SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Current Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 13, 1998
PACIFIC AEROSPACE & ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
Washington 0-26088 91-1744587
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation or
organization)
430 Olds Station Road, Wenatchee, WA 98801
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number,
including area code: (509) 667-9600
<PAGE>
Item 2. Acquisition of Assets
- -----------------------------
On April 13, 1998 (the "Closing Date"), ESC Acquisition Corp. ("Buyer"), a
Washington corporation and wholly-owned subsidiary of Pacific Aerospace &
Electronics, Inc. ("PA&E"), purchased substantially all of the assets (the
"Asset Purchase") of Electronic Specialty Corporation, a Washington corporation
("Seller"), pursuant to an Asset Purchase Agreement between PA&E, the Buyer, the
Seller, and Deltec International, Inc., a Florida corporation and Seller's
majority shareholder (the "Asset Purchase Agreement").
Pursuant to the terms of the Asset Purchase Agreement, the Buyer acquired
substantially all of the assets, properties and rights of the Seller (the
"Assets") used in the Seller's business of designing and manufacturing
electronic relays, solenoids, sensors and flat panel displays. In consideration
for the Buyer's purchase of the Assets, PA&E delivered to Seller $2,000,000 in
cash, which PA&E paid from its working capital, and 923,304 newly-issued,
restricted shares of PA&E's common stock (the "Shares"). The parties determined
the number of Shares based on a per share value of $6.4984, which was the
average closing price of PA&E's common stock on the Nasdaq National Market
System for the 20 consecutive days preceding the closing date of the Asset
Purchase. The purchase price for the Assets was determined in arms-length
negotiations between Deltec, the Seller and PA&E.
Immediately preceding closing of the Asset Purchase, the Seller dissolved
its wholly-owned subsidiary, Displays & Technologies, Inc., a Washington
corporation ("D&T"). In that dissolution, all of D&T's assets were distributed
to the Seller. The assets previously held by D&T were therefore included in the
Assets purchased by the Buyer from the Seller.
Prior to the Asset Purchase, no material relationship existed between the
Seller and the Buyer or PA&E, or any of their respective affiliates, directors,
officers, or associates.
Prior to the Asset Purchase, the Seller owned or leased equipment and
property used in its business and included in the Assets. PA&E intends to
continue to use such Assets for substantially the same business purposes as used
by the Seller prior to the Asset Purchase.
Item 7. Financial Statements and Exhibits
- -----------------------------------------
(a) Financial statements of the business acquired.
The consolidated financial statements of Electronic Specialty Corporation
and subsidiary required to be filed with this Form 8-K/A are attached to this
report as pages F-1 to F-16.
(b) Pro forma financial data.
The pro forma financial data required to be filed with this Form 8-K/A are
attached to this report as pages P-1 to P-6.
<PAGE>
(c) Exhibits.
The following document is filed as an exhibit to this Current Report:
2.1 Asset Purchase Agreement dated April 13, 1998, by and between
Electronic Specialty Corporation, a Washington corporation, Deltec
International, Inc., a Florida corporation, ESC Acquisition Corp., a
Washington corporation, and Pacific Aerospace & Electronics, Inc., a
Washington corporation.*
- --------------
* Incorporated by reference to the Company's Current Report on Form 8-K filed
with the Commission on July 10, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PACIFIC AEROSPACE & ELECTRONICS, INC.
By: /s/ DONALD A. WRIGHT
-------------------------------------
Donald A. Wright
President and Chief Executive Officer
Dated: August 25, 1998
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
2.1 Asset Purchase Agreement* dated April 13, 1998, by and between
Electronic Specialty Corporation, a Washington corporation, Deltec
International, Inc., a Florida corporation, ESC Acquisition Corp.,
a Washington corporation, and Pacific Aerospace & Electronics,
Inc., a Washington corporation.**
- --------------
* In accordance with Item 601(b)(2), the following attachments to Exhibit 2.1
have been omitted from this filing. The registrant agrees to furnish a copy
of any omitted schedule to the Commission upon request.
Exhibits
--------
A Warranty Bill of Sale
B Assignment of Lease with Landlord's Consent
C Assignment and Assumption Agreement
D Investment Letter
Schedules
---------
1.2 Excluded Assets
1.3 Permitted Liens
2.1 Assumed Liabilities
2.2 Excluded Liabilities
3.2 Allocation of Purchase Price
5.5 Material Adverse Changes (PA&E)
6.5 Seller's Consents
6.7 Material Adverse Changes (Seller)
6.8 Taxes
6.9 Absence of Indebtedness and Other Obligations
6.10 Real Property
6.11 Personal Property
6.12 Contracts
6.14 Intellectual Property
6.16 Customer and Supplier List
6.17 Compliance
6.18 Certain Interests
6.19 Employment Arrangements
6.20 Employee Benefits
6.21 Labor Matters
6.22 Environmental Matters
6.23 Insurance
6.24 Litigation
6.25 Banks
6.26 Letters of Credit and Powers of Attorney
6.31 Undisclosed Liabilities
7.3 Deltec's Consents
- --------------
** Incorporated by reference to the Company's Current Report on Form 8-K filed
with the Commission on July 10, 1998.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Electronic Specialty Corporation Page
----
Report of Independent Accountants ......................................... F-2
Consolidated Balance Sheet as of March 31,1997............................. F-3
Consolidated Statement of Operations for the Year ended March 31, 1997 .... F-4
Consolidated Statement of Non-Redeemable Shareholders' Equity for the
year ended March 31, 1997 ................................................. F-5
Consolidated Statement of Cash Flows for the year ended March 31, 1997 .... F-6
Notes to Consolidated Financial Statements ................................ F-7
Electronic Specialty Corporation (unaudited) Page
----
Consolidated Balance Sheets as of December 31, 1997 and March 31, 1997..... F-13
Consolidated Statements of Operations for the Nine-Month Periods Ended
December 31, 1997 and 1996................................................. F-14
Consolidated Statements of Cash Flows for the Nine-Month Periods Ended
December 31, 1997 and 1996................................................. F-15
Notes to Unaudited Consolidated Financial Statements....................... F-16
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Shareholders of Electronic Specialty Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of nonredeemable shareholders' equity and
of cash flows present fairly, in all material respects, the financial position
of Electronic Specialty Corporation and its subsidiaries at March 31, 1997, and
the results of their operations and their cash flows for the year in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
Portland, Oregon
June 27, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC SPECIALTY CORPORATION
Consolidated Balance Sheet
March 31, 1997
ASSETS
<S> <C>
Current assets:
Cash....................................................................... $ 89,375
Accounts receivable, net (Note 1).......................................... 1,338,014
Inventories (Notes 1 and 2)................................................ 2,975,533
Prepaid expenses and other current assets.................................. 168,227
Deferred income taxes...................................................... 79,650
-----------
Total current assets.................................................. 4,650,799
Equipment, net (Notes 1 and 3).................................................. 3,854,827
Intangibles, net (Note 12)...................................................... 258,122
Other long-term assets.......................................................... 67,152
-----------
$ 8,830,900
===========
LIABILITIES AND REDEEMABLE, CUMULATIVE PREFERED STOCK AND NON-REDEEMABLE
SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit (Note 4).................................................... $ 988,194
Accounts payable........................................................... 688,547
Delinquent taxes........................................................... 485,671
Accrued payroll......................................................... 157,977
Accrued vacation........................................................ 184,125
Other accrued liabilities............................................... 213,960
Note payable to parent (Note 5)............................................ 32,682
Current portion of notes payable (Note 6).................................. 99,462
Current portion of deferred gain (Note 7).................................. 50,137
-----------
Total current liabilities............................................. 2,900,755
Notes payable, net of current portion (Note 6).................................. 267,711
Deferred gain, net of current portion (Note 7).................................. 539,502
Deferred income taxes........................................................... 201,792
Other long-term liabilities..................................................... 57,298
-----------
3,967,058
-----------
Commitments and contingencies (Notes 8 and 11) --
Redeemable, cumulative preferred stock, no par value; 1,000,000 shares
authorized, 1,700 shares issued and outstanding (Note 11).................... 2,652,000
Non-redeemable shareholders' equity: (Note 9)
Common stock, no par value; 6,000,000 shares authorized, 5,986,201
shares issued and outstanding at stated value............................ 48,000
Paid-in capital............................................................ 1,942,951
Retained earnings.......................................................... 220,891
-----------
Total non-redeemable shareholders' equity............................. 2,211,842
-----------
$ 8,830,900
===========
The accompanying notes are an integral part of this financial statement.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC SPECIALTY CORPORATION
Consolidated Statement of Operations
Year ended March 31, 1997
<S> <C>
Sales:
Relays and solenoids............................................ $ 4,836,022
Displays........................................................ 2,632,187
------------
Net sales.................................................. 7,468,209
Cost of goods sold.................................................. 5,584,492
------------
Gross profit.................................................... 1,883,717
Operating expenses.................................................. 1,224,535
Research and development expenses (Note 1).......................... 103,343
------------
Income from operations.......................................... 555,839
------------
Other expenses:
Interest expense................................................ (185,089)
Other expense................................................... (14,026)
------------
(199,115)
------------
Provision for income taxes.......................................... 356,724
Income tax expense (Note 9)......................................... (121,549)
------------
Net income.......................................................... $ 235,175
============
The accompanying notes are an integral part of this financial statement.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC SPECIALTY CORPORATION
Consolidated Statement of Non-Redeemable Shareholders' Equity
Year ended March 31, 1997
Non-redeemable shareholders' equity
--------------------------------------------------------------
Common
shares Paid-in Retained
outstanding Amount capital earnings Total
----------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Balances at March 31, 1996.......... 5,986,201 $ 48,000 $ 1,942,951 $ 121,716 $ 2,112,667
Net income.......................... -- -- -- 235,175 235,175
Accretion of dividends not
declared......................... -- -- -- (136,000) (136,000)
----------- ---------- ----------- ---------- -----------
Balances at March 31, 1997.......... 5,986,201 $ 48,000 $ 1,942,951 $ 220,891 $ 2,211,842
=========== ========== =========== ========== ===========
The accompanying notes are an integral part of this financial statement.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC SPECIALTY CORPORATION
Consolidated Statement of Cash Flows
Year ended March 31, 1997
<S> <C>
Cash flows from operating activities:
Net income................................................................. $ 235,175
Adjustments to reconcile net income to net cash provided
by operating activities:................................................
Depreciation............................................................ 652,160
Amortization of deferred gain........................................... (50,834)
Amortization of intangibles............................................. 32,270
Deferred income taxes................................................... 121,549
Changes in assets and liabilities:
Accounts receivable..................................................... (644,355)
Inventories............................................................. (807,783)
Prepaid expenses and other current assets............................... (15,199)
Other long-term assets.................................................. 54,288
Accounts payable........................................................ 485,644
Accrued liabilities..................................................... 637,241
----------
Net cash provided by operating activities............................. 700,156
----------
Cash flows used in investing activities:
Capital expenditures....................................................... (1,719,494)
----------
Cash flows from financing activities:
Proceeds from the line of credit, net...................................... 988,194
Payments on notes payable.................................................. (200,990)
----------
Net cash provided by financing activities............................. 787,204
----------
Net (decrease) in cash.......................................................... (232,134)
Cash at beginning of year....................................................... 321,509
----------
Cash at end of year............................................................. $ 89,375
==========
Supplemental disclosure of cash flow information:
Cash paid for interest..................................................... $ 65,431
==========
The accompanying notes are an integral part of this financial statement.
</TABLE>
F-6
<PAGE>
ELECTRONIC SPECIALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Significant Accounting Policies
Organization
Electronic Specialty Corporation, an 82% owned subsidiary of Deltec
International, Inc. ("Deltec"), is primarily engaged in the manufacturing and
distribution of electromechanical relays and solenoids to large,
high-reliability aerospace and military prime contractors, and specialized
anti-glare displays for use on laptop computers and military/commercial airplane
view screens. All production operations are performed at the Electronic
Specialty Corporation's manufacturing plant and offices in Clark County,
Washington. During 1996, Electronic Specialty Corporation acquired all the
assets and certain liabilities of Displays and Technologies, Inc. (D&T). The
accompanying financial statements include all of the costs of doing business of
Electronic Specialty Corporation. The accounts of Electronic Specialty
Corporation do not include any charges for services from its parent, Deltec, as
no services were provided to Electronic Specialty Corporation by Deltec.
Principles of Consolidation
The consolidated financial statements include the accounts of Electronic
Specialty Corporation and its wholly owned subsidiaries: ESN Corporation (a
leasing company) and D&T (collectively, "ESC"). Significant intercompany
accounts and transactions have been eliminated in consolidation.
Management Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition and Accounts Receivable
ESC recognizes sales when the related products are shipped. Sales are
recorded net of applicable cash discounts and allowances for returns.
Inventories
Inventories are stated at the lower of cost or market. ESC uses the
first-in, first-out (FIFO) method to determine cost.
Equipment
Equipment is stated at cost. Depreciation has been provided for financial
reporting purposes over the estimated useful lives of the assets, which range
from five to ten years based on the straight-line method. Repair and maintenance
costs are charged to expense as incurred. Upon disposal, the cost and related
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is included in the results of operations.
Research and Development Expenses
Research and development expenses are related to the design, prototyping and
development of new products. These expenditures are charged to expense as
incurred.
F-7
<PAGE>
ELECTRONIC SPECIALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
ESC accounts for income taxes under the liability method as set forth in
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," (SFAS No. 109).
Fair Value of Financial Instruments
There are no significant differences between the carrying values and fair
market values of ESC's financial instruments. ESC estimates fair value based
upon existing interest rates related to such assets and liabilities compared to
the current market rates of interest for instruments of similar nature and
degree of risk.
Concentrations of Credit Risk
Approximately 19% of ESC's fiscal year 1997 sales and 23% of March 31, 1997
accounts receivable were from an aerospace manufacturer.
Earnings per share
Earnings per share has not been presented because it is not considered
meaningful.
(2) Inventories
Inventories at March 31, 1997 consist of the following:
Raw materials....................... $ 725,123
Work-in-process..................... 2,059,619
Finished goods...................... 190,791
----------
$2,975,533
==========
(3) Equipment
Equipment at March 31, 1997 consists of the following:
Machinery and equipment............. $7,345,776
Furniture and fixtures.............. 455,572
----------
7,801,348
Less accumulated depreciation....... (3,946,521)
----------
$3,854,827
==========
(4) Line of Credit
ESC has an operating line of credit with a bank. The line provides for
borrowings of up to $1,000,000 at the interest rate of 3.25% plus the 30-day
commercial paper rate (5.69% at March 31, 1997). Borrowings of $988,194 were
outstanding under the line at March 31, 1997. Borrowings are collateralized by
ESC's inventories and accounts receivable. The line of credit agreement expires
on December 31, 1997 and requires ESC to comply with certain financial ratios
and requirements. ESC was in compliance as of March 31, 1997.
F-8
<PAGE>
ELECTRONIC SPECIALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) Note Payable to Deltec
ESC has a note to Deltec with an outstanding balance of $32,682 payable at
March 31, 1997. The note is payable on demand with interest due monthly at the
rate of 12% per annum. Interest on the note aggregated $4,090 for fiscal year
1997.
(6) Notes Payable
ESC has unsecured notes payable to third parties in connection with a
non-competition agreement. At March 31, 1997, the notes payable aggregated
$36,724, and are classified as a current liability. The notes were due on May 1,
1995 and bear no interest. The notes are in default at March 31, 1997; however,
the note holders have notified ESC that they will continue to accept monthly
payments of $1,750 until the notes are paid in full.
On March 20, 1996, ESC obtained a bank note which was secured by ESC's
inventories and equipment. The note was paid in full on August 27, 1996.
On June 10, 1996, ESC obtained a five-year note secured by certain
equipment. The note bears interest at 9.5% and is due in monthly payments of
principal and interest of $3,026. On September 30, 1996, ESC obtained a
five-year note secured by certain equipment. The note bears interest at 9.5% and
is due in monthly payments of principal and interest of $4,603. Future principal
maturities on these notes are as follows:
Fiscal Year
-----------
1998.................... $ 62,738
1999.................... 68,996
2000.................... 75,881
2001.................... 83,452
2002.................... 39,382
----------
330,449
Less current portion.... (62,738)
----------
$ 267,711
==========
(7) Deferred Gain
During March 1994, ESC entered into an agreement to sell and lease back its
principal place of business. The agreement provided for the sale of the property
(consisting of land and a building) in the net amount of $2,522,030, resulting
in a gain of $752,050. The gain was deferred and is being amortized ratably as
other income over the lease term of fifteen years. Such other income aggregated
$50,834 for fiscal year 1997.
(8) Commitments
Operating Leases
ESC leases its office space and certain equipment under noncancelable
leases expiring in various years through fiscal year 2009. Future minimum lease
payments under noncancelable operating leases for the next five years are
summarized as follows:
Fiscal Year
-----------
1998.................... $ 440,347
1999.................... 327,443
2000.................... 319,739
2001.................... 318,233
2002.................... 304,412
Thereafter.............. 2,100,000
-----------
$ 3,810,174
===========
Total rental expense under operating leases for the year ended March 31,
1997 aggregated $535,922.
F-9
<PAGE>
ELECTRONIC SPECIALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Income Taxes
ESC's taxable income is included in the consolidated income tax returns of
Deltec. No income tax expense is allocated or charged by Deltec to ESC. ESC has
adopted the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," (SFAS No. 109).
SFAS No. 109 requires ESC to account for income taxes as though it were a
separate entity for tax reporting purposes, and transactions with Deltec
relating to ESC's tax attributes are recorded as adjustments to paid-in capital.
The provision for income taxes for the year ended March 31, 1997 consists
of non-current deferred tax expense of $121,549.
The components of the net deferred tax assets and liabilities as of March
31, 1997 are as follows:
Net current deferred tax asset:
Assets:
Deferred gain.................................... $ 17,048
Vacation accrual................................. 62,602
----------
Current deferred tax asset.............................. $ 79,650
==========
Noncurrent deferred tax assets and liability:
Assets:
Intangibles...................................... $ 7,314
Deferred gain.................................... 183,431
190,745
----------
Liability:
Equipment........................................ 392,537
----------
Net noncurrent deferred tax liability................... $ (201,792)
==========
F-10
<PAGE>
ELECTRONIC SPECIALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(10) Benefit Plans
ESC's bargaining unit employees were covered by a multi-employer pension
plan through March 31, 1995. Effective December 1, 1994, the plan was replaced
by a multi-employer pension 401(k) savings plan for bargaining employees. Both
plans are administered by the Western Conference of Teamsters. The plans, which
are not considered ESC pension plans, are defined contribution benefit plans to
which ESC makes voluntary contributions based on a fixed amount per hour for
each employee, as specified in the labor agreement. Information as to ESC's
portion of accumulated plan benefits, plan net assets and unfunded vested
benefits is not available. Contributions to these plans for the year ended March
31, 1997 aggregated $85,206.
ESC has a salary reduction plan (IRS Code section 401(k)) covering its
nonbargaining unit employees. The plan provides for tax-exempt salary reduction
payments to be made by participants to a trust, with a limited matching payment
to be made by ESC. No matching payments were made during the year ended March
31, 1997.
(11) Redeemable Preferred Stock
The holders of ESC's redeemable preferred stock have the following
privileges and rights:
Dividends. A cumulative dividend on the redeemable preferred stock
will accrue at the rate of $80 (i.e. 8%) per share per annum. The dividend
will be payable only (a) if, as and when determined by the board of
directors of ESC or (b) upon the liquidation or winding up of ESC or
redemption of the redeemable preferred stock. For the year ended March 31,
1997, no dividends were declared by the board of directors.
Liquidation Preference. In the event of the liquidation or winding up
of ESC, the holders of the redeemable preferred stock will be entitled to
receive, in preference to the holders of the common stock, an amount (the
"liquidation amount") equal to the original purchase price ($1,000 per
share) plus any dividends accrued but not paid.
Redemption. At any time after the date of original issuance of the
redeemable preferred stock, ESC may redeem the whole or any part of the
redeemable preferred stock by paying in cash the liquidation amount. At any
time after the date which is ten years after the date of original issuance
of the redeemable preferred stock, at the written request of a holder of
any shares of the redeemable preferred stock, ESC will redeem the shares by
paying in cash the liquidation amount.
Conversion. The redeemable preferred stock shall not be convertible
into shares of common stock or any other securities of ESC.
Voting rights. Except as may be otherwise provided by law, the
redeemable preferred stock shall be nonvoting and shall not participate in
any actions to be taken by the shareholders of ESC.
Because ESC may be required to redeem all of the outstanding shares of
preferred stock at liquidating values, the accompanying consolidated balance
sheet reflects total redeemable preferred stock at its original purchase price
plus accrued dividends. As a result, the amount of $2,652,000 represents the
liquidation value of redeemable preferred stock at March 31, 1997.
F-11
<PAGE>
ELECTRONIC SPECIALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(12) Acquisition of Displays and Technologies, Inc.
In connection with the Company's purchase of D & T the purchase price
includes contingent consideration to be calculated based on D&T's future
earnings, and is to be paid with ESC's series B nonvoting preferred stock for 70
percent of the purchase price and a promissory note for the remaining 30
percent. On June 26, 1997, the purchase option agreement was amended extending
the earnings period by two years. As amended, the calculation provides that the
former owners of D & T will receive 60% of net income, as defined, calculated
over the period from fiscal 1996 through fiscal 2000. Due to the contingent
nature of the purchase price, no purchase adjustment has been recorded as of
March 31, 1997.
ESC has accounted for this acquisition using the purchase method.
Accordingly, the cost of the acquisition was allocated to the assets acquired
and liabilities assumed on the basis of their fair values at the date of
acquisition. Goodwill of $322,658 was recorded as an intangible asset equal to
the difference between the acquisition cost and the fair values of the assets
acquired and liabilities assumed. ESC is amortizing goodwill over ten years
using the straight-line method. Accumulated amortization was $64,536 at March
31, 1997.
(13) Subsequent Event - Unaudited
Effective March 1, 1998, substantially all of the Company's assets were
purchased and certain liabilities were assumed by Pacific Aerospace &
Electronics, Inc. The purchase price consisted of $2.0 million in cash and
923,304 shares of Pacific Aerospace & Electronics, Inc.
F-12
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet
December 31, 1997 and March 31, 1997
(Unaudited)
December 31, March 31,
1997 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash $ 9,819 $ 89,375
Accounts receivable, net 1,373,646 1,338,014
Inventories 3,456,040 2,975,533
Prepaid expenses and other current assets 100,452 168,227
Deferred income taxes 79,650 79,650
------------ ------------
Total current assets 5,019,607 4,850,799
Equipment, net 3,856,316 3,854,827
Intangibles, net 233,921 258,122
Other long-term assets 66,795 67,152
------------ ------------
TOTAL ASSETS $ 9,176,639 $ 8,830,900
============ ============
LIABILITIES AND REDEEMABLE, CUMULATIVE
PREFERRED STOCK AND NON-REDEEMABLE SHAREHOLDERS' EQUITY
Current liabilities
Line of credit $ 1,151,777 $ 988,194
Accounts payable 703,149 688,547
Accrued liabilities 641,485 1,041,733
Note payable to parent - 32,682
Current portion of notes payable 146,380 99,462
Current portion of deferred gain 50,137 50,137
------------ ------------
Total current liabilities 2,692,928 2,900,755
Notes payable, net of current portion 428,468 267,711
Deferred gain, net of current portion 501,376 539,502
Deferred income taxes 348,310 201,792
Other long-term liabilities 57,298 57,298
------------ ------------
4,028,380 3,967,508
Commitments and contingencies
Redeemable, cumulative preferred stock 2,754,000 2,652,000
Non-redeemable shareholders' equity:
Common stock 48,000 48,000
Paid-in capital 1,942,951 1,942,951
Retained earnings 403,308 220,891
------------ ------------
Total shareholders' equity 2,394,259 2,211,842
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,176,639 $ 8,830,900
============ ============
The accompanying notes are an integral part of this financial statement.
</TABLE>
F-13
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Operations
1997 1996
-------------- --------------
<S> <C> <C>
Sales:
Relays and solenoids $ 4,120,442 $ 2,506,008
Displays 3,884,058 2,441,391
-------------- --------------
Net sales 8,004,500 4,947,399
Cost of goods sold 7,273,081 3,711,233
-------------- --------------
Gross profit 731,419 1,236,166
Operating expenses 1,054,367 897,291
Research and development expenses 177,777 70,436
-------------- --------------
Income from operations (500,725) 268,439
Other expenses:
Interest expense (113,470) (87,485)
Other expense (54,870) 1,486
-------------- --------------
Income before income tax expense (669,065) 182,440
Income tax expense (146,518) (62,030)
-------------- --------------
Net income $ (815,583) $ 120,410
============== ==============
The accompanying notes are an integral part of this financial statement.
</TABLE>
F-14
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC SPECIALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine-Month Periods Ended December 31, 1997 and 1996
(Unaudited)
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) $ 284,417 $ 120,410
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 550,524 487,363
Amortization of deferred gain (38,126) (38,125)
Amortization of intangibles 24,201 26,324
Deferred income taxes 146,518 62,030
Changes in assets and liabilities:
Accounts receivable (35,632) (558,481)
Inventories (480,507) (838,411)
Prepaid expenses and other current assets 67,775 (55,417)
Other long-term assets 357 -
Accounts payable 14,601 482,914
Accrued liabilities (400,248) 394,718
------------ ------------
Net cash provided by operating activities 133,881 83,325
CASH FLOW USED IN INVESTING ACTIVITIES
Capital expenditures (552,013) (1,120,424)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from line of credit, net 163,583 949,865
Payments on notes payable 174,993 345,766
Proceeds from issuance of notes payable - (524,862)
------------ ------------
Net cash flow from financing activities 338,576 770,769
------------ ------------
NET CHANGE IN CASH (79,556) (266,330)
Cash, beginning of period 89,375 321,509
------------ ------------
Cash, end of period $ 9,819 $ 55,179
============ ============
The accompanying notes are an integral part of this financial statement.
</TABLE>
F-15
<PAGE>
ELECTRONIC SPECIALTY CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Nine-Month Periods Ending December 31, 1997 and 1996
Note 1: Basis of Presentation
The accompanying unaudited consolidated financial statements of Electronic
Specialty Corporation ("ESC") have been prepared in accordance with Form 8-K
instructions and, in the opinion of management, contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
ESC's consolidated financial position as of December 31, 1997 and 1996, the
consolidated results of operations for the nine-month periods ended December 31,
1997 and 1996, and the consolidated statements of cash flow for the nine-month
periods ended December 31, 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
ESC's annual financial statements for the year ended March 31, 1997
Certain information and footnote disclosures normally included in 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 statement and notes thereto for the year
ended March 31, 1997.
The results of operations for the nine-month periods ended December 31, 1997 and
1996 are not necessarily indicative of the results to be expected or anticipated
for the full fiscal year.
Note 2: Inventories
Inventories consist of the following:
December 31, March 31,
1997 1997
----------- -----------
Raw materials $ 825,936 $ 725,123
Work in progress 2,415,976 2,059,619
Finished goods 214,128 190,791
----------- -----------
$ 3,456,040 $ 2,975,533
=========== ===========
Note 3: Nonredeemable Shareholders' Equity
Changes in nonredeemable shareholders' equity during the nine-month period ended
December 31, 1997, included net income of $287,417, and the accretion of
dividends not declared to the redeemable, cumulative preferred stock of $102,000
in each period.
Note 4: Subsequent Event
Effective March 1, 1998, substantially all of the Company's assets were
purchased and certain liabilities were assumed by Pacific Aerospace &
Electronics, Inc. The purchase price consisted of $2.0 million in cash and
923,304 shares of Pacific Aerospace & Electronics, Inc.
F-16
<PAGE>
INDEX TO UNAUDITED PRO FORMA DATA
Page
Unaudited Pro Forma Financial Data ......................................... P-2
Unaudited Pro Forma Balance Sheet Data ..................................... P-3
Notes to Unaudited Pro Forma Balance Sheet Data ............................ P-4
Unaudited Pro Forma Statements of Operations Data .......................... P-5
Notes to Unaudited Pro Forma Statements of Operations Data ................. P-6
P-1
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following Unaudited Pro Forma Financial Data for the most recent
audited periods and unaudited periods of the respective companies, gives effect
to the acquisition of Electronic Specialty Corporation by Pacific Aerospace &
Electronics, Inc. (the Company), as if the acquisition had occurred at the
beginning of the respective periods.
This Unaudited Pro Forma Financial Data is based on the assumptions and
adjustments described in the accompanying notes, which the Company believes are
reasonable. The Unaudited Pro Forma Statement of Operations Data does not
purport to represent what the Company's results of operations actually would
have been if the event described above had occurred as of the periods indicated
or what such results will be for any future periods. This Unaudited Pro Forma
Financial Data and the accompanying notes should be read in conjunction with the
historical financial statements of the Company and Electronic Specialty
Corporation, including the notes thereto.
The acquisition referred to in this Unaudited Pro Forma Financial Data has
been accounted for using the purchase method of accounting. Accordingly, the
assets acquired and liabilities assumed have been recorded at their fair values
as of the date of acquisition. The Company does not believe that any changes to
these estimates that may occur will have a material impact on the Unaudited Pro
Forma Financial Data.
P-2
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET DATA
As of March 1, 1998
<TABLE>
<CAPTION>
Historical
---------------------------- Pro forma
Unaudited Unaudited Pro forma as
PA&E (1) ESC (2) Adjustments Adjusted (3)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash $ 4,324,000 $ 9,000 $(2,000,000) (9) $ 2,333,000
Accounts receivable, net 7,681,000 905,000 12,000 (4) 8,598,000
Inventories 11,686,000 4,216,000 (1,100,000) (4) 14,802,000
Prepaid expenses and other current assets 222,000 72,000 (10,000) (4) 284,000
Deferred income taxes 480,000 80,000 (80,000) (5) 480,000
----------- ----------- ----------- -----------
Total current assets 24,393,000 5,282,000 (3,178,000) 26,497,000
Equipment, net 18,179,000 4,642,000 (278,000) (4) 22,543,000
Other assets:
Investment 836,000 - - 836,000
Note receivable 4,878,000 - - 4,878,000
Costs in excess of net book value of acquired
subsidiaries, net 2,893,000 229,000 3,402,000 (7) 6,524,000
Patents, net 1,254,000 - - 1,254,000
Deferred income taxes 128,000 - - 128,000
Other 624,000 63,000 (13,000) (4) 674,000
----------- ----------- ----------- -----------
Total other assets 10,613,000 292,000 3,389,000 14,294,000
----------- ----------- ----------- -----------
TOTAL ASSETS $53,185,000 $10,216,000 $ (67,000) $63,334,000
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Line of credit $ - $ 1,589,000 $ 60,000 (4) $ 1,649,000
Accounts payable 4,213,000 880,000 (41,000) (4) 5,052,000
Accrued liabilities 2,004,000 756,000 (41,000) (4) 2,719,000
Current portion of notes payable 770,000 337,000 203,000 (8) 1,310,000
Current portion of capital lease obligations 37,000 - - 37,000
Current portion of deferred gain - 50,000 (50,000) (6) -
----------- ----------- ----------- -----------
Total current liabilities 7,024,000 3,612,000 131,000 10,767,000
Long-term liabilities:
Convertible notes 1,946,000 - - 1,946,000
Notes payable, net of current portion 7,916,000 240,000 (20,000) (4) 8,136,000
Capital leases, net of current portion 81,000 - - 81,000
Deferred gain, net of current portion - 491,000 (491,000) (6) -
Deferred income taxes - 202,000 (202,000) (5) -
Other long-term liabilities 389,000 - - 389,000
----------- ----------- ----------- -----------
Total long-term liabilities 10,332,000 933,000 (713,000) 10,552,000
Shareholders' equity
Convertible preferred stock 74,000 - - 74,000
Redeemable, cumulative preferred stock - 2,754,000 (2,754,000) (9) -
Common stock 37,744,000 70,000 6,116,000 (9) 43,930,000
Paid-in capital - 1,165,000 (1,165,000) (9) -
Retained earnings (deficit) (1,989,000) 581,000 (1,882,000) (9) (1,989,000)
----------- ----------- ----------- -----------
Total shareholders' equity 35,829,000 4,570,000 515,000 42,015,000
----------- ----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $53,185,000 $10,216,000 $ (67,000) $63,334,000
=========== =========== =========== ===========
</TABLE>
P-3
<PAGE>
Notes to Unaudited Pro Forma Balance Sheet Data
(1) Represents the unaudited consolidated balance sheet of Pacific Aerospace &
Electronics, Inc. as of March 1, 1998.
(2) Represents the unaudited consolidated balance sheet of Electronic Specialty
Corporation as of March 1, 1998
(3) Represents Pacific Aerospace & Electronics, Inc.'s pro forma, as adjusted
balance sheet as if the ESC acquisition had occurred on March 1, 1998.
(4) Represents the incremental increase (decrease) in fair value of the related
asset or liability as determined by management as of the acquisition date.
Total purchase price of ESC was allocated to assets and liabilities based
on their value as follows:
ESC purchase price $ 8,109,000
Acquisition costs 77,000
------------
Total purchase price to be allocated $ 8,186,000
============
Historical book value of total assets acquired $ 10,216,000
Adjustment of current assets to fair value as
determined by management (1,098,000)
Adjustment of equipment and other assets to
fair value as determined by management (291,000)
Elimination of historical deferred gain (80,000)
Liabilities assumed (3,963,000)
Costs in excess of net tangible assets 3,631,000
Elimination of historical costs in excess of
net tangible assets (229,000)
------------
Total purchase price allocated $ 8,186,000
============
(5) Represents elimination of ESC deferred taxes.
(6) Represents elimination of ESC deferred gain.
(7) Represents excess of purchase price over fair value of tangible net assets
acquired with ESC. Total excess of purchase price over fair value of
tangible net assets acquired with ESC is $3,631,000 which will be amortized
over 15 years.
(8) Represents incremental increase in the current portion long-term notes
payable as a result of the acquisition.
(9) Represents the elimination of ESC preferred stock, additional paid-in
capital, and retained earnings and the incremental increase in common stock
value, less 2,000,000 representing the cash portion of the purchase price
as a result of the acquisition.
P-4
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS DATA
Fiscal Year Historical
-----------------------------------
Audited Audited
PA&E ESC Pro forma Pro forma
May 31, 1997 March 31, 1997 Adjustments As adjusted (1)
------------ -------------- ----------- ------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 34,175,000 $ 7,468,000 $ - $ 41,643,000
Cost of sales 25,969,000 5,584,000 - 31,553,000
------------ ----------- ----------- ------------
Gross profit 8,206,000 1,884,000 - 10,090,000
Operating expenses 6,259,000 1,328,000 208,000 (2) 7,795,000
------------ ----------- ----------- ------------
Income from operations 1,947,000 556,000 (208,000) 2,295,000
Net interest expense (384,000) (185,000) - (569,000)
Other income (expense) 169,000 (14,000) (51,000) (3) 104,000
------------ ----------- ----------- ------------
Income (loss) before income taxes 1,732,000 357,000 (259,000) 1,830,000
Income taxes (50,000) (122,000) 88,000 (4) (84,000)
------------ ----------- ----------- ------------
Net income (loss) $ 1,682,000 $ 235,000 $ (171,000) $ 1,746,000
============ =========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
Nine-Month Period Historical
---------------------------------------
Unaudited Unaudited
PA&E ESC Pro forma Pro forma
February 28, 1998 December 31, 1997 Adjustments As adjusted (5)
----------------- ----------------- ----------- ------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 12,783,000 $ 8,004,000 $ - $ 20,787,000
Cost of sales 9,137,000 7,273,000 - 15,310,000
------------ ------------ ----------- ------------
Gross profit 3,646,000 731,000 - 5,477,000
Operating expenses 2,368,000 1,232,000 156,000 (2) 3,756,000
------------ ------------ ----------- ------------
Income from operations 1,278,000 (501,000) (156,000) 1,721,000
Net interest expense (142,000) (113,000) - (255,000)
Other income (expense) (1,012,000) (55,000) (38,000) (3) (1,105,000)
------------ ------------ ----------- ------------
Income (loss) before income taxes 124,000 (669,000) (194,000) 361,000
Income taxes 1,128,000 (147,000) 66,000 (4) 1,047,000
------------ ------------ ----------- ------------
Net income (loss) $ 1,252,000 $ (816,000) $ (128,000) $ 1,408,000
============ ============ =========== ============
</TABLE>
P-5
<PAGE>
Notes to Unaudited Pro Forma Statements of Operations Data
(1) Represents the results of operations of Pacific Aerospace & Electronics,
Inc. for the year ended May 31, 1997 and the results of Electronic
Specialty Corporation for the year ended March 31,1997 as if Electronic
Specialty Corporation had been acquired by Pacific Aerospace & Electronics,
Inc. at the beginning of their respective periods.
(2) Represents the incremental amortization in excess of purchase price over
fair market value of net tangible assets acquired with ESC. Excess of
purchase price over fair market value of net tangible assets acquired with
ESC is being amortized over 15 years.
(3) Represents elimination of amortization of deferred gain.
(4) Tax provision to reflect the estimated taxes on certain pro forma
adjustments at an effective tax rate approximately ESC's historical rate.
(5) Represents the results of operations of Pacific Aerospace & Electronics,
Inc. for the nine-month period ended February 28, and the results of
Electronic Specialty Corporation for the nine-month period ended December
31, 1997 as if Electronic Specialty Corporation had been acquired by
Pacific Aerospace & Electronics, Inc. at the beginning of their respective
periods.
P-6
