U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended
February 28, 1997
[ ] 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 small business issuer as specified in its charter)
Washington 91-1744587
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
434 Olds Station Road, Wenatchee, Washington 98801
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (509) 664-8000
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes [ ] No [ ]
Applicable only to corporate issuers
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of April 1, 1997, there were
9,742,709 shares outstanding of the Company's Common Stock, par value $.001 per
share.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - February 28, 1997 and May 31, 1996
Consolidated Statements of Income - Third Quarters and Nine-Month Periods
Ended February 28, 1997 and February 29, 1996
Consolidated Statements of Cash Flow - Third Quarters and Nine-Month Periods
Ended February 28, 1997 and February 29, 1996
Management's Statement and Notes to Unaudited Consolidated Financial Statements
2
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FORM 10-QSB
February 28, 1997 and May 31, 1996
February 28, May 31,
1997 1996
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 6,353,000 $ 725,000
Restricted cash 1,000,000 1,000,000
Stock subscriptions receivable 1,030,000
Accounts receivable 4,124,000 3,359,000
Inventory 7,935,000 6,699,000
Current portion of note receivable from related party 52,000 52,000
Prepaid expenses and other 112,000 144,000
------------ ------------
Total current assets 19,576,000 13,009,000
------------ ------------
PROPERTY AND EQUIPMENT, NET 11,608,000 10,656,000
------------ ------------
OTHER ASSETS
Note receivable from related party, net of current portion 132,000 183,000
Costs in excess of net book value of acquired subsidiaries 1,841,000 1,938,000
Patents, net 1,309,000 1,387,000
Non-compete agreement 67,000 79,000
Other 63,000 397,000
------------ ------------
Total other assets 3,412,000 3,984,000
------------ ------------
TOTAL ASSETS $ 34,596,000 $ 27,649,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable 2,438,000
Bank line of credit 474,000 1,224,000
Accounts payable 2,829,000 3,142,000
Accrued liabilities 910,000 840,000
Current portion - long-term debt 2,676,000 4,290,000
Current portion - capital lease obligations 83,000 53,000
Current portion - non-compete agreement payable 35,000 70,000
------------ ------------
Total current liabilities 7,007,000 12,057,000
------------ ------------
LONG-TERM LIABILITIES
Long-term debt, net of current portion 2,905,000 1,809,000
Capital lease obligations, net of current portion 269,000 152,000
Non compete agreement payable, net of current portion 30,000 30,000
Deferred income tax 592,000 592,000
Deferred rent and other 447,000 470,000
------------ ------------
Total long-term liabilities 4,243,000 3,053,000
------------ ------------
Total liabilities 11,250,000 15,110,000
------------ ------------
STOCKHOLDERS' EQUITY
Common stock 24,454,000 19,102,000
Convertible preferred stock 4,527,000
Accumulated deficit (5,635,000) (6,563,000)
------------ ------------
Total stockholders' equity 23,346,000 12,539,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 34,596,000 $ 27,649,000
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
3
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FORM 10-QSB
Third Quarters and Nine-Month Periods Ended
February 28, 1997 and February 29, 1996
Quarters Ended Nine Months Ended
--------------------------------- -------------------------------
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 8,093,000 $ 6,356,000 $ 23,854,000 $ 13,488,000
COST OF SALES 6,467,000 5,039,000 18,350,000 10,826,000
------------ ------------ ------------ ------------
GROSS PROFIT 1,626,000 1,317,000 5,504,000 2,662,000
OPERATING EXPENSES 1,258,000 1,360,000 4,277,000 3,183,000
------------ ------------ ------------ ------------
INCOME (LOSS) FROM
OPERATIONS 368,000 (43,000) 1,227,000 (521,000)
------------ ------------ ------------ ------------
OTHER INCOME AND EXPENSE
Interest Income 23,000 14,000 62,000 23,000
Interest Expense (107,000) (228,000) (386,000) (334,000)
Other (34,000) 19,000 46,000 10,000
------------ ------------ ------------ ------------
(118,000) (195,000) (278,000) (301,000)
------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE
FEDERAL INCOME TAXES 250,000 (238,000) 949,000 (822,000)
PROVISION FOR FEDERAL
INCOME TAXES (6,000) (21,000)
------------ ------------- ------------ -------------
NET INCOME (LOSS) FOR THE
PERIOD $ 244,000 $ (238,000) $ 928,000 $ (822,000)
============ ============ ============ ============
PER SHARE OF COMMON STOCK $ 0.03 $ (0.03) $ 0.10 $ (0.14)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING DURING THE PERIOD 9,742,709 7,128,419 9,363,955 5,949,203
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
4
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FORM 10-QSB
Third Quarters and Nine-Month Periods Ended
February 28, 1997 and February 29, 1996
Quarters Ended Nine Months Ended
---------------------------------- ------------------------------------
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net cash from operating activities $ 204,000 $ 314,000 $ (352,000) $(2,788,000)
------------ ------------ ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment (648,000) (398,000) (1,644,000) (1,012,000)
Purchase of patents (400,000) (400,000)
Reduction in notes receivable 17,000 51,000
Other changes, net 19,000 291,000 (36,000) 81,000
------------ ------------ ----------- -----------
Net cash from investing activities (612,000) (507,000) (1,629,000) (1,331,000)
------------ ------------ ------------ -----------
CASH FLOW FROM FINANCING ACTIVITIES
Payments on notes payable (2,288,000)
Payments on notes payable to stockholders (17,000) (150,000) (48,000)
Payments of debt and capital leases (191,000) (468,000) (984,000) (1,111,000)
Proceeds from financing debt 543,000 254,000 543,000 773,000
Reduction in stock subscriptions receivable 1,030,000
Net change in bank line of credit (191,000) (750,000) 1,289,000
Sale of units 7,031,000
Payment of unit issuance costs (8,000) (1,340,000)
Sale of preferred stock 5,000,000 5,000,000
Payment of preferred stock issuance costs (473,000) (473,000)
Sale of common stock 3,613,000
Other changes, net (44,000) (33,000) (10,000) 20,000
------------ ------------ ------------ -----------
Net cash from financing activities 4,827,000 (455,000) 7,609,000 4,536,000
------------ ------------ ------------ -----------
NET CHANGE IN CASH 4,419,000 (648,000) 5,628,000 417,000
Cash, beginning of period 1,934,000 2,144,000 725,000 1,079,000
------------ ------------ ------------ -----------
Cash, end of period $ 6,353,000 $ 1,496,000 $ 6,353,000 $ 1,496,000
============ ============ ============ ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING ACTIVITIES
Acquisition of subsidiaries involved the following:
Fair value of assets acquired other than cash $ 10,286,000
Liabilities assumed $ (7,203,000)
------------
Total non-cash financing activities $ 3,083,000
============
Seller financed purchase of equipment $ 428,000 $ 92,000 $ 361,000
Seller financed purchase of patents $ 320,000
Equipment purchased - capital leases $ 82,000 $ 82,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
5
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
MANAGEMENT'S STATEMENT AND NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-QSB
February 28, 1997
Management's Statement
The accompanying unaudited consolidated financial statements have been prepared
in accordance with Form 10-QSB instructions and, in the opinion of management,
contain all adjustments (consisting of only normal recurring accruals) necessary
to present fairly the Company's consolidated financial position as of February
28, 1997 and May 31, 1996, the consolidated results of operations for the three-
and nine-month periods ended February 28, 1997 and February 29, 1996, and the
consolidated statements of cash flow for the three- and nine-month periods ended
February 28, 1997 and February 29, 1996. All significant intercompany
transactions have been eliminated in the consolidation process. These results
have been determined on the basis of generally accepted accounting principles
and practices applied consistently with those used in the preparation of the
Company's annual and quarterly reports under the Securities Exchange Act of
1934, as amended (the "Exchange Act").
Certain information and footnote disclosures normally included in audited
financial statements presented in accordance with generally accepted accounting
principles have been condensed or omitted. The financial statements should be
read in conjunction with the audited financial statements and notes thereto for
the years ended May 31, 1996 and 1995.
The results of operations for the three- and nine-month periods ended February
28, 1997 and February 29, 1996 are not necessarily indicative of the results to
be expected or anticipated for the full fiscal year. Also, certain
reclassifications have been made to the February 29, 1996 statement of income
and statement of cash flow to conform to the 1997 presentations.
Significant Events and Transactions
Nine Months Ended February 28, 1997:
Registered Public Offering
The Company completed a public offering of Units consisting of Common Stock and
common stock purchase warrants during July 1996, resulting in net proceeds after
fees and expenses of approximately $5,300,000. A portion of the net proceeds was
used during the first nine months of fiscal 1997 to pay off debt of
approximately $2,438,000 and certain interest and fees associated with such
debt. The remainder has been or is expected to be used for further reductions of
debt, acquisition of manufacturing equipment, facilities expansion, potential
acquisitions and working capital.
6
<PAGE>
Renewal of Bank Line of Credit
During the first nine months of fiscal 1997, the Company obtained a modification
and renewal of its lending arrangements with its primary lender. The Company's
arrangements with that lender provide for a working capital line of credit,
collateralized by accounts receivable and inventories, and a letter of credit
required to support a loan from another lender. The Company believes that it was
in compliance with all loan provisions at February 28, 1997.
Reincorporation Merger
Effective as of November 30, 1996, PCT Holdings, Inc., a Nevada corporation
("PCTH"), merged into Pacific Aerospace & Electronics, Inc., a Washington
corporation (the "Company"), in order to effect a change in PCTH's domicile from
Nevada to Washington (the "Reincorporation Merger"), with the Company being the
surviving entity. Prior to the Reincorporation Merger, the Company was a
wholly-owned subsidiary of PCTH, organized for the purpose of reincorporating
PCTH in Washington. Immediately prior to the Reincorporation Merger, the Company
had no assets or liabilities.
The Reincorporation Merger was approved by the shareholders of PCTH at the 1996
annual meeting of shareholders, for which proxies were solicited pursuant to
Section 14(a) of the Securities Exchange Act of 1934, as amended. Upon the
effectiveness of the Reincorporation Merger, the directors and executive
officers of PCTH became the directors and executive officers of the Company. The
Company's business, mailing address, principal executive offices and telephone
number are the same as those of PCTH.
Upon the effectiveness of the Reincorporation Merger, each outstanding share of
the $.001 par value common stock of PCTH was automatically converted into one
share of the $.001 par value common stock of the Company (the "Common Stock"),
and each of the warrants to purchase common stock of PCTH sold in PCTH's
registered public offering in July 1996 was automatically converted into a
warrant to purchase one share of Common Stock (the "Warrants"). It will not be
necessary for shareholders or warrantholders of the Company to exchange their
existing certificates. The Common Stock sold in PCTH's registered public
offering in July 1996 and the Warrants continue to be traded on the Nasdaq
National Market System, after the Reincorporation Merger, under the symbols
"PCTH" and "PCTHW," respectively.
Private Placement of Series A Convertible Preferred Stock
Effective as of February 28, 1997, the Company completed a private placement of
50,000 shares of Series A Convertible Preferred Stock, $.001 par value (the
"Preferred Stock"), to 11 accredited investors, at a total offering price of
$5,000,000. Costs and fees of approximately $500,000 were incurred in that
offering, for net proceeds to the Company of approximately $4,500,000. The
Company intends to use these net proceeds for future acquisitions, to purchase
new manufacturing equipment to support the growth of its subsidiaries, and for
working capital. If not sooner converted by the holders or the Company, the
Preferred Stock will automatically convert, on February 28, 1999, to an amount
of Common Stock computed at that time pursuant to a specified formula.
7
<PAGE>
Nine-Month Period Ended February 29, 1996:
Morel Merger
The Company entered into an Agreement and Plan of Merger with Morel Industries,
Inc., a Washington corporation ("Morel"), pursuant to which Morel Acquisition
Corporation, a Washington corporation and subsidiary of the Company formed for
the purpose of effecting the acquisition of Morel, was merged into Morel
effective, for accounting purposes, as of November 30, 1995 (the "Morel
Merger"). The Morel Merger was accounted for as a purchase.
Seismic Asset Acquisition
The Company also entered into a purchase agreement with Seismic Safety Products,
Inc., a Florida corporation ("Florida Seismic"), pursuant to which Seismic
Safety Products, Inc., a Washington corporation and wholly-owned subsidiary of
the Company, purchased substantially all of Florida Seismic's assets, subject to
certain liabilities, for consideration consisting of cash and common stock of
the Company. The Seismic asset acquisition was accounted for as a purchase.
Computations of Earnings (Loss) per Share
Earnings (loss) per common and common equivalent share are computed using the
weighted average number of common and common equivalent shares outstanding
during each reported period. Common equivalent shares consist of stock options
and warrants, which are excluded from the computation if antidilutive.
Fully-diluted earnings (loss) per common share did not differ significantly from
primary earnings (loss) per common share in any period reported.
8
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Preliminary Note Regarding Forward-Looking Statements
The information set forth in this Item 2 includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and is subject
to the safe harbor created by those sections.
Overview
The Company's net sales for the three- and nine-month periods ended February 28,
1997 were derived from its five operating subsidiaries, which are divided into
two operational and marketing groups. The Company's aerospace group consists of
Cashmere Manufacturing Co., Inc. ("Cashmere"), which manufactures high quality
machined aluminum parts and components, Seismic Safety Products, Inc.
("Seismic"), which markets seismic safety gas shutoff valves manufactured by
Cashmere, and Morel Industries, Inc. ("Morel"), which manufactures cast aluminum
parts and assemblies. The Company's electronics group consists of Pacific Coast
Technologies, Inc. ("Pacific Coast"), which manufactures and sells electrical
connectors and instrument packages, and Ceramic Devices, Inc. ("Ceramic
Devices"), which manufactures ceramic capacitors, filters and feedthroughs.
The Company's electronic products business is characterized by relatively low
volumes and higher margins, as compared with its aerospace (metal products)
business, where volumes have historically been higher and margins lower than in
the electronic products business. The Company believes that margins will
generally remain higher in its electronics group than in its aerospace group,
although products incorporating both electronic and metal parts are expected to
generate margins closer to electronic product margins. As a result of margin
differences, changes in product mix between electronic and aerospace products
can be expected to affect overall margins for the Company.
The Company's financial condition and results of operations have been
substantially affected by acquisitions. In November 1995, the Company formed
Seismic, which acquired substantially all of the assets of a Florida corporation
of the same name and acquired certain patents from affiliates of the Florida
corporation. The Company also acquired Morel in December 1995 (effective for
accounting purposes as of November 30, 1995). The Company's net sales for the
nine-month period ended February 29, 1996 were therefore substantially derived
from the three operating subsidiaries owned by the Company prior to those
acquisitions: Pacific Coast, Cashmere and Ceramic Devices. A portion of the
changes in the Company's results of operations from the first nine months of
fiscal 1996 to the same period in fiscal 1997 are attributable to the addition
of Morel and Seismic.
9
<PAGE>
Results of Operations
Quarter Ended February 28, 1997
Net sales for the quarter ended February 28, 1997 were $8,093,000, compared to
net sales of $6,356,000 for the quarter ended February 29, 1996, an increase of
$1,737,000. In the aerospace group, net sales of Cashmere increased by $837,000,
or 54.3%, between the two periods, and net sales of Morel increased by $486,000,
or 19.2%,between the two periods, in both cases primarily as a result of
increased orders in the commercial airplane market. Net sales of Seismic
decreased by $45,000, or 321%, between the two periods, primarily from
inconsistent sales activity of its new product. Within the electronics group,
net sales of Pacific Coast increased by $632,000, or 40.7%, between the two
periods, primarily as a result of increases in order sizes and products
incorporating the Company's patented technologies. Net sales of Ceramic Devices
decreased by $174,000, or 25.8%, between the two periods, primarily as a result
of Ceramic Devices' focus during the period on building production capacity.
Gross profit for the quarter ended February 28, 1997 was $1,626,000, compared to
gross profit of $1,317,000 for the quarter ended February 29, 1996, an increase
of $309,000. The Company's gross profit percentage was 20% of net sales for both
periods. In the aerospace group, Cashmere's gross profit declined by $231,000,
or 59.4%, between the two periods, primarily as the result of having a major
portion of its manufacturing facilities and delivery systems virtually shut down
for almost two weeks by the worst snow storm in over 50 years. Morel's gross
profit increased by $258,000, or 263.3%, between the two periods, as a result of
increased sales in the commercial airplane market, production efficiencies and
equipment capabilities incorporated since the Morel Merger. Seismic's gross
profit was ($5,000), reflecting the reduced sales level for the quarter. In the
electronics group, Pacific Coast's gross profit increased by $369,000, or 62.6%,
between the two periods, due in part to the 40.7% increase in net sales and
production efficiencies gained with that increase in sales activities. Gross
profit of Ceramic Devices declined by $92,000, or 36.6%, between the two
periods, coinciding with the 25.8% decrease in net sales.
Operating expenses for the quarter ended February 28, 1997 were $1,258,000,
compared to $1,360,000 for the quarter ended February 29, 1996, a decrease of
$102,000. In the aerospace group, Cashmere's operating expenses decreased by
$86,000, or 22.6%, between the two periods, reflecting an increase in efficiency
after Cashmere's operations were moved from Cashmere, Washington to a new
facility in Wenatchee in October 1995, providing more production and office
space. Morel's operating expenses increased $25,000, or 9.9%, between the two
periods. Seismic's operating expenses were $76,000 for both periods. In the
electronics group, Pacific Coast's operating expenses increased by $66,000, or
14.3%, between the two periods, in response to the increase in net sales.
Ceramic Devices' operating expenses declined by $45,000, or 27.9%, between the
two periods, due in part to efficiencies created by Ceramic Devices' move to the
Wenatchee production facilities from San Diego, California in the spring of
1996. Interest expense decreased from $228,000 in the third quarter of fiscal
1996 to $107,000 in the third quarter of fiscal 1997, due primarily to
reductions in short-term debt made with the cash proceeds of the Company's July
1996 public offering.
10
<PAGE>
Net income for the quarter ended February 28, 1997 was $244,000, or $.03 income
per share, which represents an improvement over a net loss of $238,000, or $.03
loss per share, for the quarter ended February 29, 1996.
Nine-Month Period Ended February 28, 1997
Net sales for the nine-month period ended February 28, 1997 were $23,854,000,
compared to net sales of $13,488,000 for the nine-month period ended February
29, 1996, an increase of $10,366,000. In the aerospace group, the operations of
the Company's two new subsidiaries contributed $6,404,000 of the increase,
consisting of $6,339,000 from Morel and $65,000 from Seismic. In addition,
Cashmere's net sales increased by $1,582,000, or 30.3%, between the two periods.
Within the electronics group, net sales of Pacific Coast increased by
$2,538,000, or 62.4%, between the two periods, primarily as a result of
increases in order sizes and products incorporating the Company's patented
technologies. Net sales of Ceramic Devices decreased by $158,000, or 9.9%,
between the two periods.
Gross profit for the nine-month period ended February 28, 1997 was $5,504,000,
compared to $2,662,000 for the nine-month period ended February 29, 1996, an
increase of $2,842,000. The Company's overall gross profit percentage also
increased to 23.1% from 19.7% of net sales between the two periods. In the
aerospace group, the operations of the Company's two new subsidiaries
contributed $1,006,000 of the increase, consisting of an increase of $1,023,000
from Morel and a decrease of $17,000 from Seismic. In addition, Cashmere's gross
profit increased by $227,000, or 21.3%, between the two periods, on a sales
increase of $1,583,000, due primarily to renegotiation of Cashmere's supplier
contract with Boeing and increases in sales to Boeing for additional products.
Within the electronics group, Pacific Coast's gross profit increased by
$1,730,000, or 172.5%, between the two periods, due in part to the 62.4%
increase in net sales, and production efficiencies gained with that increase in
sales activities. Gross profit of Ceramic Devices declined by $170,000, or
33.8%, between the two periods.
Operating expenses for the nine months ended February 28, 1997 were $4,277,000,
compared to $3,183,000 for the nine months ended February 29, 1996, an increase
of $1,094,000. In the aerospace group, the operations of the Company's two new
subsidiaries accounted for $888,000 of the increase, consisting of $689,000 from
Morel and $199,000 from Seismic. Cashmere's operating expenses decreased by
$89,000, or 7.8%, between the two periods. Pacific Coast's operating expenses
increased by $286,000, or 23.2%, between the two periods, in response to the
62.4% increase in net sales. Ceramic Devices' operating expenses declined by
$104,000, or 23.2%, between the two periods, due in part to efficiencies created
by Ceramic Devices' move to the Wenatchee production facilities from San Diego,
California in the spring of 1996. Interest expense increased to $386,000 in the
first three quarters of fiscal 1997 as the result of obligations related to the
new operating subsidiaries, Morel ($169,000) and Seismic ($2,000), up from
$334,000 in the first three quarters of fiscal 1996.
Net income for the nine-month period ended February 28, 1997 was $928,000, or
$.10 income per share, which represents an improvement over a net loss of
$822,000, or $.14 loss per share, for the nine-month period ended February 29,
1996.
11
<PAGE>
Liquidity and Capital Resources
Overview
At February 28, 1997, the Company's total current assets were $19,576,000, and
its total current liabilities were $7,007,000, resulting in net working capital
of $12,569,000 and a current ratio of 2.8 to 1.0. Comparable amounts at May 31,
1996 were $13,009,000 of current assets and $12,057,000 of current liabilities,
resulting in net working capital of $952,000, and a current ratio of 1.08 to
1.0.
Registered Public Offering
On July 19, 1996, the Company closed an underwritten public offering of
2,250,000 Units, with each Unit consisting of one share of Common Stock and one
warrant to purchase a share of Common Stock, at a price of $3.125 per Unit,
subject to certain possible adjustments (the "July 1996 public offering"). The
July 1996 public offering resulted in net proceeds to the Company, after fees
and expenses, of approximately $5,300,000. A portion of the net proceeds was
used during the first nine months of fiscal 1997 to pay off approximately
$2,438,000 of short term debt and certain interest and fees associated with such
debt. The remainder has been or is expected to be used for further reductions of
debt, acquisition of manufacturing equipment, facilities expansion, potential
acquisitions and working capital.
Renewal of Bank Line of Credit
During the first nine months of fiscal 1997, the Company obtained a modification
and renewal of its lending arrangements with its primary lender. The Company's
lending arrangements with that lender provide for a working capital line of
credit, collateralized by accounts receivable and inventories, and a letter of
credit required to support a loan from another lender. The Company believes that
it was in compliance with all loan provisions at February 28, 1997.
Private Placement of Series A Convertible Preferred Stock
Effective as of February 28, 1997, the Company completed a private placement of
50,000 shares of Series A Convertible Preferred Stock, $.001 par value (the
"Preferred Stock"), to 11 accredited investors, at a total offering price of
$5,000,000. Costs and fees of approximately $500,000 were incurred in that
offering, for net proceeds to the Company of approximately $4,500,000. The
Company intends to use these net proceeds for future acquisitions, to purchase
new manufacturing equipment to support the growth of its subsidiaries, and for
working capital. If not sooner converted by the holders or the Company, the
Preferred Stock will automatically convert, on February 28, 1999, to an amount
of Common Stock computed at that time pursuant to a specified formula.
12
<PAGE>
Future Working Capital Needs
The Company believes that the net proceeds from the July 1996 public offering
and from the February 1997 private offering of Preferred Stock, together with
its existing credit facilities, will be sufficient to meet the Company's
budgeted working capital requirements for at least the next 12 months. However,
there is no assurance that the Company's working capital requirements will not
exceed those currently budgeted, or that additional financing will be available
to the Company, if and when needed.
Capital Resources
The Company has a pending purchase order to an equipment supplier for capital
equipment with an expected total cost of approximately $1,400,000, subject to
obtaining financing acceptable to the Company. The Company expects to take
delivery of the equipment in mid-May 1997.
Additions and replacements of plant and equipment are generally funded through
working capital, trade-in credits for the replaced equipment, or capital leases
or long-term notes secured by the equipment being acquired.
13
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
Private Placement of Series A Convertible Preferred Stock
Effective as of February 28, 1997, the Company completed a private placement of
50,000 shares of Series A Convertible Preferred Stock, $.001 par value (the
"Preferred Stock"), to 11 accredited investors, at a total offering price of
$5,000,000. Pacific Continental Securities Corp. acted as placement agent and
received $375,000 in commissions. The offering was exempt from registration
under the Securities Act of 1933 pursuant to Rule 506 of Regulation D.
At the closing of the Preferred Stock offering, the Company entered into a
Registration Rights Agreement with the holders of the Preferred Stock by which
it is obliged to file a registration statement on Form S-3 to register for
resale the shares of Common Stock underlying the Preferred Stock. Under the
terms of that agreement, the registration statement must be effective by June
13, 1997.
The holders of the Preferred Stock will not have voting rights unless required
by law and are not entitled to receive dividends except on an as-converted basis
with the holders of the Company's common stock, $.001 par value ("Common
Stock"). On the occurrence of certain events, the holders of Preferred Stock are
entitled to a liquidation preference equal to the purchase price per share, plus
any accrued but unpaid dividends.
The holders may convert their shares of Preferred Stock to Common Stock at any
time after the earlier of (i) June 13, 1997, or (ii) the date that a
registration statement covering the underlying shares of Common Stock is
declared effective. The Company may cause the conversion of the Preferred Stock
to Common Stock after fifteen days' notice to the holders if (i) the average
closing bid prices of the Common Stock for 20 consecutive trading days is
greater than $6.11, and (ii) the underlying shares of Common Stock are
registered or qualified for resale under federal and state securities laws and
listed or quoted for trading on the Nasdaq National Market System or such other
securities exchange or quotation system on which the Company's Common Stock is
then traded. If not sooner converted, the shares of Preferred Stock will be
automatically converted to Common Stock on February 28, 1999.
On conversion of a share of Preferred Stock, the holder will receive a number of
shares of Common Stock equal to $100 divided by the conversion price of the
Preferred Stock. The conversion price will be the lower of (i) $3.49 or (ii) 85%
of the average closing bid price per share of the Common Stock over the five
days before conversion. As of February 28, 1997, the closing date, 1,432,665
shares of Common Stock would have been issuable on conversion of all of the
Preferred Stock, and 9,742,709 shares of Common Stock were issued and
14
<PAGE>
outstanding. The Company may issue up to approximately 1.95 million shares of
Common Stock on conversion, and must redeem any Preferred Stock that it is not
permitted to convert.
The Company intends to use the proceeds of the Preferred Stock offering for
future acquisitions, purchase of manufacturing equipment, facilities expansion
and working capital.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
The following are filed as exhibits to this Quarterly Report:
3.1 Amendment to Articles of Incorporation of Pacific Aerospace &
Electronics, Inc., as filed on February 27, 1997 and corrected on
March 3, 1997 with the Secretary of State of the State of
Washington. *
4.1 Form of specimen certificate for the Preferred Stock. *
10.1 Series A Convertible Preferred Stock Purchase Agreement dated as
of February 27, 1997. *
10.2 Registration Rights Agreement dated as of February 27, 1997. *
27. Financial Data Schedule
- --------------------------
* Incorporated by reference to the Company's Current Report on Form 8-K filed
on March 12, 1997.
15
<PAGE>
b. Reports on Form 8-K
The Company filed with the Commission the following Current Reports on Form 8-K
with regard to events occurring during the quarter ended February 28, 1997:
1. On December 12, 1996, the Company reported that it had effected
the Reincorporation Merger as of November 30, 1996. No financial
statements were filed with that Form 8-K report.
2. On March 12, 1997, the Company reported that it had (i) completed
the offering of its Series A Convertible Preferred Stock
discussed in Item 2 above, as of February 28, 1997, and (ii)
entered into a non-binding letter of intent to purchase
substantially all of the assets of Northwest Technical
Industries, Inc. No financial statements were filed with that
Form 8-K report.
16
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PACIFIC AEROSPACE & ELECTRONICS, INC.
Date: April 2, 1997 DONALD A. WRIGHT
----------------------------------------
Donald A. Wright
President, Chief Executive Officer, and
Chairman of the Board
(Principal Executive Officer)
Date: April 2, 1997 NICK A. GERDE
----------------------------------------
Nick A. Gerde
Vice President Finance, Chief Financial
Officer and Treasurer (Principal Financial
and Accounting Officer)
17
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
3.1 Amendment to Articles of Incorporation of Pacific Aerospace &
Electronics, Inc., as filed on February 27, 1997 and corrected on
March 3, 1997 with the Secretary of State of the State of
Washington. *
4.1 Form of specimen certificate for the Preferred Stock. *
10.1 Series A Convertible Preferred Stock Purchase Agreement dated as
of February 27, 1997. *
10.2 Registration Rights Agreement dated as of February 27, 1997. *
27. Financial Data Schedule
- --------------------------
* Incorporated by reference to the Company's Current Report on Form 8-K filed
on March 12, 1997.
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
unaduited financial statements of Pacific Aerospace & Electronics, Inc., and its
subsidiaries for the quarter ended February 28, 1997, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> FEB-28-1997
<CASH> 6,353,000
<SECURITIES> 0
<RECEIVABLES> 4,214,000
<ALLOWANCES> 90,000
<INVENTORY> 7,935,000
<CURRENT-ASSETS> 19,576,000
<PP&E> 14,531,000
<DEPRECIATION> 2,923,000
<TOTAL-ASSETS> 34,596,000
<CURRENT-LIABILITIES> 7,007,000
<BONDS> 3,174,000
0
4,527,000
<COMMON> 24,454,000
<OTHER-SE> (5,635,000)
<TOTAL-LIABILITY-AND-EQUITY> 34,596,000
<SALES> 8,093,000
<TOTAL-REVENUES> 8,093,000
<CGS> 6,467,000
<TOTAL-COSTS> 7,725,000
<OTHER-EXPENSES> 118,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 107,000
<INCOME-PRETAX> 250,000
<INCOME-TAX> 6,000
<INCOME-CONTINUING> 244,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 244,000
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
