SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period
ended November 30, 1998
[ ] 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 registrant as specified in its charter)
Washington 91-1744587
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
430 Olds Station Road, Wenatchee, Washington 98801
(Address of Principal Executive Offices; Zip Code)
Registrant's telephone number, including area code: (509) 667-9600
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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
stock, as of the latest practicable date: As of January 5, 1999, there were
18,580,265 shares outstanding of the Company's Common Stock, par value $.001 per
share.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets - November 30, 1998 and May 31, 1998
Consolidated Statements of Operations - Second Quarters and Six Months Ended
November 30, 1998 and 1997
Consolidated Statements of Cash Flow - Six Months Ended November 30, 1998 and
1997
Management's Statement and Notes to Unaudited Consolidated Financial Statements
- - Second Quarters and Six Months Ended November 30, 1998 and 1997
-2-
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FORM 10-Q
November 30, 1998 and May 31, 1998
November 30, May 31,
1998 1998
ASSETS (Unaudited) (Audited)
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 16,392,000 $ 11,461,000
Accounts receivable 21,327,000 9,375,000
Inventories 27,065,000 16,184,000
Deferred income taxes 519,000 386,000
Prepaid expense and other 1,449,000 272,000
------------ ------------
Total current assets 66,752,000 37,678,000
------------ ------------
PROPERTY AND EQUIPMENT, NET 46,283,000 26,335,000
------------ ------------
OTHER ASSETS
Note receivable, net - 700,000
Investment, net 2,719,000 4,579,000
Costs in excess of NBV of acquired subsidiaries, net 42,894,000 6,515,000
Patents, net 1,178,000 1,229,000
Deferred income taxes 1,583,000 222,000
Deferred financing costs, net 5,366,000 856,000
Other assets 604,000 466,000
------------ ------------
Total other assets 54,344,000 14,567,000
------------ ------------
TOTAL ASSETS $167,379,000 $ 78,580,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 12,303,000 $ 6,748,000
Accrued liabilities 7,748,000 2,587,000
Current portion - long-term debt 886,000 1,027,000
Current portion - capital lease obligations 629,000 206,000
Line of credit - 1,511,000
------------ ------------
Total current liabilities 21,566,000 12,079,000
------------ ------------
LONG-TERM LIABILITIES
Long-term debt, net of current portion 80,884,000 9,059,000
Capital leases, net of current portion 1,738,000 941,000
Deferred rent and other 317,000 359,000
------------ ------------
Total long-term liabilities 82,939,000 10,359,000
------------ ------------
TOTAL LIABILITIES 104,505,000 22,438,000
------------ ------------
SHAREHOLDERS' EQUITY
Convertible preferred stock - -
Common stock 19,000 15,000
Additional paid in capital 70,781,000 57,830,000
Accumulated other comprehensive income (loss) 326,000 (436,000)
Accumulated deficit (8,252,000) (1,267,000)
------------ ------------
Total shareholders' equity 62,874,000 56,142,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $167,379,000 $ 78,580,000
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FORM 10-Q
Second Quarters and Six Months Ended November 30, 1998 and 1997
Second Quarters Ended Six Months Ended
November 30, November 30, November 30, November 30,
1998 1997 1998 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $30,477,000 $12,427,000 $49,655,000 $24,203,000
COST OF SALES
Inventory impairment 1,600,000 - 1,600,000 -
Other cost of sales 24,055,000 9,084,000 38,559,000 17,876,000
----------- ----------- ----------- -----------
TOTAL COST OF SALES 25,655,000 9,084,000 40,159,000 17,876,000
----------- ----------- ----------- -----------
GROSS PROFIT 4,822,000 3,343,000 9,496,000 6,327,000
OPERATING EXPENSES 4,355,000 2,151,000 8,131,000 4,158,000
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 467,000 1,192,000 1,365,000 2,169,000
----------- ----------- ----------- -----------
OTHER INCOME AND EXPENSE
Interest income 137,000 28,000 363,000 46,000
Interest expense (2,683,000) (199,000) (3,752,000) (329,000)
Other income (expense) (196,000) 16,000 (6,917,000) 23,000
----------- ----------- ----------- -----------
(2,742,000) (155,000) (10,306,000) (260,000)
----------- ----------- ----------- -----------
NET INCOME (LOSS) BEFORE FEDERAL
INCOME TAX (2,275,000) 1,037,000 (8,941,000) 1,909,000
INCOME TAX BENEFIT (EXPENSE) (300,000) (207,000) 1,955,000 (269,000)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $(2,575,000) $ 830,000 $(6,986,000) $ 1,640,000
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE:
BASIC $ (0.15) $ 0.07 $ (0.43) $ 0.14
DILUTED $ (0.15) $ 0.07 $ (0.43) $ 0.14
SHARES USED IN COMPUTATION OF NET
INCOME (LOSS) PER SHARE:
BASIC 16,731,000 11,903,105 16,073,000 11,814,219
DILUTED 16,731,000 11,903,105 16,073,000 11,814,219
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FORM 10-Q
Six Months Ended November 30, 1998 and 1997
November 30, November 30,
1998 1997
(Unaudited) (Unaudited)
------------ ------------
<S> <C> <C>
CASH FLOW FROM OPERATING
ACTIVITIES:
Net cash from
operating activities $ (184,000) $ 1,516,000
CASH FLOW FROM INVESTING
ACTIVITIES:
Purchase of property and (3,592,000) (4,170,000)
equipment
Reduction in notes receivable - 36,000
Acquisition of subsidiaries (29,012,000) -
Purchase of goodwill (40,134,000) -
Proceeds from certificate of
deposit - 1,000,000
Purchase of short term
investments - (836,000)
Increase in notes receivable - (5,808,000)
------------ ------------
Net cash from investing
activities (72,738,000) (9,778,000)
------------ ------------
CASH FLOW FROM FINANCING
ACTIVITIES:
Net borrowings (repayments)
under line of credit (1,511,000) 452,000
Proceeds from long-term debt 72,622,000 5,820,000
Payments on long term debt and
capital leases (4,824,000) (1,000,000)
Sale of common stock, net of
issuance costs 4,838,000 2,240,000
Sale of preferred stock, net
of issuance costs 6,707,000 -
Sale of convertible
debentures, net of issuance
costs - 5,426,000
Conversion of purchase warrants - 740,000
Other changes, net - (20,000)
------------ ------------
Net cash from financing
activities 77,832,000 13,658,000
------------ ------------
NET CHANGE IN CASH 4,910,000 5,396,000
CASH AT BEGINNING OF PERIOD 11,461,000 3,048,000
EFFECT OF EXCHANGE RATES ON CASH 21,000 -
------------ ------------
CASH AT END OF PERIOD $ 16,392,000 $ 8,444,000
============ ============
SUPPLEMENTAL CASH FLOW:
Cash paid during the period for:
Interest $ 708,000 $ 257,000
Income taxes 411,000 246,000
Noncash investing and
financing activities:
Seller financed
acquisition of property, 290,000 -
plant and equipment
</TABLE>
-5-
<PAGE>
PACIFIC AEROSPACE & ELECTORINCS, INC. AND SUBSIDIARIES
MANAGEMENT'S STATEMENT AND
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-Q
Second Quarters and Six Months Ended November 30, 1998 and 1997
Management's Statement
- ----------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with Form 10-Q instructions and, in the opinion of management,
contain all adjustments necessary to present fairly the Company's consolidated
financial position as of November 30, 1998 and May 31, 1998, the consolidated
results of operations for the quarters and six months ended November 30, 1998
and 1997, and the consolidated statements of cash flows for the six months ended
November 30, 1998 and 1997. 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, 1998 and 1997.
The results of operations for the quarters and six months ended November 30,
1998 and 1997 are not necessarily indicative of the results to be expected or
anticipated for the full fiscal year.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Note 1: Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
(Statement 130), which establishes standards for reporting and disclosure of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. Statement 130 is
effective for fiscal years beginning after December 15, 1997 and requires
reclassification of financial statements for earlier periods to be provided for
comparative purposes. The Company has not determined the manner in which it will
present the information required by Statement 130 in its annual financial
statements for the year ending May 31, 1999. The Company's total comprehensive
income (loss) for the quarters and six months ended November 30, 1998 and 1997
was $(3,380,000), $(6,224,000), $830,000, and $1,640,000, respectively.
Components of comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
Quarters Ended November 30, Six Months Ended November 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) $ (2,575,000) $ 830,000 $ (6,986,000) $ 1,640,000
Other comprehensive income (loss):
Foreign currency translation (1,220,000) - 494,000 -
Income tax benefit (expense) 415,000 - (168,000) -
Adjustment for unrealized loss on investment - - 436,000 -
------------ ------------ ------------ ------------
Total other comprehensive income (loss) (805,000) - 762,000 -
------------ ------------ ------------ ------------
Comprehensive income (loss) $ (3,380,000) $ 830,000 $ (6,224,000) $ 1,640,000
============ ============ ============ ============
</TABLE>
-6-
<PAGE>
Note 2: Computations of Earnings per Share
The Company has adopted SFAS No. 128, Earnings Per Share (Statement 128). In
accordance with Statement 128, basic earnings per share is computed using the
weighted average number of common shares outstanding. Diluted earnings per share
is computed using the weighted average number of common shares plus dilutive
common share equivalents outstanding during the period using the treasury stock
method. Due to the net loss during the quarter and six months ended November 30,
1998, the same number of shares were used to compute both basic and diluted
earnings per share.
Note 3: Aeromet Acquisition
On July 30, 1998, the Company's indirect wholly-owned subsidiary, Pacific
Aerospace and Electronics (U.K.) Limited, closed the purchase of Aeromet
International PLC ("Aeromet") pursuant to a Share Acquisition Agreement. In
consideration for the purchase, the Company paid the seller 42 million pounds
sterling (or approximately US $69 million) in cash. Aeromet is located in the
United Kingdom.
At the purchase date, the total purchase price of Aeromet including capitalized
costs of the acquisition was $72.7 million, including $32.6 million in net
assets (current assets of $30.6 million; property plant and equipment of $18.1
million; current liabilities of $14.5 million; long term liabilities of $1.7
million) and resultant goodwill of $40.1 million. Accounting policies at Aeromet
have been conformed to generally accepted accounting principles consistent with
those of the Company. Goodwill is being amortized over 40 years. Step-up in the
valuation of property, plant and equipment to fair market value is being
amortized over the estimated useful lives of the assets, generally 7 to 10
years. For balance sheet purposes, the Company has translated UK valuations to
US dollars for Aeromet using the translation at the balance sheet date. For
statement of operations purposes, the revenues and expenses have been reported
at average transaction rates on a monthly basis. Income tax rates have been
estimated at the prevailing rates in the UK. The Company has also filed a Form
8-K with corresponding disclosures on August 14, 1998.
The following summary, prepared on a pro forma basis, presents the unaudited
consolidated condensed results of operations of the Company, as if the Aeromet
acquisition was made as of the first day of the quarter and six months being
reported and the comparable periods in the previous year.
<TABLE>
<CAPTION>
Quarters Ended November 30, Six Months Ended November 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $ 30,477 $ 25,581 $ 59,237 $ 49,497
Net income (loss) $ (2,575) $ 106 $ (8,044) $ (943)
Net income (loss) per share:
Basic $ (.15) $ .01 $ (.50) $ (.08)
Diluted $ (.15) $ .01 $ (.50) $ (.08)
</TABLE>
These pro forma results are not necessarily indicative of the actual results of
operations that would have occurred had the Aeromet acquisition been consummated
as of the dates indicated, nor are they intended to indicate results that may
occur in the future.
Note 4: Inventories
Components of inventories are as follows:
November 30, May 31,
1998 1998
-------------- --------------
Raw materials $ 8,009,000 $ 5,789,000
Work in progress 13,566,000 5,683,000
Finished goods 5,490,000 4,712,000
-------------- --------------
Total $ 27,065,000 $ 16,184,000
-------------- --------------
-7-
<PAGE>
Note 5: Investment
At November 30, 1998, the Company's investment in the common stock of a public
company, determined in accordance with Statement of Financial Accounting
Standards No. 115, is shown net of a reserve for additional loss exposure
related to the Company's guarantee of certain debt of the public company and
other related matters.
Note 6: Consolidating Condensed Financial Statements
The following financial statements present consolidating condensed financial
information of the Company for the indicated periods. The Company's senior
subordinated notes, which were used to finance the Aeromet acquisition in July
1998, were issued by the parent corporation, Pacific Aerospace & Electronics,
Inc., and have been guaranteed by all of its domestic subsidiaries, which are
wholly-owned by the parent corporation. The guarantor subsidiaries have fully
and unconditionally guaranteed this debt on a joint and several basis. This debt
is not guaranteed by the Company's foreign subsidiaries, which consist of
Aeromet and two related holding companies. There are no significant contractual
restrictions on the distribution of funds from the guarantor subsidiaries to the
parent corporation. The consolidating condensed financial information is
presented in lieu of separate financial statements and other disclosures of the
guarantor subsidiaries, as management has determined that such information is
not material to investors.
-8-
<PAGE>
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Balance Sheet
November 30, 1998
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 9,939,000 $ 3,382,000 $ 3,071,000 $ - $ 16,392,000
Accounts receivable, net - 7,565,000 14,269,000 (507,000) 21,327,000
Inventories - 14,793,000 12,272,000 - 27,065,000
Other 922,000 340,000 706,000 - 1,968,000
------------ ------------ ------------ ------------- ------------
Total current assets 10,861,000 26,080,000 30,318,000 (507,000) 66,752,000
PROPERTY, PLANT, AND EQUIPMENT, net 4,802,000 23,623,000 17,858,000 - 46,283,000
OTHER ASSETS
Costs in excess of net book value
of acquired subsidiaries, net - 2,822,000 40,072,000 - 42,894,000
Investment in subsidiaries 54,128,000 - - (54,128,000) -
Investment in common stock, net 2,719,000 - - - 2,719,000
Intercompany note and loan receivable 61,637,000 - 85,000 (61,722,000) -
Other 9,007,000 663,000 (939,000) - 8,731,000
------------ ------------ ------------ ------------- ------------
Total other assets 127,491,000 3,485,000 39,218,000 (115,850,000) 54,344,000
------------ ------------ ------------ ------------- ------------
TOTAL ASSETS $143,154,000 $ 53,188,000 $ 87,394,000 $(116,357,000) $167,379,000
============ ============ ============ ============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Accounts payable $ 585,000 $ 3,720,000 $ 8,505,000 $ (507,000) $ 12,303,000
Current portion of long-term debt 123,000 763,000 - - 886,000
Other 3,027,000 824,000 4,526,000 - 8,377,000
------------ ------------ ------------ ------------- ------------
Total current liabilities 3,735,000 5,307,000 13,031,000 (507,000) 21,566,000
LONG-TERM LIABILITIES
Long-term debt, net of current portion 76,460,000 4,424,000 - - 80,884,000
Intercompany note and loan payable 85,000 24,137,000 37,500,000 (61,722,000) -
Other - 1,170,000 885,000 - 2,055,000
------------ ------------ ------------ ------------- ------------
Total long-term liabilities 76,545,000 28,792,000 38,385,000 (61,722,000) 82,939,000
SHAREHOLDERS' EQUITY
Convertible preferred stock - - - - -
Common stock 19,000 21,546,000 35,268,000 (56,814,000) 19,000
Additional paid-in capital 70,781,000 - - - 70,781,000
Accumulated other comprehensive income 326,000 - 326,000 (326,000) 326,000
Retained earnings (accumulated
deficit) (8,252,000) (3,396,000) 384,000 3,012,000 (8,252,000)
------------ ------------ ------------ ------------- ------------
Total shareholders' equity 62,874,000 18,150,000 35,978,000 (54,128,000) 62,874,000
------------ ------------ ------------ ------------- ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $143,154,000 $ 53,188,000 $ 87,394,000 $(116,357,000) $167,379,000
============ ============ ============ ============= ============
</TABLE>
-9-
<PAGE>
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Balance Sheet
May 31, 1998
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 9,398,000 $ 2,063,000 - $ - $ 11,461,000
Accounts receivable, net - 9,608,000 - (233,000) 9,375,000
Inventories - 16,184,000 - - 16,184,000
Other 12,000 646,000 - - 658,000
------------ ------------ ------------ ------------- ------------
Total current assets 9,410,000 28,501,000 - (233,000) 37,678,000
PROPERTY, PLANT, AND EQUIPMENT, net 3,464,000 22,871,000 - - 26,335,000
OTHER ASSETS
Costs in excess of net book value - 6,515,000 - - 6,515,000
of acquired subsidiaries, net
Investment in subsidiaries 21,452,000 - - (21,452,000) -
Investment in common stock, net 4,579,000 - - - 4,579,000
Intercompany loan receivable 19,764,000 - - (19,764,000) -
Other 2,852,000 621,000 - - 3,473,000
------------ ------------ ------------ ------------- ------------
Total other assets 48,808,000 6,975,000 - (41,216,000) 14,567,000
------------ ------------ ------------ ------------- ------------
TOTAL ASSETS $ 61,682,000 $ 58,347,000 - $ (41,449,000) $ 78,580,000
============ ============ ============ ============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Accounts payable $927,000 $ 6,054,000 - $ (233,000) $ 6,748,000
Current portion of long-term debt 24,000 1,003,000 - - 1,027,000
Other 623,000 3,681,000 - - 4,304,000
------------ ------------ ------------ ------------- ------------
Total current liabilities 1,413,000 10,899,000 - (233,000) 12,079,000
LONG-TERM LIABILITIES
Long-term debt, net of current 4,127,000 4,932,000 - - 9,059,000
portion
Intercompany loan payable - 19,764,000 - (19,764,000) -
Other - 1,300,000 - - 1,300,000
------------ ------------ ------------ ------------- ------------
Total long-term liabilities 4,127,000 25,996,000 - (19,764,000) 10,359,000
SHAREHOLDERS' EQUITY
Convertible preferred stock - - - - -
Common stock 15,000 - - - 15,000
Additional paid-in capital 57,830,000 21,546,000 - (21,546,000) 57,830,000
Accumulated other comprehensive loss (436,000) - - - (436,000)
Retained earnings (accumulated deficit) (1,267,000) (94,000) - 94,000 (1,267,000)
------------ ------------ ------------ ------------- ------------
Total shareholders' equity 56,142,000 21,452,000 - (21,452,000) 56,142,000
------------ ------------ ------------ ------------- ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 61,682,000 $ 58,347,000 - $ (41,449,000) $ 78,580,000
============ ============ ============ ============= ============
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Operations
For the quarter ended November 30, 1998
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales $ - $ 14,925,000 $ 16,098,000 $ (546,000) $ 30,477,000
Cost of sales - 13,099,000 13,102,000 (546,000) 25,655,000
------------ ------------ ------------ ------------- ------------
Gross profit - 1,826,000 2,996,000 - 4,822,000
Operating expenses 1,057,000 2,779,000 1,080,000 (561,000) 4,355,000
------------ ------------ ------------ ------------- ------------
Income (loss) from operations (1,057,000) (953,000) 1,916,000 561,000 467,000
Other income (expense)
Parent's share of subsidiaries'
net income (1,156,000) - - 1,156,000 -
Interest expense (2,533,000) (143,000) (1,413,000) 1,406,000 (2,683,000)
Other 2,171,000 (263,000) - (1,967,000) (59,000)
------------ ------------ ------------ ------------- ------------
Total other income (expense) (1,518,000) (406,000) (1,413,000) 595,000 (2,742,000)
------------ ------------ ------------ ------------- ------------
Income (loss) before income taxes (2,575,000) (1,359,000) 503,000 1,156,000 (2,275,000)
Income tax benefit (expense) - - (300,000) - (300,000)
------------ ------------ ------------ ------------- ------------
Net income (loss) (2,575,000) (1,359,000) 203,000 1,156,000 (2,575,000)
Other comprehensive income (loss)
Foreign currency translation, net of tax (805,000) - (805,000) 805,000 (805,000)
------------ ------------ ------------ ------------- ------------
Total other comprehensive income (805,000) - (805,000) 805,000 (805,000)
(loss)
------------ ------------ ------------ ------------- ------------
Comprehensive income (loss) $ (3,380,000) $ (1,359,000) $ (602,000) $ 1,961,000 $ (3,380,000)
============ ============ ============ ============= ============
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Operations
For the quarter ended November 30, 1997
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales $ - $ 12,623,000 - $ (196,000) $ 12,427,000
Cost of sales - 9,280,000 - (196,000) 9,084,000
------------ ------------ ------------ ------------- ------------
Gross profit - 3,343,000 - - 3,343,000
Operating expenses 641,000 1,961,000 - (451,000) 2,151,000
------------ ------------ ------------ ------------- ------------
Income from operations (641,000) 1,382,000 - 451,000 1,192,000
Other income (expense)
Parent's share of subsidiaries' net income 914,000 - - (914,000) -
Interest expense (76,000) (123,000) - - (199,000)
Other 480,000 15,000 - (451,000) 44,000
------------ ------------ ------------ ------------- ------------
Total other income (expense) 1,318,000 (108,000) - (1,365,000) (155,000)
------------ ------------ ------------ ------------- ------------
Income before income taxes 677,000 1,274,000 - (914,000) 1,037,000
Income tax benefit (expense) 153,000 (360,000) - - (207,000)
------------ ------------ ------------ ------------- ------------
Net income 830,000 914,000 - (914,000) 830,000
Other comprehensive income (loss) - - - - -
------------ ------------ ------------ ------------- ------------
Comprehensive income $ 830,000 $ 914,000 - $ (914,000) $ 830,000
============ ============ ============ ============= ============
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Operations
For the six months ended November 30, 1998
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales $ - $ 30,206,000 $ 20,559,000 $ (1,110,000) $ 49,655,000
Cost of sales - 24,503,000 16,766,000 (1,110,000) 40,159,000
------------ ------------ ------------ ------------- ------------
Gross profit - 5,703,000 3,793,000 - 9,496,000
Operating expenses 1,790,000 5,916,000 1,553,000 (1,128,000) 8,131,000
------------ ------------ ------------ ------------- ------------
Income (loss) from operations (1,790,000) (213,000) 2,240,000 1,128,000 1,365,000
Other income (expense)
Parent's share of subsidiaries'
net loss (2,920,000) - - 2,920,000 -
Interest expense (3,412,000) (326,000) (1,420,000) 1,406,000 (3,752,000)
Other (262,000) (3,767,000) 9,000 (2,534,000) (6,554,000)
------------ ------------ ------------ ------------- ------------
Total other income (expense) (6,594,000) (4,093,000) (1,411,000) 1,792,000 (10,306,000)
------------ ------------ ------------ ------------- ------------
Income (loss) before income taxes (8,384,000) (4,306,000) 829,000 2,920,000 (8,941,000)
Income tax benefit (expense) 1,398,000 1,002,000 (445,000) - 1,955,000
------------ ------------ ------------ ------------- ------------
Net income (loss) (6,986,000) (3,304,000) 384,000 2,920,000 (6,986,000)
Other comprehensive income (loss)
Foreign currency translation, net of tax 326,000 - 326,000 (326,000) 326,000
Adjustment for unrealized loss
on investment 436,000 - - - 436,000
------------ ------------ ------------ ------------- ------------
Total other comprehensive
income (loss) 762,000 - 326,000 (326,000) 762,000
------------ ------------ ------------ ------------- ------------
Comprehensive income (loss) $ (6,224,000) $ (3,304,000) $ 710,000 $ 2,594,000 $ (6,224,000)
============ ============ ============ ============= ============
</TABLE>
-13-
<PAGE>
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Operations
For the six months ended November 30, 1997
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales $ - $ 24,514,000 - $ (311,000) $ 24,203,000
Cost of sales - 18,187,000 - (311,000) 17,876,000
------------ ------------ ------------ ------------- ------------
Gross profit - 6,327,000 - - 6,327,000
Operating expenses 1,101,000 3,868,000 - (811,000) 4,158,000
------------ ------------ ------------ ------------- ------------
Income (loss) from operations (1,101,000) 2,459,000 - 811,000 2,169,000
Other income (expense)
Parent's share of subsidiaries'
net income 1,867,000 - - (1,867,000) -
Interest expense (100,000) (229,000) - - (329,000)
Other 857,000 23,000 - (811,000) 69,000
------------ ------------ ------------ ------------- ------------
Total other income (expense) 2,624,000 (206,000) - (2,678,000) (260,000)
------------ ------------ ------------ ------------- ------------
Income before income taxes 1,523,000 2,253,000 - (1,867,000) 1,909,000
Income tax benefit (expense) 117,000 (386,000) - - (269,000)
------------ ------------ ------------ ------------- ------------
Net income 1,640,000 1,867,000 - (1,867,000) 1,640,000
Other comprehensive income (loss) - - - - -
------------ ------------ ------------ ------------- ------------
Comprehensive income $ 1,640,000 $ 1,867,000 - $ (1,867,000) $ 1,640,000
============ ============ ============ ============= ============
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Cash Flows
For the six months ended November 30, 1998
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net cash provided by (used in) $ (2,748,000) $ 1,080,000 $ 187,000 $ 1,297,000 $ (184,000)
operating activities
CASH FLOW FROM INVESTING ACTIVITIES:
Acquisition of property, plant
and equipment (779,000) (2,327,000) (486,000) - (3,592,000)
Acquisition of subsidiaries (69,146,000) - - - (69,146,000)
Other changes, net (6,869,000) - 3,027,000 3,842,000 -
------------ ------------ ------------ ------------- ------------
Net cash provided by (used in) (76,794,000) (2,327,000) 2,541,000 3,842,000 (72,738,000)
investing activities
CASH FLOW FROM FINANCING ACTIVITIES:
Payments on long-term debt and (4,084,000) (727,000) (13,000) - (4,824,000)
capital leases
Proceeds from long-term debt 72,622,000 - - - 72,622,000
Proceeds from sale of common stock, 4,838,000 - - - 4,838,000
net
Proceeds from sale of preferred 6,707,000 - - - 6,707,000
stock, net
Other changes, net 3,293,000 335,000 (5,139,000) (1,511,000)
------------ ------------ ------------ ------------- ------------
Net cash provided by (used in) 80,083,000 2,566,000 322,000 (5,139,000) 77,832,000
financing activities
------------ ------------ ------------ ------------- ------------
NET CHANGE IN CASH 541,000 1,319,000 3,050,000 - 4,910,000
CASH AT BEGINNING OF PERIOD 9,398,000 2,063,000 - - 11,461,000
EFFECT OF EXCHANGE RATES ON CASH - - 21,000 - 21,000
------------ ------------ ------------ ------------- ------------
CASH AT END OF PERIOD $ 9,939,000 $ 3,382,000 $ 3,071,000 $ - $ 16,392,000
============ ============ ============ ============= ============
SUPPLEMENTAL CASH FLOW:
Cash paid during the period for:
Interest $ 360,000 $ 335,000 $ 13,000 $ - $ 708,000
Income taxes 100,000 - 311,000 - 411,000
Noncash investing and financing
activities:
Seller financed acquisition of 128,000 162,000 - - 290,000
property, plant and equipment
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Cash Flows
For the six months ended November 30, 1997
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net cash provided by (used in)
operating activities $ (99,000) $ 2,721,000 - $ (1,106,000) $ 1,516,000
CASH FLOW FROM INVESTING ACTIVITIES:
Acquisition of property, plant and (1,874,000) (2,296,000) - - (4,170,000)
equipment
Issuance of notes receivable (5,808,000) - - - (5,808,000)
Other changes, net 21,000 (650,000) 829,000 200,000
------------ ------------ ------------ ------------- ------------
Net cash provided by (used (7,661,000) (2,946,000) - 829,000 (9,778,000)
in) investing activities
CASH FLOW FROM FINANCING ACTIVITIES:
Payments on long-term debt and
capital leases (125,000) 1,930,000 - - (1,000,000)
Proceeds from long-term debt and
convertible notes 9,316,000 1,943,000 - - 11,246,000
Proceeds from sale of common
stock, net 2,240,000 - - - 2,240,000
Other changes, net 857,000 38,000 - 277,000 1,172,000
------------ ------------ ------------ ------------- ------------
Net cash provided by (used 12,288,000 1,093,000 - 277,000 13,658,000
in) financing activities
NET CHANGE IN CASH 4,528,000 868,000 - - 5,396,000
CASH AT BEGINNING OF PERIOD 2,063,000 985,000 - - 3,048,000
EFFECT OF EXCHANGE RATES ON CASH - - - - -
------------ ------------ ------------ ------------- ------------
CASH AT END OF PERIOD $ 6,591,000 $ 1,853,000 - $ - $ 8,444,000
============ ============ ============ ============= ============
SUPPLEMENTAL CASH FLOW:
Cash paid during the period for:
Interest $ 24,000 $ 233,000 - $ - $ 257,000
Income taxes 246,000 - - - 246,000
</TABLE>
-16-
<PAGE>
Inventories consist of the following:
November 30, May 31,
1998 1998
-------------- --------------
Guarantor subsidiaries
Raw materials $ 4,551,000 $ 5,789,000
Work in progress 5,447,000 5,683,000
Finished goods 4,795,000 4,712,000
-------------- --------------
$ 14,793,000 $ 16,184,000
============== ==============
Non-guarantor subsidiaries
Raw materials $ 3,458,000 -
Work in progress 8,119,000 -
Finished goods 695,000 -
-------------- --------------
$ 12,272,000 -
============== ==============
-17-
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Preliminary Note Regarding Forward-Looking Statements
This report contains "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and is subject to the safe harbor created by those sections. Actual
results could differ materially from those projected in the forward-looking
statements set forth in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Overview
The Company has been an active consolidator of companies, and its results
of operations have been substantially affected by acquisitions. These
acquisitions, as well as internal growth in the Company's existing and acquired
businesses, have resulted in substantial increases in net sales. The Company's
operating expenses and margins and other expenses also have been affected by
certain expenses directly associated with the acquisitions and related capital
raising transactions. The Company has experienced substantial increases in all
other expense categories as a result of the increases in its operations. A
portion of these expenses is attributable to the assimilation of acquired
operations into the Company's existing businesses.
In July 1998, the Company acquired Aeromet International plc ("Aeromet"), a
British limited company (the "Aeromet Acquisition"). Aeromet is a manufacturer
of magnesium and aluminum precision sand and investment castings, and of
titanium and aluminum formed sheet products, with five locations in England. The
Aeromet Acquisition will have a significant effect on the Company's future
operations and on comparisons of income, expense and balance sheet items in
periods after fiscal 1998. The Company's financial results for the six months
ended November 30, 1998 include only four months of operations of Aeromet.
Substantially all of the Company's revenues are generated by sales to
customers in the commercial aerospace, defense, electronics and transportation
industries, with commercial aerospace and defense industry sales being the most
significant. The commercial aerospace and defense industries are cyclical in
nature and subject to changes based on general economic conditions and
commercial airline industry, defense and government spending.
The Company's operations focus on developing, manufacturing and marketing
high performance electronics and metal components and assemblies. The Company's
electronics products are characterized by relatively low volumes and high
margins. In comparison, volumes have historically been higher and margins lower
for the Company's metals products. The Company believes that margins will remain
higher for electronic products than for its metals products. Assembled products
incorporating both electronics and metal parts are expected to generate margins
closer to, but not as high as, electronics product margins. As a result of
margin differences, changes in product mix among its electronics, assembled and
metals products can be expected to affect overall margins for the Company.
The Company's sales are not subject to significant seasonal fluctuations.
However, production and resulting sales are subject to the number of working
days in any given period. Results for various periods may vary materially due to
the number of working days available in any period. Management believes that the
Company's operations for the periods discussed have not been adversely affected
by inflation.
-18-
<PAGE>
Results of Operations
Quarter Ended November 30, 1998 Compared to Quarter Ended November 30, 1997
Net Sales. Net sales increased by $18.1 million, or 146%, to $30.5 million
for the quarter ended November 30, 1998, from $12.4 million for the quarter
ended November 30, 1997. This increase included increases in both its aerospace
industry group net sales (a $16.0 million increase) and its electronics industry
group net sales (a $2.0 million increase). The increase in the Company's net
sales to the aerospace industry was attributable to the inclusion of three
months of Aeromet sales which were offset slightly by slowdowns in delivery of
Boeing orders. Boeing is slowing the timetable of deliveries to better match its
production schedule. The Company expects that this slowdown could continue into
the third and fourth quarters of this fiscal year. The increase in the Company's
net sales to the electronics industry was attributable to the acquisition in
February 1998 of Balo Precision Parts, Inc. ("Balo") and the acquisition
effective as of March 1998 of Electronic Specialty Corporation ("ESC"). Net
sales by Balo, ESC and Aeromet for the second quarter of fiscal 1999 were $1.0
million, $1.1 million, and $16.1 million, respectively.
Gross Profit. Gross profit increased by $1.5 million, or 45.5%, to $4.8
million for the quarter ended November 30, 1998, from $3.3 million for the
quarter ended November 30, 1997. As a percentage of net sales, gross profit
decreased to 15.8% for the quarter ended November 30, 1998, from 26.9% for the
quarter ended November 30, 1997. This decrease was primarily attributable to (a)
the acquisitions of ESC and Aeromet, which have comparatively lower average
gross profit margins, and (b) a $1.6 million non-recurring inventory write down
at ESC due to discontinuation of an unprofitable product line. The impaired
inventory would have been used in certain product lines that are no longer going
to be produced at ESC. ESC may be able to incorporate some of the impaired
material in continuing products, but only as a substitute for less expensive
material. Without ESC and Aeromet, gross profit as a percentage of net sales
would have decreased to 26.2% for the quarter ended November 30, 1998, primarily
because of increased price competition in the electronics industry group. Gross
profit (loss) attributable to Balo, ESC and Aeromet for the second quarter of
fiscal 1999 was $0.3 million, $(1.7 million) and $3.0 million, respectively.
Operating Expenses. Operating expenses increased by $2.2 million, or
100.0%, to $4.4 million for the quarter ended November 30, 1998, from $2.2
million for the quarter ended November 30, 1997. This increase was primarily due
to increased levels of operations in the second quarter of fiscal 1999,
resulting primarily from acquisitions. As a percentage of net sales, operating
expenses decreased to 14.3% for the quarter ended November 30, 1998, from 17.3%
for the quarter ended November 30, 1997. This decrease is primarily attributable
to the acquisition of Aeromet, which has relatively low operating expenses in
relation to net sales. Operating expenses attributable to Balo, ESC and Aeromet
for the second quarter of fiscal 1999 were $0.3 million, $0.2 million and $1.1
million, respectively.
Interest Expense. Interest expense increased by $2.5 million, or 1,250%, to
$2.7 million for the quarter ended November 30, 1998, from $0.2 million for the
quarter ended November 30, 1997. This increase was primarily due to (a) the debt
incurred by the Company to finance the Aeromet Acquisition, (b) the Company's
financing of capital equipment purchases, and (c) the bank debt incurred to
finance the expansion of the Company's Wenatchee facilities. Interest expense
attributable to Balo, ESC and Aeromet for the second quarter of fiscal 1999 was
$0.0 million, $0.0 million and $1.4 million, respectively. Aeromet interest
expense includes approximately 50% of the interest attributable to the
acquisition financing, which has been allocated to Aeromet.
Other Income (Expense). Other income (expense) represents non-recurring and
non-operational income and expense for the period. Other income decreased
$213,000 to an other expense of $197,000 for the quarter ended November 30,
1998, from other income of $16,000 for the quarter ended November 30, 1997.
Other income (expense) attributable to Balo, ESC, and Aeromet for the second
quarter of fiscal 1999 was $0.0 million, $(0.2) million and $0.0 million,
respectively.
Net Income (Loss). Net income decreased by $3.4 million, or 425%, to a net
loss of $2.6 million for the quarter ended November 30, 1998, from net income of
$0.8 million for the quarter
-19-
<PAGE>
ended November 30, 1997, primarily as a result of losses at ESC and additional
interest expense on the financing for the acquisition of Aeromet. Pre-tax net
income (loss) attributable to Balo, ESC and Aeromet for the second quarter of
fiscal 1999 was $0.1 million, $(2.2) million and $0.5 million, respectively.
Aeromet pre-tax net income includes amortization of goodwill, and approximately
50% of the interest expense associated with the acquisition indebtedness.
Six Months Ended November 30, 1998 Compared To Six Months Ended November 30,
1997
Net Sales. Net sales increased by $25.5 million, or 105.2%, to $49.7
million for the six months ended November 30, 1998, from $24.2 million for the
six months ended November 30, 1997. This increase included increases in both the
Company's aerospace industry group net sales (a $21.5 million increase) and its
electronics industry group net sales (a $4.0 million increase). The increase in
the Company's net sales to the aerospace industry was attributable to (a) the
inclusion of four months of Aeromet sales, and (b) increases in the first
quarter of production at Boeing which increased its demand for the Company's
precision cast and machined products. However, Boeing began slowing the
timetable for deliveries of product during the second quarter of fiscal 1999 to
better match its production schedule. This slowdown negatively affected revenue
in the aerospace industry group during the quarter ended November 30, 1998. The
Company expects that the slowdown could continue to negatively affect net sales
for the aerospace group in the third and fourth quarters of fiscal 1999. The
increase in the Company's net sales to the electronics industry was primarily
attributable to the acquisition in February 1998 of Balo and the acquisition
effective as of March 1998 of ESC. Net sales by Balo, ESC and Aeromet for the
first six months of fiscal 1999 were $1.9 million, $2.2 million, and $20.6
million, respectively.
Gross Profit. Gross profit increased by $3.2 million, or 50.8%, to $9.5
million for the six months ended November 30, 1998, from $6.3 million for the
six months ended November 30, 1997. As a percentage of net sales, gross profit
decreased to 19.1% for the six months ended November 30, 1998, from 26.1% for
the six months ended November 30, 1997. This decrease was primarily attributable
to (a) the acquisitions of ESC and Aeromet, which have comparatively lower
average gross profit margins and (b) a $1.6 million non-recurring write down of
impaired inventory at ESC. The impaired inventory would have been used in
certain product lines that are no longer going to be produced at ESC. ESC may be
able to incorporate some of the impaired material in continuing products, but
only as a substitute for less expensive material. Without ESC and Aeromet, gross
profit as a percentage of net sales would have increased to 28.3% for the six
months ended November 30, 1998, primarily because of improved efficiencies from
the development of manufacturing processes and in-house production capabilities
that had previously been purchased from outside vendors, and because of capital
investments in equipment and production capabilities. Gross profit (loss)
attributable to Balo, ESC and Aeromet for the first six months of fiscal 1999
was $0.4 million, $(1.9) million and $3.8 million, respectively.
Operating Expenses. Operating expenses increased by $4.0 million, or 97.6%,
to $8.1 million for the six months ended November 30, 1998, from $4.1 million
for the six months ended November 30, 1997. This increase was primarily due to
increased levels of operations in fiscal 1999 resulting primarily from
acquisitions. As a percentage of net sales, operating expenses decreased to
16.4% for the six months ended November 30, 1998, from 17.2% for the six months
ended November 30, 1997. This decrease is primarily attributable to the
acquisition of Aeromet, which had lower than average operating expenses in
relation to net sales. Operating expenses attributable to Balo, ESC and Aeromet
for the first six months of fiscal 1999 were $0.8 million, $0.5 million and $1.2
million, respectively.
Interest Expense. Interest expense increased by $3.4 million, or 1,042.3%,
to $3.7 million for the six months ended November 30, 1998, from $0.3 million
for the six months ended November 30, 1997. This increase was primarily due to
(a) the debt incurred by the Company to finance the Aeromet Acquisition, (b) the
Company's financing of capital equipment purchases, and (c) the debt incurred to
finance the expansion of the Company's Wenatchee facilities. Interest expense
attributable to Balo, ESC and Aeromet for the first six months of fiscal 1999
was $0.0 million, $0.1 million and $1.4 million, respectively. Interest expense
for Aeromet includes approximately 50% of the interest associated with the
acquisition financing, which has been allocated to Aeromet.
-20-
<PAGE>
Other Income (Expense). Other income (expense) represents non-recurring and
non-operational income and expense for the period. Other income decreased $6.9
million to an other expense of $6.9 million for the six months ended November
30, 1998. This decrease in other income was primarily due to: (a) a $3,581,000
write-down during the quarter ended August 31, 1998 in connection with ESC, and
(b) a $3,103,000 write-down during the quarter ended August 31, 1998 of the
Company's investment in and guarantees related to Orca Technologies, Inc.
("Orca"). The Company is presently considering its options regarding its
investments in ESC and Orca, and additional losses in the future are reasonably
possible. The Company is also exploring its potential remedies under the ESC
purchase agreement. Other income (expense) attributable to Balo, ESC (exclusive
of the write-down discussed above), and Aeromet for the first six months of
fiscal 1999 was $0.1 million, $(0.3) million and $0.0 million, respectively.
Net Income (Loss). Net income decreased by $8.6 million, or 537.5%, to a
net loss of $7.0 million for the six months ended November 30, 1998, from net
income of $1.6 million for the six months ended November 30, 1997, primarily as
a result of (a) the ESC goodwill, ESC impaired inventory, and Orca write-downs,
and (b) the operating losses at Balo and ESC. Pre-tax net income (loss)
attributable to Balo, ESC and Aeromet for the first six months of fiscal 1999
was $(0.3) million, $(6.4) million and $0.8 million, respectively. Aeromet
pre-tax net income includes amortization of goodwill and approximately 50% of
the interest expense associated with the acquisition indebtedness.
Deferred Tax Assets. At November 30, 1998, the Company had net deferred tax
assets of $2.1 million, the realization of which is dependent on material
increases over present levels of pre-tax income and capital gains, primarily in
the United States. The Company expects to achieve these increases through (a)
continued integration, cross selling, and operational efficiencies of its
businesses, including Aeromet, and (b) future asset sales. A deferred tax asset
was recognized during the quarter ended August 31, 1998, however, no deferred
tax asset was recognized during the quarter ended November 30, 1998.
Liquidity and Capital Resources
Financing Activities. During the quarter ended November 30, 1998, the
Company completed a private placement of 2,585,000 shares of common stock,
generating net cash of approximately $4.8 million. See "Significant Events
During Quarter -- Fall 1998 Common Stock Offering." Cash generated by this
financing transaction was offset by payments on long-term debt and capital
leases of $4.5 million during the quarter.
The Company's primary banking relationships include a revolving line of
credit up to $6.3 million for the Company's U.S. operations, a revolving line of
credit up to approximately $7.5 million (4.5 million pounds sterling) for
Aeromet's operations, a term loan of approximately $700,000 for building
improvements, and a term loan of $1.2 million for the construction of the
Company's headquarters building. Currently both revolving lines of credit are
unused.
Capital Expenditures and Commitments. The Company made capital expenditures
of $2.0 million during the second quarter of fiscal 1999. The expenditures were
for the completion of the new corporate headquarters, and for capital
improvements and equipment at various manufacturing sites.
The Company's Balo subsidiary closed the purchase of its manufacturing
facility, which Balo had previously been renting, for a purchase price of
approximately $1.1 million in early December 1998. Also in early December 1998,
the Company's Aeromet America, Inc. subsidiary purchased substantially all the
assets of Lyden Castparts, Inc. ("Lyden") from a related party. The purchase
price consisted of approximately $642,000 of Lyden's liabilities which the
Company paid off, plus approximately $300,000 in assumed liabilities consisting
primarily of trade payables. The Company is currently negotiating an agreement
that would give it the option to purchase three parcels of land that make up the
majority of its Wenatchee campus from the Port of Chelan County for $5.4
million. Upon execution of that agreement, the Company anticipates that the
purchase of the first parcel would close in January 1999. If the Company
exercises its options to purchase both of the remaining two parcels, the
purchase of the second parcel is expected to close by August 31, 1999 and the
third is expected to close by June 10, 2000. In connection with the
-21-
<PAGE>
Aeromet Acquisition, the Company entered into an Option Agreement with Charles
Baynes plc, which grants the Company a one-year option to purchase three of the
facilities currently leased by Aeromet.
As of November 30, 1998, the Company had no other material commitments
outstanding for purchases of additional capital assets.
Working Capital. The Company's working capital, as of November 30, 1998 and
May 31, 1998 was $45.2 million and $25.6 million, respectively. The increase in
working capital at November 30, 1998 over May 31, 1998 was primarily the result
of the Aeromet Acquisition and the associated financing, the sale of the Series
B Convertible Preferred Stock, and the sale of common stock.
Future Capital Requirements. The Company believes that the net proceeds
from its fall 1998 common stock offering, plus cash from operations, will be
sufficient to meet the Company's operating cash requirements and to fund
budgeted capital expenditures for fiscal 1999. The Company may, however, decide
to seek additional financing in the future to fund capital expenditures after
fiscal 1999, fund possible acquisition opportunities, or to fund the eventual
redemption or repayment of the notes used to finance the Aeromet acquisition.
Foreign Currency Translation. With the acquisition of Aeromet, whose
functional currency is the British Pound Sterling, the Company translates the
activity of Aeromet into U.S. Dollars on a monthly basis. The balance sheet of
Aeromet is translated using the exchange rate as of the date of the balance
sheet. For purposes of the statement of operations and statement of cash flows,
the Company uses the weighted average exchange rate for the period. The value of
the Company's assets, liabilities, revenue, and expenses may vary materially
from one reporting period to the next solely as a result of varying exchange
rates. The Company is in the process of developing a comprehensive foreign
currency hedging policy but has not entered into any hedging activity as of
November 30, 1998.
The Company does not expect any material changes in the results of
operations or in operating procedures due to the conversion to the "Euro" by
eleven countries in the European Union on January 1, 1999. The Company expects
to continue to transact business using primarily the U.S. Dollar and the British
Pound Sterling.
Significant Events During Quarter
Reduction of Long-Term Debt. During September 1998, the Company paid off a
note in the amount of $4.0 million. In connection with the payoff the Company
accelerated recognition of $160,000 of related loan fees, which is included in
interest expense for the second quarter of fiscal 1999.
Fall 1998 Common Stock Offering. In November 1998, the Company closed an
offering (the "Offering") of 2,585,000 shares of Common Stock to five accredited
investors for aggregate offering proceeds of $5,170,000 before expenses, in a
transaction exempt from registration under Rule 506 under the Securities Act of
1933, as amended. The Company paid $310,200 in commissions in connection with
the Offering. The Company has agreed to use its best efforts to file a
registration statement within 180 days after the closing date to register the
resale of the shares sold in the Offering.
Proposed Nova-Tech Acquisition. In November 1998, the Company entered into
a non-binding letter of intent to acquire NOVA-TECH Engineering, Inc. of
Edmonds, Washington ("Nova-Tech") for a purchase price of approximately $7
million in cash and Common Stock. Nova-Tech is a professional engineering group
that designs and manufactures specialized manufacturing equipment, primarily for
the aerospace industry. Closing of the Nova-Tech acquisition is subject to a
number of conditions, including the execution of a definitive agreement, receipt
of a letter ruling from the IRS relating to Nova-Tech's employee stock ownership
plan, and satisfactory completion of the Company's due diligence review, among
other things. Due to these
-22-
<PAGE>
conditions, the Company does not expect to be in a position to close the
acquisition until spring or summer of 1999.
Year 2000
The Company (including Aeromet) is developing and carrying out a
comprehensive strategy for updating its information management and manufacturing
systems for Year 2000 ("Y2K") compliance. The Company's information technology
("IT") systems include customized and standard software purchased from outside
vendors. All software has been identified and is being assessed to determine the
extent of renovations required in order to be Y2K compliant. The Company
believes that all software will be made Y2K compliant early in the next fiscal
year through vendor-provided updates or replacement with other Y2K compliant
hardware and software. The Company is in the process of identifying significant
non-IT systems which may be impacted by the Y2K problem, including those
relating to production, processing and communication equipment and is in the
process of determining through inquiries of equipment suppliers, as well as
testing of such equipment, the extent of renovations required, if any. The
Company believes its Y2K assessment will be completed before the end of the
Company's current fiscal year, and that renovation, validation and
implementation will be completed early in the next fiscal year.
The Company is in the process of identifying third parties with which it
has a significant relationship that, in the event of a Y2K failure, could have a
material impact on the Company's financial position or operating results. The
third parties include energy and utility suppliers, creditors, material and
product suppliers, communication vendors and the Company's significant
customers. These relationships, especially those associated with certain
suppliers and customers, are material to the Company, and a Y2K failure by one
or more of these parties could result in a material adverse effect on the
Company's operating results and financial position. The Company is making
inquiries of these third parties to assess their Y2K readiness. The Company
expects that this process will continue throughout the current and subsequent
fiscal year.
The Company expects that costs to address Y2K issues will total
approximately $250,000, of which approximately $125,000 will be spent in fiscal
1999, with the remainder being spent during fiscal 2000. Costs include salary
and benefits for personnel, hardware and software costs, and consulting and
travel expenses associated, directly or indirectly, with addressing Y2K issues.
Y2K issues have received a high priority within the Company and, as a result,
certain other IT projects have been delayed. While such non-Y2K projects are
expected to enhance operational efficiencies and improve the quality of
information available to management, the delay of such projects is not expected
to have a material adverse impact on the Company's operations. Worst case Y2K
scenarios could be as insignificant as a minor interruption in production or
shipping resulting from unanticipated problems encountered in the IT systems of
the Company or any of the significant third parties with whom the Company does
business. The pervasiveness of the Y2K issue makes it likely that previously
unidentified issues will require remediation during the normal course of
business. In such a case, the Company anticipates that transactions could be
processed manually while IT and other systems are repaired and that such
interruptions would have a minor effect on the Company's operations. On the
other hand, a worst case Y2K scenario could be as catastrophic as an extended
loss of utility service resulting from interruptions at the point of power
generation, long-line transmission, or local distribution to the Company's
production facilities. Such an interruption could result in an inability to
provide products to the Company's customers, resulting in a material adverse
effect on the Company's operating results and financial position. The Company is
in the process of developing a contingency plan in the event of a catastrophic
Y2K problem and expects to have a plan in place early in the next fiscal year.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
disclosure of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. SFAS No. 130,
which is effective for fiscal years beginning after December 15, 1997, requires
restatement of financial statements for earlier periods to be provided for
comparative purposes. The Company anticipates that implementing the provisions
of SFAS No. 130 will not have a significant
-23-
<PAGE>
impact on the Company's existing disclosures. The Company has not determined the
manner in which it will present the information required by SFAS No. 130 in its
annual financial statements.
In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years must be restated. The
Company anticipates that implementing the provisions of SFAS No. 131 will not
have a significant impact on the Company's existing disclosures. The Company has
not determined the manner in which it will present the information required by
SFAS No. 131 in its annual financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires the recognition of all
derivatives in the consolidated balance sheet as either assets or liabilities
measured at fair value. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999. The Company has not yet determined what impact SFAS No. 133
will have on its financial position or results of operations when such statement
is adopted.
-24-
<PAGE>
PART II
OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
From time to time the Company is involved in legal proceedings relating to
claims arising out of operations in the normal course of business. The Company
is not aware of any material legal proceedings pending or threatened against the
Company or any of its properties.
Item 2. Changes in Securities
(a) None.
(b) Dividend Payment Restrictions
In connection with the issuance of its 11 1/4% Senior Subordinated Notes
due 2005, the Company is subject to an Indenture that limits the Company's
ability to pay dividends, repurchase its equity securities, make certain other
kinds of restricted payments, and incur certain indebtedness. The Company has
never declared or paid cash dividends on the Common Stock. The Company currently
anticipates that it will retain all future earnings to fund the operation of its
business and does not anticipate paying dividends on the Common Stock in the
foreseeable future.
(c) Fall 1998 Common Stock Offering
In November 1998, the Company closed an offering (the "Offering") of
2,585,000 shares of Common Stock to five accredited investors for aggregate
offering proceeds of $5,170,000 before expenses, in a transaction exempt from
registration under Rule 506 under the Securities Act of 1933, as amended. The
Company paid $310,200 in commissions in connection with the Offering. The
Company has agreed to use its best efforts to file a registration statement with
180 days after the closing date to register the resale of the shares sold in the
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 (the "Annual Meeting")
was held on October 13, 1998. The shareholders voted upon the following matters
at the Annual Meeting:
(a) Election of Directors
The following six directors nominated by the Board of Directors were
elected to serve as directors of the Company until the 1999 Annual Meeting of
Shareholders:
<TABLE>
<CAPTION>
BROKER
DIRECTOR FOR AGAINST ABSTAIN NON-VOTES
- ------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Allen W. Dahl 14,379,985 42,397 52,590 0
Urs Diebold 14,197,593 224,789 52,590 0
Werner Hafelfinger 14,198,518 223,864 52,590 0
Dale L. Rasmussen 14,212,718 209,664 52,590 0
William A. Wheeler 14,215,718 206,664 52,590 0
Donald A. Wright 14,219,256 203,126 52,590 0
</TABLE>
-25-
<PAGE>
(b) Approval of Amended and Restated Independent Director Stock Plan
The Company's Amended and Restated Independent Director Stock Plan, as
described in the Company's proxy materials for the Annual Meeting, was approved
by the following vote:
For 13,276,326
Against 1,079,034
Abstain 119,612
Broker Non-Votes 0
Total 14,474,972
(c) Ratification of KPMG Peat Marwick LLP as the Company's Independent Auditor
The selection of KPMG Peat Marwick LLP as the Company's independent auditor
was ratified by the following vote:
For 14,361,317
Against 56,073
Abstain 57,582
Broker Non-Votes 0
Total 14,474,972
Item 5. Other Information
None.
-26-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits.
The following documents are filed as exhibits to this Quarterly Report:
Exhibit
Number Document
- ------- --------
3.1 Articles of Incorporation of Pacific Aerospace & Electronics, Inc.
(1)
3.2 Amendment to Articles of Incorporation containing Designation of
Rights and Preferences of Series A Convertible Preferred Stock, as
corrected. (2)
3.3 Amendment to Articles of Incorporation containing Designation of
Rights and Preferences of Series B Convertible Preferred Stock.
(3)
3.4 Bylaws of Pacific Aerospace & Electronics, Inc. (1)
4.1 Form of specimen certificate for the Series B Preferred.(3)
4.2 Form of Common Stock Purchase Warrant issued to holders of the
Series B Preferred.(3)
4.3 Securities Purchase Agreement, dated May 15, 1998, between Pacific
Aerospace & Electronics, Inc. and the purchasers of the Company's
Series B Preferred.(3)
4.4 Registration Rights Agreement, dated May 15, 1998 between Pacific
Aerospace & Electronics, Inc. and the holders of the Series B
Preferred.(3)
4.5 Purchase Agreement, dated as of July 23, 1998, between Pacific
Aerospace & Electronics, Inc., Balo Precision Parts, Inc.,
Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc.,
Electronic Specialty Corporation, Morel Industries, Inc.,
Northwest Technical Industries, Inc., Pacific Coast Technologies,
Inc., Seismic Safety Products, Inc., PA&E International, Inc. and
Friedman, Billings, Ramsey & Co., Inc. and BancBoston Securities
Inc.(4)
4.6 Indenture dated as of July 30, 1998, between Pacific Aerospace &
Electronics, Inc., Balo Precision Parts, Inc., Cashmere
Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic
Specialty Corporation, Morel Industries, Inc., Northwest Technical
Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety
Products, Inc., PA&E International, Inc. and IBJ Schroder Bank &
Trust Company.(4)
4.7 Form of Global Note of Pacific Aerospace & Electronics, Inc.(4)
4.8 Registration Rights Agreement, dated as of July 30, 1998, between
Pacific Aerospace & Electronics, Inc., Balo Precision Parts, Inc.,
Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc.,
Electronic Specialty Corporation, Morel Industries, Inc.,
Northwest Technical Industries, Inc., Pacific Coast Technologies,
Inc., Seismic Safety Products, Inc., PA&E International, Inc. and
Friedman, Billings, Ramsey & Co., Inc. and BancBoston Securities
Inc.(4)
10.1 Loan Agreement, dated September 22, 1998, between Pacific
Aerospace & Electronics, Inc. and KeyBank National Association.
(5)
10.2 Promissory Note, dated September 22, 1998, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association.(5)
10.3 Security Agreement, dated September 22, 1998, between Pacific
Aerospace & Electronics, Inc. and KeyBank National Association.(5)
10.4 Promissory Note, dated September 30, 1998, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association.(5)
10.5 Deed of Trust, dated September 30, 1998, between Pacific Aerospace
& Electronics, Inc., KeyBank National Association and Land Title
Company, Chelan-Douglas County, Inc.(5)
10.6 Condominium Purchase and Sale Agreement, dated as of November 7,
1998, between Pacific Aerospace & Electronics, Inc. and Donald A.
Wright. (6)
27 Financial Data Schedule. (6)
-27-
<PAGE>
- --------------
(1) Incorporated by reference to the Company's Current Report on Form 8-K filed
on December 12, 1996.
(2) Incorporated by reference to the Company's Current Report on Form 8-K filed
on March 12, 1997.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K filed
on August 28, 1998.
(4) Incorporated by reference to the Company's Current Report on Form 8-K filed
on August 14, 1998
(5) Incorporated by reference to the Company's Quarterly Report on 10-Q filed
on October 13, 1998.
(6) Filed with this report.
b. Reports on Form 8-K.
The Company filed with the Commission the following Current Report on Form
8-K during the quarter ended November 30, 1998:
On September 21, 1998, the Company filed Amendment No. 2 to the Current
Report on Form 8-K, dated July 10, 1998, reporting the Company's
acquisition of ESC, effective as of March 1998, as previously amended by an
amendment on Form 8-K/A, dated August 26, 1998, filing the consolidated
financial statements of ESC and its subsidiary for (1) the two years ended
March 31, 1997 and March 31, 1996, and (2) the nine-month periods ended
December 31, 1997 and December 31, 1996.
-28-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PACIFIC AEROSPACE & ELECTRONICS, INC.
Date: January 8, 1999 /s/ DONALD A. WRIGHT
-----------------------------------------
Donald A. Wright
President, Chief Executive Officer, and
Chairman of the Board
(Principal Executive Officer)
Date: January 8, 1999 /s/ NICK A. GERDE
-----------------------------------------
Nick A. Gerde
Vice President Finance, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting Officer)
-29-
<PAGE>
EXHIBIT INDEX
The following documents are filed as exhibits to this Quarterly Report:
Exhibit
Number Document
- ------- --------
3.1 Articles of Incorporation of Pacific Aerospace & Electronics, Inc.
(1)
3.2 Amendment to Articles of Incorporation containing Designation of
Rights and Preferences of Series A Convertible Preferred Stock, as
corrected. (2)
3.3 Amendment to Articles of Incorporation containing Designation of
Rights and Preferences of Series B Convertible Preferred Stock.
(3)
3.4 Bylaws of Pacific Aerospace & Electronics, Inc. (1)
4.1 Form of specimen certificate for the Series B Preferred.(3)
4.2 Form of Common Stock Purchase Warrant issued to holders of the
Series B Preferred.(3)
4.3 Securities Purchase Agreement, dated May 15, 1998, between Pacific
Aerospace & Electronics, Inc. and the purchasers of the Company's
Series B Preferred.(3)
4.4 Registration Rights Agreement, dated May 15, 1998 between Pacific
Aerospace & Electronics, Inc. and the holders of the Series B
Preferred.(3)
4.5 Purchase Agreement, dated as of July 23, 1998, between Pacific
Aerospace & Electronics, Inc., Balo Precision Parts, Inc.,
Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc.,
Electronic Specialty Corporation, Morel Industries, Inc.,
Northwest Technical Industries, Inc., Pacific Coast Technologies,
Inc., Seismic Safety Products, Inc., PA&E International, Inc. and
Friedman, Billings, Ramsey & Co., Inc. and BancBoston Securities
Inc.(4)
4.6 Indenture dated as of July 30, 1998, between Pacific Aerospace &
Electronics, Inc., Balo Precision Parts, Inc., Cashmere
Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic
Specialty Corporation, Morel Industries, Inc., Northwest Technical
Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety
Products, Inc., PA&E International, Inc. and IBJ Schroder Bank &
Trust Company.(4)
4.7 Form of Global Note of Pacific Aerospace & Electronics, Inc.(4)
4.8 Registration Rights Agreement, dated as of July 30, 1998, between
Pacific Aerospace & Electronics, Inc., Balo Precision Parts, Inc.,
Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc.,
Electronic Specialty Corporation, Morel Industries, Inc.,
Northwest Technical Industries, Inc., Pacific Coast Technologies,
Inc., Seismic Safety Products, Inc., PA&E International, Inc. and
Friedman, Billings, Ramsey & Co., Inc. and BancBoston Securities
Inc.(4)
10.1 Loan Agreement, dated September 22, 1998, between Pacific
Aerospace & Electronics, Inc. and KeyBank National Association.
(5)
10.2 Promissory Note, dated September 22, 1998, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association.(5)
10.3 Security Agreement, dated September 22, 1998, between Pacific
Aerospace & Electronics, Inc. and KeyBank National Association.(5)
10.4 Promissory Note, dated September 30, 1998, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association.(5)
10.5 Deed of Trust, dated September 30, 1998, between Pacific Aerospace
& Electronics, Inc., KeyBank National Association and Land Title
Company, Chelan-Douglas County, Inc.(5)
10.6 Condominium Purchase and Sale Agreement, dated as of November 7,
1998, between Pacific Aerospace & Electronics, Inc. and Donald A.
Wright. (6)
27 Financial Data Schedule. (6)
<PAGE>
- --------------
(1) Incorporated by reference to the Company's Current Report on Form 8-K filed
on December 12, 1996.
(2) Incorporated by reference to the Company's Current Report on Form 8-K filed
on March 12, 1997.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K filed
on August 28, 1998.
(4) Incorporated by reference to the Company's Current Report on Form 8-K filed
on August 14, 1998
(5) Incorporated by reference to the Company's Quarterly Report on 10-Q filed
on October 13, 1998.
(6) Filed with this report.
CONDOMINIUM PURCHASE AND SALE AGREEMENT
THIS AGREEMENT, made and entered into this 7th day of November, 1998, by
and between PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington corporation,
hereinafter referred to as the "Seller," and DONALD A. WRIGHT, hereinafter
referred to as the "Buyer,"
W I T N E S S E T H:
1. Agreement of Sale. The Seller agrees to sell and the Buyer agrees to
purchase Unit 4 (the "Unit") in the Confluence Park Condominium (the
"Condominium"), as established by the Declaration of Covenants, Conditions,
Restrictions and Reservations recorded under Document No. 2040202 in
Chelan County, Washington (the "Declaration"), plus the exclusive rights to
use the limited common elements identified as the two (2) parking spaces in
the existing garage upon and subject to the terms of the Declaration.
2. Purchase Price. The total purchase price for the Unit is ONE HUNDRED
SEVENTY-FIVE THOUSAND DOLLARS ($175,000), which purchase price shall be
paid to the Seller in cash on the Closing Date. The Seller shall have no
obligation to pay interest on the Deposit, but any interest which is
otherwise earned thereon shall be paid to the person to whom the Deposit is
paid and, if paid to the Seller, shall be credited against the purchase
price.
3. Title. Title to the Unit shall be conveyed to the Buyer by statutory
warranty deed subject to easements, reservations, restrictions, covenants
and conditions of record, including, without limitation, the terms and
provisions of the Declaration and the survey map and plans recorded in
conjunction therewith; taxes and assessments, general and special, not due
and payable as of the Closing Date (defined below); Condominium association
assessments not due and payable on the Closing Date; rights of the public
to parts, if any, lying in streets and rights-of-way; rights reserved in
federal patents or state deeds; building and use restrictions general to
the district in which the Condominium is located; and building and zoning
regulations applicable to the Condominium. Any other liens or encumbrances
may be discharged by the Seller out of the purchase price on the Closing
Date.
4. Title Insurance. The Buyer shall be responsible for any title insurance he
requires for this purchase.
5. Buyer's Conditions to Closing. The Buyer's obligation to close this
transaction is conditioned solely upon (a) the Seller's compliance with the
terms hereof in all material
-1-
<PAGE>
respects, and (b) the Unit having not been materially damaged or destroyed
by fire or other casualty, unless the Seller elects to restore such damage
and such restoration is completed in all material respects prior to the
Closing Date. If the Unit is materially damaged by fire or other casualty
and is not substantially restored by the Seller at its expense by the
Closing Date, or if the Buyer is unable to obtain its purchase money loan
by the Closing Date after making due application therefor, this agreement
shall automatically terminate, whereupon the Deposit shall be returned to
the Buyer.
6. Closing Date and Procedures. This transaction shall close in the offices of
Seller on the Closing Date. For the purposes of this agreement, the
"Closing Date" shall mean the date of recordation of the Seller's deed to
the Buyer.
7. Closing Costs and Prorations. The Seller shall be responsible for the
payment of any excise tax assessed on the conveyance of title to the Unit
and any sums due with respect to the discharge of any encumbrances for
which the Seller is responsible. The Buyer shall pay the fees for recording
the Seller's deed and for any title insurance required by the Buyer.
Condominium assessments for the month which includes the Closing Date, real
estate taxes and assessments, and billings for utilities not separately
metered, if any, shall be prorated between the parties hereto as of the
Closing Date.
8. Assessment Deposit. If the Seller so requests prior to the Closing Date,
the Buyer shall deposit with the Seller at closing a sum sufficient to
discharge the Buyer's estimated first two (2) months' assessments for the
common expenses levied or to be levied by the Condominium owners'
association.
9. Association Notice. The Buyer agrees to provide the Condominium owners'
association with written notice of its name, address and the date this sale
closed immediately following the Closing Date. The Buyer acknowledges that
such notice is required by statute and is necessary for the association to
include the Buyer as an insured under the association's insurance policies.
10. Receipt of Public Offering Statement. The Buyer acknowledges that at least
seven (7) days before the execution of this Agreement he received a
complete and legible copy of the Seller's public offering statement and
each of the documents which were identified therein as accompanying such
statement. The Buyer agrees that all of the documents which accompanied the
public offering state are incorporated herein as a part of this agreement
and covenants with the Seller to comply with and observe each and every
term, covenant and condition therein contained. This covenant shall survive
the closing of this sale.
11. Possession. The Buyer shall be entitled to possession of the Unit as of the
Closing Date.
-2-
<PAGE>
12. Fixtures and Improvements. The Seller agrees that as part of the purchase
price for this transaction, the Unit shall be equipped and furnished with
the items specifically indicated on Exhibit A attached hereto, and that all
of such items are included in the purchase price. The Buyer acknowledges
that he is familiar with each of such items and has accepted and agreed to
the same, and Seller shall be under no obligation to change, modify or
replace any such items. If any of such items become unavailable to Seller
or cost thereof significantly increases, Seller shall have the right to
replace such items with new furnishings, fixtures and equipment of
comparable quality and utility.
13. Condition of Property. Except as otherwise stated in the Seller's public
offering statement, the Seller has made no representations and does not
warrant the condition of the Property, and the Buyer, having inspected the
Property, agrees to purchase the same "as is."
14. Defaults and Remedies. If the Buyer fails, without legal excuse, to close
this transaction as and when required by this agreement, the Seller may
terminate this agreement and all of the rights granted to the Buyer herein
and Buyer shall pay Seller $500 as its sole and exclusive remedy. The
parties acknowledge that this provision is intended to satisfy the
requirements of RCW 64.04.005(1)(a); is not to be construed to be a
limitation upon any right or remedy available to Seller in the event of any
other default on the part of the Buyer under this or any other agreement;
and does not affect the parties' rights to recover attorneys' fees in any
action commenced with respect to this agreement.
Parties' initials:
[Illegible] /s/ DW
----------------- ----------------
Seller's Initials Buyer's Initials
Any default by the Seller under this agreement which continues to the earlier of
(a) fifteen (15) days after the Buyer's written notice thereof, or (b) the
Closing Date shall enable the Buyer to terminate this agreement and recover the
Deposit and its actual damages from the Seller.
15. Attorneys' Fees. The prevailing party in any litigation concerning this
agreement shall be entitled to be paid its court costs and reasonable
attorneys' fees by the party against whom judgment is rendered, including
such costs and fees as may be incurred on appeal.
16. Real Estate Brokers. The parties agree that the commission of any real
estate broker or agent employed in connection with this transaction shall
be paid solely by the party contracting for such services in writing. The
Buyer acknowledges that no broker or agent has made any representations or
warranties regarding the Unit, the Condominium or any other matters
relating to this transaction which are binding upon the Seller.
-3-
<PAGE>
17. Notices. All notices which are given in connection with this agreement
shall be in writing and delivered or sent by certified mail, return receipt
requested, with postage prepaid. Notices given to the Seller shall be
delivered or addressed to 430 Olds Station Road, Wenatchee, Washington
98801, Attn: President, and notices given to the Buyer shall be delivered
or addressed to the address listed below its signature on this agreement.
The place for receipt of such notices may be changed by not less than
fifteen (15) days' advance notice given by the means above described.
Notices shall be deemed effective upon the date of delivery or two (2)
calendar days following the date of the U.S. postmark thereon.
18. Time of Performance. Time is of the essence of each and every term,
covenant and condition hereof.
19. Partial Invalidity. If any of the provisions of this agreement are ruled
invalid by any court of competent jurisdiction, such ruling shall not
affect, impair, or invalidate any of the other terms hereof.
20. Construction of Agreement. This agreement shall create only the
relationship of seller and purchaser and no agency, employment,
partnership, joint venture or other joint undertaking shall be inferred
from these presents. Except to the extent stated in this agreement, neither
party shall have the right to make any representations or incur any debts
on behalf of the other. If either party is comprised of more than one
person, such persons shall be jointly and severally liable hereunder. The
Buyer acknowledges that he has read this agreement and has been given the
opportunity to seek the assistance of legal counsel, and that this
agreement has been mutually negotiated and shall not be construed against
either party. All sums herein mentioned, including, without limitation, the
purchase price and the installments thereof, shall be calculated by and
payable in the lawful currency of the United States.
21. Successors. Subject to the limitations upon assignments contained herein,
all rights and obligations arising out of this agreement shall inure to the
benefit of and be binding upon the respective heirs, successors, assigns,
administrators, and marital communities, if any, of the parties hereto.
22. Venue. The venue of any action brought to interpret or enforce this
agreement shall be laid in Chelan County, Washington.
23. Controlling Law. This agreement shall be construed, interpreted and
enforced in accordance with the laws of the State of Washington.
-4-
<PAGE>
24. Entire Agreement. This agreement constitutes the entire agreement of the
parties hereto, it supersedes all previous oral and written agreements
between the Seller and the Buyer which relate to the Buyer's purchase of
the Unit, and may not be amended except by subsequent written agreement
executed by the Seller and the Buyer. No waiver of any term, covenant or
condition of or right or remedy under this agreement shall be effective
unless and to the extent evidenced by an express written agreement signed
by the waiving party in each instance.
PACIFIC AEROSPACE & ELECTRONICS,
INC., a Washington corporation
By /s/ NICK GERDE
--------------------------------------
Printed Name: Nick Gerde
------------------------
Title: VP Finance
-------------------------------
"Seller"
/s/ DONALD A. WRIGHT
-----------------------------------------
DONALD A. WRIGHT
"Buyer"
Address:
430 Olds Station Road
-----------------------------------------
Wenatchee, WA 98801
-----------------------------------------
-----------------------------------------
THIS AGREEMENT REQUIRES THE PARTIES TO INITIAL PARAGRAPH 14.
-5-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited financial statements of Pacific Aerospace & Electronics, Inc., and its
subsidiaries for the quarter and six months ended November 30, 1998, and is
qualified it its entirety by reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> MAY-31-1999 MAY-31-1999
<PERIOD-END> NOV-30-1998 NOV-30-1998
<CASH> 16,392,000 16,392,000
<SECURITIES> 2,719,000 2,719,000
<RECEIVABLES> 21,746,000 21,746,000
<ALLOWANCES> 419,000 419,000
<INVENTORY> 27,065,000 27,065,000
<CURRENT-ASSETS> 66,752,000 66,752,000
<PP&E> 54,048,000 54,048,000
<DEPRECIATION> 6,485,000 6,485,000
<TOTAL-ASSETS> 167,379,000 167,379,000
<CURRENT-LIABILITIES> 21,566,000 21,566,000
<BONDS> 82,622,000 82,622,000
0 0
0 0
<COMMON> 19,000 19,000
<OTHER-SE> 62,855,000 62,855,000
<TOTAL-LIABILITY-AND-EQUITY> 167,379,000 167,379,000
<SALES> 30,477,000 49,655,000
<TOTAL-REVENUES> 30,477,000 49,655,000
<CGS> 25,655,000 40,159,000
<TOTAL-COSTS> 25,655,000 40,159,000
<OTHER-EXPENSES> 4,355,000 8,131,000
<LOSS-PROVISION> 0 700,000
<INTEREST-EXPENSE> 2,683,000 3,752,000
<INCOME-PRETAX> (2,275,000) (8,941,000)
<INCOME-TAX> 300,000 (1,955,000)
<INCOME-CONTINUING> (2,575,000) (6,986,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,575,000) (6,986,000)
<EPS-PRIMARY> (0.15) (0.43)
<EPS-DILUTED> (0.15) (0.43)
</TABLE>
