments during the nine months ended February 28, 2003.

We translate the activity of our European Operations, whose functional currency is the British Pound Sterling, into U.S. Dollars on a monthly basis. The balance sheet of the European Operations is translated using the exchange rate as of the date of the balance sheet, and for purposes of the statement of operations and statement of cash flows we use the weighted average exchange rate for the period. As a result, the value of our assets, liabilities, revenue, and expenses may vary materially from one reporting period to the next solely as a result of varying exchange rates. We had not entered into any hedging arrangements as of February 28, 2003.

Significant Events During The Quarter

Conversion of Series C Convertible Preferred Stock and Reverse Stock Split

Revolving Invoice Funding Facility

Sale of U.S. Operations’ Boeing Statement of Work

On January 31, 2003, the Company sold its rights and responsibilities for the U.S. Operations’ Boeing Statement of Work to an independent third party. The Company also sold inventory, tooling and certain intangible assets related to the Boeing Statement of Work. The sale price was $400,000 payable as follows: $181,250 due at closing and seven quarterly payments of $31,250. There was no significant gain or loss resulting from the transaction.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and normal use of the asset. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset, and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. The Company is required to adopt the provisions of SFAS No. 143 in the first quarter of fiscal year 2004. To accomplish this, the Company must identify all legal obligations for asset retirement obligations, if any, and determine the fair value of these obligations on the date of adoption. The determination of fair value is complex and will require the Company to gather market information and develop cash flow models. Additionally, the Company will be required to develop processes to track and monitor these obligations. The adoption of this statement is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Among other things, this statement rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, which required all gains and losses from early extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. As a result, the criteria in APB Opinion No. 30, Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, will now be used to classify those gains and losses. The statement became effective for the Company on June 1, 2002 for prospective transactions. Additionally, adoption of the statement requires that the Company reclassify gains previously reported for the years ended May 31, 2000 and 2002 related to debt extinguishments from extraordinary items to income from continuing operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). This statement requires that a liability for a cost associated with an exit or disposal activity be recognized at fair value when the liability is incurred. The Company adopted this statement for exit or disposal activities that were initiated after December 31, 2002, and the adoption did not have a material impact on the Company’s consolidated results of operations or financial position.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation -Transition and Disclosure — an amendment of FAS 123. SFAS No. 148 amends SFAS No. 123 Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Finally, SFAS No.148 amends APB Opinion No. 28, “Interim Financial Reporting,” to require disclosure about those effects in interim financial information. The amendments to the transition and disclosure provisions is effective for fiscal years ending after December 15, 2002. The amendment to APB Opinion 28 is effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. We are currently evaluating the impact

of SFAS No. 148. We will adopt the disclosure provisions of SFAS No. 148 in our Annual Report on Form 10-K for the year ending May 31, 2003.

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, regardless of the guarantor’s fiscal year-end. The guarantor may not revise or restate its previous accounting for guarantees issued before the date of the Interpretation’s initial application to reflect the effect of the recognition and measurement provisions of the Interpretation. The disclosure requirements in this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The guidance on indirect guarantees of the indebtedness of others, which previously was included in FASB Interpretation No. 34, Disclosure of Indirect Guarantees of Indebtedness of Others, continues to apply to financial statements for fiscal years ended after June 15, 1981. The adoption of this interpretation did not have a material impact on the Company’s results of operations, consolidated financial position or cash flows and has been considered in formulating disclosures for the third quarter of fiscal year 2003 condensed consolidated financial statements.

In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on EITF 00-21, Revenue Arrangements with Multiple Deliverables, with respect to determining when and how to allocate revenue from sales with multiple deliverables. The EITF 00-21 consensus provides a framework for determining when and how to allocate revenue from sales with multiple deliverables based on a determination of whether the multiple deliverables qualify to be accounted for as separate units of accounting. The consensus is effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003. The Company does not expect that the adoption of this consensus will have a material impact on the Company’s consolidated results of operations or financial position.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have financial instruments including debt obligations issued at a fixed rate which generally are not callable until maturity and therefore market fluctuations in interest rates will not affect our earnings for the period. Based upon this fact, we do not consider the market risk exposure for interest rates to be material. It is not practicable to estimate the fair value of our long-term debt due to our history of losses and debt defaults, among other factors.

We are subject to foreign currency exchange rate risk relating to receipts from and payments to suppliers in currencies other than the functional currencies in which our business segments operate (the U.S. Dollar and the British Pound Sterling). Although we have significant foreign operations, transactions in currencies other than our functional currencies are not significant. We also do not have significant transactions between our U.S. and European Operations. Historically, we have not experienced material foreign currency transaction gains and losses and do not anticipate any material foreign currency transaction gains or losses in the future. Therefore, we have not entered into any hedging or other transactions to manage our foreign currency exchange rate risk as of February 28, 2003. However, the value of our assets, liabilities, revenue and expenses may vary materially from one reporting period to the next solely as a result of varying exchange rates between the British Pound Sterling and the U.S. Dollar. For example, British Pound Sterling was worth $1.4625 on May 31, 2002 but one British Pound Sterling was worth $1.5737 on February 28, 2003. As a result, we incurred a positive foreign currency translation adjustment of $1,892,000 during the nine months ended February 28, 2003.

We are exposed to commodity price fluctuations through purchases of aluminum, titanium, and other raw materials. We enter into certain supplier agreements that guarantee quantity and price of the applicable commodity to limit the exposure to commodity price fluctuations and availability concerns. At February 28, 2003, we had purchase commitments for raw materials aggregating approximately $1.4 million. This amount relates to a titanium supply agreement with a fixed price.

ITEM 4. CONTROLS AND PROCEDURES.

Our executive officers, including our Chief Executive Officer and Chief Financial Officer, are responsible for establishing and maintaining disclosure controls and procedures for Pacific Aerospace & Electronics, Inc and its’ subsidiaries. Those executives have designed such controls to ensure that all material information relating to Pacific Aerospace & Electronics, Inc. and its’ subsidiaries is made known to them by others within the organization.

On April 4, 2003, our executive officers completed an evaluation of our disclosure controls and procedures and have determined them to be functioning properly and effectively. They did not discover any significant deficiencies or material weaknesses within the controls and procedures that required modification.

Since the completion of that evaluation, management has noted no significant changes in internal controls or in other factors that could significantly affect internal controls.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time the Company is involved in legal proceedings relating to claims arising out of operations in the normal course of business.

On November 26, 2002 the Company filed a complaint in the United States District Court for the Eastern District of Washington against Edward Taylor, James Petri, their spouses, and RAAD Technologies, a Washington corporation. In the compliant we seek to enjoin the defendants from continuing infringement of certain intellectual property rights and against certain conduct we contend represents unfair competition. We also seek damages, attorney fees, court costs and other equitable relief. The defendants filed a lawsuit in the United States District Court for the Western District of Washington on February 18, 2003 seeking a declaratory judgment that infringement has not occurred on certain related technologies. The Company plans either to seek to dismiss the second action or to consolidate it with the original claim.

Other than as described above, the Company is not aware of any suits or proceedings that, if decided adversely to the Company, would have a material adverse effect upon the Company or its assets.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(a) None.

(b) Dividend Payment Restrictions.

We have never declared or paid cash dividends on our common stock. We currently anticipate that we will retain any future earnings to fund the operations, and we do not anticipate paying dividends on our common stock in the foreseeable future. Our agreements with our senior secured lenders and the indenture governing our Subordinated Notes restrict our ability to pay dividends.

(c) None.

(d) Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On January 27, 2003, we held a special meeting of shareholders in lieu of our 2001 annual meeting of shareholders. The shareholders voted upon the following matters at the meeting:

(a) Election of the following five individuals to serve as directors of the Company:


							BROKER
DIRECTOR	FOR		AGAINST		ABSTAIN		NON-VOTES

Richard W. Detweiler		80,399,631		29,001		1,465,820
Carl H. Goldsmith		80,373,582		55,050		1,465,820
Matthew C. Kaufman		80,357,666		70,966		1,465,820
Philip Raygorodetsky		80,334,482		94,150		1,465,820
Donald A. Wright		79,788,049		640,583		1,465,820

(b) Approval of an amendment to the Company’s Articles of Incorporation to increase the number of authorized shares of Common Stock from one hundred million (100,000,000) shares to twenty billion (20,000,000,000) shares (without affecting par value):


For			48,261,710
Against			3,017,797
Abstain			142,815
Broker Non-Votes			30,472,130
TOTAL			81,894,452

(c) Approval of a 1-for-200 reverse stock split of the Company’s authorized, issued and outstanding shares of Common Stock:


For			48,196,948
Against			3,142,352
Abstain			83,022
Broker Non-Votes			30,472,130
TOTAL			81,894,452

(d) Approval of a new Stock Option Plan for the Company providing for non-qualified stock option grants to employees, directors and consultants:


For			47,712,458
Against			3,439,974
Abstain			269,890
Broker Non-Votes			30,472,130
TOTAL			81,894,452

(e) Ratification of the appointment of KPMG LLP as the independent auditors of the Company for the fiscal year ended May 31, 2002:


For			81,058,074
Against			641,938
Abstain			194,440
Broker Non-Votes			—
TOTAL			81,894,452

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

The following documents are filed as exhibits to this Quarterly Report:


Exhibit
Number		Description
10.56		Asset Purchase Agreement dated January 31, 2003, among Cashmere Manufacturing Co., Inc. as Seller and Damar Machine Company, Inc. as Buyer.
10.57		Contract of Sale and Security Agreement between CAPCO Financial, Inc., a subsidiary of Cupertino National Bank, the registrant and certain of the registrant's subsidiaries dated February 12, 2003.
10.58		Subordination Agreement dated February 12, 2003 among CAPCO Financial, Inc., a division of Cupertino National Bank, Wachovia Bank, N.A. (f/k/a First Union National Bank), the registrant and its wholly owned subsidiaries, Cashmere Manufacturing Co., Inc., Northwest Technologies, Inc., and Pacific Coast Technologies, Inc.
10.59		Cross Guaranty and Collateral Agreement dated February 12, 2003 among CAPCO Financial, Inc., a division of Cupertino National Bank, the registrant and its wholly owned subsidiaries, Cashmere Manufacturing Co., Inc., Northwest Technologies, Inc., and Pacific Coast Technologies, Inc.
10.60		Guaranty dated February 12, 2003 among CAPCO Financial, Inc., a division of Cupertino National Bank, the registrant and Cashmere Manufacturing Co., Inc.
10.61		Security Agreement dated February 12, 2003 among CAPCO Financial, Inc., a division of Cupertino National Bank, the registrant and its wholly owned subsidiaries, Cashmere Manufacturing Co., Inc., Northwest Technologies, Inc., and Pacific Coast Technologies, Inc.
10.62		Amendment No. 1 to Security Agreement dated February 12, 2003 between CAPCO Financial, Inc., the registrant and its wholly owned subsidiaries, Cashmere Manufacturing Co., Inc., Northwest Technologies, Inc., and Pacific Coast Technologies, Inc.
99.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K.

The Company filed a Current Report on Form 8-K on February 17, 2003, reporting a 1-for-200 reverse split of its outstanding shares of common stock, as well as a proportionate reduction in its shares of authorized but unissued common stock.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		PACIFIC AEROSPACE & ELECTRONICS, INC

		/s/ Donald A. Wright
Date: April 14, 2003
		Donald A. Wright
		President and Chief Executive Officer
		(Principal Executive Officer)

		/s/ Charles A. Miracle
Date: April 14, 2003
		Charles A. Miracle
		Chief Financial Officer and Treasurer
		(Principal Financial and Accounting Officer)

CERTIFICATION

I, Donald A. Wright, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Pacific Aerospace & Electronics, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: April 14, 2003

/s/ Donald A. Wright

Donald A. Wright

Chief Executive Officer

CERTIFICATION

I, Charles A. Miracle, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Pacific Aerospace & Electronics, Inc.;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: April 14, 2003

/s/ Charles A. Miracle

Charles A. Miracle

Chief Financial Officer

EXHIBIT INDEX

The following documents are filed as exhibits to this Quarterly Report:


Exhibit
Number		Description
10.56		Asset Purchase Agreement dated January 31, 2003, among Cashmere Manufacturing Co., Inc. as Seller and Damar Machine Company, Inc. as Buyer.
10.57		Contract of Sale and Security Agreement between CAPCO Financial, Inc., a subsidiary of Cupertino National Bank, the registrant and certain of the registrant's subsidiaries dated February 12, 2003.
10.58		Subordination Agreement dated February 12, 2003 among CAPCO Financial, Inc., a division of Cupertino National Bank, Wachovia Bank, N.A. (f/k/a First Union National Bank), the registrant and its wholly owned subsidiaries, Cashmere Manufacturing Co., Inc., Northwest Technologies, Inc., and Pacific Coast Technologies, Inc.
10.59		Cross Guaranty and Collateral Agreement dated February 12, 2003 among CAPCO Financial, Inc., a division of Cupertino National Bank, the registrant and its wholly owned subsidiaries, Cashmere Manufacturing Co., Inc., Northwest Technologies, Inc., and Pacific Coast Technologies, Inc.
10.60		Guaranty dated February 12, 2003 among CAPCO Financial, Inc., a division of Cupertino National Bank, the registrant and Cashmere Manufacturing Co., Inc.
10.61		Security Agreement dated February 12, 2003 among CAPCO Financial, Inc., a division of Cupertino National Bank, the registrant and its wholly owned subsidiaries, Cashmere Manufacturing Co., Inc., Northwest Technologies, Inc., and Pacific Coast Technologies, Inc.
10.62		Amendment No. 1 to Security Agreement dated February 12, 2003 between CAPCO Financial, Inc., the registrant and its wholly owned subsidiaries, Cashmere Manufacturing Co., Inc., Northwest Technologies, Inc., and Pacific Coast Technologies, Inc.
99.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, Section 906 of the Sarbanes-Oxley Act of 2002.

34 EX-10.56 3 f89244exv10w56.txt EXHIBIT 10.56 Exhibit 10.56 ASSET PURCHASE AGREEMENT This Asset Purchase Agreement (this "Agreement") is entered effective as of January ____, 2003, by and between Cashmere Manufacturing Co., Inc., a Washington corporation ("Seller"), and Damar Machine Company, Inc., a Washington corporation ("Buyer"). RECITALS A. Seller is in the business of, among other things, manufacturing parts for The Boeing Company ("Boeing") through a statement of work (the "Business"). B. Seller desires to sell, and Buyer desires to purchase, Seller's rights in the statement of work, selected inventory and tooling and programs to support the line items in the statement of work and the name "Cashmere Manufacturing." C. Seller and Buyer desire that Buyer sublet a portion of Seller's premises, such space to be determined by Seller, for storage and operation of machinery pursuant to the terms of this Agreement. AGREEMENT Accordingly, the parties, intending legally to be bound, agree as follows: 1. PURCHASE AND SALE 1.1 Purchase and Sale of Assets. Subject to all the terms and conditions of this Agreement, in reliance on the representations and warranties set forth herein, Seller agrees to sell to Buyer, and Buyer agrees to purchase from Seller, all of Seller's right, title and interest in and to the following assets, properties and rights (collectively, the "Assets"), free and clear of all liens, security interests, mortgages, deeds of trust, encumbrances, reservations or charges of any kind ("Liens"): (a) Statement of Work. Approximately 705 line items pursuant to the statement of work with Boeing attached as Exhibit A hereto (the "Current Statement of Work"). (b) Mark. The name "Cashmere Manufacturing", and all associated goodwill (the "Mark"). (c) Tooling. The tooling and software programs in Seller's possession that are used by Seller exclusively to support the Current Statement of Work (the "Tooling"). (d) Finished Goods Inventory. The finished goods inventory listed on Exhibit B hereto (the "Finished Goods Inventory"). (e) Raw Material Inventory. The raw materials listed on Exhibit C hereto (the "Raw Material Inventory"), which are reflected on Seller's books and records as having a total cost to Seller of approximately $375,000. The selection of raw material to be included on Exhibit C is to be to the mutual agreement of both Buyer and Seller. In the event that the cost of the Raw Material Inventory is more than ten percent (10%) higher or lower than the estimated $375,000, the Purchase Price for the Raw Material Inventory, as defined in Clause 1.2(iii), shall be adjusted on a prorated basis, such that the Purchase Price for the Raw Material Inventory will be approximately equal to twenty percent (20%) of the cost to the Seller of the Raw Material Inventory. 1.2 Purchase Price and Payment. (a) The total purchase price (the "Purchase Price") for the Assets is Four Hundred Thousand Dollars ($400,000). The Purchase Price shall be paid as follows: (i) Buyer shall pay Two Hundred Fifty Thousand Dollars ($250,000) for the Current Statement of Work, the Mark and the Tooling, such amount to be paid Thirty-One Thousand Two Hundred Fifty Dollars ($31,250) in cash at Closing and seven (7) quarterly payments of Thirty-One Thousand Two Hundred Fifty Dollars ($31,250) each (each a "Quarterly Payment") on the following dates: April 30, 2003, July 31, 2003, October 31, 2003, January 31, 2004, April 30, 2004, July 31, 2004 and October 31, 2004, (each, a "Quarterly Payment Date"); (ii) Buyer shall pay Seventy-Five Thousand Dollars ($75,000) in cash at Closing for the Finished Goods Inventory; and (iii) Buyer shall pay Seventy-Five Thousand ($75,000) in cash at Closing for the Raw Material Inventory. (b) The parties acknowledge that Buyer may perform work for Pacific Aerospace & Electronics, Inc. ("PA&E") after Closing and, in such event, the parties agree that Seller may elect to offset any amounts owing to Buyer by Seller or any affiliate thereof, including PA&E, against the Quarterly Payments and/or amounts owing to Seller pursuant to Section 2.2. Similarly, the Buyer may elect to offset any amounts owing to Seller by Buyer, against the amounts invoiced to Seller by Buyer, for work performed. The right of offset may only be applied when the payment for offset and the offsetting receipt fall within a similar payment due date. The difference in due dates between the two offsetting payments must not exceed fifteen (15) days. 1.3 Allocation. The parties have jointly determined and set forth in Schedule 1.3 the proper allocation of the Purchase Price among the Assets based upon the fair market value of the Assets on the Closing Date in accordance with Section 1060 of the Internal Revenue Code. Such allocation shall be binding upon Buyer and Seller, and no party hereto shall file or cause to be filed any tax return, IRS Form 8594 or other form, or take a position with any tax authority or jurisdiction, that is inconsistent with the allocation. 1.4 Transfer and Conveyance Taxes. Seller shall bear all state or local transfer taxes arising from the transactions contemplated by this Agreement, other than state or local sales or use taxes levied on the transfer of any personal property Assets, which shall be borne by Buyer. 1.5 Closing. The consummation of the transactions contemplated herein (the "Closing") shall take place at the offices of Davis Wright Tremaine LLP in Seattle, Washington, at 10:00 a.m. local time on January 31, 2003, or such other time and location as the Parties may mutually determine (the "Closing Date"). 1.6 Closing Deliveries of Seller. At the Closing, Seller shall deliver or cause to be delivered to Buyer (a) a Bill of Sale in the form attached to this Agreement as Exhibit D, duly executed by Seller, conveying the Assets free and clear of any Liens, (b) a Washington State Resale Certificate, the form of which is attached hereto as Exhibit E, and (c) such other instruments as shall be reasonably requested by Buyer in accordance with this Agreement. 1.7 Closing Deliveries of Buyer. At the Closing, Buyer shall deliver or cause to be delivered to Seller the cash due at Closing pursuant to Section 1.2 (i.e., $181,250). 2 1.8 Closing Conditions. Buyer's obligation to purchase the Assets is subject to the satisfaction or waiver in writing, on or before the Closing Date, of the following conditions: (i) the representations and warranties of Seller set forth in this Agreement shall be true and correct in all material respects on the Closing Date, (ii) Seller shall have provided the deliveries set forth in Section 1.6, (iii) Boeing's consent shall have been obtained, as described in Section 5.4, (iv) Seller shall have conducted the Business in the ordinary course since the date of this Agreement, and (v) Buyer shall be satisfied, in its reasonable discretion, with its inspection of Assets pursuant to Section 7.11. Seller's obligation to sell the Assets is subject to the satisfaction or waiver in writing, on or before the Closing Date, of the following: (i) the representations and warranties of Buyer shall be true in all material respects on the Closing Date, (ii) Buyer shall have provided the closing delivery set forth in Section 1.7, and (iii) Boeing's consent shall have been obtained, as described in Section 5.4. 2. CONDITIONAL PURCHASE AND SALE OF ADDITIONAL ASSETS 2.1 Additional Raw Material Inventory. Within 60 days of Closing, at Buyer's option, Buyer may purchase additional units of the Raw Material Inventory (the "Additional Inventory"), to the extent Seller has Additional Inventory. The purchase price for the Additional Inventory ("Additional Inventory Purchase Price") is 20 cents for every one dollar of Seller's cost of the Additional Inventory, as reflected in Seller's books and records. At the time Buyer notifies Seller that it intends to purchase Additional Inventory, Seller shall provide Buyer its purchasing records setting forth Seller's cost for the Additional Inventory. Buyer shall pay the Additional Inventory Purchase Price at the time of the transfer of the Additional Inventory from Seller to Buyer. The parties agree and acknowledge that Seller is not obligated to possess, and Buyer is not obligated to purchase, any minimum amount of Additional Inventory. Nothing contained herein shall limit or prohibit Seller from selling Additional Inventory to any party other than Buyer, including during the 60-day period following Closing. 2.2 Past Statement of Work. Prior to the date of this Agreement, in addition to the Current Statement of Work, Seller's statement of work with Boeing contained approximately 2,400 additional line items as set forth on Exhibit F hereto (the "Past Statement of Work"). Buyer intends to deliver one or more bids to Boeing to acquire all or a portion of the Past Statement of Work from Boeing. If Boeing awards all or any portion of the Past Statement of Work to Buyer (or any affiliate thereof, including any entity owned in whole or in part, directly or indirectly, by Buyer) within twelve (12) months after the Closing Date, Seller shall sell to Buyer, and Buyer shall purchase from Seller, all of Seller's right, title and interest in and to the tooling and software programs in Seller's possession that were used by Seller exclusively to support the Past Statement of Work awarded to Buyer (the "Past Tooling"). Such purchase and sale shall be mandatory and not optional, subject to confirmation by Buyer that such assets are substantially in the same condition and functionality as when they were used by Seller, in the performance of the awarded portion of the Past Statement of Work. The purchase price for the Past Tooling (the "Past Tooling Purchase Price") shall be the product of the percentage of the Past Statement of Work acquired by Buyer and Five Hundred Thousand Dollars ($500,000) (for example, if Buyer contracts with Boeing to provide or is otherwise awarded 50% of the line items listed on the Past Statement of Work, the purchase price to be paid to Seller for the applicable Past Tooling shall be $250,000). 2.3 Payment of Past Tooling Purchase Price. Buyer shall pay Seller the Past Tooling Purchase Price in eight (8) equal installments, the first installment to be paid at the time of the transfer of the Past Tooling from Seller to Buyer and the remaining balance to be paid in seven 3 equal quarterly installments. If Boeing awards portions of the Statement of Work to Buyer in more than one transaction during the 12 months following Closing, the purchase price owing to Seller for each such portion shall be paid in accordance with the preceding sentence (i.e. the first installment in each case shall be paid upon each corresponding transfer of applicable Past Tooling to Buyer, and all remaining installments shall be paid upon the remaining payments dates as established in the first sentence). A Bill of Sale substantially in the form of Exhibit D shall be used to effect each such transfer. 3. REPRESENTATIONS AND WARRANTIES OF SELLER 3.1 Organization and Standing. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Washington and has all requisite corporate power and authority to own, lease and operate its properties and assets and to conduct its business. 3.2 Authorization; Binding Agreement. Seller has all requisite corporate power and authority to enter into this Agreement and all documents delivered or to be delivered by Seller hereunder (the "Seller Related Documents"), to execute and deliver this Agreement and the Seller Related Documents, to carry out its obligations hereunder and thereunder, and to consummate the transactions contemplated hereby and thereby (the "Contemplated Transactions"). The execution and delivery of this Agreement and the Seller Related Documents by Seller and the consummation by Seller of its obligations hereunder and thereunder have been duly and validly authorized by all necessary corporate action on the part of the Seller. This Agreement has been duly executed and delivered (and at Closing the Seller Related Documents will be duly executed and delivered) on behalf of Seller and, assuming the due authorization, execution and delivery by Buyer, constitute legal, valid and binding obligations of Seller enforceable in accordance with their respective terms, except that the enforcement hereof may be limited by applicable bankruptcy, insolvency, or other similar laws now or hereafter in effect relating to creditors' rights generally and general principles of equity. 3.3 Condition of Assets, Additional Inventory and the Past Statement of Work. Buyer hereby acknowledges and accepts the Assets, the Additional Inventory and the Past Statement of Work, on an "as is, where is" basis without any representation or warranty of any kind from Seller, other than as it relates to accepted aerospace industry practice for quality tracking of raw materials and finished goods. Evidence of quality tracking and related documentation shall be made available to Buyer by Seller with assurances by Seller that the documentation is accurate and complete, to the best of Seller's knowledge, as it relates to the Additional Inventory acquired. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH HEREIN, SELLER DISCLAIMS ALL WARRANTIES, EITHER EXPRESS OR IMPLIED WITH RESPECT TO THE ASSETS, THE ADDITIONAL INVENTORY, THE PAST TOOLING AND THE PAST STATEMENT OF WORK INCLUDING BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 3.4 Title to Assets. Seller shall have good and marketable title to the Assets at Closing, free and clear of all Liens. In the event Buyer purchases Additional Inventory or Past Tooling pursuant to Sections 2.1 or 2.2, Seller shall have good and marketable title to such Additional Inventory and Past Tooling (as applicable), free and clear of all Liens, at the time Seller transfers such Additional Inventory and Past Tooling (as applicable) to Buyer. 4 3.5 Litigation. There is no suit, proceeding or litigation pending or, to the actual knowledge of Seller, any investigation or any threat of any suit, proceeding, litigation or investigation, that (i) arises out of the ownership or use of the Assets, Additional Inventory, Past Statement of Work or Past Tooling, (ii) will materially and detrimentally affect the use or operation of the Assets, Additional Inventory or Past Tooling, or (iii) will adversely affect the ability of Seller to perform its obligations under this Agreement. 4. REPRESENTATIONS AND WARRANTIES OF BUYER. 4.1 Organization and Standing. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Washington and has all requisite corporate power and authority to own, lease and operate its properties and assets and to conduct its business. 4.2 Authorization; Binding Agreement. Buyer has all requisite corporate power and authority to enter into this Agreement and all documents delivered or to be delivered by Buyer hereunder ("Buyer Related Documents"), to execute and deliver this Agreement and the Buyer Related Documents, to carry out its obligations hereunder and thereunder, and to consummate the Contemplated Transactions. The execution and delivery of this Agreement and the Buyer Related Documents by Buyer and the consummation by Buyer of its obligations hereunder and thereunder have been duly and validly authorized by all necessary corporate action on the part of Buyer. This Agreement has been duly executed and delivered (and at Closing the Buyer Related Documents will be duly executed and delivered) on behalf of Buyer and, assuming the due authorization, execution and delivery by Seller, constitute legal, valid and binding obligations of Buyer enforceable in accordance with their respective terms, except that the enforcement hereof may be limited by applicable bankruptcy, insolvency, or other similar laws now or hereafter in effect relating to creditors' rights generally and general principles of equity. 5. COVENANTS 5.1 Non-Solicitation. Buyer and any affiliate thereof shall not at any time, (i) recruit, solicit or induce in any way any employee, advisor or consultant of Seller or PA&E or any affiliate thereof to terminate his or her relationship with Seller, provided that nothing contained herein shall prohibit Buyer from employing any individual who independently initiates hiring discussions with Buyer or responds to a general advertisement, or (ii) directly or indirectly, contact or solicit any "Clients of Seller" (as defined below) for the express purpose of selling or supplying to Clients of Seller the same products that Buyer sold or supplied to Seller, PA&E or any affiliate thereof. The term "Clients of Seller" shall mean any client or customer of Seller or PA&E or any affiliate thereof for which Buyer performs work for or on behalf of Seller, PA&E or any affiliate thereof; provided, that with respect to any person or entity that is a Client of Seller for which Buyer has been performing other work prior to or after the date of this Agreement and such other work is not for or on behalf of Seller, PA&E or any affiliate thereof ("Independent Work"), then such person or entity shall not be deemed to be a Client of Seller with respect to the Independent Work. Notwithstanding the foregoing, nothing contained herein shall prohibit Buyer from (i) selling or supplying products to any Client of Seller who independently initiates purchase and sale discussions with Buyer, or (ii) responding to unsolicited requests for proposals or invitations to bid. Buyer acknowledges that any violation of this Section 5.1 will cause irreparable injury to Seller and Buyer agrees that Seller and PA&E and its affiliates, as applicable, will be entitled to extraordinary relief in court, including, but not limited to, temporary restraining orders, preliminary injunctions and permanent injunctions 5 without the necessity of posting a bond or other security and without prejudice to any other rights and remedies that Seller may have for a breach of this Agreement. 5.2 Risk of Loss. The risk of any loss, damage, impairment, confiscation, or condemnation of the Assets from any cause whatsoever shall be borne by Seller at all times prior to the Closing. In the event of any such material loss, damage, impairment, confiscation, or condemnation, whether or not covered by insurance, Seller shall provide Buyer with written notice immediately after the occurrence thereof, and Buyer may elect, at its sole option, (a) to proceed to Closing on the condition that (i) Buyer receives at Closing all insurance proceeds or condemnation award with respect to the Assets so affected, free and clear of all Liens or interests of any third persons, and (ii) the amount of the Purchase Price is reduced by the amount of any applicable insurance deductible and the amount by which the cost of restoring the Assets so affected exceeds the condemnation award or applicable insurance loss limits (provided that Buyer shall have no obligation to close if the Purchase Price would be reduced to a number less than zero) or (b) unless Seller shall, at its expense, repair, replace, or restore the Assets to their prior condition to the reasonable satisfaction of Buyer before the Closing, to terminate this Agreement and the purchase of the Assets contemplated by this Agreement. Pending election by Buyer, any insurance proceeds or condemnation award shall be deposited in escrow. 5.3 Boeing Consent. Buyer and Seller shall use their best efforts to obtain Boeing's consent to the transfer of the Current Statement of Work to Buyer, and obtaining such consent shall be a condition to Closing for both parties. Following Closing, Seller shall use commercially reasonable efforts to assist Buyer in acquiring the Past Statement of Work. 5.4 Further Assurances. The parties agree that, from time to time, whether before, at or after the Closing, each of them will execute and deliver such further instruments of conveyance and transfer, in form and substances reasonably satisfactory to each party, and take such other action as may be reasonably necessary to carry out the purposes and intents of this Agreement, including to assure that Buyer has acquired all of the Assets. 6. SUBLEASE 6.1 Sublease. Effective upon Closing, Seller hereby subleases and demises to Buyer, and Buyer hereby subleases from Seller, a portion of Seller's leased premises located at 430 Olds Station Road in Wenatchee, Washington, such portion to be determined by Seller and to be used by Buyer for the storage and operation of certain equipment sold by Seller to Buyer (the "Sublease") for the Term (as defined below) and on the terms and conditions hereinafter set forth. 6.2 Term. The term of the Sublease (the "Term") shall commence on the Closing Date and shall continue on a month-to-month basis until terminated by either party on three (3) days notice or March 31, 2003, whichever comes first. 6.3 Rent. During each calendar month during the Term, Buyer shall pay to Seller rent for the Sublease in the amount of One Thousand Five Hundred Dollars ($1,500). 7. MISCELLANEOUS 7.1 Amendments and Waivers. The provisions of this Agreement may be amended only by the written agreement of all of the parties hereto. Any waiver, permit, consent or 6 approval of any kind or character by any party of any provision or condition of this Agreement must be made in writing and shall be effective only to the extent specifically set forth in such writing. 7.2 Successors and Assigns. This Agreement will bind and inure to the benefit of the respective successors and assigns of the parties to this Agreement. 7.3 Default. Time is of the essence of this Agreement. In the event of any actual or threatened default in or breach of term, condition or provision of this Agreement, the aggrieved party shall have the right to specific performance and injunction in addition to any and all other rights and remedies at law or in equity, and all such rights and remedies shall be cumulative. 7.4 Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. 7.5 Notices. Any notices, requests, demands or other communications required or permitted to be sent under this Agreement shall be delivered personally, sent by overnight courier or mailed by registered or certified mail, return receipt requested, to the following addresses, and shall be deemed to have been received on the day of personal delivery, one business day after deposit with an overnight courier or three business days after deposit in the mail: If to Buyer, to: Damar Machine Company 14767 - 172nd Drive SE Monroe, Washington 98272 Attention: M. Thomas Kroon, CEO If to Seller, to: Cashmere Manufacturing Co., Inc. 430 Olds Station Road Wenatchee, Washington 98801 Attention: Don Wright, President 7.6 Governing Law. The validity, meaning and effect of this Agreement shall be determined in accordance with the laws of the State of Washington applicable to contracts made and to be performed in that state, without regard to the conflicts of laws principles thereof. 7.7 Attorneys' Fees. In the event of a dispute regarding the interpretation or enforcement of this Agreement, the prevailing party in such dispute shall be entitled to recover its reasonable attorneys' fees and costs at trial and in appeal. 7.8 Entire Agreement. This Agreement, together with those documents expressly referred to in this Agreement, constitutes the final agreement of the parties concerning the matters referred to in this Agreement, and supersedes all prior agreements and understandings. 7 7.9 Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, and all of which together shall constitute one and the same agreement binding on all parties hereto. 7.10 Expenses. Each party hereto shall pay its own legal, accounting, out-of-pocket and other expenses incident to this Agreement and to any action taken by such party in preparation for carrying this Agreement into effect. 7.11 Inspection. Between the date hereof and Closing, Buyer shall have the right to inspect the Tooling, Finished Goods Inventory and Raw Material Inventory, provided that such inspection shall not interfere with the conduct of business by Seller or PA&E. In the event Buyer purchases any Additional Inventory or Past Tooling pursuant to Sections 2.1 and 2.2, Buyer shall have the right to inspect such Additional Inventory and Past Tooling (as applicable), provided that such inspection does not interfere with the conduct of business by Seller or PA&E. 7.12 Termination. This Agreement may be terminated at any time prior to Closing: (i) by mutual agreement of the parties, or (ii) by either party if Closing has not occurred by February 28, 2003 and such party is not in breach of this Agreement. Nothing contained herein shall release a party from liability for a willful failure to carry out its obligations under this Agreement. 7.13 Indemnification by Seller. Seller shall be responsible to Buyer for, and shall defend, indemnify and hold Buyer harmless from and against any loss, damage, liability, cost or expense (including, without limitation, reasonable attorneys' fees, legal expenses and consultant's fees) (collectively, "Losses") that shall be suffered or incurred by Buyer, resulting or relating to (i) claims or demands made by third parties arising from Seller's conduct of the Business or ownership or use of the Assets prior to the Closing Date and (ii) any breach by Seller of the representations or warranties of Seller contained in this Agreement or failure of Seller to observe or perform any term of or covenant in this Agreement; provided, that no claim for indemnification may be made until the Losses exceed Five Thousand Dollars ($5,000), whereupon all indemnity obligations thereafter (i.e., in excess of $5,000) shall be payable up to the Purchase Price. Seller's indemnity obligations hereunder shall not, collectively, exceed the Purchase Price. 7.14 Indemnification by Buyer. Buyer shall be responsible to Seller for, and shall defend, indemnify and hold Seller harmless from and against any Losses that shall be suffered or incurred by Seller, resulting or relating to (i) claims or demands made by third parties arising from Buyer's conduct of the Business or ownership or use of the Assets from and after Closing, and (ii) any breach by Buyer of the representations or warranties of Buyer contained in this Agreement or failure of Buyer to observe or perform any term of or covenant in this Agreement; provided, that no claim for indemnification may be made until the Losses exceed Five Thousand Dollars ($5,000), whereupon all indemnity obligations thereafter (i.e., in excess of $5,000) shall be payable up to the Purchase Price. Buyer's indemnity obligations hereunder shall not, collectively, exceed the Purchase Price. 7.15 Arbitration. The parties agree that any controversy, claim or dispute arising out of or relating to the terms and conditions of this Agreement shall be settled by arbitration before a mutually selected arbitrator to be held in the city of Seattle, Washington in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. The parties agree that the discovery provisions of the Federal Rules of Civil Procedure shall apply 8 and govern in any proceedings instituted in accordance herewith. Judgment may be entered on the Arbitrator's award in any court having jurisdiction, and the parties consent to the jurisdiction of the courts of Washington for this purpose. The prevailing party shall be entitled to all costs and expenses resulting from such dispute or controversy, including without limitation, reasonable attorneys' fees and expenses. If such controversy, claim or dispute involves a claim for injunctive or other equitable relief, and suit or cross-claim for such relief is filed in a court of competent jurisdiction, the litigation shall be bifurcated to the extent feasible, to the end that all issues other than those required to be determined by the court shall be determined by arbitration as hereinabove required. Subject to the foregoing, the parties hereby irrevocably submit to the jurisdiction of any state or federal court having jurisdiction over the subject matter sitting in Seattle, King County, Washington, in any action or proceeding (other than arbitration) brought to enforce or otherwise arising out of or relating to this Agreement and irrevocably waive to the fullest extent permitted by any law any objection which they may now or hereafter have to the laying of venue in any such action or proceeding in any such forum, and hereby further irrevocably waive any claim in any such forum as an inconvenient forum. Each party has caused this Agreement to be duly executed personally or by its duly authorized officer or representative on the date first above written. SELLER: CASHMERE MANUFACTURING CO., INC. By______________________________________ Name ___________________________________ Its ____________________________________ BUYER: DAMAR MACHINE COMPANY. By______________________________________ Name: M. Thomas Kroon Its: Chief Executive Officer Schedules and Exhibits Schedule 1.3 Allocation Exhibit A Current Statement of Work Exhibit B Finished Goods Inventory Exhibit C Raw Material Exhibit D Bill of Sale Exhibit E Washington State Resale Certificate Exhibit F Past Statement of Work 9 Exhibit D BILL OF SALE THIS BILL OF SALE (this "Bill of Sale") is entered into effective as of the _____ day of January __, 2003, by Cashmere Manufacturing Co., Inc. ("Seller") in favor of Damar Machine Company. ("Buyer"), pursuant to that certain Asset Purchase Agreement (the "Purchase Agreement") dated as of January ___, 2003 by and among Seller and Buyer pursuant to which Seller agreed to transfer certain of its assets to Buyer. Capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Purchase Agreement. FOR GOOD AND VALUABLE CONSIDERATION, the receipt and adequacy of which are hereby acknowledged, Seller does hereby transfer, convey, set over and deliver to Buyer, all Seller's right, title and interest in and to the tangible Assets of Seller, free and clear of all Liens. TO HAVE AND TO HOLD said tangible Assets unto Buyer, Buyer's representatives, successors, and assigns, to and for its and their uses and benefit forever. Seller further agrees that it will at any time and from time to time, at the request of Buyer, do, execute, acknowledge and deliver or cause to be done, executed, acknowledged and delivered to Buyer any all other and further acts, deeds, assignments, transfers, conveyances, assurances and instruments necessary to vest in Buyer full right, title and interest in or to any of the property, assets or rights which this instrument purports to transfer to Buyer. To the extent there is a conflict between the terms and provisions of this Bill of Sale and the Purchase Agreement, the terms and provisions of the Purchase Agreement will govern. This Bill of Sale and the rights of the parties under it will be governed by and construed in all respects in accordance with the laws of the State of Washington, without regard to the conflicts of laws principles of such state. IN WITNESS WHEREOF, Seller has caused this Bill of Sale to be executed effective as of the date first written above. SELLER: CASHMERE MANUFACTURING CO., INC. By --------------------------------------- Its ------------------------------- 10 EX-10.57 4 f89244exv10w57.txt EXHIBIT 10.57 Exhibit 10.57 CONTRACT OF SALE SECURITY AGREEMENT (LOC Form 5) This Contract of Sale and Security Agreement dated for purposes of reference February 12, 2003; is between the undersigned, PACIFIC COAST TECHNOLOGIES, INC., hereinafter called "CLIENT", and CAPCO Financial Company, a division of Cupertino National Bank hereinafter called "CAPCO ", agree as follows: PURPOSE OF AGREEMENT: 1. CLIENT desires to obtain short-term financing by selling, to CAPCO ALL Accounts receivable. CAPCO agrees to Purchase CLIENTs Accounts from time to time at a discount below face value, utilizing an advance formula for the purchase of ALL Accounts based upon advances against Acceptable/Eligible Accounts. It is clearly understood by both parties that ALL Accounts of CLIENT are to be sold to CAPCO. DEFINITIONS: 2. "Account" means any right of payment for goods sold, or leased, and delivered, or services rendered, any specific transaction, or any right of payment. 3. "Advance Formula" means the maximum amount available to CLIENT from CAPCO for the purchase of All Accounts will not exceed 80% of Acceptable/Eligible Accounts. 4. "Acceptable/Eligible Account" means an Account conforming to the Warranties and terms set forth herein that has not been outstanding for more than 90 DAYS from the date of invoice, has been underwritten and approved by CAPCO , and has not been reduced from the original amount billed by, credit memo, offset, adjustment of any kind, or partial payment subsequent to invoice date. 5. "Customer" means CLIENT'S Customer or the Account debtor. 6. "CLIENT" means the seller of All Accounts. 7. "Collateral" means the intangible or tangible property given as security to CAPCO by CLIENT for any obligations and liabilities of CLIENT to CAPCO under the Agreement. 8. "Warrant" means to guarantee, as a material element of this Agreement. 9. "Credit Problem" means Customer is unable to pay his debts because of problems or insolvency. 10. "Customer Dispute" means any claim by Customer against CLIENT, of any kind whatsoever, valid or invalid, that reduces the amount collectible from Customer by CAPCO . CLIENT COVENANTS: 11. CLIENT agrees to sell to CAPCO ALL ACCOUNTS RECEIVABLE, (Accounts) mechanic's lien(s), and rights to payment under any stop notice(s), or bonded stop notice(s) securing payment of those Accounts created by CLIENT in the course of its business, existing as of the date of this agreement or thereafter created during the term of this agreement, subject to approval and verification by CAPCO . CAPCO is not obligated to advance funds for the purchase of All Accounts from CLIENT. When CLIENT notifies CAPCO of it's Accounts, CLIENT shall provide the original Assigned Account (Invoice) together with one copy thereof, a copy of the bill of lading contract, purchase order, purchase order number, and/or any other requisite supporting documentation corresponding to said Accounts and appropriate to the business of CLIENT. 12. CLIENT shall prepare and give to CAPCO proper written assignments of Accounts, mechanic's lien(s) on forms provided by CAPCO. The execution of said assignments shall transfer to CAPCO all of CLIENTs right, title and ownership to ALL Accounts. CLIENT or CAPCO by this agreement, will properly mark Accounts, as assigned and sold to CAPCO, and CAPCO is authorized to notify Customer of said sale and assignment. Form Date 6/97 Page 1 Initial__________ 13. CLIENT represents and Warrants to CAPCO that: a. CLIENT is sole and absolute owner of any and all Accounts and mechanic's liens and rights to payment under any stop notices, or bonded stop notices, sold and assigned hereunder, and CLIENT has full legal right to make said sale, assignment, and/or transfer. b. all Accounts sold to CAPCO are an accurate statement of a bonafide sale, delivery and acceptance of merchandise, or performance of service by CLIENT to / for Account-debtor. Accounts are not contingent upon the fulfillment by CLIENT and each Account-debtor's business is believed to be solvent. The terms for payment of said Accounts are Net 30 days or as expressly set forth on the face of said sold and assigned Accounts, and the payment of said Accounts are not contingent upon the fulfillment by CLIENT of any further performance of any nature whatsoever. CLIENT shall accept no returns and shall grant no allowances or credits to any sold and Assigned Account of any Account-debtor without the prior written approval of CAPCO. c. There are no known setoffs, Customer Disputes, adverse claims, defenses, and/or liens whatsoever against the payment of Accounts, and Account's mechanic's liens have not been previously assigned or encumbered by CLIENT in any manner whatsoever. CLIENT will, immediately upon sale of Accounts to CAPCO make proper entries on its books and records disclosing the absolute sale of Accounts to CAPCO and CLIENT will post no payment unless it is reflected in a payment report from CAPCO . d. CLIENT will promptly notify CAPCO in writing of any proposed change in CLIENT'S place of business, name, legal entity, corporate structure, record-keeping location, and/or as to any additional place of business, or expiration of any special license(s), or transfer of assets, or technology, to a third party, or proposed change in ownership in excess of twenty five percent, (25%), of outstanding shares; e. CLIENT does not own, control, manage, participate in management, or have any involvement and/or association whatsoever with the business of any Account-debtor related to any Accounts sold and assigned hereunder; f. There are no financing statements now on file in any public office governing, any Account, Inventory or work in process of CLIENT in which CLIENT is named in or has signed as the debtor, except the financing statement or statements filed or to be filed in respect to this Agreement, or those statements now on file that have been disclosed in writing by CLIENT to CAPCO. CLIENT will not execute any financing statements pledging Accounts receivables, inventory or work in process, in favor of any other person or entity, excepting CAPCO, for the term of this Agreement; g. CLIENT'S taxes are not delinquent nor has CLIENT been subject to a tax levy by any governmental entity nor are there now on file in any public office tax liens affecting CLIENT other than those delinquencies, levies and/or liens which have been disclosed by CLIENT to CAPCO; h. All records, statements, books, or other documents shown to CAPCO by CLIENT at any time, either before, or after the signing of the Agreement are true and accurate; i. CLIENT has served or caused to be served any and all preliminary 10-day notices required by law to perfect or enforce any mechanic's lien for All Accounts to insure perfection of ownership for CAPCO and the information contained on those preliminary 10-day notices is true, correct, and properly recorded, to Seller's knowledge and belief; j. Waivers and releases for all labor, services, equipment, or material of CLIENT and others will be submitted on CAPCO 's form concurrent with Accounts. 14. CLIENT and CAPCO agree that CAPCO will have FULL RECOURSE against CLIENT and CLIENT shall be liable to repay to CAPCO any amount paid by CAPCO to CLIENT in consideration for the sale, transfer, and assignment of Accounts. 15. All Accounts shall be the sole property of CAPCO, but if for any reason a payment owing on said Accounts shall be paid to CLIENT; CLIENT shall promptly notify CAPCO of such payment, shall hold any check, draft or money so received in trust and for the benefit of CAPCO , and shall pay over such check or draft in-kind, or money, to CAPCO promptly and without delay. All of CLIENT'S invoices shall bear the address of CAPCO'S LOCK BOX as the "REMIT TO" address, and CLIENT agrees that ALL remittances for payment on ALL Accounts shall be made to the CAPCO LOCK BOX or other repository authorized in writing by CAPCO. 16. CLIENT will furnish CAPCO periodic statements, accounts receivable agings, journals, bank records, and other information as requested by CAPCO from time to time. 17. CLIENT will not pledge the credit of CAPCO to any other person, or business for any purpose whatsoever. Form Date 6/97 Page 2 Initial__________ 18. CLIENT is properly licensed and authorized to operate the business of Pacific Coast Technologies, Inc., under the trade name of Pacific Aerospace & Electronics, Inc.- U.S. Electronics Group- Interconnect Division, and CLIENT'S trade name has been properly filed and published as required by the laws of the State of Washington. 19. CLIENT'S business is solvent. 20.CLIENT will not sell Accounts, or pledge Accounts to any party, except to CAPCO for the period of this Agreement unless specific Accounts are subordinated and released by CAPCO in writing. 21. CLIENT will not transfer, pledge, or give a security interest of the Assets sold or Collateral granted to CAPCO to any other party. 22. CLIENT will not change, or modify the terms of the original sold and assigned Account with Customer unless CAPCO first consents to such change in writing. CAPCO agrees to provide a prompt response to CLIENT request for modification or change with respect to an Assigned Account . For example, CLIENT may not extend credit to a Customer BEYOND NET 30 DAYS OR THE TIME SET FORTH ON THE FACE OF THE SOLD AND ASSIGNED ACCOUNT WITHOUT PRIOR WRITTEN CONSENT FROM CAPCO . 23. NOTICE OF DISPUTE: CLIENT must immediately notify CAPCO of Customer Disputes greater than $400.00 in total for any one Customer. 24. POWER OF ATTORNEY: In order to carry out this Agreement and avoid unnecessary notification of Customers. CLIENT irrevocably appoints CAPCO, or any person designated by CAPCO, as its special attorney in fact, or agent, with power to : a. strike out CLIENT'S address on all Accounts mailed to Customers and put on CAPCO 's address. b. receive, direct and forward, open, and dispose of all mail addressed to CLIENT, or to CLIENT'S fictitious trade name via CAPCO's address. c. endorse the name of CLIENT, or CLIENT'S fictitious trade name on any checks or other evidences of payment that may come into the possession of CAPCO on Accounts purchased by CAPCO and on any other documents relating to any of the Accounts or to assigned Collateral. d. in CLIENT'S name, or otherwise, demand, sue for, collect, and give release for any and all monies due, or to become due on Accounts sold and assigned hereunder. e. do any and all things necessary and proper to carry out the purpose intended by this Agreement. f. execute any documents necessary to perfect or to continue any Security Interest and without further authorization from CLIENT file a carbon, photograph, facsimile, or other reproduction of any financing statement for use as a financing statement The authority granted CAPCO shall remain in full force and effect until all Accounts are paid in full and any indebtedness of CLIENT to CAPCO is discharged. CAPCO COVENANTS: 25. CAPCO reserves the sum of ($3,000,000.00) THREE MILLION AND 00/100 for the purchase of ALL of CLIENT'S Accounts. These funds are available daily at CLIENT'S option, subject to restriction as governed by the Advance Formula. Daily availability will be communicated to CLIENT via CAPCO'S Availability / Advance Request. 26. This Agreement shall have an initial term ending with the first full (12) TWELVE calendar months and unless terminated by either party giving not less than thirty (30) days prior written notice. 27. STATEMENT OF Acceptable/Eligible Accounts: CAPCO shall identify in writing all Acceptable/Eligible Accounts and provide to CLIENT, upon request, a written statement thereof (Weekly Aging Report). ACCOUNTING & FEES : 28. Funds advanced by CAPCO to CLIENT are subject to DAILY FEE OF CUPERTINO NATIONAL BANK PRIME RATE + 5.000% /360 (EQUIVALENT TO A MONTHLY DISCOUNT FEE OF CUPERTINO NATIONAL BANK PRIME RATE + 5.000% /12 ) PER CENT calculated on the daily balance (as reported on the CLIENT Liability Detail Report) owing to CAPCO. This period will usually be 1 calendar day except for weekends and or weeks where holidays or other non-operating days prevent the fee from being taken on a daily basis. 29. CAPCO will provide to the CLIENT daily, via fax , an advance and availability request. This report must be acknowledged and returned, via fax, to CAPCO no later than 11:30AM if a deposit or wire transfer is to be made the same date as the request form was issued to the CLIENT by CAPCO . 30. PAYMENT PROCESSING: All payments received by CAPCO will be applied to CLIENT's Outstanding Balance daily following a 3 (THREE) business day hold to allow for the application of collected funds. 31. DISPUTED ACCOUNT: CLIENT will immediately notify CAPCO of any Account subject to a Customer Dispute Form Date 6/97 Page 3 Initial__________ (See Paragraph 10 for definition) of any kind whatsoever and said Account shall be removed as an Acceptable/Eligible Account. 32. INVOICING ERRORS: Mistaken, incorrect and/or erroneous invoicing, submitted by CLIENT to CAPCO may at CAPCO 's discretion be deemed a Customer Disputed sold and Assigned Account and shall be removed as an Acceptable/Eligible Account. COLLATERAL: 33. As Collateral for the payment of any indebtedness now owing, or in the future owing, by CLIENT to CAPCO, CLIENT hereby grants to CAPCO a security interest in the following property: A. SEE EXHIBIT A ATTACHED. 34. CLIENT will maintain such insurance covering CLIENT'S business and/or the property of CLIENT'S Customers as is customary for businesses similar to the business of CLIENT. 35. CLIENT shall complete any and all documents required to provide CAPCO a perfected security interest/lien in the Collateral pledged to CAPCO. DEFAULT: 36. Any one or more of the following shall constitute an event of default: a. If CLIENT shall fail to pay any amount of indebtedness to CAPCO when owing; b. If CLIENT shall be in breach of any term, provision, Warranty, or representation under this Agreement, or any other agreement related hereto; c. If bankruptcy or insolvency proceedings shall be instituted by or against CLIENT. d. If the Collateral shall be attached, levied upon, seized in any legal proceeding, and not released within 5 working days thereof; e. If CLIENT shall cease doing business and there shall exist any indebtedness or commitments by CLIENT to CAPCO ; f. Any Accounts, documents, statements, or other writings submitted by CLIENT to CAPCO prove false or inaccurate in any material respect; g. If CLIENT has contributed to, or aggravated Account debtor's problem, insolvency, and/or said Account debtor's ability and/or willingness to pay any Accounts; h. If any unpaid judgment or tax lien exists against CLIENT; i. If CAPCO with reasonable cause and in good faith determines that it's purchased asset or collateral is impaired for any reason whatsoever; j. Terminating prior to end of initial term; k. Any change in CLIENT'S place of business, name, legal entity, corporate structure, record-keeping location, and/or as to any additional place of business, or expiration of any special license(s), or transfer of assets, or technology, to a third party, or proposed change in ownership in excess of twenty five percent, (25%), of outstanding shares. REMEDIES AFTER DEFAULT: 37. In the event of any default CAPCO may do any one or more of the following: a. Declare any indebtedness secured hereby immediately due and payable; b. Notify any and all Customers and take possession of the Accounts and Collateral and collect any receivables or funds paid to CLIENT all without judicial process; c. Require CLIENT to assemble the Collateral and the records pertaining to receivables or other assets pledged as collateral, and make them available to CAPCO, at a place designated by CAPCO; d. Enter the premises of CLIENT and take possession of the Collateral and of the records pertaining to the receivables and any other Collateral; e. Grant extensions, compromise claims and settle receivables for less than face value, all without prior notice to CLIENT; f. Use, in connection with any assembly or disposition of the Collateral, any trademark, trade name, trade style, copyright, patent right or technical process used or utilized by CLIENT; g. Return any surplus realized to CLIENT after deduction of reasonable expenses, attorney's fees, attorney's fees on appeal, collection costs, independent third party auditors, incurred by CAPCO in resolving said default; Form Date 6/97 Page 4 Initial__________ h. Hold CLIENT liable for any deficiency. i. Establish a reserve from the collection of Accounts to meet reasonable legal expenses associated with a future defense resulting from an action brought against CAPCO by CLIENT, CLIENT's customer, or other third party, as a result of an action of default. j. Injunction against CLIENT taking any action with regard to the Accounts or Collateral. k. CAPCO is authorized by CLIENT to receive, direct and forward, open, and dispose of all mail addressed to CLIENT at any address used by CLIENT to receive mail. GENERAL: 38. After termination CLIENT remains fully responsible to CAPCO for any indebtedness existing, or which may yet arise in connection with Accounts that remain unpaid. 39. If during the term hereof CLIENT fails to make any payment required, CAPCO may at its discretion pay the same and charge CLIENT therefore. 40. CLIENT will not, under any circumstances, or in any manner whatsoever, interfere with any of CAPCO's rights under this Agreement. 41. TAX COMPLIANCE: CLIENT will furnish CAPCO upon request satisfactory proof of payment and/or compliance with all Federal, State and/or Local tax requirements. 42. NOTICE OF LEVY: CLIENT will promptly notify CAPCO of any attachment or any other legal process levied against CLIENT. 43. LEGAL FEES: The losing party will pay any and all legal expenses and reasonable attorney's fees, paralegal fees, staff overtime expense, travel costs, costs on appeal, or other reasonable collection costs, that the prevailing party may incur as a result of either CLIENT or CAPCO enforcing this Agreement one against the other. 44. HOLD HARMLESS: CLIENT shall hold CAPCO harmless against any liability, damages, loss, attorneys' fees and costs of any type due to any action by a Customer arising from CAPCO'S collecting or attempting to collect any Accounts so long as these collections are performed in a commercially reasonable manner and in compliance with all applicable laws, rules and regulations. CLIENT maintains the primary responsibility for collections efforts, until the occurrence of an event of default. 45. BINDING ON FUTURE PARTIES: This Agreement inures to the benefit of and is binding upon the heirs, executors, administrators, successors and assigns of the parties thereto. 46. CUMULATIVE RIGHTS: All rights, remedies and powers granted to CAPCO in this Agreement, or in any note, or other agreement given by CLIENT to CAPCO, are cumulative and may be exercised singularly or concurrently with such other rights as CAPCO may have. These rights may be exercised from time to time as to all or any part of the pledged Collateral as CAPCO in its discretion may determine. 47. WRITTEN WAIVER: CAPCO may not waive its rights and remedies unless the waiver is in writing and signed by CAPCO. A waiver by CAPCO of a right, or remedy under this Agreement on one occasion is not a waiver of the right, or remedy on any subsequent occasion. 48. WASHINGTON LAW: This Agreement shall be governed by and construed in accordance with the laws of the State of WASHINGTON. CLIENT hereby consents to the exclusive jurisdiction of the State of Washington in any dispute arising hereunder or related hereto. Venue for any actions shall be in King Co. WASHINGTON. 49. INVALID PROVISIONS: If any provision of this Agreement shall be declared illegal or contrary to law, it is agreed that such provision shall be disregarded and this Agreement shall continue in force as though such provision had not been incorporated herein. 50. ENTIRE AGREEMENT: This instrument contains the entire Agreement between the parties. Any addendum or modification hereto will be signed by both parties and attached hereto. 51. EFFECTIVE: This Agreement becomes effective when it is accepted and executed by the authorized officers of CAPCO . 52. Execution of this document may contain multiple signature pages; each shall be considered, when combined, as one signed and executed document. Executed the 12th day of February, 2003 at Wenatchee, Washington. Form Date 6/97 Page 5 Initial__________ PACIFIC COAST TECHNOLOGIES, INC. By:_____________________________ Title: ___________________________ By:_____________________________ Title: ___________________________ CAPCO FINANCIAL COMPANY, A DIVISION OF CUPERTINO NATIONAL BANK Accepted this _____ day of _____________, 200_, at Bellevue, Washington By:_________________________________________ Title: ____________________________ Form Date 6/97 Page 6 Initial__________ LINE OF CREDIT PACIFIC COAST TECHNOLOGIES, INC. EXHIBIT "A" ALL ACCOUNTS, CONTRACT RIGHTS, CHATTEL PAPER, DOCUMENTS, INSTRUMENTS AND GENERAL INTANGIBLES NOW OWNED OR HEREAFTER ACQUIRED AND PROCEEDS, THEREOF: ALL RIGHT, TITLE, AND INTEREST IN INVENTORY, RAW MATERIALS, WORK IN PROGRESS AND FINISHED GOODS NOW OWNED OR HEREAFTER ACQUIRED AND PRODUCTS AND PROCEEDS THEREOF: Form Date 6/97 Page 7 Initial__________ Form Date 6/97 Page 1 Initial__________ EX-10.58 5 f89244exv10w58.txt EXHIBIT 10.58 Exhibit 10.58 SUBORDINATION AGREEMENT This subordination Agreement (this "Agreement") is entered into as of February 12, 2003, by and among FIRST UNION NATIONAL BANK ("LENDER") and CAPCO FINANCIAL COMPANY, A DIVISION OF CUPERTINO NATIONAL BANK ("CAPCO"). WHEREAS, LENDER has or may hereafter have a security interest in the present and future accounts, contract rights and other forms of obligation for the payment of money arising out of the sale of goods or rendition of services, arising after February 12, 2003 and proceeds thereof ("Accounts") of PACIFIC COAST TECHNOLOGIES, INC. ("CLIENT") as collateral security for obligations of CLIENT to LENDER, now existing or hereafter arising; WHEREAS, LENDER has or may hereafter have a security interest in the present and future inventory, raw materials, work-in-process, finished goods and proceeds thereof ("Inventory") of PACIFIC COAST TECHNOLOGIES, INC. ("CLIENT") as collateral security for obligations of CLIENT to LENDER, now existing or hereafter arising; WHEREAS, CAPCO also has or may hereafter have a security interest in the Accounts and Inventory as collateral security for all obligations of CLIENT to CAPCO, now existing or hereafter arising; and WHEREAS, in connection with, and in consideration of CAPCO's financing of CLIENT, LENDER desires to subordinate its interest in the Accounts and Inventory to CAPCO's interest, and CAPCO requires a first position security interest in the Accounts and Inventory, it is hereby agreed as follows: 1. All security interests which LENDER may now or hereafter have in the Accounts and Inventory shall at all times be subordinate and junior in right of priority to any security interest in the Accounts and Inventory that CAPCO may at any time have. 2. LENDER hereby agrees that until the obligations of CLIENT to CAPCO shall have become due and payable (whether pursuant to their terms or as a result of the occurrence of an event of default, or otherwise) and CAPCO shall have commenced liquidation of the Accounts and Inventory, LENDER shall not directly or indirectly seek to foreclose or realize upon the Accounts and Inventory or LENDER's junior security interest therein. 3. LENDER hereby consents to CAPCO's financing of CLIENT from time to time upon such terms and for such amounts (whether less than or greater than the face amount or actual value of the Accounts and Inventory) as may be agreed to between CLIENT and CAPCO PROVIDED THAT THE TOTAL SUM MADE AVAILABLE TO CLIENT WILL NOT EXCEED THREE MILLION DOLLARS, ($3,000,000.00), UNLESS APPROVED BY LENDER IN WRITING. Such terms and loans may be amended, modified, extended or terminated from time to time, all without notice to or further consent by LENDER, WITH THE EXCEPTION OF THE PRECEDING SENTENCE. LENDER also consents to the liquidation of the Accounts and Inventory, and any other security CAPCO may hold for CLIENT's obligations to CAPCO, in such order and manner as CAPCO may elect from time to time without notice to Lender. LENDER hereby waives any rights (if any) that LENDER may have to require a marshalling of CLIENT's assets upon liquidation of the Accounts and Inventory. LENDER hereby waives all other notices of any kind to which LENDER may be entitled at any time in connection with CAPCO's financing arrangements with CLIENT or the transactions contemplated by this Agreement. IN THE EVENT OF DEFAULT OF CLIENT, CAPCO WILL NOTIFY LENDER VIA CERTIFIED MAIL SIMULTANEOUS WITH ANY NOTICE OF DEFAULT TO CLIENT. 4. This Agreement shall be effective regardless of the time or order of attachment or manner of perfection of LENDER's and CAPCO's respective security interests in the Accounts and Inventory. This Agreement shall be binding upon LENDER's heirs, representatives, successors and assigns and shall inure to the benefit of CAPCO's successors and assigns. This agreement shall be governed in accordance with the laws of the State of Washington. Form Date 6/97 page 1 Initial________ 5. This agreement may not be terminated so long as any of CLIENT's obligations to CAPCO, or any agreements under which CAPCO may, or may be obligated to, extend credit to CLIENT, remain outstanding. No modification or amendment hereof shall be binding unless in writing and signed by the parties hereto. 6. Execution of this document may contain multiple signature pages; each shall be considered, when combined, as one signed and executed document. IN WITNESS HEREOF, the parties hereto have executed this Agreement as of the date first written above. CAPCO FINANCIAL COMPANY, A DIVISION OF CUPERTINO NATIONAL BANK By:__________________________________ Its: __________________________________ FIRST UNION NATIONAL BANK By:_________________________________ Its: _________________________________ PACIFIC COAST TECHNOLOGIES, INC. By:_________________________________ Its: _________________________________ Date: _______________________________ Form Date 6/97 page 2 Initial________ EX-10.59 6 f89244exv10w59.txt EXHIBIT 10.59 Exhibit 10.59 CROSS GUARANTY AND COLLATERAL AGREEMENT This Agreement is entered into between CAPCO Financial Company, a division of Cupertino National Bank ("CAPCO"), and Pacific Aerospace & Electronics, Inc. ("Pacific") and its wholly owned subsidiaries, Cashmere Manufacturing Co., Inc., Northwest Technologies, Inc., and Pacific Coast Technologies, Inc. (collectively "Subsidiaries"). WHEREAS Pacific and the Subsidiaries have requested that CAPCO provide funding and other services to them collectively under which CAPCO would purchase accounts receivable generated and owned by each of the Subsidiaries and other assets owed by Pacific and the Subsidiaries; and WHEREAS Pacific and the Subsidiaries desire that the receivables and other assets purchased by CAPCO be pooled on a collective basis in order to create a single large base against which advances will be made to Pacific and who in turn may provide advances to the Subsidiaries; CAPCO is willing to provide these services on the terms and conditions set forth below, and in addition to the terms and conditions set forth in other agreements between CAPCO and the parties of even date, now, therefore, the parties agree as follows: 1. Each Subsidiary shall transfer, sell and assign its eligible invoices and other assets ("Assets") to CAPCO pursuant to the terms set forth in respective agreements between it and CAPCO. 2. For the purpose of calculating the advances to be made available as a result of purchased Assets, CAPCO shall be pool all Assets purchased from Pacific or any Subsidiary into 1 one account and shall calculate the borrowing base in the aggregate without regard to the identity of the seller of each Asset. 3. CAPCO shall make all advances that are available as a result of the purchased Assets payable to Pacific, and Pacific shall have the sole discretion and authority as to the distribution of the advances. 4. In order to induce CAPCO into entering into this arrangement Pacific and each of its subsidiaries agree that they shall be jointly and severally liable for the following: a. All advances made by CAPCO to Pacific; b. All fees earned by CAPCO against outstanding advances; c. All collection costs incurred by CAPCO; d. All attorneys' fees as may be incurred by CAPCO in collecting any account; e. Any and all such further charges as Pacific or any of its subsidiaries shall be liable for pursuant to the terms of their respective agreements with CAPCO; and f. CAPCO shall not be obligated to notify Pacific or any Subsidiary of a default by any other party. 5. Pacific and each of its subsidiaries hereby acknowledge receipt of copies of all lending documents between CAPCO and Pacific and/or CAPCO and each subsidiary. 6. Neither Pacific nor any of its subsidiaries shall be permitted to terminate this Agreement without the written consent of CAPCO, and CAPCO may condition its agreement to terminate upon immediate payment in full of all sums due and owing to CAPCO. 7. This Agreement shall be construed according to the laws of the State of Washington. 2 8. If any suit is commenced to enforce this Agreement suit shall be brought in the Superior Court of King County Washington, and the prevailing party shall be entitled to reasonable attorneys' fees. DATED this ____ day of February, 2003. CAPCO Financial Company, a division of Cupertino National Bank. By --------------------------------------- Its -------------------------------------- Pacific Aerospace & Electronics, Inc. By --------------------------------------- Its -------------------------------------- Cashmere Manufacturing Co., Inc. By --------------------------------------- Its -------------------------------------- Northwest Technologies, Inc. By --------------------------------------- Its -------------------------------------- Pacific Coast Technologies, Inc. By --------------------------------------- Its -------------------------------------- 3 EX-10.60 7 f89244exv10w60.txt EXHIBIT 10.60 Exhibit 10.60 GUARANTY This contract of guaranty made and entered into this FEBRUARY 12, 2003 between CAPCO FINANCIAL COMPANY, A DIVISION OF CUPERTINO NATIONAL BANK hereinafter referred to as "CAPCO", and PACIFIC AEROSPACE & ELECTRONICS, INC. hereinafter referred to as Client; and CASHMERE MANUFACTURING CO., INC. and hereinafter referred to as the Guarantors, WITNESSETH: That the Client has made application to CAPCO for financial accommodation, which the Guarantors seek to induce CAPCO to grant. NOW, THEREFORE, IT IS UNDERSTOOD AND AGREED AS FOLLOWS: 1. To induce CAPCO to grant or extend and/or to continue to grant or extend to or for the benefit of the Client such invoice financing, factoring, loan(s), credit(s), or other financial accommodation upon such terms and conditions and at such rate, or rates of discount, or interest, as may be agreed upon between the Client and CAPCO, and for other good and valuable consideration, including the sum of One Dollar to Guarantors in hand paid, receipt of which is hereby acknowledged, the Guarantors, and each of them (if more than one), and their respective marital communities, hereby jointly and severally guarantee to CAPCO absolutely and unconditionally, at all times, payment immediately when due, of any and all indebtedness and/or liabilities, direct or contingent, irrespective of their character, regularity, enforceability or validity, now owing, or which may hereafter be owing or become due, from the Client to CAPCO, its successors or assigns, or which may arise from dealings between CAPCO and the Client and/or from other dealings by which CAPCO may become in any manner whatsoever a creditor of the Client, including in such indebtedness and/or liabilities (and in addition to whatever limiting amount may be set forth herein), all fees, and or interest charges and expenses accrued with respect thereto, and all costs, charges and expenses which CAPCO may incur in enforcing or obtaining payment of any such indebtedness and/or liabilities, or pay in connection with the Client's account, up to a limiting principal amount of ($3,000,000.00) THREE MILLION AND 00/100 dollars, (regardless of any excess amount which may now or hereafter be or become owing from Client to CAPCO): but nothing herein contained shall be deemed to obligate CAPCO to extend any definite amount of credit to the Client. 2. CAPCO is hereby given the following powers and rights, which CAPCO may at its sole discretion exercise one or more times and from time to time without in any way diminishing, releasing or discharging the Guarantors' obligation hereunder. To make change, alter, cancel, renew, extend, decrease or increase the amount, principal and/or fee of the indebtedness and/or liabilities of the Client; to change, substitute, withdraw, decrease, increase, release, alter, collect or sell (at public or private sale for such price and upon such terms as CAPCO may deem reasonable) any Account, account receivable, right to payment, collateral or property securing such indebtedness and/or liabilities, or any part thereof (CAPCO shall not be bound in any way to effect the reduction or satisfaction of the Client's indebtedness and/or liabilities to CAPCO and neither the Guarantors nor the Client shall have the right to require CAPCO to reduce or to satisfy said indebtedness and/or liabilities either by application of any Account, or collateral or by the enforcement of any guaranty, which CAPCO either now holds or hereafter may obtain as security for the whole or any part of said indebtedness and/or liabilities): to add other guarantors to the guaranty; to procure additional guaranties of any or all of the Clients indebtedness and/or liabilities to CAPCO; to release any of the guarantors executing either this guaranty or other guaranties now extant or hereafter obtained; to enforce for CAPCO's benefit any security which the Client has given to the Guarantors for the Guarantors' indemnity; to apply all sums of money and/or property, of any kind or nature, which may be received by CAPCO from the Client, or from any one on the Client's behalf, or for the Client's use or benefit, to the reduction and/or payment of whatever portion of the Client's indebtedness and/or liabilities which CAPCO, in its sole discretion, may determine, regardless of whether said portion is unsecured, is in any Form Date 6/97 Initial__________ way secured or guaranteed, is barred by the statute of limitations, or is in excess of the limit of this guaranty (it being the intention of the parties hereto that CAPCO shall have absolute control over the application of all payments from whatever source received); to receive payment in full of all of the indebtedness and/or liabilities owing from the Client to CAPCO before the Guarantors shall be entitled to receive any of the aforesaid money or property or to apply the same upon the Guarantors claims against the Client (including claims acquired by subrogation from CAPCO); to exercise the same powers and rights in the event of the Client's insolvency, bankruptcy, receivership, or assignment for the benefit of creditors, in which event all of the indebtedness and/or liabilities owing from the Client to CAPCO shall be satisfied in full before the Guarantors shall be entitled to participate in the distribution of the Client's assets; and to otherwise deal with the Client, the Guarantors and/or any endorser or guarantor as CAPCO may elect. The liability of Guarantors shall not be affected or impaired by CAPCO's failure, neglect or omission to realize on the indebtedness and/or liabilities or any collateral therefor. 3. Any financial accommodation granted or continued by CAPCO to the Client shall be conclusively deemed to have been induced hereby and in reliance hereon. Notice of acceptance of this guaranty as well as all demands, presentments, notices of protest and notices of every kind or nature, including those of any action or non-action on the part of the Client, CAPCO, any of the Guarantors, any other Guarantor, any creditor of the Client, of CAPCO, or any of the Guarantors, or of any other Guarantor, or any other person, whomsoever, are hereby fully waived by the Guarantors. 4. This is a continuing guaranty and neither the exercise by CAPCO of any of the aforesaid rights and powers, nor the payment and/or satisfaction by anyone, either in whole or in part, of the Client's indebtedness and/or liabilities to CAPCO, nor the intervention of lapses of time between CAPCO's transactions with the Client, regardless of how long or how frequent the lapses shall be, shall operate either as a full or partial discharge of this guaranty but the Guarantors' obligation to CAPCO hereunder, regardless of the foregoing contingencies, shall continue binding and enforceable to the full limit aforesaid, both as to said indebtedness and/or liabilities which then may be extant and unpaid, and as to those which thereafter in any manner may arise until notice in writing, via certified mail, signed by the Guarantors to make no further advances to the Client hereunder is received by CAPCO. If the Guarantors, or any of them, give such notice of their election to be no longer bound by this guaranty, they shall thereby be released from future liability hereunder, but they shall remain bound as to indebtedness and/or liabilities then existing and renewals or extensions in whole or in part of the then existing indebtedness and/or liabilities, but this guaranty, at CAPCO's option shall continue in full force and effect as to any or all of the Guarantors who have not given such notice. 5. Each Guarantor also hereby waives any claim, right, or remedy which such Guarantor may now have or hereafter acquire against the Client, or against other Guarantors, including, without limitation, any claim, right or remedy of subrogation, reimbursement, exoneration, indemnification, contribution, or participation in any claim, right, or remedy of CAPCO against the Client, or against any Guarantor, or any security which CAPCO now has or hereafter acquires, whether or not such claim, right or remedy arises in equity, under contract, by statute, under common law, or otherwise. 6. Upon any default of the Client in any of its indebtedness and/or liabilities to be due and payable, and, without making any demand upon or bringing any action against the Client, without seeking recovery against the guarantors under any other guaranties, and without foreclosing upon, selling or otherwise disposing of or collecting any collateral which CAPCO may then have as security for such indebtedness and/or liabilities, CAPCO may proceed directly against the Guarantors to enforce payment by the Guarantors to the full extent of the Guaranty, or, without in any way releasing the Guarantors from their full obligation hereunder, CAPCO may seek recovery from the Client and/or from the guarantors under any other guaranties, and may apply the proceeds of such recovery in the manner set forth in paragraph 2 above. In the event that suit is instituted to enforce this guaranty or any claim arising hereunder, the Guarantors agree and undertake to pay to CAPCO its costs, together with a reasonable attorneys fee (as fixed by the court), and further agree that the venue of any such suit may be laid in King County Washington. 7. Words used herein in the singular number shall be deemed to include the plural and vice versa, and word Form Date 6/97 Initial__________ importing the masculine gender shall also include the feminine and neuter, where the number or gender of the signatories hereto shall require such construction. 8. This guaranty shall be valid and binding upon the Guarantors who have executed this Guaranty notwithstanding the non-execution hereof by any of the within named Guarantors, by any prospective Guarantors, or by the Client, and notwithstanding the existence of other guaranties of the Client's indebtedness and/or liabilities to CAPCO, and this Guaranty shall inure to the benefit of and bind the heirs, administrators, executors, successors (including successor partnerships of the Client and/or of the Guarantors regardless of changes in name and membership) and assigns of CAPCO, the Client and the Guarantors. IN WITNESS THEREOF, WE have signed, sealed and delivered this instrument, at Wenatchee, Washington this 12th day of February, 2003. CAPCO FINANCIAL COMPANY, A DIVISION OF CUPERTINO NATIONAL BANK By ________________________________ Title _____________________________ PACIFIC AEROSPACE & ELECTRONICS, INC. By ________________________________ Title _______________________________ GUARANTORS: __________________________________ Cashmere Manufacturing Co., Inc. __________________________________ Form Date 6/97 Initial__________ GUARANTY This contract of guaranty made and entered into this FEBRUARY 12, 2003 between CAPCO FINANCIAL COMPANY, A DIVISION OF CUPERTINO NATIONAL BANK hereinafter referred to as "CAPCO", and PACIFIC AEROSPACE & ELECTRONICS, INC. hereinafter referred to as Client; and NORTHWEST TECHNICAL INDUSTRIES, INC. and hereinafter referred to as the Guarantors, WITNESSETH: That the Client has made application to CAPCO for financial accommodation, which the Guarantors seek to induce CAPCO to grant. NOW, THEREFORE, IT IS UNDERSTOOD AND AGREED AS FOLLOWS: 1. To induce CAPCO to grant or extend and/or to continue to grant or extend to or for the benefit of the Client such invoice financing, factoring, loan(s), credit(s), or other financial accommodation upon such terms and conditions and at such rate, or rates of discount, or interest, as may be agreed upon between the Client and CAPCO, and for other good and valuable consideration, including the sum of One Dollar to Guarantors in hand paid, receipt of which is hereby acknowledged, the Guarantors, and each of them (if more than one), and their respective marital communities, hereby jointly and severally guarantee to CAPCO absolutely and unconditionally, at all times, payment immediately when due, of any and all indebtedness and/or liabilities, direct or contingent, irrespective of their character, regularity, enforceability or validity, now owing, or which may hereafter be owing or become due, from the Client to CAPCO, its successors or assigns, or which may arise from dealings between CAPCO and the Client and/or from other dealings by which CAPCO may become in any manner whatsoever a creditor of the Client, including in such indebtedness and/or liabilities (and in addition to whatever limiting amount may be set forth herein), all fees, and or interest charges and expenses accrued with respect thereto, and all costs, charges and expenses which CAPCO may incur in enforcing or obtaining payment of any such indebtedness and/or liabilities, or pay in connection with the Client's account, up to a limiting principal amount of ($3,000,000.00) THREE MILLION AND 00/100 dollars, (regardless of any excess amount which may now or hereafter be or become owing from Client to CAPCO): but nothing herein contained shall be deemed to obligate CAPCO to extend any definite amount of credit to the Client. 2. CAPCO is hereby given the following powers and rights, which CAPCO may at its sole discretion exercise one or more times and from time to time without in any way diminishing, releasing or discharging the Guarantors' obligation hereunder. To make change, alter, cancel, renew, extend, decrease or increase the amount, principal and/or fee of the indebtedness and/or liabilities of the Client; to change, substitute, withdraw, decrease, increase, release, alter, collect or sell (at public or private sale for such price and upon such terms as CAPCO may deem reasonable) any Account, account receivable, right to payment, collateral or property securing such indebtedness and/or liabilities, or any part thereof (CAPCO shall not be bound in any way to effect the reduction or satisfaction of the Client's indebtedness and/or liabilities to CAPCO and neither the Guarantors nor the Client shall have the right to require CAPCO to reduce or to satisfy said indebtedness and/or liabilities either by application of any Account, or collateral or by the enforcement of any guaranty, which CAPCO either now holds or hereafter may obtain as security for the whole or any part of said indebtedness and/or liabilities): to add other guarantors to the guaranty; to procure additional guaranties of any or all of the Clients indebtedness and/or liabilities to CAPCO; to release any of the guarantors executing either this guaranty or other guaranties now extant or hereafter obtained; to enforce for CAPCO's benefit any security which the Client has given to the Guarantors for the Guarantors' indemnity; to apply all sums of money and/or property, of any kind or nature, which may be received by CAPCO from the Client, or from any one on the Client's behalf, or for the Client's use or benefit, to the reduction and/or payment of whatever portion of the Client's indebtedness and/or liabilities which CAPCO, in its sole discretion, may determine, regardless of whether said portion is unsecured, is in any Form Date 6/97 Initial__________ way secured or guaranteed, is barred by the statute of limitations, or is in excess of the limit of this guaranty (it being the intention of the parties hereto that CAPCO shall have absolute control over the application of all payments from whatever source received); to receive payment in full of all of the indebtedness and/or liabilities owing from the Client to CAPCO before the Guarantors shall be entitled to receive any of the aforesaid money or property or to apply the same upon the Guarantors claims against the Client (including claims acquired by subrogation from CAPCO); to exercise the same powers and rights in the event of the Client's insolvency, bankruptcy, receivership, or assignment for the benefit of creditors, in which event all of the indebtedness and/or liabilities owing from the Client to CAPCO shall be satisfied in full before the Guarantors shall be entitled to participate in the distribution of the Client's assets; and to otherwise deal with the Client, the Guarantors and/or any endorser or guarantor as CAPCO may elect. The liability of Guarantors shall not be affected or impaired by CAPCO's failure, neglect or omission to realize on the indebtedness and/or liabilities or any collateral therefor. 3. Any financial accommodation granted or continued by CAPCO to the Client shall be conclusively deemed to have been induced hereby and in reliance hereon. Notice of acceptance of this guaranty as well as all demands, presentments, notices of protest and notices of every kind or nature, including those of any action or non-action on the part of the Client, CAPCO, any of the Guarantors, any other Guarantor, any creditor of the Client, of CAPCO, or any of the Guarantors, or of any other Guarantor, or any other person, whomsoever, are hereby fully waived by the Guarantors. 4. This is a continuing guaranty and neither the exercise by CAPCO of any of the aforesaid rights and powers, nor the payment and/or satisfaction by anyone, either in whole or in part, of the Client's indebtedness and/or liabilities to CAPCO, nor the intervention of lapses of time between CAPCO's transactions with the Client, regardless of how long or how frequent the lapses shall be, shall operate either as a full or partial discharge of this guaranty but the Guarantors' obligation to CAPCO hereunder, regardless of the foregoing contingencies, shall continue binding and enforceable to the full limit aforesaid, both as to said indebtedness and/or liabilities which then may be extant and unpaid, and as to those which thereafter in any manner may arise until notice in writing, via certified mail, signed by the Guarantors to make no further advances to the Client hereunder is received by CAPCO. If the Guarantors, or any of them, give such notice of their election to be no longer bound by this guaranty, they shall thereby be released from future liability hereunder, but they shall remain bound as to indebtedness and/or liabilities then existing and renewals or extensions in whole or in part of the then existing indebtedness and/or liabilities, but this guaranty, at CAPCO's option shall continue in full force and effect as to any or all of the Guarantors who have not given such notice. 5. Each Guarantor also hereby waives any claim, right, or remedy which such Guarantor may now have or hereafter acquire against the Client, or against other Guarantors, including, without limitation, any claim, right or remedy of subrogation, reimbursement, exoneration, indemnification, contribution, or participation in any claim, right, or remedy of CAPCO against the Client, or against any Guarantor, or any security which CAPCO now has or hereafter acquires, whether or not such claim, right or remedy arises in equity, under contract, by statute, under common law, or otherwise. 6. Upon any default of the Client in any of its indebtedness and/or liabilities to be due and payable, and, without making any demand upon or bringing any action against the Client, without seeking recovery against the guarantors under any other guaranties, and without foreclosing upon, selling or otherwise disposing of or collecting any collateral which CAPCO may then have as security for such indebtedness and/or liabilities, CAPCO may proceed directly against the Guarantors to enforce payment by the Guarantors to the full extent of the Guaranty, or, without in any way releasing the Guarantors from their full obligation hereunder, CAPCO may seek recovery from the Client and/or from the guarantors under any other guaranties, and may apply the proceeds of such recovery in the manner set forth in paragraph 2 above. In the event that suit is instituted to enforce this guaranty or any claim arising hereunder, the Guarantors agree and undertake to pay to CAPCO its costs, together with a reasonable attorneys fee (as fixed by the court), and further agree that the venue of any such suit may be laid in King County Washington. 7. Words used herein in the singular number shall be deemed to include the plural and vice versa, and word Form Date 6/97 Initial__________ importing the masculine gender shall also include the feminine and neuter, where the number or gender of the signatories hereto shall require such construction. 8. This guaranty shall be valid and binding upon the Guarantors who have executed this Guaranty notwithstanding the non-execution hereof by any of the within named Guarantors, by any prospective Guarantors, or by the Client, and notwithstanding the existence of other guaranties of the Client's indebtedness and/or liabilities to CAPCO, and this Guaranty shall inure to the benefit of and bind the heirs, administrators, executors, successors (including successor partnerships of the Client and/or of the Guarantors regardless of changes in name and membership) and assigns of CAPCO, the Client and the Guarantors. IN WITNESS THEREOF, WE have signed, sealed and delivered this instrument, at Wenatchee, Washington this 12th day of February, 2003. CAPCO FINANCIAL COMPANY, A DIVISION OF CUPERTINO NATIONAL BANK By __________________________________ Title _______________________________ PACIFIC AEROSPACE & ELECTRONICS, INC. By __________________________________ Title _______________________________ GUARANTORS: _____________________________________ Northwest Technical Industries, Inc. _____________________________________ Form Date 6/97 Initial__________ GUARANTY This contract of guaranty made and entered into this FEBRUARY 12, 2003 between CAPCO FINANCIAL COMPANY, A DIVISION OF CUPERTINO NATIONAL BANK hereinafter referred to as "CAPCO", and PACIFIC AEROSPACE & ELECTRONICS, INC. hereinafter referred to as Client; and PACIFIC COAST TECHNOLOGIES, INC. and hereinafter referred to as the Guarantors, WITNESSETH: That the Client has made application to CAPCO for financial accommodation, which the Guarantors seek to induce CAPCO to grant. NOW, THEREFORE, IT IS UNDERSTOOD AND AGREED AS FOLLOWS: 1. To induce CAPCO to grant or extend and/or to continue to grant or extend to or for the benefit of the Client such invoice financing, factoring, loan(s), credit(s), or other financial accommodation upon such terms and conditions and at such rate, or rates of discount, or interest, as may be agreed upon between the Client and CAPCO, and for other good and valuable consideration, including the sum of One Dollar to Guarantors in hand paid, receipt of which is hereby acknowledged, the Guarantors, and each of them (if more than one), and their respective marital communities, hereby jointly and severally guarantee to CAPCO absolutely and unconditionally, at all times, payment immediately when due, of any and all indebtedness and/or liabilities, direct or contingent, irrespective of their character, regularity, enforceability or validity, now owing, or which may hereafter be owing or become due, from the Client to CAPCO, its successors or assigns, or which may arise from dealings between CAPCO and the Client and/or from other dealings by which CAPCO may become in any manner whatsoever a creditor of the Client, including in such indebtedness and/or liabilities (and in addition to whatever limiting amount may be set forth herein), all fees, and or interest charges and expenses accrued with respect thereto, and all costs, charges and expenses which CAPCO may incur in enforcing or obtaining payment of any such indebtedness and/or liabilities, or pay in connection with the Client's account, up to a limiting principal amount of ($3,000,000.00) THREE MILLION AND 00/100 dollars, (regardless of any excess amount which may now or hereafter be or become owing from Client to CAPCO): but nothing herein contained shall be deemed to obligate CAPCO to extend any definite amount of credit to the Client. 2. CAPCO is hereby given the following powers and rights, which CAPCO may at its sole discretion exercise one or more times and from time to time without in any way diminishing, releasing or discharging the Guarantors' obligation hereunder. To make change, alter, cancel, renew, extend, decrease or increase the amount, principal and/or fee of the indebtedness and/or liabilities of the Client; to change, substitute, withdraw, decrease, increase, release, alter, collect or sell (at public or private sale for such price and upon such terms as CAPCO may deem reasonable) any Account, account receivable, right to payment, collateral or property securing such indebtedness and/or liabilities, or any part thereof (CAPCO shall not be bound in any way to effect the reduction or satisfaction of the Client's indebtedness and/or liabilities to CAPCO and neither the Guarantors nor the Client shall have the right to require CAPCO to reduce or to satisfy said indebtedness and/or liabilities either by application of any Account, or collateral or by the enforcement of any guaranty, which CAPCO either now holds or hereafter may obtain as security for the whole or any part of said indebtedness and/or liabilities): to add other guarantors to the guaranty; to procure additional guaranties of any or all of the Clients indebtedness and/or liabilities to CAPCO; to release any of the guarantors executing either this guaranty or other guaranties now extant or hereafter obtained; to enforce for CAPCO's benefit any security which the Client has given to the Guarantors for the Guarantors' indemnity; to apply all sums of money and/or property, of any kind or nature, which may be received by CAPCO from the Client, or from any one on the Client's behalf, or for the Client's use or benefit, to the reduction and/or payment of whatever portion of the Client's indebtedness and/or liabilities which CAPCO, in its sole discretion, may determine, regardless of whether said portion is unsecured, is in any Form Date 6/97 Initial__________ way secured or guaranteed, is barred by the statute of limitations, or is in excess of the limit of this guaranty (it being the intention of the parties hereto that CAPCO shall have absolute control over the application of all payments from whatever source received); to receive payment in full of all of the indebtedness and/or liabilities owing from the Client to CAPCO before the Guarantors shall be entitled to receive any of the aforesaid money or property or to apply the same upon the Guarantors claims against the Client (including claims acquired by subrogation from CAPCO); to exercise the same powers and rights in the event of the Client's insolvency, bankruptcy, receivership, or assignment for the benefit of creditors, in which event all of the indebtedness and/or liabilities owing from the Client to CAPCO shall be satisfied in full before the Guarantors shall be entitled to participate in the distribution of the Client's assets; and to otherwise deal with the Client, the Guarantors and/or any endorser or guarantor as CAPCO may elect. The liability of Guarantors shall not be affected or impaired by CAPCO's failure, neglect or omission to realize on the indebtedness and/or liabilities or any collateral therefor. 3. Any financial accommodation granted or continued by CAPCO to the Client shall be conclusively deemed to have been induced hereby and in reliance hereon. Notice of acceptance of this guaranty as well as all demands, presentments, notices of protest and notices of every kind or nature, including those of any action or non-action on the part of the Client, CAPCO, any of the Guarantors, any other Guarantor, any creditor of the Client, of CAPCO, or any of the Guarantors, or of any other Guarantor, or any other person, whomsoever, are hereby fully waived by the Guarantors. 4. This is a continuing guaranty and neither the exercise by CAPCO of any of the aforesaid rights and powers, nor the payment and/or satisfaction by anyone, either in whole or in part, of the Client's indebtedness and/or liabilities to CAPCO, nor the intervention of lapses of time between CAPCO's transactions with the Client, regardless of how long or how frequent the lapses shall be, shall operate either as a full or partial discharge of this guaranty but the Guarantors' obligation to CAPCO hereunder, regardless of the foregoing contingencies, shall continue binding and enforceable to the full limit aforesaid, both as to said indebtedness and/or liabilities which then may be extant and unpaid, and as to those which thereafter in any manner may arise until notice in writing, via certified mail, signed by the Guarantors to make no further advances to the Client hereunder is received by CAPCO. If the Guarantors, or any of them, give such notice of their election to be no longer bound by this guaranty, they shall thereby be released from future liability hereunder, but they shall remain bound as to indebtedness and/or liabilities then existing and renewals or extensions in whole or in part of the then existing indebtedness and/or liabilities, but this guaranty, at CAPCO's option shall continue in full force and effect as to any or all of the Guarantors who have not given such notice. 5. Each Guarantor also hereby waives any claim, right, or remedy which such Guarantor may now have or hereafter acquire against the Client, or against other Guarantors, including, without limitation, any claim, right or remedy of subrogation, reimbursement, exoneration, indemnification, contribution, or participation in any claim, right, or remedy of CAPCO against the Client, or against any Guarantor, or any security which CAPCO now has or hereafter acquires, whether or not such claim, right or remedy arises in equity, under contract, by statute, under common law, or otherwise. 6. Upon any default of the Client in any of its indebtedness and/or liabilities to be due and payable, and, without making any demand upon or bringing any action against the Client, without seeking recovery against the guarantors under any other guaranties, and without foreclosing upon, selling or otherwise disposing of or collecting any collateral which CAPCO may then have as security for such indebtedness and/or liabilities, CAPCO may proceed directly against the Guarantors to enforce payment by the Guarantors to the full extent of the Guaranty, or, without in any way releasing the Guarantors from their full obligation hereunder, CAPCO may seek recovery from the Client and/or from the guarantors under any other guaranties, and may apply the proceeds of such recovery in the manner set forth in paragraph 2 above. In the event that suit is instituted to enforce this guaranty or any claim arising hereunder, the Guarantors agree and undertake to pay to CAPCO its costs, together with a reasonable attorneys fee (as fixed by the court), and further agree that the venue of any such suit may be laid in King County Washington. 7. Words used herein in the singular number shall be deemed to include the plural and vice versa, and word Form Date 6/97 Initial__________ importing the masculine gender shall also include the feminine and neuter, where the number or gender of the signatories hereto shall require such construction. 8. This guaranty shall be valid and binding upon the Guarantors who have executed this Guaranty notwithstanding the non-execution hereof by any of the within named Guarantors, by any prospective Guarantors, or by the Client, and notwithstanding the existence of other guaranties of the Client's indebtedness and/or liabilities to CAPCO, and this Guaranty shall inure to the benefit of and bind the heirs, administrators, executors, successors (including successor partnerships of the Client and/or of the Guarantors regardless of changes in name and membership) and assigns of CAPCO, the Client and the Guarantors. IN WITNESS THEREOF, WE have signed, sealed and delivered this instrument, at Wenatchee, Washington this 12th day of February, 2003. CAPCO FINANCIAL COMPANY, A DIVISION OF CUPERTINO NATIONAL BANK By ________________________________ Title _____________________________ PACIFIC AEROSPACE & ELECTRONICS, INC. By ________________________________ Title _____________________________ GUARANTORS: ___________________________________ Pacific Coast Technologies, Inc. ___________________________________ Form Date 6/97 Initial__________ EX-10.61 8 f89244exv10w61.txt EXHIBIT 10.61 Exhibit 10.61 SECURITY AGREEMENT -- INVENTORY (OTHER THAN FLOORING) AND PROCEEDS (Gross Accounting) THE UNDERSIGNED Cashmere Manufacturing Co., Inc. (hereinafter called "Debtor") hereby grants to Capco Financial Company, a division of Cupertino National Bank (hereinafter called "Secured Party"), a security interest in the following described property, consisting of all of the inventory and stock in trade of the Debtor, including all raw materials and work in process and materials to be used or consumed in the business of Debtor, and all products of Debtor; together with all increases in said property and all property of a similar nature hereinafter acquired by Debtor in any of the categories herein described, all of which is hereinafter referred to as "property"; together with all cash and non-cash proceeds of such property, including without limitation chattel paper and accounts receivable. Without limiting the generality of the foregoing, the property covered hereby includes the following: (Insert description of type of property covered.) All right, title, and interest in inventory, raw materials, work in progress and finished goods now owned or hereafter acquired and products and proceeds thereof: This Security Agreement is given to secure the payment and performance of all indebtedness and obligations of Debtor to Secured Party presently existing and hereafter arising, direct or indirect, and interest thereon. Regardless of the adequacy of any security which the Secured Party may at any time hold hereunder, and regardless of the adequacy of any other security which Secured Party may obtain at any of its offices from Debtor in connection with any other transactions, any deposits or other moneys owing from Secured Party at any of its offices to Debtor shall (as collateral in the possession of Secured Party) constitute additional security for, any may be set off against, obligations secured hereby even though said obligations may not then be due. When more than one person is the Debtor, they shall be jointly and severally liable. DEBTOR HEREBY REPRESENTS, COVENANTS AND AGREES WITH SECURED PARTY AS FOLLOWS: 1. USE OF PROPERTY: Debtor agrees to comply with any governmental regulation affecting the use of the property and will not use nor permit the use of the property in any unlawful manner. Debtor represents and agrees that the primary use of said property is for use and consumption in his business, for manufacturing and for sale or lease. 2. DEBTOR AND COLLATERAL LOCATION: The address appearing next to Debtor's signature below is the address of Debtor's chief executive office or, if the Debtor has no place of business, his residence. If the collateral is not located at the Debtor's address appearing below, it will be located at: ___________________________________________________________________________ ___________________________________________________________________________ . Debtor will give Secured Party prior written notice of any change in either the Debtor's chief executive office or, if he has no place of business, his residence and of any change in collateral location. 3. INVENTORY: The property covered hereby is and will be at times inventory of the Debtor, and proceeds thereof, and any deposits or moneys owed at any time by Secured Party to Debtor. 4. OWNERSHIP AND LIENS: Debtor owns the property and the same is free and clear of all security interests and encumbrances of every nature. Debtor will not create nor permit the existence of any lien or security interest other than that created hereby on the property without the written consent of Secured Party. Any certificate of title now or hereafter existing on any of the property will be delivered to Secured Party and will recite the interest of Secured Party. 5. TAXES: Debtor will pay before delinquency all taxes or other government charges that are or may become a lien or charge on the property and will pay any tax which may be levied on any obligation secured hereby. 6. REPAIRS AND INSPECTION: Debtor will keep the property in good repair. Secured Party may inspect the property at reasonable times and intervals and may for this purpose enter the premises upon which the property is located. 7. INSURANCE: Debtor will keep the property continuously insured by an insurance approved by Secured Party against fire, theft and other hazards designated any time by Secured Party, in an amount equal to the full insurable value thereby or to all sums secured hereby, with such form of loss-payable clause as designated by and in favor of Secured Party, and will deliver the policies and receipts showing payment of premiums to the Secured Party. In the event of loss, Secured Party shall have full power to collect any and all insurance upon the property and to apply the same at its option to any obligation secured hereby whether or not matured, or to the restoration or repair of the property. Secured Party shall have no liability whatsoever for any loss that may occur by reason or the omission or lack of coverage of any such insurance. THE TERMS AND CONDITIONS APPEARING ON THE BACK HEREOF ARE PART OF THIS SECURITY AGREEMENT. Signed this __________day of ___________________________________________ 432 Olds Station Road Wenatchee ________________________________________________________________________ Street City WA 98801 ________________________________________________________________________ County State Zip Code ADDRESS OF DEBTOR (Print) ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ (SIGNATURE OF DEBTOR) NOTICE: SEE REVERSE SIDE FOR IMPORTANT INFORMATION 8. REMOVAL, SALE AND ACCOUNTING: Without the prior written consent of Secured Party, Debtor will not remove the property from the State of Washington. Debtor may sell and dispose of said inventory, in the ordinary course of business, whether now owned or hereafter acquired, so long as the terms and conditions of this Security Agreement are kept and performed by Debtor, including the following which Debtor agrees to perform except as otherwise agreed in writing by Secured Party; a. All sales shall be for cash or upon credit for a term not exceeding ninety (90) days; and b. All cash proceeds shall immediately be deposited in an account with Secured Party designated as "collateral account" over which Debtor shall have no control whatsoever, and which shall be held as security for the indebtedness of Debtor. c. All negotiable instruments and chattel paper proceeds shall immediately be endorsed and delivered to Secured Party, with full authority to collect. d. All resulting accounts receivable arising from the sale or disposition of the inventory are assigned to Secured Party with authority to notify and make collections; Debtor covenants to deliver to Secured Party copies of all invoices and records of collection or aging or otherwise thereof in such form and frequency as Secured Party may require. e. All "trade-ins" and "returned merchandise" shall be retained by Debtor as "inventory" subject to this Security Agreement. f. All collections by Secured Party shall be applied to any indebtedness of Debtor secured by this agreement, either through the collateral account or directly, as Secured Party shall elect. g. From time to time, Secured Party, at its discretion, shall make applications from the collateral account onto any indebtedness secured hereby. h. Debtor will permit Secured Party or its duly accredited representatives to examine its books and records at all reasonable times during business hours and shall furnish such financial data and financial statements as Secured Party may require from time to time. i. Whenever any of the property is stored in a warehouse, the warehouse receipts evidencing such storage shall be appropriately endorsed by Debtor and shall immediately be assigned by Debtor and delivered to Secured Party as security for the indebtedness secured hereby. 9. EXPENSES INCURRED BY SECURED PARTY: Secured Party is not required to, but may, at its option, pay any tax or other charge or expense payable by Debtor and any filing or recording fees and any amounts so paid shall be repayable by Debtor upon demand. Debtor will also repay upon demand all of Secured Party's expenses incurred in collecting, insuring, conserving or protecting the collateral or in any inventories, audits, inspections or other examination by Secured Party in respect of the collateral. All such sums shall bear interest at the lesser of 2% per month or the maximum rate permitted by law from the date of payment by the Secured Party until repaid by Debtor and such sums and interest thereon shall be secured hereby. The rights granted by this paragraph are not a waiver of any other rights of Secured Party arising from breach of any of Debtor's covenants. 10. WAIVERS: This Security Agreement shall not be qualified or supplemented by course of dealing. No waiver or modification by Secured Party of any of the terms or conditions hereof shall be effective unless in writing signed by Secured Party. No waiver nor indulgence by Secured Party as to any required performance by Debtor shall constitute a waiver as to any required performance or other obligations of Debtor hereunder. 11. DEFAULT: Time is of the essence in this Security Agreement, and in any of the following events, hereinafter called "Events of Default," to-wit: a. Any failure to pay when due the full amount of any payment of principal, interest, taxes, insurance premiums or other charges which are or may be secured hereby; or b. Any failure to perform as required by any covenant or agreement herein; or c. The falsity of any representation by Debtor herein or in any credit application or financial statement given by Debtor to Secured Party as a basis for any extension of credit secured hereby; or d. If the property should be seized or levied upon under any legal or governmental process against Debtor or against the property; or e. If Debtor becomes insolvent or is the subject of a petition in bankruptcy, either voluntary or involuntary, or in any other proceeding under the federal bankruptcy laws; or makes an assignment for the benefit of creditors; or if Debtor is named in or the property is subjected to a suit for the appointment of a receiver; or f. Loss, substantial damage to, or destruction of any portion of the property; or g. Entry of any judgment against Debtor; or h. Dissolution or liquidation of Debtor; or i. The Secured Party deems itself insecure. Then and in any of such events of default, the entire amount of indebtedness secured hereby shall then or at any time thereafter, at the option of Secured Party, become immediately due and payable without notice or demand, and Secured Party shall have an immediate right to pursue the remedies set forth in this Security Agreement. 12. REMEDIES: In the event of a default hereunder, Secured Party shall have all remedies provided by law; and without limiting the generality of the foregoing, shall be entitled as follows: a. Debtor agrees to put Secured Party in possession of the property on demand; and b. Secured Party is authorized to enter any premises where the property is situated and take possession of said property without notice or demand and without legal proceedings; and c. At the request of Secured Party, Debtor will assemble the property and make it available to Secured Party at a place designated by Secured Party which is reasonably convenient to both parties; and d. Debtor agrees that a period of fifteen (15) days from the time notice is sent, by first-class mail or otherwise, shall be a reasonable period of notification of a sale or other disposition of the property; and e. Debtor agrees that any notice or other communication by Secured Party to Debtor shall be sent to the address of the Debtor stated herein; and f. Debtor agrees to pay on demand the amount of all expenses reasonably incurred by Secured Party in protecting or realizing on the property. In the event that this Security Agreement or any obligation secured by it is referred to an attorney for protecting or defending the priority of Secured Party's interest or for collection or realization procedures, Debtor agrees to pay a reasonable attorney's fee, including fees incurred in both trial and appellate courts, or fees incurred without suit, and expenses of title search and all court costs and costs of public officials. The sums agreed to be paid in this subparagraph shall be secured hereby; and g. If Secured Party disposes of the property, Debtor agrees to pay any deficiency remaining after application of the net proceeds to any indebtedness secured hereby. 13. APPLICABLE LAW: This security agreement shall be governed by the laws of the State of Washington. (WBA) UCC-3 9/82 NOTICE: SEE OTHER SIDE FOR IMPORTANT INFORMATION. Initial _______ EX-10.62 9 f89244exv10w62.txt EXHIBIT 10.62 Exhibit 10.62 AMENDMENT #1 TO CAPCO SECURITY AGREEMENT FEBRUARY 12, 2003 CLIENT COVENANTS: PARAGRAPH 11 AS FOLLOWS: CLIENT agrees to sell to CAPCO ALL ACCOUNTS RECEIVABLE, (Accounts) mechanic's lien(s), and rights to payment under any stop notice(s), or bonded stop notice(s) securing payment of those Accounts created by CLIENT in the course of its business, existing as of the date of this agreement or thereafter created during the term of this agreement, subject to approval and verification by CAPCO. CAPCO is not obligated to advance funds for the purchase of All Accounts from CLIENT. When CLIENT notifies CAPCO of it's Accounts, CLIENT shall provide the original Assigned Account (Invoice) together with one copy thereof, a copy of the bill of lading contract, purchase order, purchase order number, and/or any other requisite supporting documentation corresponding to said Accounts and appropriate to the business of CLIENT. IS REPLACED BY: CLIENT agrees to sell to CAPCO ALL ACCOUNTS RECEIVABLE, (Accounts) mechanic's lien(s), and rights to payment under any stop notice(s), or bonded stop notice(s) securing payment of those Accounts created by CLIENT in the course of its business, existing as of the date of this agreement or thereafter created during the term of this agreement, subject to approval and verification by CAPCO. CAPCO is not obligated to advance funds for the purchase of All Accounts from CLIENT. When CLIENT notifies CAPCO of it's Accounts, CLIENT shall provide a copy of the original Assigned Account (Invoice) a copy of the bill of lading contract, purchase order, purchase order number, and/or any other requisite supporting documentation corresponding to said Accounts and appropriate to the business of CLIENT, as requested by CAPCO. PARAGRAPH 13 AS FOLLOWS: D. CLIENT will promptly notify CAPCO in writing of any proposed change in CLIENT'S place of business, name, legal entity, corporate structure, record-keeping location, and/or as to any additional place of business, or expiration of any special license(s), or transfer of assets, or technology, to a third party, or proposed change in ownership in excess of twenty five percent, (25%), of outstanding shares; G. CLIENT'S taxes are not delinquent nor has CLIENT been subject to a tax levy by any governmental entity nor are there now on file in any public office tax liens affecting CLIENT other than those delinquencies, levies and/or liens which have been disclosed by CLIENT to CAPCO; IS REPLACED BY: D. CLIENT will promptly notify CAPCO in writing of any proposed change in CLIENT'S place of business, name, legal entity, corporate structure, record-keeping location, and/or as to any additional place of business, or proposed change in ownership in excess of fifty-one percent, (51%), of outstanding shares; G. CLIENT'S taxes are not delinquent nor has CLIENT been subject to a tax levy, in excess of $5,000, by any governmental entity nor are there now on file in any public office tax liens affecting CLIENT other than those delinquencies, levies and/or liens which have been disclosed by CLIENT to CAPCO; PARAGRAPH 15 AS FOLLOWS: All Accounts shall be the sole property of CAPCO, but if for any reason a payment owing on said Accounts shall be paid to CLIENT; CLIENT shall promptly notify CAPCO of such payment, shall hold any check, draft or money so received in trust and for the benefit of CAPCO , and shall pay over such check or draft in-kind, or money, to CAPCO promptly and without delay. All of CLIENT'S invoices shall bear the address of CAPCO'S LOCK BOX as the "REMIT TO" address, and CLIENT agrees that ALL remittances for payment on ALL Accounts shall be made to the CAPCO LOCK BOX or other repository authorized in writing by CAPCO. IS REPLACED BY: All Accounts shall be the sole property of CAPCO, but if for any reason a payment owing on said Accounts shall be paid to CLIENT; CLIENT shall promptly notify CAPCO of such payment, shall hold any check, draft or money so received in trust and for the benefit of CAPCO , and shall pay over such check or draft in-kind, or money, to CAPCO promptly and without delay. All of CLIENT'S invoices shall bear the address of A BANK LOCK BOX ACCEPTABLE TO CAPCO; as the "REMIT TO" address, and CLIENT agrees that ALL remittances for payment on ALL Accounts shall be made to the BANK LOCK BOX or other repository authorized in writing by CAPCO. PARAGRAPH 21 AS FOLLOWS: CLIENT will not transfer, pledge, or give a security interest of the Assets sold or Collateral granted to CAPCO to any other party. IS REPLACED BY: CLIENT will not transfer, pledge, or give a security interest of the Accounts sold or Collateral granted to CAPCO to any other party. PARAGRAPH 28 AS FOLLOWS Funds advanced by CAPCO to CLIENT are subject to DAILY FEE OF CUPERTINO NATIONAL BANK PRIME RATE + 5.000% /360 (EQUIVALENT TO A MONTHLY DISCOUNT FEE OF CUPERTINO NATIONAL BANK PRIME RATE + 5.000% /12 ) PER CENT calculated on the daily balance (as reported on the CLIENT Liability Detail Report) owing to CAPCO. This period will usually be 1 calendar day except for weekends and or weeks where holidays or other non-operating days prevent the fee from being taken on a daily basis. IS REPLACED BY: Funds advanced by CAPCO to CLIENT are subject to DAILY FEE OF CUPERTINO NATIONAL BANK PRIME RATE + 5.000% /360 (EQUIVALENT TO A MONTHLY DISCOUNT FEE OF CUPERTINO NATIONAL BANK PRIME RATE + 5.000% /12 ) PER CENT calculated on the daily balance (as reported on the CLIENT Liability Detail Report) owing to CAPCO. This period will usually be 1 calendar day except for weekends and or weeks where holidays or other non-operating days prevent the fee from being taken on a daily basis. No fee will accrue on balances of zero or balances less that zero. DEFAULT: PARAGRAPH 36 AS FOLLOWS: H. If any unpaid judgment or tax lien exists against CLIENT; I. If CAPCO with reasonable cause and in good faith determines that it's purchased asset or collateral is impaired for any reason whatsoever; J. Terminating prior to end of initial term; K. Any change in CLIENT'S place of business, name, legal entity, corporate structure, record-keeping location, and/or as to any additional place of business, or expiration of any special license(s), or transfer of assets, or technology, to a third party, or proposed change in ownership in excess of twenty five percent, (25%), of outstanding shares. IS REPLACED BY: H. If any unpaid judgment or tax lien exists against CLIENT, in excess of $5,000, and not released within 5 working days thereof; I. If CAPCO with reasonable cause and in good faith determines that it's purchased asset or collateral is impaired for any reason whatsoever and the issue is not resolved within 2 business days of notice from CAPCO; J. Terminating prior to end of initial term with any amount still due to CAPCO from Client; K. Any change in CLIENT'S place of business, name, legal entity, corporate structure, record-keeping location, and/or as to any additional place of business, or proposed change in ownership in excess of fifty-one percent, (51%), of outstanding shares. REMEDIES AFTER DEFAULT: PARAGRAPH 37 AS FOLLOWS: K. CAPCO is authorized by CLIENT to receive, direct and forward, open, and dispose of all mail addressed to CLIENT at any address used by CLIENT to receive mail. IS REPLACED BY: K. CAPCO is authorized by CLIENT to receive, open, direct and forward, all mail addressed to CLIENT at any address used by CLIENT to receive mail. GENERAL: PARAGRAPH 50 AS FOLLOWS: 50. ENTIRE AGREEMENT: This instrument contains the entire Agreement between the parties. Any addendum or modification hereto will be signed by both parties and attached hereto. IS REPLACED BY: 50. ENTIRE AGREEMENT: This instrument and related documents contain the entire Agreement between the parties. Any addendum or modification hereto will be signed by both parties and attached hereto. This amendment is effective and applicable to invoices purchased after February 12, 2003 All other terms, covenants and conditions will remain in effect and unchanged. PACIFIC COAST TECHNOLOGIES, INC. By:________________________________ Title:_____________________________ CAPCO FINANCIAL COMPANY, A DIVISION OF CUPERTINO NATIONAL BANK By:________________________________ Title:_____________________________ EX-99.1 10 f89244exv99w1.txt EXHIBIT 99.1 EXHIBIT 99.1 CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002. In connection with the Quarterly Report on Form 10-Q of Pacific Aerospace & Electronics, Inc. (the "Company") dated April 14, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Donald A. Wright, as Chief Executive Officer and President of the Company, and Charles A. Miracle, as Vice President -- Finance, Treasurer, and Chief Financial Officer, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By /s/ DONALD A. WRIGHT DONALD A. WRIGHT President and Chief Executive Officer Date: April 14, 2003 By /s/ CHARLES A. MIRACLE CHARLES A. MIRACLE Vice President Finance, Treasurer and Chief Financial Officer Date: April 14, 2003 This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. -----END PRIVACY-ENHANCED MESSAGE-----