Case analysis

REINHART\3890541PBLAIN:PBLAIN 07/06/10 1

PACER, INC. Background and History

Pacer, Inc. ("Pacer") was originally founded in the 1940's as a metal

stamping company. Organized in its present form in 1970, Pacer manufactures and finishes precision fasteners, grommets and other related parts for the aerospace industry. It also sources parts from global suppliers for its customers.

In 2003, Pacer secured a contract with Air Inc., a multi billion dollar

aerospace firm. After securing that contract, Pacer employed 150 people at its West Bend, WI manufacturing facility, which it leased. It established a Florida subsidiary, Pacer Space, Inc., which also leased a manufacturing facility in California and a distribution facility in Florida. Overall, Pacer and its subsidiary employed 500 total persons nationwide. Although it had a number of other customers, Air, Inc. accounted for about 70% of Pacer's business.

Pacer is owned by John King, an accountant turned entrepreneur, who owns

all of the common stock of Pacer. King's other investments include ownership of all of the stock of Drive, Inc. a distribution company in Milwaukee, and a minority stock interest in Global Structures, Inc., a very successful global manufacturer of complex commercial window systems, also based in Milwaukee.

Over time, Water Street Bank provided a total loan to Pacer of $9.0

Million, made up of a line of credit of $4.0 Million and a term loan of $5.0 Million. John King personally guarantied the loan, meaning he agreed to pay the loan personally if Pacer could not or did not do so.

King lives large, owning a large house on Lake Michigan, a condominium

in San Francisco and a vacation home in British Columbia, all furnished very expensively. From Pacer, King draws an annual salary of $20,000 per month and $15,000 per month in fees charged by the consulting firm he owns. In addition, he draws an undisclosed amount as salary from Drive, Inc. He has his own web site, which claims that he is an expert in foreign affairs, that he consults regularly with the US State Department and that he is a confidant of several African and Middle Eastern heads of state.

Pacer's business grew significantly, with record annual sales of $32.0

Million in 2006. However, as with many things in life, fortunes change. John King, who has somewhat of an imperious manner, commenced a dispute with Air, Inc. over the terms of Pacer's relationship with that company. As a result, Air, Inc. started to gradually move the business it had with Pacer to other suppliers and Pacer started a steady decline. Pacer sued one of its competitors which began

REINHART\3890541PBLAIN:PBLAIN 07/06/10 2

working with Air, Inc., claiming the competitor wrongfully interfered with Pacer's agreement with Air, Inc. Pacer devoted significant resources on this inconclusive litigation, which continues today. In March 2010, John King threatened to sue Air, Inc., and Air, Inc quickened the move of its business away from Pacer, accelerating Pacer's decline.

Pacer's annual sales precipitously dropped from the December 2006 high of

$32.0 Million, to $22.5 Million in 2008, and $12.9 Million in 2009, and currently total only $6.1 Million for the first four months of 2010. Pacer has closed its subsidiary's Florida distribution facility and ceased operations at its California facility. It currently employs only 40 persons in West Bend. While it continues to serve its other customers, it has all but lost the Air, Inc. business. Pacer owns $5.8 Million (at book value) of Air, Inc. dedicated inventory. However, unless Air, Inc. buys it, this inventory has only scrap value. Pressure from vendors has steadily increased although currently there are no lawsuits for collection.

Over the last several years, King has focused on his consulting business,

and has spent less and less time at Pacer. King has delegated day to day management to Chief Operating Officer Peter Johnson, who is a very capable executive. According, to information King reluctantly shared with Water Street Bank, Drive, Inc., King's second operating company, went into default with its lender, Tower Bank, and has a negative net worth. However, King's investment in Global Structures, Inc. has doubled in value and today is worth more than $4.0 Million.

The loans with Water Street Bank went into default in November 2009. In

December 2009, at the Bank's insistence, King hired a well known investment banking firm to sell Pacer. In February 2010, the investment banker procured a buyer for all of the assets of Pacer for $7.5 Million. After closing costs and the investment banker's commission, the net proceeds were estimated to be $6.8 Million. The Bank wanted Pacer to accept this offer but King refused, saying the price was unacceptably low. The buyer has since lost interest, and given the stormy relationship now has with Air, Inc., the investment banker has not been able to find any other buyers.

When King declined to sell Pacer, the Bank threatened legal action and the

Bank and Pacer entered into a forbearance agreement, pursuant to which the Bank agreed to forbear from taking legal action so long as Pacer met certain conditions and operating benchmarks. The forbearance agreement was amended once in February 2010, but expired without renewal in May 2010. Throughout the negotiations regarding the forbearance agreement, King told the Bank that reducing his compensation or the fees paid to his consulting firm were topics "not

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open for discussion." At one point, he also told the president of the Bank that no matter what happened, he would never pay a dime on his personal guaranty.

The parties are at an impasse. King has proposed that the Bank continue

funding Pacer to allow him to sell the company, but the Bank is unwilling to do so, especially after the last abortive sale effort. The Bank adamantly insists that King must forgo his salary and consulting fees and agree to begin liquidating the assets on an orderly basis. Using the King's guaranty as leverage, the Bank would like King to use his contacts within Air, Inc. to convince Air, Inc. to buy the dedicated Air, Inc. inventory owned by Pacer. The Bank would also like the liquidation to proceed in a court supervised proceeding which would include an auction. This would conserve the Bank's collateral and provide a safe forum to convey the assets in order to avoid claims from other creditors. King, whose reputation in the community as an entrepreneur would be at risk, has strongly resisted any formal proceeding which would be public, as he perceives it would be an abject admission of failure.

You are advising the Bank or King and it is up to you to try to negotiate a

resolution. Please refer to the information your team has been given regarding your party's negotiation goals and objectives.

EXHISIT A

PACE& INC. AND SU86IDIARIES

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EXHIBIT E

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PACER/ INC"

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P A C E R , I N C .

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