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 November 30, 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 I.R.S. Employer
incorporation Identification No.)
or organization)
434 Olds Station Road, Wenatchee, Washington 98801
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (509) 667-9608
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 January 2, 1998, there were
12,228,707 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 - November 30, 1997 and May 31, 1997
Consolidated Statements of Income - Second Quarters and Six Months Ended
November 30, 1997 and 1996
Consolidated Statements of Cash Flow - Second Quarters and Six Months Ended
November 30, 1997 and 1996
Management's Statement and Notes to Unaudited Consolidated Financial Statements
2
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PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FORM 10-QSB
NOVEMBER 30, 1997 AND MAY 31, 1997
November 30, May 31,
1997 1997
ASSETS (Unaudited) (Audited)
- --------------------------------------------------------------- ----------------- -----------------
CURRENT ASSETS
<S> <C> <C>
Cash $ 8,444,000 $ 3,048,000
Certificate of Deposit 1,000,000
Short-Term Investments 837,000
Accounts Receivable 6,397,000 5,455,000
Inventory 10,222,000 9,082,000
Current Portion of Note Receivable from Related Party 62,000 55,000
Prepaid Expense and Other 235,000 299,000
Notes Receivable 5,808,000
----------------- -----------------
Total Current Assets 32,005,000 18,939,000
----------------- -----------------
PROPERTY AND EQUIPMENT, NET 16,625,000 13,190,000
----------------- -----------------
OTHER ASSETS
Note Receivable from Related Party, net of Current Portion 88,000 125,000
Costs in Excess of Net Book Value of Acquired Subsidiaries 1,998,000 2,071,000
Patents, net 1,280,000 1,331,000
Other Assets 113,000 96,000
----------------- -----------------
Total Other Assets 3,479,000 3,623,000
----------------- -----------------
TOTAL ASSETS $ 52,109,000 $ 35,752,000
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------
CURRENT LIABILITIES
Bank Line of Credit $ 452,000
Accounts Payable 4,533,000 $ 3,736,000
Accrued Liabilities 1,303,000 1,116,000
Current Portion of Long-Term Debt 765,000 959,000
Current Portion of Capital Lease Obligations 35,000 38,000
----------------- -----------------
Total Current Liabilities 7,088,000 5,849,000
----------------- -----------------
LONG-TERM LIABILITIES
Convertible Notes 5,426,000
Long-Term Debt, net of Current Portion 8,134,000 3,138,000
Capital Leases, net of Current Portion 91,000 98,000
Deferred Income Tax 592,000 592,000
Deferred Rent and Other 406,000 456,000
----------------- -----------------
Total Long-Term Liabilities 14,649,000 4,284,000
----------------- -----------------
Total Liabilities 21,737,000 10,133,000
----------------- -----------------
STOCKHOLDERS' EQUITY
Convertible Preferred Stock 806,000 4,481,000
Common Stock 32,807,000 26,019,000
Accumulated Deficit (3,241,000) (4,881,000)
----------------- -----------------
Total Stockholders' Equity 30,372,000 25,619,000
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 52,109,000 $ 35,752,000
================= =================
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
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PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FORM 10-QSB
SECOND QUARTERS AND SIX MONTHS ENDED NOVEMBER 30, 1997 AND 1996
Quarters Ended Six Months Ended
--------------------------------- --------------------------------
November 30, November 30, November 30, November 30,
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
NET SALES $ 12,427,000 $ 8,317,000 $ 24,203,000 $ 15,761,000
COST OF SALES 9,084,000 6,384,000 17,876,000 11,883,000
GROSS PROFIT 3,343,000 1,933,000 6,327,000 3,878,000
OPERATING EXPENSES 2,151,000 1,443,000 4,158,000 3,019,000
--------------- -------------- -------------- --------------
INCOME FROM OPERATIONS 1,192,000 490,000 2,169,000 859,000
--------------- -------------- -------------- --------------
OTHER INCOME AND EXPENSE
Interest Income 28,000 25,000 46,000 39,000
Interest Expense (199,000) (105,000) (329,000) (279,000)
Other 16,000 58,000 23,000 80,000
--------------- -------------- -------------- --------------
(155,000) (22,000) (260,000) (160,000)
--------------- -------------- -------------- --------------
NET INCOME FROM BEFORE FEDERAL 1,037,000 468,000 1,909,000 699,000
INCOME TAX
PROVISION FOR FEDERAL INCOME TAXES (207,000) (10,000) (269,000) (15,000)
--------------- -------------- -------------- --------------
NET INCOME FOR THE PERIOD $ 830,000 $ 458,000 $ 1,640,000 $ 684,000
=============== ============== ============== ==============
EARNINGS PER SHARE OF COMMON STOCK $ 0.07 $ 0.04 $ 0.14 $ 0.07
=============== ============== ============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING
DURING THE PERIOD 11,903,105 9,733,630 11,814,219 9,177,676
=============== ============== ============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FORM 10-QSB
SECOND QUARTERS AND SIX MONTHS ENDED NOVEMBER 30, 1997 AND 1996
Quarters Ended Six Months Ended
--------------------------------- ----------------------------------
November 30, November 30, November 30, November 30,
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net cash from operating activities $ (96,000) $ 461,000 $ 1,516,000 $ (567,000)
-------------- --------------- --------------- ---------------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,470,000) (755,000) (4,170.000) (996,000)
Reduction in notes receivable 19,000 17,000 36,000 34,000
Proceeds from certificate of deposit 1,000,000
Purchase of short-term investments (836,000)
Increase in notes receivable (2,116,000) (5,808,000)
Other Changes, net 3,000 (55,000)
-------------- --------------- --------------- ---------------
Net cash from investing activities (3,567,000) (735,000) (9,778,000) (1,017,000)
-------------- --------------- --------------- ---------------
CASH FLOW FROM FINANCING ACTIVITIES
Payments on note payable (200,000) (2,288,000)
Payments on notes payable to stockholders (150,000)
Payments on long-term debt and capital leases (430,000) (354,000) (1,000,000) (796,000)
Proceeds from long-term debt 4,629,000 5,820,000
Reduction in stock subscriptions receivable 1,030,000
Net change in bank line of credit 452,000 452,000 (750,000)
Sale of units 7,031,000
Payment of unit issuance costs (143,000) (1,331,000)
Sale of common stock 2,358,000 2,358,000
Increase in common stock issue costs (118,000) (118,000)
Sale of convertible notes 5,800,000
Increase in convertible notes issuance costs (13,000) (374,000)
Increase in preferred stock issuance costs (7,000)
Conversion of purchase warrants 740,000 740,000
Other changes, net 12,000 12,000 (13,000) 47,000
-------------- --------------- --------------- ---------------
Net cash from financing activities 7,630,000 (685,000) 13,658,000 2,793,000
-------------- --------------- --------------- ---------------
NET CHANGE IN CASH 3,967,000 (959,000) 5,396,000 1,209,000
Cash, beginning of period 4,477,000 2,893,000 3,048,000 725,000
-------------- --------------- --------------- ---------------
Cash, end of period $ 8,444,000 $ 1,934,000 $ 8,444,000 $ 1,934,000
============== =============== =============== ===============
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
5
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PACIFIC AEROSPACE & ELECTRONICS, INC AND SUBSIDIARIES
MANAGEMENT'S STATEMENT AND NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-QSB
NOVEMBER 30, 1997
Note 1: 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 November
30, 1997 and May 31, 1997, the consolidated results of operations for the
quarters and six-month periods ended November 30, 1997 and 1996, and the
consolidated statements of cash flow for the quarters and six-month periods
ended November 30, 1997 and 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.
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, 1997 and 1996.
The results of operations for the quarters and six-month periods ended November
30, 1997 and 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 November 30, 1996 statement of income and statement of cash
flow to conform to the 1997 presentations.
Note 2: Notes Receivable - Information Technology Group
As of December 18, 1997, the Company had made bridge loans in the aggregate
principal amount of $5,797,772 to three companies which the Company declined to
acquire upon termination of its proposal to form an information technology
group. The Company had also guaranteed a $1,300,000 bank line of credit to one
of those companies. Each of the companies that received loans is currently
pursuing alternative financing sources and/or refinancing by the Company. As of
November 14, 1997, the Company had demanded repayment of $1,630,000 of these
loans from one borrower. The Company has agreed with that borrower to forbear
from instituting legal action if the borrower makes specified payments to the
Company from the proceeds of its alternative financing; however, the borrower is
currently in default under that agreement.
Note 3: New Credit Facility
On May 29, 1997, the Company executed a commitment letter with a commercial bank
to provide a new credit facility to the Company. That credit facility consists
of (a) a revolving working capital line of credit of up to $3,500,000 that
extends from June 1997 to September 1998 (the "Line of Credit"), (b) a
seven-year capital equipment acquisition credit facility of up to $2,000,000
(the "Equipment Line"), and (c) a 10-year term loan of approximately $700,000,
or approximately 80% of the cost
6
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of the recent addition to the Pacific Coast building (the "Construction Loan").
The Line of Credit extends until September 1998 and replaces the Company's
previous line of credit from its previous primary lender. The Company has
executed the documents for the working capital line of credit and, as of January
2, 1998, the Line of Credit had no outstanding balance. The Company has not
yet elected to close the Construction Loan or the Equipment Line.
Note 4: Convertible Note Offering
In August 1997, the Company closed a private offering of $5,800,000, before
expenses, in convertible promissory notes (the "Convertible Notes") to two
accredited investors. The Company intends to use the proceeds of this offering
primarily in connection with proposed and future acquisitions. The Company
subsequently filed a Form S-3 Registration Statement, which was declared
effective on December 31, 1997, registering for resale up to 1,720,690 shares of
Common Stock issuable upon conversion of the Convertible Notes. The registration
of the underlying Common Stock, the conversion of the Convertible Notes, and the
sale by the holders of the underlying Common Stock after conversion will not
generate any further cash to the Company.
Note 5: Fall 1997 Common Stock and Promissory Note Offering
In November 1997, the Company closed a private offering of $6,087,545, before
expenses, in Common Stock and promissory notes to three accredited investors.
The Company subsequently filed a Form S-3 Registration Statement, which was
declared effective on December 29, 1997, registering for resale the 524,000
shares of Common Stock sold in that offering. Neither the registration of those
shares nor the sale of those shares by their holders will generate any further
cash to the Company. The Registration Statement also covered resale of 537,500
shares of Common Stock issuable upon the exercise of certain unregistered common
stock purchase warrants (the "Private Warrants"). If all of the Private Warrants
were exercised, the Company would receive up to $2,369,063 from the exercise.
The Company intends to use the proceeds from the November 1997 offering and from
the exercise, if any, of the Private Warrants primarily in connection with
proposed and future acquisitions.
Note 6: Registered Public Offering of Common Stock and Warrants to Purchase
Common Stock
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, at a total offering price of $7,031,250 (the "July 1996 public
offering"). The proceeds of the July 1996 public offering were used primarily to
pay off short-term debt and certain interest and fees associated with such debt,
to provide working capital for operations, and to purchase capital equipment.
Note 7: Computations of Earnings per Share
Earnings per common and common equivalent share are computed using the weighted
average number of common and common equivalent shares consists of convertible
preferred stock, convertible debentures, stock options and warrants 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 per common share did not differ significantly from primary
earnings per common share in any period reported.
7
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Preliminary Note Regarding Forward-Looking Statements
Forward-looking statements in this report are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties related to the Company's operations. These
risks and uncertainties include, but are not limited to, competitive factors
(including the possibility of increased competition or technological
development, competitors, and price pressures); legal factors (such as limited
protection of the Company's proprietary technology and changes in government
regulation); and the Company's dependence on key personnel and significant
customers.
Overview
The Company's net sales for the six-month period ended November 30, 1997 were
derived from its six 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, Ceramic Devices, Inc. ("Ceramic Devices"),
which manufactures ceramic capacitors, filters and feedthroughs, and Northwest
Technical Industries, Inc. ("NTI"), which manufactures explosively bonded
dissimilar metals.
The electronic products business of the Electronics Group is characterized by
relatively low volumes and higher margins, as compared with the metal products
business of the Aerospace Group, 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. Most recently, in April 1997, the
Company acquired NTI as a part of its Electronics Group. The Company's net sales
for the six-month period ended November 30, 1996 were derived from the five
operating subsidiaries then owned by the Company: Cashmere, Morel and Seismic in
the Aerospace Group, and Pacific Coast and Ceramic Devices in the Electronics
Group. A portion of the changes in the Company's results of operations from the
first quarter of fiscal 1996 to the same period in fiscal 1997 are attributable
to the addition of NTI.
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Results of Operations
Quarter Ended November 30, 1997
Net sales for the quarter ended November 30, 1997 were $12,427,000, compared to
net sales of $8,317,000 for the quarter ended November 30, 1996, an increase of
$4,110,000. In the Aerospace Group, Cashmere's net sales increased by
$2,067,000, or 80.5%, and Morel's net sales increased by $919,000, or 30.2%,
between the two periods, in both cases primarily as a result of increased orders
in the commercial aircraft market. Seismic's net sales decreased $28,000 or
36.8%, between the two periods. Within the Electronics Group, Pacific Coast's
net sales increased by $328,000, or 15.9%, and Ceramic Devices' net sales
increased by $272,000, or 50.1%, between the two periods, in both cases
primarily as a result of increased order backlog and production throughput
increases. NTI contributed net sales of $552,000 for the quarter ended November
30, 1997.
Gross profit for the quarter ended November 30, 1997 was $3,343,000, compared to
gross profit of $1,933,000 for the quarter ended November 30, 1996, an increase
of $1,410,000. The Company's gross profit percentage increased from 23.2% in
1996 to 26.9% in 1997. In the Aerospace Group, Cashmere's gross profit increased
by $468,000, or 75%, between the two periods, primarily related to Cashmere's
increase in net sales, and Morel's gross profit increased by $157,000, or 35.0%,
primarily related to Morel's increase in net sales and efficiencies gained
through the addition of capital assets in the production facility. Seismic's
gross profit decreased by $16,000, or 69.6%, between the two periods. In the
Electronics Group, Pacific Coast's gross profit increased by $254,000, or 36.1%,
primarily as a result of changes in product mix between the two quarterly
periods, and Ceramic Devices' gross profit increased by $217,000, or 161.9%,
primarily as a result of Ceramic Devices' increase in net sales and increased
production efficiencies. NTI contributed gross profit of $330,000 for the
quarter ended November 30, 1997.
Operating expenses for the quarter ended November 30, 1997 were $2,151,000,
compared to $1,443,000 for the quarter ended November 30, 1996, an increase of
$708,000. In the Aerospace Group, Cashmere's operating expenses increased by
$156,000, or 30.5%, and Morel's operating expenses increased by $141,000, or
39.7%. In the Electronics Group, Pacific Coast's operating expenses increased by
$138,000, or 29.5%, and Ceramic Devices' operating expenses increased $59,000,
or 50.9%, between the two periods, primarily as a result of their significant
increase in net sales. NTI's operating expenses for the quarter were $173,000.
Interest expense for the quarter ended November 30, 1997 was $199,000, compared
to $105,000 for the quarter ended November 30, 1996, an increase of $94,000, or
89.5%, primarily related to the reduction of average long-term debt outstanding
during the comparative periods.
Net income for the quarter ended November 30, 1997 was $830,000, or $.07 income
per share, which represents an improvement over net income of $458,000, or $.04
income per share for the quarter ended November 30, 1996.
9
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Six Months Ended November 30, 1997
Net sales for the six months ended November 30, 1997 were $24,203,000, compared
to net sales of $15,761,000 for the six months ended November 30, 1996, an
increase of $8,442,000. In the Aerospace Group, Cashmere's net sales increased
by $4,473,000, or 100.6%, and Morel's net sales increased by $1,755,000, or
29.0%, between the two periods, in both cases primarily as the result of
increased orders in the commercial aircraft market. Seismic's net sales
decreased by $29,000, or 26.4%, between the two periods. Within the Electronics
Group, Pacific Coast's net sales increased by $220,000, or 5.0%, and Ceramic
Devices' net sales increased by $924,000, or 98.2%, between the two periods, in
both cases primarily as the result of increased order backlog and production
throughput increases. NTI contributed net sales of $1,090,000 for the six-month
period ended November 30, 1997.
Gross profit for the six months ended November 30, 1997 was $6,327,000, compared
to $3,878,000 for the six months ended November 30, 1996, an increase of
$2,449,000. The Company's gross profit percentage increased to 26.1% in 1997
from 24.6% in 1996. In the Aerospace Group, Cashmere's gross profit increased by
$761,000, or 66.6%, primarily related to its increase in net sales, and Morel's
gross profit increased by $454,000, or 59.4%, between the two periods, primarily
related to the increase in net sales and efficiencies gained through the
addition of capital assets in Morel's production facility. Seismic's gross
profit increased by $3,000, or 13%, between the two periods. Within the
Electronics Group, Pacific Coast's gross profit decreased by $121,000, or 6.82%,
between the two periods. Ceramic Devices' gross profit increased by $732,000, or
420.7%, between the two periods, primarily as a result of its increase in net
sales and increased production efficiencies. NTI contributed gross profit of
$619,000 for the six-month period ended November 30, 1997.
Operating expenses for the six months ended November 30, 1997 were $4,158,000,
compared to $3,019,000 for the six months ended November 30, 1996, an increase
of $1,139,000. In the Aerospace Group, Cashmere's operating expenses increased
by $161,000, or 18.7%, and Morel's operating expenses increased by $172,000, or
21.4%. In the Electronics Group, Pacific Coast's operating expenses increased by
$176,000, or 17.7%, and Ceramic Devices' operating expenses increased by
$107,000, or 46.5%, primarily as a result of their significant increase in net
sales. NTI's operating expenses for the six months were $364,000. Interest
expense for the period was $329,000, compared to $279,000 in the same period
last year, an increase of $50,000, or 17.9%, primarily related to the addition
of capital equipment and its associated debt in this period and interest
accruing on the Convertible Notes issued in the Company's August 1997
Convertible Note Offering.
Net income for the six months ended November 30, 1997 was $1,640,000, or $.14
per share, which represents an improvement over net income of $684,000, or $.07
per share, for the six months ended November 30, 1996.
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Liquidity and Capital Resources
Overview
At November 30, 1997, total current assets were $32,005,000 and total current
liabilities were $7,088,000, resulting in net working capital of $24,917,000 and
a current ratio of 4.5 to 1.0. Comparable amounts at May 31, 1997 were
$18,939,000 of current assets and $5,849,000 of current liabilities, resulting
in net working capital of $13,090,000, and a current ratio of 3.2 to 1.0.
New Credit Facility
On May 29, 1997, the Company executed a commitment letter with Key Bank of
Washington providing for a revolving working capital line of credit of up to
$3,500,000 that extends until September 1998, a capital equipment acquisition
credit facility of up to $2,000,000, and a construction loan of approximately
$700,000, or 80% of the cost of an addition to the Pacific Coast building. The
Company has executed the documents for the working capital facility, which, as
of January 2, 1998, had no outstanding principal balance. The Company has not
yet elected to close the capital equipment acquisition credit facility or the
construction loan.
Registration of Common Stock Issuable under Series A Convertible Preferred Stock
Effective on June 11, 1997, the Company registered 1,948,541 shares of Common
Stock underlying 50,000 shares of the Company's outstanding Series A Convertible
Preferred Stock, $.001 par value (the "Preferred Stock") on a Form S-3
Registration Statement. As of January 2, 1998, 43,097 shares of Preferred Stock
had been converted into 1,296,799 shares of Common Stock, and 6,903 shares of
Preferred Stock remained unconverted. This registration related to a $5 million
offering of Preferred Stock that the Company closed in February 1997, and
neither the conversion of the Preferred Stock nor the registration will generate
any further cash to the Company.
Convertible Note Offering
In August 1997, the Company closed an offering of $5,800,000, before expenses,
in convertible debt to two accredited investors (the "Convertible Notes"), in a
transaction exempt from registration under Rule 506 of Regulation D of the
Securities Act of 1933, as amended ("Rule 506"). The Company intends to use the
proceeds of the Convertible Note offering primarily in connection with proposed
and future acquisitions. The Company subsequently filed a Form S-3 Registration
Statement, which was declared effective on December 31, 1997, registering for
resale up to 1,720,690 shares of Common Stock issuable upon conversion of the
Convertible Notes. The conversion of the Convertible Notes, the registration,
and the sale by the holders of the underlying Common Stock after conversion will
not generate any further cash to the Company.
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Fall 1997 Common Stock and Promissory Note Offering
In November 1997, the Company closed an offering of $6,087,545, before expenses,
in Common Stock and promissory notes to three accredited investors, in a
transaction exempt from registration under Rule 506. The Company subsequently
filed a Form S-3 Registration Statement, which was declared effective on
December 29, 1997, registering for resale the 524,000 shares of Common Stock
sold in the offering. The Registration Statement also covered resale of 537,500
shares of Common Stock issuable upon the exercise of certain unregistered common
stock purchase warrants (the "Private Warrants"). The Company will not receive
any cash proceeds as the result of the registration or the resale of those
shares. If all of the Private Warrants were exercised, the Company would receive
up to $2,369,063 from the exercise. The Company intends to use the proceeds from
the November 1997 offering and from the exercise, if any, of the Private
Warrants, primarily in connection with proposed and future acquisitions.
Post-Effective Amendment No. 1 to Form SB-2 Registration Statement
In November 1997, the Company filed Post-Effective Amendment No. 1 to the Form
SB-2 Registration Statement filed in connection with the Company's July 1996
public offering. The Post-Effective Amendment, which was declared effective as
of November 6, 1997, covered (a) issuance of the 2,250,000 shares of Common
Stock underlying warrants registered by the Company in its July 1996 public
offering (the "Warrants"), (b) resale of 450,000 shares of Common Stock
underlying warrants issued to the underwriters of the July 1996 public offering
(the "Underwriters' Warrants"), and (c) resale of 300,000 shares of Common Stock
underlying a warrant issued to UTCO Associates, Ltd. in connection with bridge
financing prior to the July 1996 public offering (the "UTCO Warrant").
The net proceeds to the Company under the Post-Effective Amendment are estimated
to be approximately $13,885,000, assuming exercise of all of the Warrants, the
Underwriters' Warrants and the UTCO Warrant. At January 2, 1997, 154,100 shares
had been issued upon exercise of the UTCO Warrant generating $739,680 in
exercise proceeds, and none of the Warrants or Underwriters' Warrants had been
exercised. If and to the extent that the Company receives proceeds from the
exercise of the Warrants, the Underwriters' Warrants and the UTCO Warrant, the
Company currently intends to use these proceeds to acquire additional processing
and manufacturing equipment, to fund certain facilities expansion, to fund
potential acquisitions, and to increase working capital. The Company will not
receive any of the proceeds from the sale of the Common Stock or Warrants
registered for resale by the holders of the Underwriters' Warrants or the UTCO
Warrant.
Information Technology Group
Proposed Formation and Acquisitions
In December 1997, the Company announced that it had terminated its
proposal to form an information technology group, and had terminated the
nonbinding letters of intent to acquire six companies for inclusion in that
group (the "ITG companies"). These companies were: Orca Technologies, Inc.
(formerly known as Jungle Street, Inc.) ("Orca"), MONITRx, Inc. ("MONITRx"),
Quantum Interlink Internet, Inc.
12
<PAGE>
("Quantum"), Digital Network Associates, Inc. ("DNA"), Brigadoon.com, Inc.
("Brigadoon"), and Market Visibility, Inc. ("Market Visibility"). Each of the
proposed acquisitions was subject to the completion of satisfactory due
diligence investigations and to certain other conditions. The Company also
entered into operations consulting and expense reimbursement agreements
("operations agreements") with Brigadoon, Orca and Market Visibility.
After completing due diligence investigations, the Company terminated its
nonbinding letters of intent and operations agreement with Market Visibility on
October 28, 1997, with Brigadoon on November 14, 1997, and with Orca on November
25, 1997. On November 25, 1997, the Company also terminated its nonbinding
letters of intent with Quantum, MONITRx and DNA.
Bridge Loans
In connection with its proposed acquisition of the ITG companies, the
Company loaned funds to Brigadoon, Orca, and MONITRx, and guaranteed a
$1,300,000 bank line of credit to Orca. As partial consideration for its loans,
Brigadoon issued a common stock purchase warrant to the Company that entitles
the Company to purchase 12.5% of Brigadoon's fully diluted common stock (the
"Brigadoon Warrant").
As of November 14, 1997, the Company had demanded repayment of its
$1,630,000 in loans to Brigadoon. Brigadoon has not repaid the loans, but has
indicated its intention to do so. The Company has agreed to forbear from
instituting legal action against Brigadoon if it makes specified payments to the
Company; however, Brigadoon is currently in default under that agreement.
Brigadoon's failure to repay its loans when due triggered a reduced exercise
price under the Brigadoon Warrant of $500,000.
Orca, MONITRx, Quantum, and DNA have informed the Company that they intend
to combine their businesses. The Company is currently discussing with Orca
arrangements for repayment and/or refinancing of the $2,872,300 that the Company
loaned to Orca under its operations agreement, and the $1,295,472 that it loaned
to MONITRx under its letter of intent. In connection with refinancing those
loans, Orca has agreed to issue to the Company warrants to purchase stock in the
entity resulting from the combination.
Although the Company understands that each of Brigadoon, Orca and MONITRx
is currently pursuing alternative financing sources, there is no assurance that
the Company will be able to collect any or all of the loans to those companies.
The failure of one or more of those companies to repay its loans could have a
detrimental effect on the Company's cash flow and financial condition.
Certain Relationships
Roger Vallo and Donald Cotton, directors of the Company, are directors and
shareholders, and Mr. Vallo is CEO, of Orca. In addition, Donald A. Wright, the
Company's Chief Executive Officer and President, and Nick A. Gerde, the
Company's Chief Financial Officer, Vice President, Finance and Treasurer, are
shareholders of Orca and were directors of Orca until June 1997. Allen Dahl, a
director of the Company, is a shareholder, but not a director, of Orca. Messrs.
Vallo, Cotton,
13
<PAGE>
Gerde, Wright, and Dahl have each personally guaranteed, or indemnified
guarantors of, certain obligations of Orca or its subsidiary. As of November 30,
1997, the Company also owned approximately 4.9% of Orca's outstanding common
stock.
Olympic Tool & Engineering, Inc.
In August 1997, the Company announced that it had signed a nonbinding letter of
intent to acquire all of the outstanding stock of Olympic Tool & Engineering,
Inc., of Shelton, Washington. The proposed acquisition was subject to completion
of satisfactory due diligence investigations and to certain other conditions.
After completing due diligence investigations, and with expansion of its similar
facilities in Wenatchee, the Company elected to not proceed with the proposed
acquisition and to let the nonbinding letter of intent expire on December 31,
1997.
Material Purchase Obligations
As of January 2, 1998, the Company had no pending purchase orders. Additions and
replacements of plant and equipment are generally funded through working
capital, trade-in credits for the replaced equipment, capital leases or
long-term notes from affiliates of the equipment vendors, or loans from
financing institutions, which are secured by the equipment being acquired.
Facilities Expansion
Pacific Coast Building Expansion.
During the first half of fiscal 1998, the Company completed an addition to
the building that houses Pacific Coast and Ceramic Devices. The addition
consists of approximately 12,000 square feet of production space, and had a cost
of approximately $900,000. The Company's primary bank has committed to finance
approximately 80% of the costs of the addition.
Headquarters Building.
The Company has acquired certain property adjacent to its existing
Wenatchee facilities and has begun construction of an office building to house
the Company's executive, administrative and accounting personnel. Total project
costs for the office building are estimated at approximately $2.8 million.
Future Working Capital Needs
The Company believes that the net proceeds from its February 1997 offering of
Preferred Stock, its August 1997 Convertible Note offering, and its November
1997 common stock and promissory note offering, together with its credit
facility with Key Bank of Washington and funds generated by operations, will be
sufficient to meet the Company's currently budgeted working capital requirements
for at least the next 12 months. However, the Company may also seek other equity
and/or debt financing for pending or future acquisitions or with respect to
capital equipment or facilities expansion plans. The Company's actual capital
needs will depend upon numerous factors, including the amount of funds generated
from operations, the cost of increasing the Company's sales and marketing
activities, the ability of third-party suppliers to meet product commitments,
14
<PAGE>
any other future acquisitions, and the continuing availability of bank
financing, none of which can be predicted with certainty. The Company may
receive additional funds upon exercise of its publicly-traded common stock
purchase warrants and other outstanding warrants and stock options, but there is
no assurance that any such warrants or stock options will be exercised. As a
result of these and other factors, the Company is unable to predict accurately
the amount or timing of future capital that it will require. Inability to obtain
additional future capital could have a material adverse effect on the Company's
growth and results of operations.
Assimilation of Acquisitions
The Company's recent acquisitions have placed, and any future acquisitions will
place, a significant strain on its management, financial and other resources.
Past and future acquisitions may subject the Company to many risks, including
risks relating to integrating and managing the operations and personnel of
acquired companies, and maintaining and implementing uniform standards,
controls, procedures and policies. The success of future acquisitions will
depend, in part, upon the Company's ability to assess and manage the risks
typically associated with acquisitions, including the risks of assessing the
value, strengths, and weaknesses of acquisition candidates or new products,
possible diversion of management attention from the Company's existing
businesses, reduction of cash, disruption of product development cycles,
dilution of earnings per share, or other factors. A failure to achieve or
sustain the anticipated benefits of any acquisition could result in that
acquisition having a detrimental effect on the Company's results of operations,
cash flow and financial condition.
15
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
Fall 1997 Common Stock and Promissory Note Offering
On November 20, 1997, the Company closed an offering of 524,000 shares of Common
Stock and $4,050,000 in promissory notes, for aggregate offering proceeds of
$6,087,545 before expenses, to three accredited investors in a transaction
exempt from registration under Rule 506 under the Securities Act of 1933, as
amended. In connection with that offering, the Company paid placement agent
commissions of (a) $142,000 to Dr. Urs Diebold, who is a director of the
Company, and (b) $178,400 to a non-affiliated person. The Company subsequently
filed a Form S-3 Registration Statement, which was declared effective on
December 29, 1997, that registered for resale the Common Stock sold in that
offering.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Company was held on October 8, 1997
(the "Annual Meeting"). The shareholders voted upon the following matters at the
Annual Meeting:
a. Election of Directors
The following seven directors nominated by the Board of Directors were
elected to serve as directors of the Company until the 1998 Annual Meeting of
Shareholders:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Broker
Director For Against Abstain Non-votes
=================================== ========== ========== ========== ==========
<S> <C> <C> <C> <C>
Donald A. Wright 7,470,529 8,540 32,439 0
- -----------------------------------------------------------------------------------
Donald B. Cotton 7,440,250 18,819 32,439 0
- -----------------------------------------------------------------------------------
Allen W. Dahl 7,458,150 20,919 32,439 0
- -----------------------------------------------------------------------------------
Urs Diebold 7,454,729 24,340 32,439 0
- -----------------------------------------------------------------------------------
Dale L. Rasmussen 7,460,050 19,019 32,439 0
- -----------------------------------------------------------------------------------
16
<PAGE>
- -----------------------------------------------------------------------------------
Roger P. Vallo 6,809,379 669,690 32,439 0
- -----------------------------------------------------------------------------------
William A. Wheeler 7,464,250 148,819 32,439 0
- -----------------------------------------------------------------------------------
</TABLE>
b. Approval of Amendment No. 1 to the Amended and Restated Stock Incentive
Plan
Amendment No. 1 to the Company's Amended and Restated Stock Incentive
Plan, as described in the Company's proxy materials for the Annual Meeting, was
approved by the following vote:
FOR 4,252,692
AGAINST 1,084,506
ABSTAIN 60,582
BROKER NON-VOTES 3,022,228
c. Approval of the Company's 1997 Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan, as described in the
Company's proxy materials for the Annual Meeting, was approved by the following
vote:
FOR 4,302,029
AGAINST 1,061,719
ABSTAIN 46,907
BROKER NON-VOTES 3,009,353
d. Ratification of Moss Adams as the Company's Independent Auditors
The selection of Moss Adams LLP as the Company's independent auditors was
ratified by the following vote:
FOR 7,192,191
AGAINST 274,130
ABSTAIN 45,187
BROKER NON-VOTES 0
Item 5. Other Information
None.
17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits.
The following are filed as exhibits to this Quarterly Report:
Exhibit
Number Document
- ------- ---------
10.1 Commercial Guaranty, dated July 16, 1997, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association.
27. Financial Data Schedule.
b. Reports on Form 8-K.
The Company filed with the Commission the following Current Report on Form 8-K
with regard to events occurring during the quarterly period ended November 30,
1997:
On December 2, 1997, the Company reported that it had announced
termination of its proposal to form an information technology group, and
that, in October 1997 and November 1997, it had terminated non-binding
letters of intent to acquire six companies in connection with the
formation of the group.
18
<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: January 12, 1998 /s/ DONALD A. WRIGHT
------------------------------------------
Donald A. Wright
President, Chief Executive Officer,
and Chairman of the Board
(Principal Executive Officer)
Date: January 12, 1998 /s/ NICK A. GERDE
------------------------------------------
Nick A. Gerde
Vice President Finance, Chief Financial
Officer and Treasurer (Principal Financial
and Accounting Officer)
19
<PAGE>
EXHIBIT INDEX
Exhibit
Number Document
- ------- ---------
10.1 Commercial Guaranty, dated July 16, 1997, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association.
27. Financial Data Schedule.
Exhibit 10.1
COMMERCIAL GUARANTY
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
016 322 357866 JCT02
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any
particular loan or item.
Borrower: JUNGLE STREET, INC. Lender: KEYBANK NATIONAL ASSOCIATION
216 YAKIMA STREET MOSES LAKE COMMERCIAL
WENATCHEE, WA 98801 BANKING CENTER
314 EAST THIRD STREET
WA-31-34-0182
Moses Lake, WA 98837
Guarantor: PACIFIC AEROSPACE &
ELECTRONICS, INC.
434 OLDS STATION ROAD
WENATCHEE, WA 98801
======================================================================================================================
</TABLE>
AMOUNT OF GUARANTY. The amount of this Guaranty is unlimited.
CONTINUING UNLIMITED GUARANTY. For good and valuable consideration, PACIFIC
AEROSPACE & ELECTRONICS, INC. ("Guarantor") absolutely and unconditionally
guarantees and promises to pay to KEYBANK NATIONAL ASSOCIATION ("Lender") or its
order, on demand, in legal tender of the United States of America, the
Indebtedness (as that term is defined below) of Jungle Street, Inc. ("Borrower")
to Lender on the terms and conditions set forth in this Guaranty. Under this
Guaranty the liability of Guarantor is unlimited and the obligations of
Guarantor are continuing.
DEFINITIONS. The following words shall have the following meanings when
used in this Guaranty:
Borrower. The word "Borrower" means JUNGLE STREET, INC.
Guarantor. The word "Guarantor" means PACIFIC AEROSPACE & ELECTRONICS, INC.
Guaranty. The word "Guaranty" means this Guaranty by Guarantor for the
benefit of Lender dated July 16, 1997.
Indebtedness. The word "Indebtedness" is used in its most comprehensive
sense and means and includes any and all of the Borrower's liabilities,
obligations, debts, and indebtedness to Lender, now existing or hereinafter
incurred or created, including, without limitation, all loans, advances,
interest, costs, debts, overdraft indebtedness, credit card indebtedness,
lease obligations, other obligations, and liabilities of Borrower, or any
of them, and any present of future judgements against Borrower, or any of
them; and whether any such indebtedness is voluntarily or
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<PAGE>
07-16-1997 COMMERCIAL GUARANTY Page 2
Loan No. 1009701 (continued)
================================================================================
involuntarily incurred, due or not due, absolute or contingent, liquidated
or unliquidated, determined or undetermined; whether Borrower may be liable
individually or jointly with others, or primarily or secondarily, or as
guarantor or surety; whether recovery on the indebtedness may be or may
become barred or unenforceable against Borrower for any reason whatsoever;
and whether the indebtedness arises from transactions which may be voidable
on account of infancy, insanity, ultra vires, or otherwise.
Lender. The word "Lender" means KEYBANK NATIONAL ASSOCIATION, its
successors and assigns.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the indebtedness.
NATURE OF GUARANTY. Guarantor's liability under this Guaranty shall be open and
continuous for so long as this Guaranty remains in force. Guarantor intends to
guarantee at all times the performance and prompt payment when due, whether at
maturity or earlier by reason of acceleration or otherwise, of all Indebtedness.
Accordingly, no payments made upon the Indebtedness will discharge or diminish
the continuing liability of Guarantor in connection with any remaining portions
of the Indebtedness or any of the Indebtedness which subsequently arises or is
thereafter incurred or contracted. Any married person who signs this Guaranty
hereby expressly agrees that recourse under this agreement may be had against
both his or her separate property and community property, whether now owned or
hereafter acquired.
DURATION OF GUARANTY. This Guaranty will take effect when received by Lender
without the necessity of any acceptance by Lender, or any notice to Guarantor or
to Borrower, and will continue in full force until all Indebtedness incurred or
contracted before receipt by Lender of any notice or revocation shall have been
fully and finally paid and satisfied and all other obligations of Guarantor
under this Guaranty shall have been performed in full. If Guarantor elects to
revoke this Guaranty, Guarantor may only do so in writing. Guarantor's written
notice of revocation must be mailed to Lender, by certified mail, at the address
of Lender listed above or such other place as Lender may designate in writing.
Written revocation of this Guaranty will apply only to advances or new
Indebtedness created after actual receipt by Lender of Guarantor's written
revocation. For this purpose and without limitation, the term "new indebtedness"
does not included indebtedness which at the time of notice of revocations is
contingent, unliquidated, undetermined or not due and which later becomes
absolute, liquidated, determined or due. This guaranty will continue to bind
Guarantor for all Indebtedness incurred by Borrower or committed by Lender prior
to receipt of Guarantor's written notice of revocation, including any
extensions, renewals, substitutions or modifications of the Indebtedness. All
renewals, extensions, substitutions, and modifications of the Indebtedness
granted after Guarantor's revocation, are contemplated under this Guaranty and,
specifically will not be considered to be new Indebtedness. This Guaranty shall
bind the estate of Guarantor as to Indebtedness created both before and after
the death or incapacity of Guarantor, regardless of Lender's actual notice of
Guarantor's death. Subject to the foregoing, Guarantor's executor
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<PAGE>
07-16-1997 COMMERCIAL GUARANTY Page 3
Loan No. 1009701 (continued)
================================================================================
or administrator or other legal representative may terminate this Guaranty in
the same manner in which Guarantor might have terminated it and with the same
effect. Release of any other guarantor or termination of any other guaranty of
the Indebtedness shall not affect the liability of Guarantor under this
Guaranty. A revocation received by Lender from any one or more Guarantors shall
not affect the liability of any remaining Guarantors under this Guaranty. It is
anticipated that fluctuations may occur in the aggregate amount of Indebtedness
covered by this Guaranty, and it is specifically acknowledged and agreed by
Guarantor that reductions in the amount of Indebtedness, even to zero dollars
($0.00), prior to written revocation of this Guaranty by Guarantor shall not
constitute a termination of this Guaranty. This Guaranty is binding upon
Guarantor and Guarantor's heirs, successors and assigns so long as any of the
guaranteed indebtedness remains unpaid and even though the Indebtedness
guaranteed may from time to time be zero dollars ($0.00).
GUARANTOR'S AUTHORIZATION TO LENDER. Guarantor authorizes Lender, either before
or after any revocation hereof, without notice or demand and without lessening
Guarantor's liability under this Guaranty, from time to time: (a) prior to
revocations as set forth above, to make one or more additional secured or
unsecured loans to Borrower, to lease equipment or other goods to Borrower, or
otherwise to extend additional credit to Borrower; (b) to alter, compromise,
renew, extend, accelerate, or otherwise change one or more times the time for
payment or other terms of the Indebtedness or any part of the Indebtedness
including increases and decreases of the rate of interest on the Indebtedness;
extensions may be repeated and may be for longer than original loan term; (c) to
take and hold security for the payment of this Guaranty or the Indebtedness, and
exchange, enforce, waive, subordinate, fail or decide not to perfect, and
release any such security, with or without the substitution of new collateral;
(d) to release, substitute, agree not to sue, or deal with any one or more of
Borrower's sureties, endorsers, or other guarantors on any terms or in any
manner Lender may choose; (e) to determine how, when and what application of
payments and credits shall be made on the Indebtedness; (f) to apply such
security and direct the order or manner of sale thereof, including without
limitation, any nonjudicial sale permitted by the terms of the controlling
security agreement or deed of trust, as Lender in its discretion may determine;
(g) to sell, transfer, assign, or grant participations in all or any part of the
Indebtedness; and (h) to assign or transfer this Guaranty in whole or in part.
GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to
Lender that (a) no representations or agreements of any kind have been made to
Guarantor which would limit or qualify in any way the terms of this Guaranty;
(b) this Guaranty is executed at Borrower's request and not at the request of
Lender; (c) Guarantor has full power, right and authority to enter into this
Guaranty; (d) the provisions of this Guaranty do not conflict with or result in
a default under any agreement or other instruments binding upon Guarantor and do
not result in a violation of any law, regulation, court decree or order
applicable to Guarantor; (e) Guarantor has not and will not, without the prior
written consent of Lender, sell, lease, assign, encumber, hypothecate, transfer
or otherwise dispose of all or substantially all of Guarantor's asserts, or any
interest therein; (f) upon Lender's request, Guarantor will provide to Lender
financial and credit information in form acceptable to Lender, and all such
financial information which currently has been, and all future financial
information will be provided to Lender is and will be true and correct in all
material respects and fairly present the financial condition of Guarantor as of
the dates the financial information is provided; (g) no material adverse change
has
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<PAGE>
07-16-1997 COMMERCIAL GUARANTY Page 4
Loan No. 1009701 (continued)
================================================================================
occurred in Guarantor's financial condition since the date of the most recent
financial statements provided to Lender and no event has occurred which may
materially adversely affect Guarantor's financial conditions; (h) no litigation,
claim, investigation, administrative proceeding or similar action (including
those for unpaid taxes) against Guarantor is pending or threatened; (i) Lender
has made no representation to Guarantor as to the creditworthiness of Borrower;
and (j) Guarantor has established adequate means of obtaining from Borrower on a
continuous basis information regarding Borrower's financial condition. Guarantor
agrees to keep adequately informed from such means of any facts, events, or
circumstances which might in any way affect Guarantor's risks under this
Guaranty, and Guarantor further agrees that, absent a request for information,
Lender shall have no obligation to disclose to Guarantor any information or
documents acquired by Lender in the course of its relationship with Borrower.
GUARANTOR'S WAIVERS. Except as prohibited by applicable law, Guarantor waives
any right to require Lender (a) to continue lending money or to extend other
credit to Borrower; (b) to make any presentment, protest, demand, or notice of
any kind, including notice of any nonpayment of the Indebtedness or any
nonpayment related to any collateral, or notice of any action or nonaction on
the part of Borrower, Lender, any surety, endorser, or other guarantor in
connection with the Indebtedness or in connection with the creation of new or
additional loans or obligations; (c) to resort for payment or to proceed
directly or at once against any person, including Borrower or any other
guarantor; (d) to proceed directly against or exhaust any collateral held by
Lender from Borrower, any other guarantor, or any other person; (e) to pursue
any other remedy within Lender's power; or (f) commit any act or omission of any
kind, or at any time, with respect to any matter whatsoever.
If now or hereafter (a) Borrower shall be or become insolvent, and (b) the
Indebtedness shall not at all times until paid be fully secured by collateral
pledged by Borrower, Guarantor hereby forever waives and relinquishes in favor
of Lender and Borrower, and their respective successors, any claim of right to
payment Guarantor may now have or hereafter have or acquire against Borrower, by
subrogation or otherwise, so that at no time shall Guarantor be or become a
"creditor" of Borrower within the meaning of 11 U.S.C. section 547(b), or any
successor provision of the Federal bankruptcy laws.
Guarantor also waives any and all rights or defenses arising by reason of (a)
any "one action" or "anti-deficiency" law or any other law which may prevent
Lender from bringing any action, including a claim for deficiency, against
Guarantor, before or after Lender's commencement or completion of any
foreclosure action, either judicially or by exercise of a power of sale; (b) any
election of remedies by Lender which destroys or otherwise adversely affects
Guarantor's subrogation rights or Guarantor's rights to proceed against Borrower
for reimbursement, including without limitation, any loss of rights Guarantor
may suffer by reason of any law limiting, qualifying, or discharging the
Indebtedness; (c) any disability or other defense of Borrower, of any other
guarantor, or of any other person, or by reason of the cessation of Borrower's
liability from any cause whatsoever, other than payment in full in legal tender,
of the Indebtedness; (d) any right to claim discharge of the Indebtedness on the
basis of unjustified impairment of any collateral for the Indebtedness; (e) any
statute of limitations, if at any time any action or suit brought by Lender
against Guarantor is commenced there is outstanding Indebtedness of Borrower to
Lender which is not barred by any applicable statute of limitations; or (f) any
defenses given to guarantors at law or in equity other than actual payment and
performance of the Indebtedness. If payment is made
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<PAGE>
07-16-1997 COMMERCIAL GUARANTY Page 5
Loan No. 1009701 (continued)
================================================================================
by Borrower, whether voluntarily or otherwise, or by any third party, on the
Indebtedness and thereafter Lender is forced to remit the amount of that payment
to Borrower's trustee in bankruptcy or to any similar person under any federal
or state bankruptcy law or law for the relief of debtors, the Indebtedness shall
be considered unpaid for the purpose of enforcement of this Guaranty.
Guarantor further waives and agrees not to assert or claim at any time any
deductions to the amount guaranteed under this Guaranty for any claim of setoff,
counterclaim, counter demand, recoupment or similar right, whether such claim,
demand or right may be asserted by the Borrower, the Guarantor, or both.
GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and agrees
that each of the waivers set forth above is made with Guarantor's full knowledge
of its significance and consequences and that, under the circumstances, the
waivers are reasonable and not contrary to public policy or law. If any such
waiver is determined to be contrary to any applicable law or public policy, such
waiver shall be effective only to the extent permitted by law or public policy.
SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR. Guarantor agrees that the
Indebtedness of Borrower to Lender, whether now existing or hereafter created,
shall be prior to any claim that Guarantor may now have or hereafter acquire
against Borrower, whether or not Borrower becomes insolvent. Guarantor hereby
expressly subordinates any claim Guarantor may have against Borrower, upon any
account whatsoever, to any claim that Lender may now or hereafter have against
Borrower. In the event of insolvency and consequent liquidation of the assets of
Borrower through bankruptcy, by an assignment for the benefit of creditors, by
voluntary liquidation, or otherwise, the assets of Borrower applicable to the
payment of the claims of both Lender and Guarantor shall be paid to Lender and
shall be first applied by Lender to the Indebtedness of Borrower to Lender.
Guarantor does hereby assign to Lender all claims which it may have or acquire
against Borrower or against any assignee or trustee in bankruptcy of Borrower;
provided, however, that such assignment shall be effective only for the purpose
of assuring to Lender full payment to Lender of the Indebtedness. If Lender so
requests, any notes or credit agreements now or hereafter evidencing any debts
or obligations of Borrower or Guarantor shall be marked with a legend that the
same are subject to this Guaranty and shall be delivered to Lender. Guarantor
agrees, and Lender hereby is authorized, in the name of Guarantor, from time to
time to execute and file financing statements and continuation statements and to
execute such other documents and to take such other actions as Lender deems
necessary to appropriate to perfect, preserve, and enforce its rights under this
Guaranty.
MISCELLANEOUS PROVISIONS. This following miscellaneous provisions are a part of
this Guaranty:
Amendments. This Guaranty, together with any Related Documents, constitutes
the entire understanding and agreement of the parties as to the matters set
forth in this Guaranty. No alteration of or amendment to this Guaranty
shall be effective unless given in writing and signed by the party or
parties sought to be charged or bound by the alteration or amendment.
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<PAGE>
07-16-1997 COMMERCIAL GUARANTY Page 6
Loan No. 1009701 (continued)
================================================================================
Applicable Law. This Guaranty has been delivered to Lender and accepted by
Lender in the State of Washington. If there is a lawsuit, Guarantor agrees
upon Lender's request to submit to the jurisdiction of the courts of CHELAN
County, State of Washington. This Guaranty shall be governed by and
construed in accordance with the laws of the State of Washington.
Attorneys' Fees; Expenses. Guarantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's legal
expenses, incurred in connection with the enforcement of this Guaranty.
Lender may pay someone else to help enforce this Guaranty and Grantor shall
pay the costs and expenses of such enforcement. Costs and expenses include
Lender's attorneys' fees and legal expenses, whether or not there is a
lawsuit, including attorneys' fees and legal expenses for bankruptcy
proceedings (and including efforts to modify or vacate any automatic stay
or injunction), applies, and any anticipated post-judgment collection
services. Guarantor also shall pay all court costs and such additional fees
as may be directed by the court.
Notices. All notices required to be given by either party to the other
under this Guaranty shall be in writing and shall be effective when
actually delivered or when deposited in the United States mail, first class
postage prepaid, addressed to the party to whom the notice is to be given
at the address shown above or to such other addresses as either party may
designate to the other in writing. If there is more than one Guarantor,
notice to any Guarantor will constitute notice to all Guarantors. For
notice purposes, Guarantor agrees to keep Lender informed at all times of
the Guarantor's current address.
Interpretation. In all cases where there is more than one Borrower or
Guarantor, then all words used in this Guaranty in the singulars shall be
deemed to have been used in the plural where the context and construction
so require; and where there is more than one Borrower named in this
Guaranty or when this Guaranty is executed by more than one Guarantor, the
words "Borrower" and "Guarantor" respectively shall mean all any one or
more of them. The words "Guarantor," "Borrower," and "Lender" include the
heirs, successors, assigns, and transferees of each of them. Caption
headings in this Guaranty are for convenience purposes only and are not to
be used to interpret or define the provisions of this Guaranty. If a court
of competent jurisdiction finds any provision of this Guaranty to be
invalid or unenforceable as to any person or circumstances, such finding
shall not render that provision invalid or unenforceable as to any other
persons or circumstances, and all provisions of this Guarantee shall in all
other respects remain valid and enforceable. If any one or more of Borrower
or Guarantor are corporations or partnerships, it is necessary for Lender
to inquire into the powers of Borrower or Guarantor or of the officers,
directors, partners, or agents acting or purporting to act on their behalf,
and any Indebtedness made or created in reliance upon the professed
exercise of such powers shall be guaranteed under this Guaranty.
Waiver. Lender shall not be deemed to have waived any rights under this
Guaranty unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Guaranty shall not prejudice or constitute a waiver of
Lender's right
-6-
<PAGE>
07-16-1997 COMMERCIAL GUARANTY Page 7
Loan No. 1009701 (continued)
================================================================================
otherwise to demand strict compliance with that provision or any other
provision of this Guaranty. No prior waiver by Lender, nor any course of
dealing between Lender and Guarantor, shall constitute a waiver of any of
Lender's rights or of any of Guarantor's obligations as to any future
transactions. Whenever the consent of Lender is required under this
Guaranty, the granting of such consent by Lender in any instance shall not
constitute continuing consent to subsequent instances where such consent is
required and in all cases such consent may be granted or withheld in the
sole discretion of Lender.
EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS
GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THAT
THIS GUARANTY IS EFFECTIVE UPON GUARANTOR'S EXECUTION AND DELIVERY OF THIS
GUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THE
MANNER SET FORTH IN THE SECTION TITLED "DURATION OF GUARANTY." NO FORMAL
ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE. THIS GUARANTY
IS DATED JULY 16, 1997.
GUARANTOR:
PACIFIC AEROSPACE & ELECTRONICS, INC.
By: /s/ DONALD A. WRIGHT
----------------------------------------
DONALD A. WRIGHT, CEO & PRESIDENT
-7-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
unaudited consolidated financial statements of Pacific Aerospace & Electronics,
Inc. and its subsidiaries for the six-month period ended November 30, 1997, and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> NOV-30-1997
<CASH> 8,444,000
<SECURITIES> 837,000
<RECEIVABLES> 6,529,000
<ALLOWANCES> 132,000
<INVENTORY> 10,222,000
<CURRENT-ASSETS> 32,005,000
<PP&E> 20,669,000
<DEPRECIATION> (4,044,000)
<TOTAL-ASSETS> 52,109,000
<CURRENT-LIABILITIES> 7,088,000
<BONDS> 8,134,000
806,000
2,303,000
<COMMON> 32,807,000
<OTHER-SE> (3,241,000)
<TOTAL-LIABILITY-AND-EQUITY> 52,109,000
<SALES> 24,203,000
<TOTAL-REVENUES> 24,203,000
<CGS> 17,876,000
<TOTAL-COSTS> 17,876,000
<OTHER-EXPENSES> 2,151,000
<LOSS-PROVISION> 44,000
<INTEREST-EXPENSE> 199,000
<INCOME-PRETAX> 1,037,000
<INCOME-TAX> 207,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,640,000
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
