SECURITY AGREEMENT
DATED: April 26, 1999
FROM: NOVA-TECH ENGINEERING, INC.
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▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇ DEBTOR
TO: PACIFIC AEROSPACE & ELECTRONICS, INC.
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▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇ SECURED PARTY
FOR VALUE RECEIVED, and to secure both the payment of the Indebtedness and
the performance of the obligations owed to Secured Party under this Security
Agreement and the Related Agreements, Debtor grants Secured Party a security
interest in the Collateral, in accordance with the definitions and terms set
forth below:
1. Definitions.
1.1 Indebtedness. "Indebtedness" shall mean all amounts now or
hereafter owed by Debtor to Secured Party, whether or not evidenced by a
promissory note or notes and whether direct, indirect, or contingent.
1.2 Related Agreements. The "Related Agreements" shall mean the
promissory note of even date herewith, in the principal amount of $1,500,000.00,
made by Debtor in favor of Secured Party, and any other present or future
agreement between Debtor and Secured Party evidencing any part of the
Indebtedness.
1.3 Collateral. The "Collateral" shall be all tangible and intangible
property of Debtor, whether now owned or hereafter acquired, whether now
existing or hereafter arising, or in which Debtor now has or hereafter acquires
any rights, including without limitation:
(1) All furniture, leasehold improvements, motor vehicles,
appliances, fixtures, furnishings, tools, machinery and equipment and other
goods of Debtor, now owned or hereafter acquired, and all additions and
accessions thereto and replacements therefor;
(2) All inventory, supplies and materials of Debtor now owned or
hereafter acquired, together with all additions and accessions thereto and
replacements therefor;
(3) All accounts, accounts receivable, negotiable documents,
notes, drafts, acceptances, claims, lease rights (to the extent they are
assignable without consent of the lessor), securities, instruments, choses in
action, whether in contract or in tort, proceeds of lawsuits, and general
intangibles of Debtor (including, but not limited to goodwill, permits,
licenses, trademarks, trade names and trade secrets), and all other rights of
Debtor to the payment of money, now existing or hereafter arising;
(4) All deposit accounts of Debtor maintained with any bank or
other financial institution;
(5) All records, papers and books of account or other documents
or papers relating to, affecting or describing any of the foregoing Collateral,
in whatever form, including without limitation all computerized records,
diskettes, programs, etc. relating thereto;
(6) All of Debtor?s contract rights and proceeds of insurance
policies;
(7) All of Debtor?s patents and patents pending;
(8) All of Debtor?s stock in and to subsidiaries wholly owned by
Debtor; and
(9) All proceeds of the foregoing Collateral. For purposes of
this Security Agreement, the term "proceeds" includes whatever is receivable or
received when Collateral or proceeds is sold, collected, exchanged or otherwise
disposed of, whether such disposition is voluntary or involuntary, and includes,
without limitation, all rights to payment, including return premiums, with
respect to any insurance relating thereto.
2. Obligations of Debtor. Debtor warrants and covenants:
2.1 Payment and Performance. Debtor shall pay to Secured Party
promptly when due all amounts payment of which is secured by this Security
Agreement and shall strictly perform all obligations imposed upon Debtor by this
Security Agreement and the Related Agreements.
2.2 Perfection of Security Interest. Debtor agrees to execute
financing statements and to take whatever other action is requested by Secured
Party to perfect and continue Secured Party's security interest in the
Collateral. Any certificate of title existing on any of the Collateral will be
endorsed and delivered to Secured Party reciting Secured Party?s security
interest. Debtor hereby appoints Secured Party Debtor's attorney in fact for the
purpose of executing any documents necessary to perfect or continue the security
interest. Secured Party may file copies or reproductions of this Security
Agreement as a financing statement at any time and without further authorization
from Debtor. Debtor will reimburse Secured Party for all expenses incurred in
perfecting or continuing this security interest. Secured Party's interest is
junior to the interest of Sterling Savings Bank as set forth in any and
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all Security Agreements, including those dated July 1, 1997 and January 25,
1999, between Nova-Tech Engineering, Inc. and Sterling Savings Bank and recorded
as Washington State UCC-1 Number 942060455 (filing date July 25, 1994) and its
continuation 990430160 dated February 12, 1999, which cover all existing and
future indebtedness of Nova-Tech Engineering, Inc. to Sterling Savings Bank
and/or its assigns.
2.3 Removal of Collateral. Debtor warrants that the Collateral is
located at Debtor's address set forth above. Except in the ordinary course of
Debtor's business, Debtor shall not remove the Collateral from its location
without the prior written consent of Secured Party, which shall not be
unreasonably withheld. To the extent the Collateral constitutes vehicles, Debtor
shall not take or permit any action which would require registration of the
vehicles outside of the State of Washington without the prior written consent of
Secured Party.
2.4 Transactions Involving Collateral. Except for inventory sold in
the ordinary course of Debtor's business, Debtor shall not sell, offer to sell,
or otherwise transfer the Collateral. Debtor shall not pledge, mortgage,
encumber, or otherwise permit the Collateral to be subject to any lien, security
interest, or charge, other than the security interest in favor of Secured Party
and those created prior to the date hereof, without the prior written consent of
Secured Party.
2.5 Title. Debtor warrants that it holds good and marketable title to
the Collateral subject only to the lien of this Security Agreement and security
interests created prior to the date hereof and that Debtor has full power and
authority to execute this Security Agreement, to perform Debtor?s obligations
hereunder, and to subject the Collateral to the security interest created
hereby. Debtor shall defend Secured Party's rights against the claims and
demands of all persons.
2.6 Compliance with Laws. Debtor warrants that its use of the
Collateral complies with, and that Debtor will in the future promptly comply
with, all applicable laws, ordinances, and regulations of governmental
authorities.
2.7 Use. Debtor shall maintain the Collateral in good condition and
repair and not use the Collateral for any unlawful purpose or in any way that
would void an effective insurance policy. Debtor will not commit or permit
damage to or destruction of the Collateral or any part of the Collateral.
2.8 Taxes, Assessments, and Liens. Debtor will pay when due all taxes,
assessments, and liens upon the Collateral, its use or operation, upon this
Security Agreement, or upon any promissory notes evidencing the Indebtedness.
Debtor may withhold any such payment or may elect to contest any lien if Debtor
is in good faith conducting appropriate proceedings to contest the obligation to
pay, so long as Secured Party's interest in the Collateral is not jeopardized.
If the Collateral is subjected to a lien which is not discharged within 15 days,
Debtor shall deposit with Secured Party cash, a sufficient corporate surety
bond, or other security satisfactory to Secured Party in an amount adequate to
provide for the discharge of the lien plus any interest, costs, attorneys' fees,
or other charges that could accrue as a result of foreclosure or sale. In any
contest proceedings, Debtor shall defend itself and
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Secured Party and will name Secured Party as an additional obligee under any
surety bond, and Debtor shall satisfy any final adverse judgment before
enforcement against the Collateral.
2.9 Maintenance of Property Damage Insurance. Debtor shall procure and
maintain policies of fire insurance with standard extended coverage endorsements
on a replacement cost basis covering the Collateral, in an amount sufficient to
avoid application of any coinsurance clause and with loss payable to Secured
Party. Policies shall be written in amounts, in form, on terms, and with
companies reasonably acceptable to Secured Party. Upon request, Debtor shall
deliver to Secured Party certificates of coverage from each insurer containing a
stipulation that coverage will not be canceled or diminished without a minimum
of 10 days' written notice to Secured Party.
2.10 Application of Insurance Proceeds. Debtor shall promptly notify
Secured Party of any loss or damage to the Collateral or any portion thereof
having a fair market value in excess of $1,000. Secured Party may make proof of
loss if Debtor fails to do so within 15 days of the casualty. Secured Party may,
at its election, apply the proceeds to the reduction of the Indebtedness or the
restoration and repair of the Collateral. If Secured Party elects to apply the
proceeds to restoration and repair, Debtor shall repair or replace the damaged
or destroyed Collateral in a manner satisfactory to Secured Party. Upon
satisfactory proof of such expenditure, Secured Party shall pay or reimburse
Debtor from the proceeds for the reasonable cost of repair or restoration. Any
proceeds which have not been paid out within 180 days after their receipt and
which Secured Party has not committed to the repair or restoration of the
Collateral shall be used to prepay first accrued interest and then principal of
Debtor's Indebtedness. If Secured Party holds any proceeds after payment in full
of the Indebtedness, such proceeds shall be paid to Debtor.
3. Debtor's Right to Possession. Until in default, Debtor may have
possession of the tangible personal property and beneficial use of all of the
Collateral and may use it in any lawful manner not inconsistent with this
Security Agreement or the Related Agreements.
4. Release on Full Performance. If Debtor pays all of the Indebtedness
when due and otherwise performs all the obligations imposed upon Debtor under
this Security Agreement, Secured Party shall execute and deliver to Debtor
suitable statements of termination of any financing statement on file. The
filing fees shall be paid by Debtor.
5. Default.
5.1 Events of Default. The following shall constitute events of
default:
(1) Failure to pay any portion of the Indebtedness when it is due.
(2) Any warranty, representation, or statement made or furnished to
Secured Party by or on behalf of Debtor proves to have been false in any
material respect when made or furnished.
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(3) Transfer or agreement to transfer any part or interest in the
Collateral without the prior written consent of Secured Party, to the extent
required by this Security Agreement.
(4) Dissolution, termination of existence as a going business,
insolvency on a balance sheet basis or business failure of Debtor; the
commencement by Debtor of a voluntary case under the federal bankruptcy laws or
under any other federal or state law relating to insolvency or debtor's relief;
the entry of a decree or order for relief against Debtor in an involuntary case
under the federal bankruptcy laws or under any other applicable federal or state
law relating to insolvency or debtor's relief; the appointment or the consent by
Debtor to the appointment of a receiver, trustee, or custodian of Debtor or of
any of Debtor's property; an assignment for the benefit of creditors by Debtor;
the making or suffering by Debtor of a fraudulent transfer under applicable
federal or state law; concealment by Debtor of any of its property in fraud of
creditors; the making or suffering by Debtor of a preference within the meaning
of the federal bankruptcy law; the imposition of a lien through legal
proceedings or distraint upon any of the property of Debtor which is not
discharged or bonded in the manner permitted by Section 2.8; or Debtor's failure
generally to pay its debts as such debts become due. The events of default in
this paragraph shall apply and refer to Debtor and to each of the individuals or
entities which are collectively referred to as "Debtor."
(5) Failure of Debtor to perform any other obligation under this
Security Agreement, the Related Agreements or any other present or future
agreement between Debtor and Secured Party evidencing the Indebtedness or
securing the Indebtedness within 10 days after receipt of written notice from
Secured Party specifying the nature of the default. No notice of default and no
opportunity to cure shall be required if during the prior 12 months Secured
Party has already sent a notice to Debtor concerning default in performance of
the same obligation.
6. Rights of Secured Party.
6.1 Rights Prior to Default or Thereafter. Secured Party and its
designated representatives or agents may examine and inspect the Collateral,
wherever located, at all reasonable times.
6.2 Rights Upon Default or Thereafter. Upon the occurrence of any
event of default and at any time thereafter, Secured Party may exercise any one
or more of the following rights and remedies:
(1) Secured Party may, but shall have no obligation to, pay and
discharge any taxes, liens and encumbrances against the Collateral or any part
thereof which Debtor has failed to discharge in a timely fashion, and pay for
any necessary maintenance and preservation of the Collateral.
(2) Secured Party may declare the entire Indebtedness immediately
due and payable, including any prepayment penalty which Debtor would be required
to pay.
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(3) Secured Party may require Debtor to deliver to Secured Party
all or any portion of the Collateral and any and all certificates of title and
other documents relating to the Collateral. Secured Party may require Debtor to
assemble the Collateral and make it available to Secured Party at a place to be
designated by Secured Party which is reasonably convenient to both parties.
Secured Party also shall have full power to enter upon the property of Debtor to
take possession of and remove the Collateral.
(4) Secured Party shall have full power to sell, lease, transfer,
or otherwise deal with the Collateral or proceeds thereof in its own name or
that of Debtor. Secured Party may sell the Collateral at public auction or
private sale. Unless the Collateral threatens to decline speedily in value or is
of the type customarily sold on a recognized market, Secured Party will give
Debtor reasonable notice of the time after which any private sale or any other
intended disposition of the Collateral is to be made. The requirements of
reasonable notice shall be met if such notice is mailed by registered or
certified mail, postage prepaid, to the address of Debtor stated in this
Security Agreement at least 10 days before the time of the sale or disposition.
Debtor shall be liable for expenses of retaking, holding, preparing for sale,
selling, or the like.
(5) Secured Party may have a receiver appointed as a matter of
right. The receiver may be an employee of Secured Party and may serve without
bond. All fees of the receiver and its attorney shall be secured hereby.
(6) Secured Party may revoke Debtor's right to collect Debtor?s
accounts receivable and revenues from the Collateral and may collect the same,
either itself or through a receiver. To facilitate collection, Secured Party
may: (i) notify any account debtors of Debtor to make payments directly to
Secured Party, (ii) demand, collect, settle, and prosecute and discontinue any
suits or proceedings in respect of any or all of the Collateral, in the name of
Debtor or otherwise, (iii) and otherwise take any action which Secured Party may
deem desirable in order to realize on the Collateral.
(7) Secured Party may obtain a judgment for any deficiency
remaining in the Indebtedness due to Secured Party after application of all
amounts received from the exercise of the rights provided in this section.
Debtor shall be liable for a deficiency even if the underlying transaction is a
sale of accounts or chattel paper.
(8) Secured Party shall have and may exercise any or all of the
rights and remedies of a secured creditor under the provisions of the Uniform
Commercial Code, in addition to any other rights or remedies that may be
available at law, in equity, or otherwise.
6.3 Waiver; Election of Remedies. A waiver by either party of a breach
of a provision of this Security Agreement shall not constitute a waiver of or
prejudice the party's right otherwise to demand strict compliance with that
provision or any other provision. Election by Secured Party to pursue any remedy
shall not exclude pursuit of any other remedy, and all remedies of Secured Party
under this Security Agreement are cumulative and not exclusive. An election to
make expenditures or take action to perform an obligation of Debtor
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shall not affect Secured Party's right to declare a default and exercise its
remedies under this Security Agreement.
6.4 Attorneys' Fees; Expenses. In the event suit or action is
instituted to enforce any of the terms of this Security Agreement, the
prevailing party shall be entitled to recover its reasonable attorneys' fees at
trial and on any appeal, in addition to all other sums provided by law. Whether
or not any court action is involved, all reasonable expenses incurred by Secured
Party that are necessary at any time in Secured Party's opinion for the
protection of its interest or the enforcement of its rights shall become a part
of the Indebtedness payable on demand and shall bear interest from the date of
expenditure until repaid at the same interest rate as provided in Section 7.3.
7. Indemnity. Debtor agrees to defend, indemnify and hold harmless
Secured Party and its officers, employees, and agents against (a) all
obligations, demands, claims and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Security
Agreement and (b) all losses or expenses in any way suffered, incurred or paid
by Secured Party as a result of or in any way arising out of, following or
consequential to transactions between Secured Party and Debtor, whether under
this Security Agreement or otherwise (including without limitation, reasonable
attorneys' fees and expenses), except for losses arising from or out of Secured
Party's gross negligence or willful misconduct.
8. Miscellaneous.
8.1 Time of Essence. Time is of the essence of this Security
Agreement.
8.2 Successor Interests. Subject to the limitations on transfer of
Debtor's interest, this Security Agreement shall be binding upon and inure to
the benefit of the parties, their successors and assigns.
8.3 Expenditure by Beneficiary. If Debtor fails to comply with any
provision of this Security Agreement, Secured Party may elect to take the
required action on Debtor's behalf, and any amount that Secured Party expends in
so doing shall be added to the Indebtedness. Amounts so added shall be payable
on demand with interest from the date of expenditure at the rate of 18 percent
(18%) per annum or at the rate the Indebtedness bears, whichever is higher, but
not in any event at a rate higher than the maximum rate permitted by law. Such
action by Secured Party shall not constitute a cure or waiver of the default or
any other right or remedy which Secured Party may have on account of Debtor's
default.
8.4 Notices. Any notice under this Security Agreement shall be in
writing and shall be effective when either delivered in person or, if mailed,
shall be deemed effective when deposited as registered or certified mail,
postage prepaid, addressed to the party at the address stated in this Security
Agreement. Any party may change its address for notices by written notice to the
other.
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8.5 Invalid Provisions to Affect No Others. If any of the provisions
contained in this Security Agreement shall be invalid, illegal, or unenforceable
in any respect, the validity of the remaining provisions shall not be affected.
8.6 Changes in Writing; No Waiver. This Security Agreement and any of
its terms may only be changed, waived, discharged, or terminated by an
instrument in writing signed by the party against which enforcement of the
change, waiver, discharge, or termination is sought. Any agreement subsequently
made by Debtor or Secured Party relating to this Security Agreement shall be
superior to the rights of the holder of any intervening security interest, lien,
or encumbrance. Secured Party shall not by any act, delay, omission or otherwise
be deemed to have waived any of its respective rights or remedies hereunder, nor
shall any single or partial exercise of any right or remedy hereunder on any one
occasion preclude the further exercise thereof or the exercise of any other
right or remedy.
8.7 Applicable Law. This Security Agreement has been executed and
delivered to Secured Party in the State of Washington, and all payments are to
be made to Secured Party in the State of Washington. The law of the State of
Washington shall be applicable for the purpose of construing and determining the
validity of this Security Agreement and, to the fullest extent permitted by the
law of any state in which any of the Collateral is located, determining the
rights and remedies of Secured Party on default.
8.8 Joint and Several Liability. If Debtor consists of more than one
person or entity, the obligations imposed upon Debtor under this Security
Agreement shall be joint and several.
IN WITNESS WHEREOF, Debtor has caused this Security Agreement to be
duly executed as of the day and year first written above.
DEBTOR: NOVA-TECH ENGINEERING, INC.
By /s/ ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
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Its President
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SECURED PARTY: PACIFIC AEROSPACE & ELECTRONICS, INC.
By /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
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Its President and CEO
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