THIS PROSPECTUS IS FILED PURSUANT
TO RULE 424(b)(3) AND RELATES TO
REGISTRATION STATEMENT
FILE #333-68023
PROSPECTUS
Pacific Aerospace & Electronics, Inc.
Offer to Exchange
11 1/4% Series B Senior Subordinated Notes due 2005
for
11 1/4% Senior Subordinated Notes due 2005
PACIFIC AEROSPACE & Pacific Aerospace develops, manufactures and
ELECTRONICS, INC. markets high-performance electronics and
430 OLDS STATION ROAD metal components and assemblies for the
WENATCHEE, WASHINGTON aerospace, defense, electronics and transportation
98801 (509) 667-9600 industries in the United States and Europe.
EXCHANGE OFFER Pacific Aerospace is offering new senior
subordinated notes ("New Notes") in exchange for
its existing senior subordinated notes ("Old
Notes") of an equal principal amount. Pacific
Aerospace will not receive any proceeds from the
issuance of the New Notes or from the exchange of
the New Notes for the Old Notes (the "Note
Exchange").
EXPIRATION OF OFFER The Exchange Offer will expire at 5:00 p.m. New
York City time on February 23, 1999, unless the
Company extends the deadline.
TERMS OF THE NEW The terms of the New Notes are substantially
NOTES identical to the terms of the Old Notes. However,
the New Notes are not subject to transfer
restrictions or registration rights, unless held by
certain broker-dealers, affiliates or certain other
persons.
o Payments. The Company will pay accrued interest
on February 1 and August 1 of each year
beginning February 1, 1999. The Company must
repay the principal balance of any New Notes
that it has not redeemed by August 1, 2005.
o Optional Redemption. The Company may redeem up
to $15,000,000 of the Notes until August 1,
2001 using the proceeds of qualified equity
offerings. After August 1, 2003, the Company
may redeem all or part of the New Notes at
redemption prices that decline over time until
the maturity date.
o Collateral; Ranking. The New Notes are not
secured by any collateral. The Company's
obligation to repay the New Notes will rank
equally with the obligation to repay its other
unsecured debt that is not Senior Indebtedness.
o Global Note. The New Notes will be issued as a
single, global note that will be deposited with
The Depository Trust Company in New York, New
York. Individual note holders will not receive
certificates for the New Notes, except in
certain limited circumstances.
Listing The Company does not plan to list the New Notes on
any securities exchange or seek quotation on any
automated quotation system. The Old Notes are
listed on Nasdaq's PORTAL system.
Mailing The Company is mailing this Prospectus and the
Letter of Transmittal to the holders of the Old
Notes on or about January 22, 1999.
Potential investors should consider the Risk Factors starting on page 10
before participating in the Note Exchange.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the New Notes, or determined if this
Prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
- --------------------------------------------------------------------------------
January 22, 1999
<PAGE>
TABLE OF CONTENTS
Page
Summary *................................................................... 3
Risk Factors * ............................................................. 10
Use of Proceeds ............................................................ 17
Selected Financial Data of the Company...................................... 18
Selected Financial Data of Aeromet.......................................... 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") *...................................... 20
Business *.................................................................. 32
Management.................................................................. 45
Certain Transactions........................................................ 52
Principal Shareholders...................................................... 53
The Exchange Offer ......................................................... 55
Description of Notes ....................................................... 64
Certain United States Federal Income Tax Consequences ..................... 99
Plan of Distribution........................................................ 100
Description of Capital Stock................................................ 101
Legal Matters............................................................... 104
Experts..................................................................... 104
Index to Financial Statements............................................... F-1
Index to Unaudited Pro Forma Financial Data................................. P-1
* Special Note Regarding Forward-Looking Statements
Many sections in this Prospectus, and the sections marked above by an
asterisk in particular, contain forward-looking statements. These
forward-looking statements are not guarantees of Pacific Aerospace's future
performance. They are subject to risks and uncertainties related to business
operations, some of which are beyond Pacific Aerospace's control. Any of these
risks or uncertainties may cause actual results or future circumstances to
differ materially from the forward-looking statements contained in this
Prospectus.
Incorporation by Reference
This Prospectus incorporates certain exhibits of Pacific Aerospace that are
not included in or delivered with this Prospectus. Copies of these documents are
available without charge upon request of the Note holders from Pacific Aerospace
at 430 Olds Station Road, Wenatchee, Washington 98801; attention Nick A. Gerde,
Vice President Finance and Chief Financial Officer (telephone number (509)
667-9600). To ensure timely delivery, Note holders must deliver their requests
for such documents to the Company by no later than February 11, 1999.
2
<PAGE>
SUMMARY
The Company
- -----------
Pacific Aerospace & Electronics, Inc. (the "Company") develops,
manufactures and markets high-performance electronics and metal components and
assemblies for the aerospace, defense, electronics and transportation
industries.
Aeromet Acquisition
On July 30, 1998, the Company nearly doubled its size by acquiring Aeromet
International plc, a British limited company. Aeromet is one of the leading
suppliers in the United Kingdom of magnesium and aluminum precision sand and
investment castings, and of titanium and aluminum formed sheet products.
Aeromet's casting and forming technologies and products complement the Company's
U.S. precision metals product lines. The Company sells Aeromet's products
primarily to the aerospace, defense and motorsport industries in Europe. The
Company funded the Aeromet acquisition with the proceeds from the sale of the
Old Notes.
Business Strengths
Significant Customer Base. The Company counts among its customers many of
the world's leading aerospace, defense, electronics and transportation
companies. The Company believes that one of the key advantages of the Aeromet
acquisition is the opportunity to access Aeromet's significant base of
additional customers. The Company's leading customers are:
U.S. Operations U.K. Operations
================================================================================
Boeing British Aerospace
PACCAR Rolls Royce
Raytheon/Hughes GKN Westland Aerospace
Honeywell Lucas Aerospace
Lockheed Martin Alenia (Aermachhi)
Northrop Grumman
Space Systems/Loral
Westinghouse
TRW
Litton Industries
Strong Position in Major Aerospace and Defense Programs. The Company
supplies components and parts to Boeing for each of Boeing's 737, 747, 757, 767
and 777 commercial aircraft construction programs, and participates in the
Airbus A300/310, A320 and A330/340 commercial aircraft construction programs. In
addition, the Company participates in major U.S. and European defense and
military aircraft programs.
Diversity of Product Offerings and Capabilities. The Company manufactures a
broad range of precision cast, machined and formed metal products, and of
component and assembled electronics products. The Company collaborates with many
of its customers to develop products that meet specific design or customization
requests. In addition, many of the Company's custom-developed electronics
components have become widely accepted in its customers' industries. The Company
believes that its experience and capabilities in working with the changing needs
of its customers will allow it to continue to respond to changing market trends
in the industries it serves.
Strong Technology Position. The Company uses specialized manufacturing
techniques, advanced materials science, process engineering and proprietary
technologies or processes to manufacture its products. In particular, the
Company has a broad base of expertise in the following manufacturing processes:
U.S. Operations U.K. Operations
================================================================================
Metal products: Cast magnesium and aluminum
o lost foam, sand and products:
permanent mold casting o precision die casting
o precision machining o sand investment casting
o explosive bonding o "Sophia Process" licensed
investment casting
Electronics products:
complex design and assembly
of: Formed metal products:
o hermetically-sealed o super plastic forming of
connectors titanium
o ceramic capacitors and filters o stretch forming of aluminum
o flat panel displays alloys
The Company owns 32 U.S. patents and one European patent, and has a number
of applications pending in the U.S. and Canada. The Company maintains an ongoing
program of evaluating and protecting its proprietary rights and processes.
3
<PAGE>
Strategy
The Company's objective is to generate profitable growth by taking
advantage of available opportunities in its industries. The Company believes
that pursuing the following business strategies will enable the Company to
increase market penetration, create operating efficiencies and enhance its
competitive position in its core markets.
Leverage the Aeromet Platform. The Aeromet acquisition significantly
enhanced the Company's commercial aerospace and defense industry presence.
Aeromet provides the Company with a solid platform from which to access major
European commercial aircraft and aircraft engine programs, as well as markets
within the European defense and transportation industries. These markets would
be difficult for the Company to enter without a physical presence in Europe. The
Company also believes that Aeromet may provide a strategic opportunity for
pursuing acquisitions of other European aerospace, defense and transportation
companies on a model similar to that which the Company has pursued in the United
States.
Increase Margins Through Enhanced Marketing and Vertical Integration. The
Company's strategy is to improve profit margins and revenues by increasing
customer penetration, improving operating efficiencies, and developing new
products and product enhancements. Key components of the Company's strategy are
to:
o leverage the synergies among its operating companies, including the
consolidation of marketing efforts,
o continue vertically integrating its manufacturing processes, and
o identify new products, services and markets by using the Company's
expertise in advanced materials science and in the manufacture and
assembly of precision products.
The Company also intends to capitalize on the current shift of commercial
aircraft manufacturers and defense contractors toward purchasing from a smaller
number of suppliers that can supply more complete systems and pre-assembled
parts. Assembled parts and systems generally are higher margin products than
individual metal parts. By producing products that integrate the Company's
metals casting, forming and machining knowledge with the Company's expertise in
the manufacture of connectors, seals, filters, relays and electronic packages,
the Company expects to improve its profit margins and position itself to capture
a larger share of its customers' total product requirements.
Leverage Product Development through Strategic and Proprietary
Technologies. The Company generally develops new products from existing
technologies in response to specific customer requests. The Company plans to
continue developing new products for its customers and, where appropriate, to
apply for additional patents for those new technologies. The Company may acquire
additional strategic and proprietary technologies from third parties and expects
to continue to develop its research and development capabilities. The Company
does not expect to devote substantial resources to research and development that
is not funded by customers.
Pursue Strategic Acquisitions. The Company's consolidation strategy is to
identify and acquire companies that it believes will:
o provide the opportunity for increased sales to the Company's existing
customers and for new sales to the Company's potential customers, and
o extend or vertically integrate the Company's manufacturing capabilities
or product lines.
The Company believes that there are and will continue to be opportunities to
grow the Company and to enhance profitability through acquisitions. The Company
intends to continue to pursue acquisitions of companies and technologies that it
believes will further this acquisition strategy.
Industry Overview
- -----------------
Aerospace Industry
Commercial. The commercial aerospace supply industry is reported to be
currently enjoying favorable trends driven by strong growth in the demand for
aerospace components, delivery and use rates for commercial aircraft, actual and
projected volume of passenger and freight traffic, average aircraft age and
global fleet size. Forecasts by Boeing and Airbus in early 1998 predicted that,
through the near term, the world's airlines would continue to add capacity and
order new aircraft in order to meet anticipated demand. Asia's economic crisis,
however, has led to a reduction in the current demand for new commercial
aircraft. As of December 1, 1998, Boeing revised its production rates to reduce
its projected deliveries through 2000.
Defense. The U.S. Department of Defense expects defense procurement funding
to grow by 40%, from approximately $43 billion in 1998 to approximately $60
4
<PAGE>
billion in 2001. The Company believes that both its electronics and aerospace
business segments will benefit from this trend.
Increase in Outsourcing. Aircraft manufacturers and defense contractors
have been actively searching for ways to improve the quality and reduce the cost
of their manufactured products. One approach is to outsource component
manufacturing to independent suppliers in order to benefit from an independent
supplier's lower cost structure and specialized manufacturing knowledge.
Suppliers that demonstrate an ability to deliver a high quality product on the
required delivery schedule at a reasonable cost should benefit from this shift.
Consolidation. Commercial aircraft manufacturers are tending to purchase
from suppliers that can supply more complete systems and pre-assembled parts.
The U.S. Department of Defense is strongly encouraging defense contractors to
take this approach as well. This shift and the increase in outsourcing appear to
be leading to a consolidation in the supply base. The Company believes that this
trend toward consolidation presents an opportunity for suppliers with the
financial and management resources to complete acquisitions and expand their
operations.
Electronics Industry
The electronics industry is enjoying revenue growth in the annual worldwide
market for electronics and components. This growth has been fueled by several
factors, including the rapid pace of technological advancement and development
of new products. The Company expects these favorable trends in the electronics
industry to continue and believes the outlook for the electronics component
supply industry will continue to be strong.
- --------------------------------------------------------------------------------
This Summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements and
related notes appearing elsewhere in this Prospectus. Except as otherwise noted,
(1) all references to a particular fiscal year of the Company refer to the
twelve months ended May 31, and (2) all currency information is denominated in
U.S. dollars.
References to the "Company" in this Prospectus include Aeromet, unless
otherwise noted or unless the context indicates otherwise. In addition, "SEC"
means the Securities and Exchange Commission, "Securities Act" means the
Securities Act of 1933, as amended, and "Exchange Act" means the Securities
Exchange Act of 1934, as amended.
- --------------------------------------------------------------------------------
5
<PAGE>
The Exchange Offer
------------------
- --------------------------------------------------------------------------------
See "Risk Factors" for a discussion of certain risks that Note holders should
consider before participating in the Note Exchange. Any undefined capitalized
terms used in this Prospectus with respect to the Notes have the meanings set
forth under "Description of Notes."
- --------------------------------------------------------------------------------
The Old Notes
- -------------
The Company issued the Company's 11 1/4% Senior Subordinated Notes due 2005
("Old Notes") on July 30, 1998, to Friedman, Billings, Ramsey & Co., Inc. and
BancBoston Securities Inc. (the "Initial Purchasers"). The Initial Purchasers
sold the Old Notes to "qualified institutional buyers," as defined in Rule 144A
under the Securities Act. The Company has filed the registration statement of
which this Prospectus is a part (the "Registration Statement") to comply with a
Registration Rights Agreement between the Company and the Initial Purchasers.
See "The Exchange Offer - Registration Rights Agreement."
The New Notes
- -------------
The terms of the Company's 11 1/4% Series B Senior Subordinated Notes due
2005 ("New Notes") are substantially identical to the terms of the Old Notes.
However, the New Notes are not subject to transfer restrictions or registration
rights unless held by certain broker-dealers, affiliates of the Company or
certain other persons. In addition, the Company does not plan to list the New
Notes on any securities exchange or seek quotation on any automated quotation
system. The Old Notes are listed on Nasdaq's PORTAL system.
The following chart summarizes the basic terms of the New Notes:
Principal: $75,000,000
Maturity Date: August 1, 2005
Interest Rate: 11 1/4% per year
Interest Payments: February 1 and August 1 of each year, beginning February
1, 1999.
Guarantors: All of the Company's United States subsidiaries, except
for future U.S. subsidiaries that the Company designates
as Unrestricted Subsidiaries.
Trustee: IBJ Whitehall Bank & Trust Company (formerly known as
IBJ Schroder Bank & Trust Company)
Collateral: None.
Payments. The Company will pay accrued interest on February 1 and August 1
of each year beginning February 1, 1999. The Company must repay the principal
balance of any New Notes that it has not redeemed by August 1, 2005. The Company
will make all payments in immediately available funds.
Optional Redemption. Until August 1, 2001, the Company may use the proceeds
of a qualified equity offering to redeem up to $15,000,000 of the New Notes,
upon payment of:
o 111.25% of the principal being redeemed,
o accrued and unpaid interest on that principal, and
o Liquidated Damages, if any.
After August 1, 2003, the Company may redeem all or part of the New Notes. See
"Description of Notes - The Indenture - Optional Redemption."
Global Note. The New Notes will be issued as a single, global note that
will be deposited with The Depository Trust Company in New York, New York.
Individual note holders will not receive certificates for the New Notes, except
in certain limited circumstances.
Debt Ranking. The Company's and the Guarantors' obligation to repay the New
Notes will rank equally with the obligation to repay their other unsecured debt
that is not Senior Indebtedness.
Subordination. The Company's and the Guarantors' obligation to repay the
New Notes is:
o subordinated to their Senior Indebtedness, which was approximately
$8.1 million at December 31, 1998, and
o effectively subordinated to the Indebtedness of the Company's foreign
subsidiaries, including Aeromet, which was approximately $1.0 million
at December 31, 1998.
Change of Control. If the Company experiences a Change of Control, the
holders of the New Notes will have the right to require the Company to
repurchase the New Notes for:
6
<PAGE>
o 101% of the principal outstanding on the New Notes,
o accrued and unpaid interest on that principal, and
o Liquidated Damages, if any.
See "Description of Notes - The Indenture - Repurchase of Notes at the Option of
the Holder Upon a Change of Control."
Restrictions. In the Indenture, the Company agreed to certain restrictions
that limit its ability to, among other things:
o incur additional debt or issue Disqualified Capital Stock,
o pay dividends or make other distributions,
o create certain liens on assets,
o sell certain assets and stock of its subsidiaries,
o enter into certain transactions with Affiliates, and
o effect certain mergers and consolidations.
See "Description of Notes - The Indenture - Certain Covenants in the Indenture."
The Note Exchange
- -----------------
The Company is offering the New Notes in exchange for Old Notes of an equal
principal amount, in order to satisfy its obligations under the Registration
Rights Agreement. The Trustee is serving as Exchange Agent in connection with
the Note Exchange. The Company will not receive any proceeds from the Note
Exchange. The holders of the Old Notes will not have any dissenters' rights or
appraisal rights in connection with the Exchange Offer. See "The Exchange
Offer."
Exchange Period. The Company will accept for exchange Old Notes that are
validly tendered to the Exchange Agent before the earliest of:
o 5:00 p.m., New York City time, on February 23, 1999, or such later
date and time to which it is extended, except that it may not be
extended beyond March 5, 1999,
o the date when all Old Notes have been tendered, or
o the date on which the Company terminates the Exchange Offer.
The Company will return any Old Note that it does not accept for exchange for
any reason, as promptly as practicable after expiration or termination of the
Exchange Offer, without charge to the holder of the Old Note. See "The Exchange
Offer - Terms of the Exchange Offer - Procedure for Tendering Old Notes and -
Withdrawal Rights."
Procedure for Tendering Old Notes. Holders of Old Notes that wish to
participate in the Note Exchange must complete and sign a Letter of Transmittal
according to the instructions contained in the Letter of Transmittal, and
forward it to the Exchange Agent (not to the Company) and must comply with the
procedures set forth in this Prospectus and the Letter of Transmittal for
delivering Old Notes to the Exchange Agent. Brokers, dealers, commercial banks,
trust companies and other nominees may tender Old Notes which they hold as
nominee by book-entry transfer. Questions regarding tender of the Old Notes, or
the Note Exchange generally, must be directed to the Exchange Agent. See "The
Exchange Offer - Terms of the Exchange Offer - Procedure for Tendering Old
Notes."
Federal Income Tax Consequences. For federal income tax purposes, the Note
Exchange will not result in any income, gain or loss to the holders of Old Notes
or the Company. See "Certain United States Federal Income Tax Consequences."
Consequences of Not Exchanging the Old Notes. Any Old Notes not exchanged
for New Notes in the Note Exchange will continue to be subject to restrictions
on transfer as described in the legend on the Old Notes. In general, Old Notes
may not be offered or sold, unless registered under the Securities Act, or
exempt from, or in a transaction not subject to, the registration requirements
of the Securities Act and applicable state securities laws. The Company does not
anticipate that it will register the Old Notes for resale under the Securities
Act, except in limited circumstances if required by the Registration Rights
Agreement. See "Risk Factors - Failure to Exchange Old Notes" and "The Exchange
Offer - Terms of the Exchange Offer - Consequences of Failure to Exchange Old
Notes."
Resale of the New Notes. The Company believes that the New Notes generally
may be resold or otherwise transferred by their holders without further
compliance with the registration and prospectus delivery requirements of the
Securities Act, so long as the holder:
o is not an "affiliate" of the Company (as defined in Rule 405 under the
Securities Act),
o is not a broker-dealer,
o acquired the New Notes in the ordinary course of the holder's
business, and
o is not participating and has no arrangement with any person to
participate in a "distribution" (as defined in the Securities Act) of
the New Notes.
7
<PAGE>
Any broker-dealer that receives New Notes for its own account in exchange
for Old Notes that were acquired as a result of market-making or other trading
activities must acknowledge that it will deliver a prospectus in connection with
any resale of the New Notes.
This analysis is based upon the SEC's position in no-action letters to
third parties in transactions that were substantially similar to the Exchange
Offer. The Company has not sought its own interpretive letter from the SEC.
While the SEC has not indicated that it has changed its position on this issue,
there is no assurance that the SEC would make a similar determination with
respect to the resale of the New Notes. Any affiliate, any broker-dealer that
acquired Old Notes directly from the Company or any affiliate of the Company,
and any holder intending to participate in a distribution of the New Notes, will
continue to be subject to the registration and prospectus delivery requirements
of the Securities Act in connection with any resale transaction. See "Risk
Factors - Resale of the New Notes" and "The Exchange Offer - Resale of the New
Notes."
8
<PAGE>
<TABLE>
<CAPTION>
Summary Financial Data of the Company
(in thousands, except percentages, ratios and per share data)
Years Ended May 31, Six-Month Periods Ended November 30,
------------------------------------------------------------ ------------------------------------
Historical Pro Forma Historical Pro Forma
----------------------------------------------- ----------- --------------------- ------------
1994 1995 1996 1997 1998 1998(2) 1997 1998 1998(3)
----------------------------------------------- ----------- --------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales(1) $ 2,940 $ 11,035 $ 20,725 $ 34,175 $ 54,099 $ 115,505 $ 24,203 $ 49,655 $ 59,237
Gross profit 80 1,943 4,286 8,206 14,612 25,330 6,327 9,496 10,658
Income (loss) from operations (884) (846) (583) 1,947 4,740 9,370 2,169 1,365 1,682
Net income (loss) $(1,098) $ (1,411) $ (999) $ 1,682 $ 3,614 $ (3,002) $ 1,640 $ (6,986) $ (8,044)
Net income (loss) per share:
Basic.................... (.60) (.41) (.16) .18 .29 (.24) .14 (0.43) (0.50)
Diluted.................. (.60) (.41) (.16) .17 .27 (.24) .14 (0.43) (0.50)
Shares used in computation of
net income (loss) per share:
Basic 1,826 3,469 6,209 9,500 12,486 12,486 11,814 16,073 16,073
Diluted 1,826 3,469 6,209 10,036 13,606 12,486 11,814 16,073 16,073
Other Financial Data:
EBITDA(4) $ (739) $ (437) $ 288 $ 3,305 $ 6,944 $ 15,692 $ 3,038 $ 4,260 $ 5,615
EBITDA margin -- -- 1.4% 9.7% 12.8% 13.6% 12.6% 8.6% 8.9%
Depreciation and
amortization $ 145 $ 409 $ 871 $ 1,358 $ 2,204 $ 6,322 $ 869 $ 2,985 $ 3,933
Ratio of earnings
(deficiency of earnings)
to fixed charges(5) (3.69x) (2.80x) (.51x) 3.59x 3.78x .85x 5.14x (1.16x) (0.81x)
At May 31, At November 30,
------------------------------------------------------ ---------------
1994 1995 1996 1997 1998 1998
------------------------------------------------------ ---------------
Balance Sheet Data:
Cash and cash equivalents... $ 27 $ 1,079 $ 725 $ 3,048 $ 11,461 $ 16,392
Working capital (deficit)... (1,237) 1,758 952 13,090 25,599 45,186
Total assets................ 7,894 11,630 27,649 35,752 78,580 167,379
Long-term debt (including
current portion)............ 3,662 3,902 6,304 4,233 11,233 84,137
Shareholders' equity........ 1,226 5,454 12,539 25,619 56,142 62,874
- --------------
(1) The increases in net sales are attributable to acquisitions by the Company
and to internal growth. See "Business - Corporate History" and "MD&A -
Results of Operations - Pacific Aerospace - Net Sales."
(2) Presents the statement of operations data of the Company as if: (a) the
Aeromet acquisition, (b) the ESC acquisition, which occurred in the fourth
quarter of fiscal 1998, and (c) the related financing transactions,
occurred on June 1, 1997.
(3) Includes Aeromet's June and July 1998 results of operations, prior to its
acquisition by the Company on July 30, 1998.
(4) "EBITDA" represents income (loss) from operations plus depreciation and
amortization expense. EBITDA should not be construed as an alternative to
(a) net income, as defined by generally accepted accounting principles, as
an indicator of the Company's operating performance, or (b) cash flow, as
defined by generally accepted accounting principles, as a measure of
liquidity.
(5) For purposes of computing the ratio of earnings (deficiency of earnings) to
fixed charges, earnings represent income (loss) before taxes and fixed
charges. Fixed charges consist of (a) interest, whether expensed or
capitalized, (b) amortization of deferred financing costs, and (c) the
portion of rental expense considered to represent interest (assumed to be
one-third). Earnings do not include any interest expense on guaranteed debt
of approximately $1.6 million related to a less than 50%-owned entity.
</TABLE>
9
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RISK FACTORS
- --------------------------------------------------------------------------------
An investment in the New Notes involves certain risks. Potential investors
should carefully consider all of the information set forth in this Prospectus.
In particular, potential investors should evaluate the following risk factors
before participating in the Note Exchange.
- --------------------------------------------------------------------------------
Acquisition Risks. The Company has pursued an aggressive growth strategy
and expects to continue to evaluate and pursue potential strategic acquisitions.
The success of this strategy depends upon the Company's ability to manage the
risks associated with acquisitions. These risks include:
o the ability of the Company to assess the value, strengths and
weaknesses of acquisition candidates accurately,
o the Company's effectiveness in implementing necessary changes at newly
acquired subsidiaries,
o possible diversion of management attention from the Company's
operations, and
o possible increased borrowings, disruption of product development
cycles and dilution of earnings per share.
The Company has recently incurred substantial losses in connection with its
acquisition of Electronic Specialty Corporation, and its investment in Orca
Technologies, Inc. Aeromet's size will cause it to have a significant impact on
the Company's future financial results. The Company's failure to manage these or
other acquisition risks could have a material adverse effect on the Company and
its financial performance. See "Business - Strategy - Pursue Other Strategic
Acquisitions," and "MD&A - Recent Events - Electronic Specialty Corporation, -
Orca Technologies, Inc., and - Aeromet Acquisition."
Management of Growth. The Company has experienced rapid growth from both
operations and acquisitions. This growth has placed and will continue to place
significant demands on the Company's managerial, administrative, financial and
operational resources. For example, the Company's total number of employees
increased from approximately 748 to over 1,200 upon consummation of the Aeromet
acquisition, and the number of the Company's operating sites increased from five
in the United States to a total of ten in the United States and the United
Kingdom. Several of the Company's subsidiaries (including Aeromet) have
different accounting systems that the Company is in the process of integrating.
As the Company grows and becomes more complex, an increasing level of diligence
in its business decisions will be necessary to comply with regulatory and
accounting requirements. To manage its growth effectively, the Company must
continue to improve its operational, accounting, financial and other management
processes and systems, and must continue to attract and retain highly skilled
management and technical personnel. See "Business - Strategy."
Significant Debt. The Company incurred substantial debt and payment
obligations in order to finance the Aeromet acquisition and ongoing operations.
This debt could have important consequences, such as:
o making the Company unable to obtain additional financing in the
future,
o diverting a significant portion of the Company's cash flow to
principal and interest payments and away from operations, acquisitions
and capital expenditures,
o increasing the Company's interest expense, and decreasing the
Company's net income,
o putting the Company at a competitive disadvantage in relation to
competitors with less debt, or
o limiting the Company's flexibility in adjusting to downturns in its
business or market conditions.
Ability to Make Debt Payments. The Company's future financial and operating
performance will affect its ability to make payments on its debt. Since the
Company's performance is affected by many factors, some of which are beyond its
control, there is no assurance that the Company will have sufficient cash flow
to make its debt payments when scheduled, or at all. If the Company did not have
sufficient cash flow to make its debt payments, the Company could be forced to:
o reduce or delay capital expenditures,
o dispose of material assets or operations,
o reduce, restructure or refinance its debt at potentially higher rates
of interest, or
o seek additional equity capital, which could dilute the value of the
shares held by the Company's existing shareholders.
10
<PAGE>
There is no assurance that the Company would be able to achieve any of these
actions on satisfactory terms or at all. In addition, if the Company were unable
to repay its secured debt, the lenders could proceed against any collateral
securing that debt.
Subordination. The obligation of the Company and the Guarantors to repay
the Notes is:
o subordinated to the Senior Indebtedness of the Company and the
Guarantors,
o effectively subordinated to the debt of the Company's foreign
subsidiaries, and
o effectively subordinated to any future secured debt to the extent of
the Company's assets securing such debt.
Because of this subordination, if the Company declares bankruptcy, liquidates or
reorganizes, the Company must use its assets and the assets of the Guarantors,
(a) first to pay Senior Indebtedness of the Company and the Guarantors and the
Indebtedness of the Company's foreign subsidiaries, and (b) then to pay any
amounts due on the Notes. In addition, under certain conditions the Company may
not be allowed to make payments on the Notes for up to 179 days in any 360-day
period, if the Company defaults on certain of the Senior Indebtedness. See
"Description of Notes - The Indenture - Subordination."
Restrictive Debt Covenants. The Company is subject to a number of
significant covenants under some of the agreements governing its debt. Those
covenants restrict a number of corporate activities, including the ability of
the Company to:
o dispose of or create liens on assets,
o incur additional indebtedness,
o prepay or amend certain debt,
o pay dividends or repurchase stock,
o enter into sale and leaseback transactions,
o make investments, loans or advances,
o engage in acquisitions, mergers or consolidations,
o make capital expenditures,
o change the business conducted by the Company or its subsidiaries, or
o engage in certain transactions with affiliates.
The breach of any of these covenants could result in a default that would permit
the lenders to declare all amounts owed by the Company to be immediately due and
payable. As a result, the Company's other lenders might terminate their
commitments to extend further credit to the Company. In addition, if there is a
change of control of the Company, the Company may be required to repay its debt.
Any of these events could have a material adverse effect on the Company and its
financial performance. See "Description of Notes - The Indenture - Certain
Covenants in the Indenture" and "MD&A - Recent Events - Aeromet Acquisition -
Rule 144A Offering."
Failure to Exchange Old Notes. Any Old Notes that are not exchanged will
continue to be subject to restrictions on transfer, as described in the legend
on the Old Notes. The Company does not intend to register the Old Notes for
resale under the Securities Act. Therefore, a holder of Old Notes may sell them
only if there is an exemption under the Securities Act available, or if sale of
those Old Notes is made in transactions that are not subject to the securities
laws. See "The Exchange Offer - Consequences of Failure to Exchange Old Notes."
Resale of New Notes. The Company believes that the New Notes generally may
be resold or otherwise transferred by their holders without further compliance
with the registration and prospectus delivery requirements of the Securities
Act, so long as the holder:
o is not an "affiliate" of the Company (as defined in Rule 405 under the
Securities Act),
o is not a broker-dealer,
o acquired the New Notes in the ordinary course of the holder's
business, and
o is not participating and has no arrangement with any person to
participate in a "distribution" (as defined in the Securities Act) of
the New Notes.
Any broker-dealer that receives New Notes for its own account in exchange for
Old Notes that were acquired as a result of market-making or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of the New Notes.
This analysis is based on the SEC's position in no-action letters to third
parties involving transactions that were substantially similar to the Note
Exchange. The Company has not sought its own interpretive letter from the SEC.
Although the SEC has not indicated that it has changed its position on this
issue, there is no assurance that the SEC would make a similar determination
with respect to the resale of the New Notes. Any affiliate, any broker-dealer
that acquired Old Notes directly from the Company or any affiliate of the
Company, and any holder intending to participate in a distribution of the New
Notes will continue to be subject to the registration and prospectus delivery
requirements of the Securities Act in connection with any
11
<PAGE>
resale transaction. See "The Exchange Offer - Resale of the New Notes."
Possible Need for Additional Capital. The Company believes that its
existing cash and credit facilities will be sufficient to meet the Company's
currently budgeted working capital requirements for at least the next 12 months.
See "MD&A - Liquidity and Capital Resources." The Company's actual capital
needs, however, will depend on many unpredictable factors, including:
o actual revenue generated from operations,
o interest due on the Company's variable rate debt,
o capital expenditures required to remain competitive, and
o cash required for acquired companies, future acquisitions, and
acquisition and financing transaction costs.
As a result of these factors, the Company is unable to predict accurately the
amount or timing of its future capital needs, if any. The Company's inability to
obtain additional capital if and when needed could have a material adverse
effect on its financial performance.
Foreign Operations. The acquisition of Aeromet subjects the Company to the
risks of foreign operations. These risks include:
o the Company's ability to manage an operation in the United Kingdom
effectively from its Wenatchee, Washington headquarters,
o unfavorable changes in foreign government policies, regulations,
tariffs, taxes and other trade barriers,
o exchange controls and limitations on dividends or other payments, and
o devaluations and fluctuations in currency exchange rates.
Exchange Rates. With the Aeromet acquisition, the Company may decide to
engage in hedging transactions in order to protect the Company from losses if
the exchange rate between the U.S. dollar and the British pound sterling
changes. However, hedging transactions may not completely offset such losses.
Aeromet has a few contracts that are in European currencies other than British
pounds sterling or in U.S. dollars. The Company believes that the conversion of
such currencies to the Euro will not have a material adverse effect on Aeromet's
business or financial condition.
Dependence on Significant Customers. The top five customers of the
Company's U.S. operations, Boeing, PACCAR, Northrop Grumman, Deere & Company and
Honeywell, accounted for approximately 60% of the Company's fiscal 1998 net
sales (which do not include Aeromet). Aeromet's top five customers, British
Aerospace, Rolls Royce, GKN Westland, Lucas Aerospace and Alenia (Aermacchi),
accounted for approximately 41% of Aeromet's net sales in calendar 1997. Because
a small number of customers account for a large percentage of the Company's
annual revenues and order flow, these customers may be able to exercise
significant influence over the Company's prices and other terms of sale.
However, the loss of these largest customers, or reduced or canceled orders from
these customers, could have a material adverse effect on the Company's business
and financial performance. See "Business - Customers."
Aerospace Industry Risks; Cyclicality. The Company operates in historically
cyclical industries. The aerospace, defense and transportation industries are
sensitive to general economic conditions and have been adversely affected by
past recessions. For example, from 1990 to 1994 the aerospace industry
experienced reduced demand for commercial aircraft, a decline in military
spending and the postponement of overhaul and maintenance on existing aircraft.
In past years, the aerospace industry has been adversely affected by a number of
factors, including increased fuel and labor costs and intense price competition.
Recently, the commercial aircraft industry has experienced a downturn in demand
due to changing economic conditions. There is no assurance that this trend will
not continue or that general economic conditions will not lead to a downturn in
demand for core products of the Company. See "Business - Industry Overview."
Volatility of Asian Markets. As of January 1998, Boeing and Airbus each had
a 10% backlog of aircraft sales to customers in Asia. The ongoing financial
crisis in Asia, however, has adversely affected Asian customers, and led to
reduced demand for commercial aircraft. On December 1, 1998, Boeing announced
that it would reduce production rates for some of its commercial airline
programs based on updated assessments of the Asian economic crisis. Additional
cancellations or delays in aircraft orders from Asian customers of Boeing or
Airbus could reduce demand for the Company's products and could have a material
adverse effect on the Company's business and financial performance. See
"Business - Industry Overview."
12
<PAGE>
Dependence on Key Management and Technical Personnel. The Company believes
that its ability to successfully implement its business strategy and to operate
profitably depends significantly on the continued employment of its senior
management team, led by its president, Donald A. Wright, and its significant
technical personnel. The Company has a $3 million key man life insurance policy
on the life of Mr. Wright. The Company's business and financial results could be
materially adversely affected if Mr. Wright, other members of the senior
management team, or significant technical personnel become unable or unwilling
to continue in their present employment. In addition, the Company's growth and
future success will depend in large part on its ability to retain and attract
additional board members, senior managers and highly skilled technical
personnel. Competition for such individuals is intense, and there is no
assurance that the Company will be successful in attracting and retaining them.
The Company's failure to do so could have a material adverse effect on the
Company's business and financial performance. See "Management."
Backlog. The majority of the Company's sales are made pursuant to
individual purchase orders. The customer may cancel these purchase orders if
they pay the cost of the work in process plus a related profit factor. As of May
31, 1998, the Company had purchase orders and contractual arrangements
evidencing anticipated future deliveries ("backlog") through fiscal year 2000 of
approximately $100 million. Of this amount, approximately $70 million is
expected to be delivered in fiscal year 1999. There is no assurance that the
Company will complete this backlog and convert it to revenue. Although the
Company historically has not experienced significant order or customer
cancellations, reduction of pending contracts or work in progress could have a
material adverse effect on the Company's business and financial performance. See
"Business - Backlog."
Technological Change; Development of New Products. The market for the
Company's products is characterized by evolving technology and industry
standards, changes in customer needs, adaptation of products to customer needs,
and new product introductions. The Company's competitors from time to time may
announce new products, enhancements or technologies that have the potential to
replace or render the Company's existing products obsolete. The Company's
success will depend on its ability to:
o enhance its current products and develop new products to meet changing
customer needs, and achieve market acceptance of such products, and
o anticipate or respond to evolving industry standards and other
technological changes on a timely and cost-effective basis.
The Company's failure to do so, or any significant delay, could have a material
adverse effect on the Company's business and financial performance.
Competition. The Company is subject to substantial competition in many of
the markets that it serves. Many of these competitors represent substantial
long-term competition, as they have greater financial resources, broader
experience, better name recognition and more substantial marketing operations.
The Company believes that its technology and manufacturing processes may give it
a competitive advantage with respect to certain of its products. However, the
Company expects that competitors will continue to develop new products. Products
made by the Company may not be able to compete successfully if customers view
the competing products as more effective or more economic. These competitive
pressures may have a material adverse effect on the Company's business and
financial performance. See "Business - Competition."
Availability and Cost of Materials. The Company generally has readily
available sources of raw materials and supplies, and, where possible, maintains
alternate sources of supply. However, shortages have occurred in the past and
may occur in the future. The Company does not have fixed price contracts or
arrangements for the raw materials and other supplies that it requires. In
addition, the Company obtains approximately 70% of its titanium from one
supplier and is subject to a lead time of approximately 80 weeks in ordering and
obtaining titanium. Shortages of, or price increases for, titanium and other raw
materials and supplies could have a material adverse effect on the ability of
the Company to manufacture and sell its products in a timely and cost-effective
manner. See "Business - Raw Materials."
Reliance on Proprietary Rights. Significant aspects of the Company's
business depend on proprietary processes, know-how and other technology that are
not subject to patent protection. The Company relies principally on trade secret
protection and confidentiality agreements and procedures to protect that
technology. However, the rights of the Company and the precautions it takes may
be inadequate to prevent others from:
o imitating the Company's products,
o obtaining or using information that the Company regards as
proprietary,
13
<PAGE>
o developing technology that is the same as or similar to the Company's
technology,
o asserting rights in the Company's proprietary rights, or
o claiming that the Company is infringing on the proprietary rights of
others.
The occurrence of any of these events may cause the Company to incur
substantial litigation costs to enforce or defend its intellectual property
rights, which may have a material adverse effect on the Company's business and
financial performance.
Almost all of the Company's patents and patent applications apply to
certain aspects of the Company's electronics business, and not to its precision
metals business. There is no assurance (a) that the Company's and Aeromet's
patent applications will result in issued patents, (b) that the Company's
existing patents or any future patents will give the Company any competitive
advantages for its products or technologies, or (c) that, if challenged, the
Company's patents will be held valid and enforceable. The Company's 32 U.S.
patents expire at various times over the next 17 years, with 17 patents expiring
over the next five years.
In addition, the Company may sell its products in countries whose laws do
not protect intellectual property rights to the same extent as U.S. law. The
Company holds one European patent that is enforceable in the U.K. and one
Canadian patent application pending, and the Company's U.S. patents are
enforceable in the U.S. alone. Therefore, the Company cannot prevent third
parties from using its technology in countries where there is no patent
protection. See "Business - Proprietary Rights."
Product Liability. The Company is subject to the risk of product liability
claims and lawsuits for harm caused by its products. The Company maintains
product liability insurance with a maximum coverage of $2 million. However,
there is no assurance that this insurance will be sufficient to cover any claims
that may arise. A successful product liability claim in excess of the Company's
insurance coverage could have a material adverse effect on the Company's
business and financial performance.
Environmental Matters. Federal, state and local environmental and health
and safety laws apply to the Company's facilities. These laws and regulations
govern such matters as:
o solid waste disposal,
o the generation, storage, use and disposal of hazardous materials,
o air pollutant emissions,
o permits to operate, and
o employee health and safety issues.
The Company takes these issues very seriously, partly because a number of
the chemicals and other materials used or generated by the Company are
considered hazardous. If the Company does not comply with these laws or
regulations, it could be fined, face other penalties, or be liable for damages
and cleanup costs. If the Company lost one of its permits, it could be required
to cease operations or limit production at one or more of its facilities. Any of
these consequences could have a material adverse effect on the Company's
business and financial performance.
The Company continually monitors and addresses environmental matters. In
the ordinary course of business, minor violations sometimes occur. When the
Company discovers these violations, it works to resolve them. When the Company
acquired Aeromet, it investigated the environmental conditions at each of the
Aeromet facilities and did not discover any violations of environmental or
health and safety laws material to the Company.
Environmental laws could become more stringent over time. This could result
in higher costs to comply with new laws, and increased risks and penalties for
noncompliance. Because the Company is a generator of hazardous materials, it is
subject to financial exposure even if it fully complies with these laws. Also,
many of the Company's facilities are located in well-established industrial
areas and have long operating histories. It is possible that historical
operations (pre-dating the Company's involvement) at each of these facilities or
on neighboring properties could have affected properties that the Company
currently owns or leases, which might cause environmental issues to arise in the
future that the Company is not aware of and cannot predict at this time. Any
present noncompliance or any discovery of noncompliance in the future could have
a material adverse effect on the Company's business or financial performance.
See "Business - Environmental Matters."
Government Regulation. The Company sells many of its products to the United
States government, either directly or indirectly through subcontracts. As a
result, the Company is subject to various federal regulations, such as bidding
rules, pricing restrictions, and federal acquisition requirements. In addition,
the Company must comply with standards established by the Occupational Safety
and Health
14
<PAGE>
Administration. These standards govern labor practices and employee health and
safety. The Company is currently updating its written health and safety policies
and training employees in these updated policies. If the Company violates these
rules or regulations, it could incur civil liability, the federal government
might cancel or suspend its existing contracts, or the federal government might
declare the Company ineligible to receive future contracts or subcontracts. In
addition, if any of the Company's major customers in the defense industry lose
their federal government certification, that loss could have a material adverse
effect on the level of their purchases from the Company, and on the Company's
business or financial performance. See "Business - Government Regulation."
Year 2000. The Company is developing and carrying out a comprehensive
strategy for updating its information technology ("IT") systems and
manufacturing systems for Year 2000 ("Y2K") compliance. The Company expects its
Y2K assessment to be completed before the end of fiscal 1999, and internal
compliance to be completed early in the next fiscal year.
The Company is also 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 business and financial performance. The effect
on the Company of such a failure could range from a minor interruption in
production or shipping, to a catastrophic 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 expects this process to
continue throughout the current and next fiscal year. In the event of a minor
interruption in production or shipping due to a Y2K problem, the Company
anticipates that transactions could be processed manually while IT and other
systems are repaired. The Company is in the process of developing a contingency
plan in the event of a catastrophic Y2K problem and expects to have the plan in
place early in the next fiscal year. See "MD&A - Year 2000."
Fraudulent Transfer Considerations. A bankruptcy or other court could
review the Subsidiary Guaranty under state or federal fraudulent transfer laws
if a Guarantor declares bankruptcy or seeks court protection for the benefit of
its creditors. If the court were to find that a Guarantor entered into the
Subsidiary Guaranty with the actual intent to hinder, delay or defraud the
Guarantor's creditors, or that a "fraudulent conveyance" had occurred, it could
require Note holders to (A) return all or part of any money paid to the Note
holders by the Guarantor under the Subsidiary Guaranty, or (B) deposit the money
into a fund with the court for the benefit of the Guarantor's creditors. The
court could find that a "fraudulent conveyance" has occurred, if:
(a) in exchange for signing the Subsidiary Guaranty, the Guarantor did not
receive (1) any of the Note proceeds, or (2) some value reasonably
equivalent to the value of the Subsidiary Guaranty, and
(b) as of the date of the Subsidiary Guaranty, the Guarantor:
o was insolvent (i.e., its debts exceeded the value of its assets),
o was rendered insolvent as a result of signing the Subsidiary Guaranty,
o had remaining unencumbered assets which constituted unreasonably small
capital for the Guarantor's business, or
o intended or believed that it would not be able to pay the Subsidiary
Guaranty if called upon to do so.
See "Description of Notes - Certain Bankruptcy Limitations."
Possible Inability to Repurchase Notes Upon a Change of Control. If the
Company experiences a "Change of Control", then each Note holder will have the
right to require the Company to repurchase that holder's Notes for the following
amount:
o 101% of the principal amount due on those Notes, plus
o any accrued and unpaid interest on the principal of those Notes, plus
o Liquidated Damages, if any.
See "Description of Notes - The Indenture - Repurchase of Notes at the Option of
the Holder Upon a Change of Control."
However, the Company might not be able to repurchase the Notes upon a
Change of Control due to (a) applicable law, (b) the terms of certain agreements
governing the Company's other Indebtedness, or (c) the Company's ability to
finance the repurchase. The Company would be in default under the Indenture if
it failed to repurchase all of the Notes tendered for repurchase after a
15
<PAGE>
Change in Control. See "Description of Notes - The Indenture - Events of Default
and Remedies."
Whether a Change in Control of the Company has occurred will depend on the
specific facts and circumstances of a particular transaction. For example, if
the Company were involved in a highly-leveraged transaction such as a
reorganization, restructuring, merger or other similar transaction, the
Indenture's Change of Control provision might not be triggered and the Note
holders might not have the right to require the Company to repurchase their
Notes. The Indenture does not contain any provisions that would give the Note
holders the right to require a repurchase of the Notes in the event of a
takeover, recapitalization or similar transaction.
Lack of a Public Market for the Notes. The Old Notes are eligible for
trading in Nasdaq's PORTAL Market. However, the Company does not intend to apply
for listing or quotation of the New Notes on any securities exchange or
automated quotation system. The New Notes will therefore have no existing, and
potentially no future, trading market. If a trading market for the New Notes
does develop, there is no assurance as to the liquidity of that market. In
addition, the trading price of the New Notes could be higher or lower than their
face value and will depend on a number of factors, including prevailing interest
rates, and the Company's operating results and cash flow. Also, declines in the
market for high-yield securities generally may adversely affect the New Notes'
liquidity and trading markets, independent of the Company's financial
performance and prospects. See "Description of Notes - The Notes."
- --------------------------------------------------------------------------------
A number of these Risk Factors contain forward-looking statements regarding
the Company's business and financial results. Actual results may differ
materially from those forward-looking statements.
- --------------------------------------------------------------------------------
16
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the issuance of the New
Notes or the Note Exchange. In consideration for issuing the New Notes, the
Company will receive an equivalent principal amount of Old Notes. The Old Notes
surrendered in exchange for New Notes will be retired and canceled and cannot be
reissued. The issuance of the New Notes will not result in any increase in the
Company's indebtedness.
The net proceeds to the Company from the sale of the Old Notes were
approximately $69.4 million, after deduction of discounts, commissions and
expenses of the offering of the Old Notes (the "Rule 144A Offering"). The
Company used those net proceeds to acquire Aeromet. See "MD&A - Recent Events -
Aeromet Acquisition - Rule 144A Offering."
17
<PAGE>
SELECTED FINANCIAL DATA OF THE COMPANY
(in thousands, except percentages, ratios and per share data)
The following selected financial data presents selected historical and pro
forma financial data of the Company, but does not include Aeromet except for
four months included in the six-month period ended November 30, 1998, and except
for the pro forma information. The selected historical financial data, as of and
for the years ended May 31, 1994, 1995, 1996, 1997 and 1998, is derived from the
Company's audited financial statements. The selected historical financial data
as of November 30, 1998, and for the six-month periods ended November 30, 1997
and 1998, is derived from the unaudited financial statements prepared by the
Company on a basis consistent with the Company's audited financial statements,
and, in the opinion of management, include all adjustments necessary for a fair
presentation of the results for such periods. Operating results for the
six-month periods ended November 30, 1997 and 1998, are not necessarily
indicative of the results that may be expected for any other interim period or
for the year ending May 31, 1999. The selected pro forma financial data for the
year ended May 31, 1998, and for the six-month period ended November 30, 1998,
is derived from the Company's Unaudited Pro Forma Financial Data. This data
should be read in conjunction with the Company's Financial Statements and Notes
thereto, Unaudited Pro Forma Financial Data, and MD&A - Results of Operations -
Pacific Aerospace, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Six-Month Periods Ended
Years Ended May 31, November 30,
---------------------------------------------------------- ----------------------------
Historical Pro Forma Historical Pro Forma
----------------------------------------------- -------- ----------------- -------
1994 1995 1996 1997 1998 1998(2) 1997 1998 1998(3)
------- ------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales(1).........................$ 2,940 $11,035 $20,725 $34,175 $54,099 $115,505 $24,203 $49,655 $59,237
Cost of sales........................ 2,860 9,092 16,439 25,969 39,487 90,175 17,876 40,159 48,579
------- ------- ------- ------- ------- -------- ------- ------- -------
Gross profit......................... 80 1,943 4,286 8,206 14,612 25,330 6,327 9,496 10,658
Operating expenses................... 964 2,789 4,869 6,259 9,872 15,960 4,158 8,131 8,976
------- ------- ------- ------- ------- -------- ------- ------- -------
Income (loss) from operations........ (884) (846) (583) 1,947 4,740 9,370 2,169 1,365 1,682
Net interest expense................. 203 282 498 384 755 10,145 283 3,389 4,894
Other income (expense)............... (11) (524) 15 169 (853) (910) 23 (6,917) (6,917)
------- ------- ------- ------- ------- -------- ------- ------- -------
Income (loss) before taxes........... (1,098) (1,652) (1,066) 1,732 3,132 (1,685) 1,909 (8,941) (10,129)
Income taxes (benefit)............... -- (241) (67) 50 (482) 1,317 269 (1,955) (2,085)
------- ------- ------- ------- ------- -------- ------- ------- -------
Net income (loss)....................$(1,098) $(1,411) $ (999) $ 1,682 $ 3,614 $ (3,002) $ 1,640 $(6,986) $(8,044)
======= ======= ======= ======= ======= ======== ======= ======= =======
Net income (loss) per share:
Basic.............................$ (.60) $ (.41) $ (.16) $ .18 $ .29 $ (.24) $ .14 $ (.43) $ (.50)
Diluted........................... (.60) (.41) (.16) .17 .27 (.24) .14 (.43) (.50)
Shares used in computation of
net income (loss) per share:
Basic............................. 1,826 3,469 6,209 9,500 12,486 12,486 11,814 16,073 16,073
Diluted........................... 1,826 3,469 6,209 10,036 13,606 12,486 11,814 16,073 16,073
Other Financial Data:
EBITDA(4)............................$ (739) $ (437) $ 288 $ 3,305 $ 6,944 $ 15,692 $ 3,038 $ 4,260 $ 5,615
EBITDA margin........................ -- -- 1.4% 9.7% 12.8% 13.6% 12.6% 8.6% 8.9%
Depreciation and amortization........$ 145 $ 409 $ 871 $ 1,358 $ 2,204 $ 6,322 $ 869 $ 2,895 $ 3,933
Capital expenditures................. 81 959 1,293 2,739 10,290 13,130 4,170 3,592 3,592
Ratio of earnings (deficiency of
earnings to fixed charges(5)......... (3.69x) (2.80x) (.51x) 3.59x 3.78x .85x 5.14x (1.16x) (0.81x)
At May 31, At November 30,
--------------------------------------------------------- ---------------
1994 1995 1996 1997 1998 1998
--------- --------- --------- --------- --------- ---------
Balance Sheet Data:
Cash and cash equivalents............ $ 27 $ 1,079 $ 725 $ 3,048 $ 11,461 $ 16,392
Working capital (deficit)............ (1,237) 1,758 952 13,090 25,599 45,186
Total assets......................... 7,894 11,630 27,649 35,752 78,580 167,379
Long-term debt (including
current portion)..................... 3,662 3,902 6,304 4,233 11,233 84,137
Shareholders' equity................. 1,226 5,454 12,539 25,619 56,142 62,874
- --------------
(1) The increases in net sales are attributable to acquisitions by the Company
and internal growth. See "Business - Corporate History" and "MD&A - Results
of Operations - Pacific Aerospace - Net Sales."
(2) Presents the statement of operations data of the Company as if: (a) the
Aeromet acquisition, (b) the ESC acquisition, which occurred in the fourth
quarter of fiscal 1998, and (c) the related financing transactions occurred
on June 1, 1997.
(3) Includes Aeromet's results of operations for June and July 1998, prior to
its acquisition by the Company on July 30, 1998.
18
<PAGE>
(4) "EBITDA" represents income (loss) from operations plus depreciation and
amortization expense. EBITDA should not be construed as an alternative to
(a) net income, as defined by generally accepted accounting principles, as
an indicator of the Company's operating performance or (b) cash flow, as
defined by generally accepted accounting principles, as a measure of
liquidity.
(5) For purposes of computing the ratio of earnings (deficiency of earnings) to
fixed charges, earnings represent income (loss) before taxes and fixed
charges. Fixed charges consist of (a) interest, whether expensed or
capitalized, (b) amortization of deferred financing costs, and (c) the
portion of rental expense considered to represent interest (assumed to be
one-third). Earnings do not include any interest expense on guaranteed debt
of approximately $1.6 million related to a less than 50% owned entity.
</TABLE>
SELECTED FINANCIAL DATA OF AEROMET
(in thousands, except percentages and ratios)
The following selected financial data presents selected historical
financial data of Aeromet and should be read in conjunction with Aeromet's
Financial Statements and Notes thereto, which have been conformed to generally
accepted accounting principles in the United States, and with MD&A - Results of
Operations - Aeromet, included elsewhere in this Prospectus. The selected
historical financial data as of and for the years ended December 31, 1996 and
1997 is derived from Aeromet's audited financial statements. The selected
historical financial data as of and for the five-month periods ended May 31,
1997 and 1998 is derived from unaudited financial statements prepared by Aeromet
on a basis consistent with Aeromet's audited financial statements and, in the
opinion of management, includes all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the results for such
periods. Operating results for the five-month period ended May 31, 1998 are not
necessarily indicative of the results that may be expected for any other interim
period or for the period ending May 31, 1999.
<TABLE>
<CAPTION>
Five-month periods ended
Years Ended December 31, May 31,
------------------------- -------------------------
1996 1997 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net sales......................................... $ 41,939 $ 48,697 $ 19,069 $ 24,212
Cost of sales..................................... 34,340 40,591 16,560 19,614
----------- ----------- ----------- -----------
Gross profit...................................... 7,599 8,106 2,509 4,598
Operating expenses................................ 7,098 6,482 2,832 2,590
----------- ----------- ----------- -----------
Income (loss) from operations..................... 501 1,624 (323) 2,008
Net interest expense.............................. 731 754 349 274
----------- ----------- ----------- -----------
Income (loss) before taxes........................ (230) 870 (672) 1,734
Income tax expense................................ 570 900 25 798
----------- ----------- ----------- -----------
Net income (loss)................................. $ (800) $ (30) $ (697) $ 936
=========== =========== =========== ===========
Other Financial Data:
EBITDA............................................ $ 3,912 $ 5,414 $ 1,217 $ 3,435
EBITDA margin..................................... 9.3% 11.1% 6.4% 14.2%
Depreciation and amortization..................... $ 3,411 $ 3,790 $ 1,540 $ 1,427
Capital expenditures.............................. 2,803 1,544 309 197
Ratio of earnings (deficiency of earnings)
to fixed charges (1).............................. .86x 1.67x (.17x) 4.48x
December 31, May 31,
--------------------------- ------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................................................. $ - $ 388 $ -
Working capital............................................................ 2,964 6,516 6,468
Total assets............................................................... 58,169 55,508 56,192
Long-term debt (including current portion)................................. 12,868 14,516 11,892
Shareholder's equity....................................................... 28,709 25,070 25,808
- --------------
(1) For purposes of computing the ratio of earnings (deficiency of earnings) to
fixed charges, earnings represent income (loss) before taxes and fixed
charges. Fixed charges consist of (a) interest, whether expensed or
capitalized, (b) amortization of deferred financing costs, and (c) the
portion of rental expense considered to represent interest (assumed to be
one-third).
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
This section and the "Business" section of this Prospectus contain
"forward-looking statements." These forward-looking statements are not
guarantees of the Company's future performance. They are subject to risks and
uncertainties related to business operations, some of which are beyond the
Company's control. Any of these risks or uncertainties may cause actual results
or future circumstances to differ materially from the forward-looking statements
set forth in this section under the captions "Overview" and "Liquidity and
Capital Resources," and in "Business" under each of the captions in that
section.
- --------------------------------------------------------------------------------
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 first six
months of fiscal 1999 include only four months of operations of Aeromet. See "-
Recent Events - Aeromet Acquisition."
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 on
commercial airline industry, defense and government spending. See "Business -
Industry Overview" and "Risk Factors - Aerospace Industry Risks; Cyclicality,"
and "- Volatility in Asian Markets."
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. See "- Results of Operations - Pacific
Aerospace." The Company believes that margins will remain higher for electronic
and assembled products than for its metals products. Assembled products
incorporating both electronics and metal parts are expected to generate margins
closer to 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.
20
<PAGE>
Results of Operations - Pacific Aerospace
- -----------------------------------------
For an understanding of the significant factors that influenced the
Company's performance during the past three fiscal years and in the first six
months of fiscal 1998 and 1997, the following discussion should be read in
conjunction with the consolidated financial statements of the Company presented
in this Prospectus.
The following table sets forth for the periods indicated certain historical
statement of operations data of the Company expressed in dollars (in thousands)
and as a percentage of net sales.
<TABLE>
<CAPTION>
Years Ended May 31, Six-Month Periods Ended November 30,
--------------------------------------------------------- -------------------------------------
1996 1997 1998 1997 1998
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales...................... $ 20,725 100.0% $ 34,175 100.0% $ 54,099 100.0% $ 24,203 100.0% $ 49,655 100.0%
Cost of sales.................. 16,439 79.3 25,969 76.0 39,487 73.0 17,876 73.9 40,159 80.9
-------- -------- -------- -------- --------
Gross profit................... 4,286 20.7 8,206 24.0 14,612 27.0 6,327 26.1 9,496 19.1
Operating expenses............. 4,869 23.5 6,259 18.3 9,872 18.2 4,158 17.2 8,131 16.4
-------- -------- -------- -------- --------
Income (loss) from operations.. (583) (2.8) 1,947 5.7 4,740 8.8 2,169 9.0 1,365 2.8
Net interest expense........... (498) (2.4) (384) (1.1) (755) (1.4) (283) (1.2) (3,389) (6.8)
Other income (expense)......... 15 - 169 0.5 (853) (1.6) 23 .1 (6,917) (14.0)
Income tax benefit (expense)... 67 0.3 (50) (0.1) 482 0.9 (269) (1.1) 1,955 4.0
-------- -------- -------- -------- --------
Net income (loss)..............$ (999) (4.8)% $ 1,682 4.9% $ 3,614 6.7% $ 1,640 6.8% $ (6,986) (14.0%)
======== ======== ======== ======== ========
EBITDA.........................$ 288 1.4% $ 3,305 9.7% $ 6,944 12.8% $ 3,038 12.6% $ 4,350 8.8%
</TABLE>
Year Ended May 31, 1998 Compared to Year Ended May 31, 1997
Net Sales. Net sales increased by $19.9 million, or 58%, to $54.1 million
for fiscal 1998 from $34.2 million in fiscal 1997. The significant increase in
net sales for fiscal 1998 from fiscal 1997 included increases in both commercial
aerospace industry net sales (an $11.3 million increase) and defense industry
net sales (a $3.5 million increase). The commercial aerospace industry net sales
increase was primarily attributable to increases in production at Boeing and the
related increase in demand from that customer for the Company's precision cast
and machined products. The defense industry net sales increase was primarily
attributable to an increase in orders of aerospace, satellite and weapons
systems electronics products.
Commercial aerospace industry net sales comprised 42.6% of total net sales
in fiscal 1998, up from 34.5% of net sales in fiscal 1997. Defense industry
sales comprised 19.9% of total net sales in fiscal 1998, down from 21.3% of net
sales in fiscal 1997.
The Company completed its Balo acquisition in February 1998 and its ESC
acquisition, effective as of March 1998. These acquisitions expanded production
of hermetically sealed product offerings and added relay, solenoid and flat
panel display product lines. See "Business - Corporate History," and "-
Products, Processes and Markets - Assembled Electronics Products." Accordingly,
net sales for fiscal 1998 also included approximately four months of operations
of Balo and three months of operations for ESC, contributing approximately $4.3
million to net sales in fiscal 1998.
Gross Profit. Gross profit increased by $6.4 million, or 78.0%, to $14.6
million for fiscal 1998 from $8.2 million in fiscal 1997. As a percentage of net
sales, gross profit increased to 27.0% in fiscal 1998 from 24.0% in fiscal 1997,
which was primarily attributable to increased efficiencies gained in
manufacturing processes and in-house production of processes that had previously
been purchased from outside vendors. The Company also believes that capital
investments in equipment and production processes contributed to the improvement
in gross profit margins.
Operating Expenses. Operating expenses increased by $3.6 million, or 57.1%,
to $9.9 million for fiscal 1998 from $6.3 million in fiscal 1997, partially due
to the Balo and ESC acquisitions and increased levels of operations in fiscal
1998. As a percentage of net sales, operating expenses remained essentially
unchanged.
EBITDA. EBITDA increased by $3.6 million, or 109.1%, to $6.9 million for
fiscal 1998 from $3.3 million in fiscal 1997. As a percentage of net sales,
EBITDA increased to 12.8% in fiscal 1998 from 9.7% in fiscal 1997. The increase
in EBITDA as a percentage of net sales during this period was primarily
attributable to production efficiencies and improved capacity utilization.
21
<PAGE>
Net Interest Expense. Net interest expense increased $371,000, or 96.6%, to
$755,000 for fiscal 1998 from $384,000 in fiscal 1997. This increase was
primarily due to the Company's financing of capital equipment purchases and the
debt incurred to finance the expansion of its Wenatchee facilities to support
growth in net sales.
Other Income (Expense). Other income (expense) represents non-recurring and
non-operational income and expense for the period. Other expense increased to
$853,000 in fiscal 1998 from income of $169,000 in fiscal 1997. This increase of
$1,022,000 was due principally to a $1.0 million write-off of portions of notes
receivable and associated debt restructuring and related expenses in connection
with the termination of the Company's efforts during the third quarter of fiscal
1998 to form an information technology group.
Net Income. Net income increased $1.9 million, or 111.8% to $3.6 million
for fiscal 1998 from $1.7 million in 1997, primarily as a result of the factors
discussed above.
Year Ended May 31, 1997 Compared to Year Ended May 31, 1996
Net Sales. Net sales increased by $13.5 million, or 65.2%, to $34.2 million
for fiscal 1997 from $20.7 million in fiscal 1996. This increase was primarily
attributable to larger order sizes for electronics products, due to broader
market acceptance of the Company's electronics products and technologies, which
increased sales of higher priced products and added new customers.
The Company acquired NTI in April 1997, which added capabilities for
explosive bonding of specialty metals. See "Business - Corporate History, and -
Products, Processes and Markets - Explosive Bonding." Accordingly, net sales for
fiscal 1997 included one month of operations of NTI, which contributed $183,000
to total net sales for that year.
Gross Profit. Gross profit increased by $3.9 million, or 90.7%, to $8.2
million for fiscal 1997, up from $4.3 million in fiscal 1996. As a percentage of
net sales, gross profit increased to 24.0% in fiscal 1997 from 20.7% in fiscal
1996. The increase in gross profit as a percentage of net sales was primarily
attributable to achieving revenue levels which allowed for production
efficiencies and increased capacity utilization. The Company also believes that
its investments in manufacturing equipment contributed to improvements in gross
profit margins.
Operating Expenses. Operating expenses increased by $1.4 million, or 28.6%,
to $6.3 million for fiscal 1997, from $4.9 million for fiscal 1996. As a
percentage of net sales, operating expenses decreased to 18.3% in fiscal 1997
from 23.5% in fiscal 1996. The substantial decrease in operating expenses as a
percentage of net sales was primarily attributable to the Company's improved
ability to leverage its operating costs and the consolidation of certain
operations to the Company's Wenatchee manufacturing campus. Specifically, both
CDI in the electronics segment and Cashmere in the aerospace segment were
consolidated into the Company's Wenatchee manufacturing campus. See "Business -
Products, Processes and Markets Assembled Electronics Products, and - Precision
Machining."
EBITDA. EBITDA increased by $3.0 million, or 1,000.0%, to $3.3 million for
fiscal 1997, up from $300,000 for fiscal 1996. As a percentage of net sales,
EBITDA increased to 9.7% in fiscal 1997, from 1.4% in fiscal 1996. The
substantial increase in EBITDA as a percentage of net sales was primarily
attributable to efficiencies gained in manufacturing processes, consolidation of
certain operations to the Company's Wenatchee campus allowing for overhead
efficiencies, and increases in net sales not requiring incremental increases in
operating expenses.
Net Interest Expense. Net interest expense decreased $114,000, or 22.9%, to
$384,000 for fiscal 1997 from $498,000 in fiscal 1996, primarily as a result of
the repayment of debt that was funded by proceeds from a July 1996 public and a
February 1997 private offering of equity securities, and the reduction of bank
line of credit balances throughout the year.
Other Income (Expense). Other income increased to $169,000 in fiscal 1997
from income of $15,000 in fiscal 1996 primarily as a result of sale of scrap and
recycling of excess materials in the manufacturing process.
Net Income. Net income increased $2.7 million to $1.7 million for fiscal
1997 from a loss of $999,000 in fiscal 1996 primarily as a result of factors
discussed above.
22
<PAGE>
Results of Operations - Aeromet
- -------------------------------
The following table sets forth for the periods indicated certain historical
statement of operations data of Aeromet expressed in U.S. dollars (in thousands)
and as a percentage of net sales:
<TABLE>
<CAPTION>
Years Ended December 31, Five Months Ended May 31,
--------------------------------------------- ---------------------------------------------
1996 1997 1997 1998
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 41,939 100.0% $ 48,697 100.0% $ 19,069 100.0% $ 24,212 100.0%
Cost of sales 34,340 81.9 40,591 83.4 16,560 86.8 19,614 81.0
--------- --------- --------- ---------
Gross profit 7,599 18.1 8,106 16.6 2,509 13.2 4,598 19.0
Operating Expenses 7,098 16.9 6,482 13.3 2,832 14.9 2,590 10.7
--------- --------- --------- ---------
Income (loss) from operations 501 1.2 1,624 3.3 (323) (1.7) 2,008 8.3
Net interest expense 731 1.7 754 1.6 349 1.8 274 1.1
Income tax benefit (expense) (570) -- (900) -- (25) -- (798) --
--------- --------- --------- ---------
Net income (loss) $ (800) --% $ (30) --% $ (697) --% $ 936 3.9%
========= ========= ========= =========
EBITDA $ 3,912 9.3% $ 5,414 11.1% $ 1,217 6.4% $ 3,435 14.2%
</TABLE>
Five Months Ended May 31, 1998 Compared to Five Months Ended May 31, 1997
Net Sales. Net sales increased by $5.1 million, or 26.7%, to $24.2 million
for the five months ended May 31, 1998 from $19.1 million for the five months
ended May 31, 1997. This increase was primarily attributable to increased sales
of commercial aircraft components (particularly from Airbus related customers)
and motorsports parts for the racing industry. Aeromet was able to capitalize on
the increase in demand by increasing production capacity at its Rochester site,
and retooling its Birmingham site from aircraft engine production to stretch
forming of aluminum alloys.
Gross Profit. Gross profit increased by $2.1 million, or 84.0%, to $4.6
million for the five months ended May 31, 1998 from $2.5 million for the five
months ended May 31, 1997. As a percentage of net sales, gross profit increased
to 19.0% of net sales for the five-month period in 1998 from 13.2% for the
five-month period in 1997. The increase in gross profit as a percentage of net
sales was primarily attributable to increased efficiencies at the Rochester and
Birmingham sites, after completion of construction and retooling at both sites
during the first half of 1997, which enabled Aeromet to increase production. In
addition, at its Worcester site, Aeromet reorganized its manufacturing
management and significantly reduced scrap levels.
Operating Expenses. Operating expenses decreased by $200,000, or 7.1%, to
$2.6 million for the five months ended May 31, 1998 from $2.8 million for the
five months ended May 31, 1997. As a percentage of net sales, operating expenses
decreased to 10.7% for the five-month period in 1998 from 14.9% for the
five-month period in 1997. This decrease in operating expenses as a percentage
of net sales was primarily attributable to a reduction of the sales and
marketing force.
EBITDA. EBITDA increased by $2.2 million, or 183.3%, to $3.4 million for
the five months ended May 31, 1998 from $1.2 million for the five months ended
May 31, 1997. As a percentage of net sales, EBITDA increased to 14.2% for the
five-month period in 1998 from 6.4% for the five-month period in 1997. This
increase in EBITDA as a percentage of net sales was attributable to the
combination of the increased gross margins and decreased operating expenses in
the 1998 period as compared to the 1997 period.
Net Interest Expense. Net interest expense decreased $75,000 or 21.5% to
$274,000 for the five months ended May 31, 1998 from $349,000 for the five
months ended May 31, 1997. Such decrease was due to lower short-term borrowings.
Net Income. Net income increased $1.6 million to $936,000 for the five
months ended May 31, 1998 from a loss of $697,000 for the five months ended May
31, 1997, primarily as a result of the factors discussed above.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net Sales. Net sales increased by $6.8 million, or 16.2%, to $48.7 million
for the year ended December 31, 1997 from $41.9 million for the year ended
December 31, 1996. This increase in annual net sales was primarily attributable
to production efficiencies and manufacturing improvements achieved at two of
Aeromet's sites, providing for increased operating
23
<PAGE>
efficiencies and product throughput. In addition, sales continued to increase in
commercial aircraft components and motorsports parts businesses.
Gross Profit. Gross profit increased by $500,000, or 6.6% to $8.1 million
for the year ended December 31, 1997 from $7.6 million for the year ended
December 31, 1996. As a percentage of net sales, gross profit decreased slightly
to 16.6% in 1997 from 18.1% in 1996. The decrease in gross profit as a
percentage of net sales was primarily attributable to production delays during
construction and retooling at two of Aeromet's production sites in the first
half of the year. Aeromet estimates that gross profit during the second half of
1997 improved significantly after completion of those projects which enabled
Aeromet to increase production and associated gross profit.
Operating Expenses. Operating expenses decreased by $600,000, or 8.5%, to
$6.5 million for the year ended December 31, 1997 from $7.1 million for the year
ended December 31, 1996. As a percentage of net sales, operating expenses
decreased to 13.3% in 1997 from 16.9% in 1996. This decrease in operating
expenses was a result of reducing sales and marketing staffing within Aeromet,
and managerial staff at one of Aeromet's manufacturing sites.
EBITDA. EBITDA increased by $1.5 million to $5.4 million for the year ended
December 31, 1997 from $3.9 million for the year ended December 31, 1996. As a
percentage of net sales, EBITDA increased to 11.1% in 1997 from 9.3% in 1996.
This increase was primarily attributable to the impact of gross profit changes
described previously. As noted, EBITDA improved significantly in the latter half
of the year.
Net Interest Expense. Net interest expense increased $23,000, or 3.1%, to
$754,000 for the year ended December 31, 1997 from $731,000 for the year ended
December 31, 1996. Such increase was due to slightly higher outstanding credit
facility balances due to increased working capital requirements.
Net Loss. Net loss decreased to $30,000 for the year ended December 31,
1997 from a loss of $800,000 for the year ended December 31, 1996, primarily as
a result of the factors discussed above.
Results of Operations - Pacific Aerospace after Aeromet Acquisition with
Comparative Prior Year Six-Month Amounts
- ------------------------------------------------------------------------
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 production at
Boeing during the Company's first quarter of fiscal 1999, which increased 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,
24
<PAGE>
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.
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. See "- Recent Events - Electronic Specialty Corporation," and "- Orca
Technologies, Inc.," below. 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
- -------------------------------
Year Ended May 31, 1998 Compared to Year Ended May 31, 1997
Cash generated from operating activities was $1.6 million for fiscal 1998
compared to cash used of $212,000 in fiscal 1997. The change in net cash from
operations was primarily a result of 111.8% increase in net income from $1.7
million in fiscal 1997 to $3.6 million in fiscal 1998. The increase in net
income was partially offset by increases in accounts receivable
25
<PAGE>
and inventories to support revenue growth. Increases in accounts payable,
accrued liabilities and other liabilities also contributed to increased cash
from operations.
Cash used in investing activities increased from $2.0 million in fiscal
1997 to $16.7 million in fiscal 1998, an increase of $14.7 million. The change
results primarily from the Company's increased investment in property and
equipment of $6.5 million in fiscal 1998 compared to $2.1 million in fiscal 1997
and the issuance of $6.3 million in notes receivable in connection with the
investment in a proposed information technology group. Of the total $6.3
million, a net of $4.6 million is represented by an investment in the common
stock of a third party internet services provider. See "- Recent Events - Orca
Technologies, Inc." and "Certain Transactions."
Cash generated from financing activities increased by $19.0 million, to
$23.5 million in fiscal 1998, from $4.5 million in fiscal 1997. During fiscal
1998, the Company completed several financing transactions, receiving net
proceeds from long-term debt financing of $10.1 million (including net proceeds
from convertible notes of $5.4 million); $2.2 million from the sale of Common
Stock; net proceeds of $9.3 million from the sale of Series B Preferred, and
$3.8 million from the proceeds from exercise of stock options and warrants. Cash
generated by the equity financing transactions was offset to a certain degree by
payments on long-term debt and capital leases of $1.5 million during the year.
Capital expenditures were $10.3 million during fiscal 1998, which was
higher than normal due to approximately $4.7 million for expansion of the
Company's Wenatchee manufacturing facilities and acquisition and construction of
its headquarters, with the balance of $5.6 million related primarily to
purchases of machinery and equipment. During fiscal 1998, the Company
substantially completed an addition to its Wenatchee facilities consisting of
approximately 12,000 square feet of production space. The cost of this expansion
was approximately $1.3 million. The Company has entered into a term loan with
its primary senior lender for approximately $712,000 of these expansion costs.
The Company has also acquired certain property adjacent to its existing
Wenatchee on which it built an office building to house the Company's executive,
administrative and accounting personnel. This facility was occupied in August
1998. Total project costs for the office building were approximately $3.5
million and were funded from working capital. In December 1998, the Company
purchased the Balo facility for approximately $1.1 million. As of May 31, 1998,
the Company had no material commitments outstanding for purchases of additional
capital assets.
The Company's working capital, as of May 31, 1998 and 1997, was $25.6
million and $13.1 million, respectively. The increase in working capital in
fiscal 1998 over fiscal 1997 was primarily the result of the equity and
financing activities discussed above and the Company's improved net income from
operations.
At May 31, 1988, the Company had net operating loss (NOLs) carryforwards
for federal income tax purposes of approximately $4.9 million, the benefits of
which expire in the tax year 2001 through the tax year 2011. The NOLs created by
the Company's subsidiaries prior to their acquisition and the NOLs created as a
consolidated group or groups subsequent to a qualifying tax free merger or
acquisition, have limitations related to the amount of usage by each subsidiary
or consolidated group as described in the Internal Revenue Code. As a result of
these limitations, approximately $800,000 of the $4.9 million of NOLs will never
become available. At May 31, 1997, the Company recorded a valuation allowance
because management believed that it was uncertain that some portion or all of
the deferred tax assets would be realized. At May 31, 1998, the Company
eliminated the valuation allowance for deferred taxes due to management's
assessment of improved probability of realization. The Company anticipates that
its effective income tax rate will continue to approach the statutory rate in
the future.
Six Months Ended November 30, 1998 Compared to Six Months Ended November
30, 1997
Financing Activities. During the six-month period ended November 30, 1998,
the Company completed three financing transactions, including (i) the Rule 144A
Offering, (ii) the Company's offering of Series B Convertible Preferred Stock
and related warrants, and (iii) a private placement of 2,585,000 shares of
common stock (the "Fall 1998 Common Stock Offering"). These offerings generated
net cash of approximately $83.0 million. See "- Recent Events -Aeromet
Acquisition - Rule 144A Offering;" "--Preferred Stock Offering;" and "-- Fall
1998 Common Stock Offering." Cash generated by these financing transactions was
offset by payments on long-term debt and capital leases of $4.8 million during
the six months ended November 30, 1998.
26
<PAGE>
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 $3.9 million during the six-month period ended November 30, 1998. 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. in Tacoma, Washington ("Lyden"). The Company
also entered into a ten year lease for Lyden's foundry facility from a third
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. See "- Recent Events -
Acquisition of Lyden." 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 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, the Rule 144A Offering, the sale of the Series B
Convertible Preferred Stock, and the sale of common stock. See "- Recent Events
- -Aeromet Acquisition - Rule 144A Offering;" "--Preferred Stock Offering;" and
"--Fall 1998 Common Stock Offering."
Future Capital Requirements. The Company believes that the net proceeds
from the release of funds escrowed in connection with the Company's Series B
Convertible Preferred Stock and the proceeds from the 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. See "- Recent Events --Preferred Stock Offering" and "-- Fall 1998 Common
Stock Offering." 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 New Notes.
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.
27
<PAGE>
Recent Events
- -------------
Aeromet Acquisition
Acquisition Transaction. On July 30, 1998, Pacific Aerospace & Electronics
(UK) Limited ("PA&E-UK"), a company organized under the laws of the United
Kingdom and an indirect wholly-owned subsidiary of the Company, purchased all of
Aeromet's issued and outstanding capital stock. The Aeromet acquisition was made
pursuant to a Share Acquisition Agreement dated July 1, 1998, between Charles
Baynes plc, Westpark Limited (an affiliate of Charles Baynes plc), PA&E-UK and
the Company. In consideration for PA&E-UK's acquisition of all of Aeromet's
issued and outstanding capital stock, the Company delivered to Westpark Limited
(pound)42 million (or approximately $69 million) in cash. The purchase price was
determined in arms-length negotiations between Charles Baynes plc and the
Company. See "Risk Factors - Acquisition Risks."
Rule 144A Offering. The Company funded the Aeromet acquisition from the net
proceeds of the sale of the Old Notes. Subject to the terms and conditions of a
Purchase Agreement (the "Purchase Agreement"), dated July 23, 1998, between the
Company, the Company's U.S. subsidiaries, and the Initial Purchasers, the
Initial Purchasers agreed to purchase, and the Company agreed to sell, the Old
Notes in the aggregate principal amount of $75 million. The Old Notes were
issued pursuant to an Indenture, dated July 30, 1998 (the "Indenture") between
the Company, its U.S. subsidiaries and the Trustee. The Old Notes (a) are senior
subordinated, unsecured, general obligations of the Company, (b) will mature on
August 1, 2005, unless previously redeemed pursuant to the Indenture, and (c)
are jointly and severally guaranteed on a senior subordinated basis by each of
the Company's U.S. subsidiaries. The Company is subject to a number of
restrictive covenants under the Old Notes. In addition, if there is a change of
control of the Company's Common Stock, the Company may be required to repay the
Old Notes. See "Risk Factors - Restrictive Debt Covenants."
Registration Rights. In connection with the Purchase Agreement, the Company
and its U.S. subsidiaries entered into a registration rights agreement with the
Initial Purchasers, pursuant to which the Company agreed to file this
Registration Statement and agreed to use its reasonable best efforts to cause
this Registration Statement to be declared effective by January 26, 1999, among
other things.
Preferred Stock Offering
In August 1998, the Company completed an offering (the "Preferred Stock
Offering") of its Series B Convertible Preferred Stock (the "Preferred Stock")
and related warrants by issuing (a) an additional 70,000 shares of Preferred
Stock, and (b) additional related warrants to purchase 97,221 shares of Common
Stock, in exchange for a purchase price of $7,000,000 which had been held in
escrow pending completion of the Aeromet acquisition. When combined with the
first Preferred Stock closing in May 1998, the Company issued a total of 170,000
Shares of Preferred Stock, and related warrants to purchase 236,109 shares of
Common Stock, for a total purchase price of $17 million. See "Description of
Capital Stock Preferred Stock - Series B Convertible Preferred Stock." The
Company filed a Registration Statement on Form S-1 covering resale of the shares
of Common Stock issuable upon conversion of the Preferred Stock and upon
exercise of the related warrants which was declared effective by the SEC on
December 23, 1998.
Electronic Specialty Corporation
On April 13, 1998, the Company's subsidiary, ESC Acquisition Corp.,
acquired substantially all of the assets of Electronic Specialty Corporation
(the "Seller"), including the name, and assumed certain of the Seller's
liabilities. The Company engaged the Seller's president to be president of ESC
after the closing. In June 1998, the Company terminated ESC's president. The
Company subsequently became aware of certain differences between ESC's actual
financial condition and the financial condition represented by the Seller in the
closing documents. These differences included a significantly lower backlog and
order flow, and significantly higher operating losses, than represented. As a
result, the Company laid off approximately 30% of ESC's workforce later in June
1998, and another 35 employees in October 1998. A new general manager appointed
by the Company in August has reassessed the business opportunities, including
cash flow and revenue forecasts, which are significantly lower than previously
forecasted. ESC is in the process of negotiating higher prices under certain of
its relay contracts.
28
<PAGE>
ESC has incurred significant losses since its acquisition. At August 31,
1998, the Company wrote off its goodwill in ESC in the amount of $3,581,000 due
to these losses, and due to its significantly lower future expectations of
revenues and profits from ESC. In addition, the Company is investigating new
product line opportunities, evaluating the feasibility of continuing older
product lines, and evaluating the business in general. During the quarter ended
November 30, 1998, the Company wrote down its inventory at ESC in the amount of
$1.6 million due to discontinuance of an unprofitable product line. Additional
losses in the future are reasonably possible. See "Risk Factors - Acquisition
Risks."
Orca Technologies, Inc.
At January 13, 1999, the Company held 2,289,309 shares of Orca's common
stock (the "Orca Shares"), which, to the Company's knowledge, constituted
approximately 17.91% of Orca's issued and outstanding common stock. The Company
acquired 179,600 of the Orca Shares in a market transaction, and the other
2,109,709 of the Orca Shares pursuant to an April 1998 restructuring agreement
between Orca and the Company. In the restructuring agreement, the Company (a)
canceled certain loans owed it by Orca in exchange for the 2,109,709 shares of
Orca's Common Stock, (b) agreed to continue guaranteeing Orca's credit facility
of $1.3 million and an equipment lease of $373,000 for equipment used by Orca's
then-subsidiary, Televar, Inc., and (c) accepted a $950,000 promissory note from
Orca (the "Orca Note") as payment for certain third-party notes then owned by
the Company. The Company also sublets its Bothell, Washington office space to
Orca for base rent of approximately $32,000 per month. See "Certain Transactions
- - Orca Technologies, Inc."
The Company originally valued the Orca Shares on its balance sheet at
$5,014,000. Due to decreases in the trading price of Orca's common stock on
Nasdaq's over-the-counter bulletin board, the Company recorded unrealized losses
on the Orca Shares, included in shareholders' equity, of $436,000 as of May 31,
1998. On August 31, 1998, the Company recorded a charge of approximately $2.3
million to reduce the value of its investment in the Orca Shares to $2.7
million, due to an other-than-temporary decrease in the traded market price of
Orca common stock and to include a liability related to certain guaranties by
the Company of Orca liabilities. The Company had also reserved $250,000 of the
Orca Note in the fourth quarter of fiscal 1998, and, during August 1998, the
Company reserved the remaining balance of $700,000.
As of January 13, 1999, Orca was six months past due on the interest
payments due on the Orca Note and on its lease payments to the Company. The
Company has demanded full payment of the past due amounts from Orca; however,
the Company has agreed to forbear on collecting payment of the past due amounts
temporarily while Orca attempts to obtain financing. If the Company is unable to
obtain release of its guarantees or collect the payments due on the Orca Note
and sublease, or if the traded market price of Orca Common Stock decreases, the
Company may incur additional significant losses as a result of its investment in
Orca. See "Risk Factors - Acquisition Risks."
Issuance of Common Stock to Liviakis
In February 1998, the Company entered into a financial services agreement
with Liviakis Financial Communications, Inc. ("Liviakis") to provide financial
and public relations services to the Company. In connection with that consulting
agreement, the Company issued to Liviakis and Robert B. Prag, one of its
principals, warrants to purchase an aggregate of 1,290,000 shares of Common
Stock for $4.62 per share. In August 1998, the Company, Liviakis and Mr. Prag
entered into an agreement ("Liviakis Agreement") in which (a) a finder's fee
claim by Liviakis against the Company was resolved in exchange for the Company's
issuance of an aggregate of 590,000 shares of Common Stock to Liviakis and Mr.
Prag under the exemption from registration provided in Section 4(2) of the
Securities Act, and (b) Liviakis and Mr. Prag transferred the warrants
previously issued to them to the Company for cancellation. No commissions were
paid in connection with issuance of the shares to Liviakis and Mr. Prag. Under
the Liviakis Agreement, Liviakis and Mr. Prag cannot transfer their shares of
Common Stock until after February 1, 1999.
Fall 1998 Common Stock Offering
In November 1998, the Company issued an aggregate of 2,585,000 shares of
Common Stock to accredited investors under Rule 506 of Regulation D, in exchange
for aggregate cash consideration of $5,170,000. The Company paid $310,200 in
commissions to a placement agent in connection with the offering. The Company
agreed to file a registration statement registering these shares for resale
during April 1999.
29
<PAGE>
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.
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 conditions, the Company does not expect to be in a position to close the
acquisition until spring or summer of 1999.
Acquisition of Lyden
In December 1998, the Company's Aeromet America, Inc. subsidiary purchased
substantially all the assets of Lyden Castparts, Inc. ("Lyden"). The Company
also entered into a ten year lease for Lyden's foundry facility from a third
party. Lyden's shareholders are Gary Lyden, general manager of Aeromet America,
Inc., and Jeff Lyden, who became general manager of the Tacoma facility after
the sale. 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.
Year 2000
- ---------
The Company 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
30
<PAGE>
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 has not determined the manner in which it will
present the information required by SFAS No. 130 in its annual financial
statements.
In June 1998, 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.
31
<PAGE>
BUSINESS
The Company develops, manufactures and markets high-performance electronics
and metal components and assemblies for the aerospace, defense, electronics and
transportation industries. The Company's consolidation strategy is to
identify and acquire companies that it believes will (1) provide the opportunity
for increased sales to the Company's existing customers and for new sales to the
Company's potential customers, and (2) extend or vertically integrate the
Company's manufacturing capabilities or product lines.
Most recently, the Company acquired Aeromet on July 30, 1998. The Aeromet
acquisition nearly doubled the Company's size, and significantly expanded its
customer base and product offerings. Aeromet is one of the leading suppliers in
the United Kingdom of magnesium and aluminum precision sand and investment
castings, and titanium and aluminum formed sheet products, for the aerospace,
defense and motorsport industries in Europe. Aeromet's casting and forming
technologies and products are complementary extensions of the Company's existing
precision metals product lines.
The Company's headquarters are located at 430 Olds Station Road, Wenatchee,
Washington 98801, and its telephone number is (509) 667-9600.
Corporate History
- -----------------
The Company acquired its operating companies in a series of transactions
since 1990. Each acquisition was accounted for as a purchase. The following
chart identifies the Company's current operating companies, the year in which
each was acquired and the current locations.
<TABLE>
<CAPTION>
Year of
Operating Companies Acquisition Current Location
------------------- ----------- ----------------
<S> <C> <C>
Pacific Coast Technologies, Inc. ("Pacific Coast") 1990 Wenatchee, Washington
Cashmere Manufacturing Co., Inc. ("Cashmere") 1994 Wenatchee, Washington
(including Seismic Safety Products, Inc.,
operated as a division of Cashmere) 1996 Wenatchee, Washington
Ceramic Devices, Inc. ("Ceramic Devices") 1995 Wenatchee, Washington
Aeromet America, Inc. ("Aeromet America") 1996 Entiat, Washington
(previously known as Morel Industries, Inc.) 1998 Tacoma, Washington
Northwest Technical Industries, Inc. ("NTI") 1997 Sequim, Washington
Balo Precision Parts, Inc. ("Balo") 1998 Butler, New Jersey
Electronic Specialty Corporation and Displays &
Technologies, Inc. ("ESC") 1998 Vancouver, Washington
Aeromet International plc ("Aeromet") 1998 England (five locations)
</TABLE>
Business Strengths
- ------------------
Significant Customer Base
The Company counts among its customers many of the world's leading
aerospace, defense, electronics and transportation companies, including those on
the following chart. The Company believes that one of the key advantages of the
Aeromet acquisition is the opportunity it creates for the Company to access a
significant base of additional customers.
32
<PAGE>
U.S. Operations U.K. Operations
================================== ======================
The Boeing Company British Aerospace plc
PACCAR Rolls Royce plc
Raytheon/Hughes Aircraft Company GKN Westland Aerospace
Honeywell, Inc. Lucas Aerospace plc
Lockheed Martin Corporation Alenia (Aermacchi)
Northrop Grumman Corporation
Space Systems/Loral, Inc.
Westinghouse Electric Corporation
TRW, Inc.
Litton Industries
Strong Position in Major Aerospace and Defense Programs
The Company supplies components and parts to Boeing for each of Boeing's
737, 747, 757, 767 and 777 commercial aircraft construction programs. Aeromet
participates in the Airbus A300/310, A320 and A330/340 commercial aircraft
construction programs. In addition, both the Company and Aeromet participate in
major defense and military aircraft programs.
Diversity of Product Offerings and Capabilities
The Company manufactures a broad range of precision cast, machined and
assembled electronics products. The Company collaborates with many of its
customers to develop products that meet specific design or customization
requests. In addition, many of the Company's custom-developed electronics
components have become widely accepted in the industry. The Company believes
that its experience and capabilities in working with the changing needs of its
customers will allow it to continue to respond to changing market trends in its
industries.
Strong Technology Position
The Company utilizes specialized manufacturing techniques, advanced
materials science, process engineering and proprietary technologies or processes
in the manufacture of their metals and assembled products. In particular, the
Company's U.S. operations have a broad base of expertise in the manufacture of
cast aluminum products using lost foam, sand and permanent mold casting
technologies, and in its precision machined, explosively bonded and assembled
electronics products. Aeromet possesses specialized expertise in casting
magnesium and aluminum products using lost wax and sand casting techniques and
its licensed "Sophia Process" technology, and in super plastic forming of
titanium and stretch forming of aluminum alloys. The Company owns 32 U.S.
patents used in the manufacture of its electronics products and one European
patent. The Company also has three patent applications pending in the U.S. and
one patent application pending in Canada. The Company maintains an ongoing
program of evaluating and protecting its proprietary rights and processes.
Strategy
- --------
The Company's objective is to generate profitable growth by taking
advantage of available opportunities in its industries. The Company believes
that pursuing the following business strategies will enable the Company to
increase market penetration, create operating efficiencies and enhance its
competitive position in its core markets.
Leverage the Aeromet Platform
The Aeromet acquisition significantly enhanced the Company's commercial
aerospace and defense industry presence and provides the Company with a solid
platform from which to access major European commercial aircraft and aircraft
engine programs as well as markets within the European defense and
transportation industries. These markets would be difficult for the Company to
enter without a physical presence in Europe. The Company also believes that
Aeromet may provide a strategic opportunity for pursuing acquisitions of other
European aerospace, defense and transportation companies on a model similar to
that which the Company has pursued successfully in the United States.
33
<PAGE>
Increase Margins Through Enhanced Marketing and Vertical Integration
The Company's strategy is to improve profit margins and revenues by (1)
consolidating the marketing of companies that share similar product lines or
customer bases and by leveraging the synergies among its consolidated companies
in order to increase customer penetration, (2) continuing to vertically
integrate its manufacturing processes in order to improve operating
efficiencies, and (3) to develop new products and product enhancements. A key
component of this strategy is to use the Company's expertise in advanced
materials science and in the manufacture and assembly of precision products to
identify new products, services and markets. The Company also intends to
capitalize on the current shift of commercial aircraft manufacturers and defense
contractors toward purchasing from a smaller number of suppliers that can supply
more complete systems and pre-assembled parts. Assembled parts and systems
generally are higher margin products than individual metal parts. By producing
products that integrate the Company's metals casting, forming and machining
expertise with its expertise in the manufacture of connectors, seals, filters,
relays and electronic packages, the Company expects to improve its profit
margins and position itself to capture a larger share of its customers' total
product requirements.
Leverage Product Development through Strategic and Proprietary Technologies
The Company develops new products from existing technologies in response to
specific customer requests. The Company plans to continue development of new
products for its customers and, where appropriate, to apply for additional
patents for those new technologies. The Company may acquire additional strategic
and proprietary technologies from third parties and expects to continue to
develop its research and development capabilities. The Company does not expect
to devote substantial resources to research and development that is not funded
by customers.
Pursue Other Strategic Acquisitions
The Company believes that there are and will continue to be opportunities
to grow the Company and enhance its profitability through acquisitions. The
Company intends to continue to pursue acquisitions of companies and technologies
that it believes will provide the opportunity for increased sales penetration
with existing customers and new sales to potential customers, and that will
extend and vertically integrate the Company's products and technologies.
Industry Overview
- -----------------
The aerospace supply industry is currently enjoying favorable trends driven
by strong growth in commercial aircraft fundamentals. Industry sources estimate
that the worldwide market for aircraft, including components, will be
approximately $520 billion over the ten-year period of 1997 through 2007.
Demand for aerospace components is closely related to delivery and use
rates for commercial aircraft. Delivery and use rates are in turn directly
related to the actual and projected volume of passenger and freight traffic,
average aircraft age and global fleet size. According to the Boeing 1998 Current
Market Outlook, world air traffic grew 6% from 1996 to 1997, following a 7%
increase in the previous year. In early 1998, Boeing and Airbus forecast that
world air traffic will grow by more than 5% each year over the next ten years.
Boeing also projects that during this same period domestic and international
airlines will lease or purchase over 7,600 new aircraft, thereby increasing the
worldwide commercial fleet from approximately 12,300 aircraft at the end of 1997
to approximately 17,700 aircraft (net of retirements) at the end of 2007. Asia's
economic crisis, however, has led to a reduction in air traffic growth and a
corresponding reduction in demand for new commercial aircraft. As of December 1,
1998, Boeing revised its production rates to reduce projected deliveries through
2000.
In 1997, Boeing delivered over 320 new aircraft compared to 220 new
aircraft it delivered in the prior year. In 1997, Airbus delivered 182 new
aircraft compared to 126 in the prior year. Boeing has predicted that it will
deliver 550 airplanes in 1998. In December, however, Boeing announced plans to
produce 620 aircraft in 1999, but only 490 in 2000, a drop of 21%.
Additionally, according to the U.S. Department of Defense, defense
procurement funding is expected to grow by 40%, from approximately $43 billion
in 1998 to approximately $60 billion in 2001. The Company believes that both its
electronics and aerospace business segments will benefit from this trend.
34
<PAGE>
As in other transportation segments, aircraft manufacturers and defense
contractors have been actively searching for ways to improve the quality and
reduce the cost of their manufactured products. One major area of focus has been
the manner in which they work with their supply base. Similar to automotive
manufacturers, aircraft manufacturers and defense contractors have increasingly
become product designers and assemblers rather than vertically integrated
manufacturers. As a result, these manufacturers are outsourcing component
manufacturing to independent suppliers, seeking to benefit from an independent
supplier's lower cost structure and specialized manufacturing knowledge.
Suppliers that demonstrate an ability to effectively deliver a high quality
product on the required delivery schedule at a reasonable cost will benefit from
this shift. In addition, commercial aircraft manufacturers are tending, and
defense contractors are being strongly encouraged by the U.S. Department of
Defense to purchase from suppliers that can supply more complete systems and
pre-assembled parts. These shifts are leading to a consolidation in the supply
base. Certain segments of the aerospace supply base are already consolidated,
such as engines, avionics and landing gear. Other segments, however, including
structural components and electronics, remain fragmented. The Company believes
that this trend toward consolidation presents an opportunity for suppliers with
the financial and management resources to complete acquisitions and expand their
operations.
The electronics industry is similarly enjoying revenue growth in several
product sectors. According to the Economic Industries Alliance, the annual
worldwide market for electronics and components produced in the United States
totaled approximately $460 billion in 1997, representing an 11% increase over
1996 figures. Electronics components comprise the largest portion of the
worldwide electronics market, accounting for $148 billion in sales in 1997. The
Company estimates the current size of the electronics connector market to be
approximately $1 billion in annual sales. The Company believes that both defense
industry sales and sales of hermetically sealed components accounted for
significant portions of that market. Additionally, the Company estimates the
size of the electronics packaging market to be over $50 million in annual sales.
The growth in the electronics industry has been fueled by several factors,
including the rapid pace of technological advancement and development of new
products. The growth in demand by consumers and businesses for technologically
advanced electronics products has prompted manufacturers to create more
elaborate designs, which frequently require more components per unit.
Additionally, international demand for advanced electronics components is
growing rapidly as an increasing array of more complex products becomes
available in developing regions. The Company expects these favorable trends in
the electronics industry to continue and believes the outlook for the
electronics component supply industry will continue to be strong.
35
<PAGE>
- --------------------------------------------------------------------------------
References to the "Company" in the following subsections of this "Business"
section do not include Aeromet, which is discussed separately.
- --------------------------------------------------------------------------------
Products, Processes and Markets
The products, manufacturing processes and markets of the Company in fiscal
1998 and of Aeromet, and the industry segments in which they operate, are
summarized separately below. For segment analysis, see "Notes to Consolidated
Financial Statements - Note 3" in the Company's financial statements for May 31,
1998.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Segments Manufacturing Processes Sample Products Company/Facility
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aerospace Metals Forming Hot and superplastic Jet engine bulkhead components, Aeromet: Welwyn
titanium forming airframe and engine details, Garden City, England
helicopter erosion shields
---------------------------------------------------------------------------------------
Cold stretch Aircraft skin panels, leading Aeromet:
aluminum forming edges and acoustic panels Birmingham, England
---------------------------------------------------------------------------------------------------------------
Precision Casting Sand, lost foam and Aircraft and truck parts Pacific Aerospace:
permanent mold casting Entiat, Washington
---------------------------------------------------------------------------------------
Investment casting Aircraft parts Aeromet: Worcester
and Rochester, England
---------------------------------------------------------------------------------------
Sand casting Aircraft engine parts and Aeromet:
windscreen canopies; Sittingbourne, England
motorsport engine parts
-----------------------------------------------------------
Industrial parts Pacific Aerospace:
Tacoma, Washington
---------------------------------------------------------------------------------------------------------------
Precision Precision machining Aircraft parts Pacific Aerospace:
Machining of bonded and cast Wenatchee, Washington
metals
Aeromet:
Sittingbourne, England
- -----------------------------------------------------------------------------------------------------------------------------
Electronics Explosive Bonding Explosive bonding Bonded stainless steel and Pacific Aerospace:
of dissimilar metals aluminum for use in electronic Sequim, Washington
connectors and assemblies
---------------------------------------------------------------------------------------------------------------
Assembled Electronic Design and Electronic connectors and Pacific Aerospace:
Products manufacture assemblies with ceramic Wenatchee, Washington
and glass hermetic seals Butler, New Jersey
-----------------------------------------------------------
Ceramic discoidal electro- Pacific Aerospace:
magnetic filters and capacitors Wenatchee, Washington
-----------------------------------------------------------
Relays and solenoids; Pacific Aerospace:
ruggedized flat panel Vancouver, Washington
displays
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Metals Forming
At its Welwyn Garden City and Birmingham facilities, Aeromet uses hot and
cold metal forming technologies to manufacture titanium and aluminum assemblies
and details for the commercial aerospace and defense industry. Aeromet also
performs finishing, welding, brazing and riveting processes on these parts.
Testing of these products is done using non-destructive techniques and in-house
X-ray facilities. Interactive discussions with customers enable Aeromet to match
component design closely to the most suitable forming process.
Hot Forming of Titanium. Aeromet's Welwyn Garden City facility specializes
in hot and super-plastic forming of titanium, and the Company believes it has
the largest independent capability in the European Union for that process.
Unlike most sheet metal materials, titanium and its alloys are extremely
difficult to form in a cold condition. To overcome this, Aeromet has developed
at its Welwyn Garden City site a variety of hot forming processes, including hot
die forming, hot brake press forming, superplastic forming, gas blow forming and
hot stretch-forming. These processes maximize weight savings, maintain
structural integrity, minimize cost and enable the designer to manipulate the
developing alloys into complex shapes. The components have no spring back,
little or no residual stress and are repeatable in form and thickness. Aeromet
undertakes responsibility for the design and manufactures the necessary tooling
using its in-house pattern facility, coupled with a tool bedding, fettling and
surface dressing capability. The forming equipment consists of air circulating,
low thermal mass heat treatment furnaces for temperatures up to 1,100 degrees
centigrade and related quenching facilities. The Welwyn Garden City site also
has the capability to chemically mill three-dimensional components in titanium.
Aeromet markets its hot-formed titanium products primarily to the commercial
aircraft, helicopter and military aircraft markets. Aeromet's titanium products
include jet engine Nacelle bulkhead components, airframe and engine details and
erosion shields for helicopters. Aeromet's
36
<PAGE>
titanium products are included on the Airbus model 320, 321, 330 and 340
aircraft, the Boeing model 717 and 737 aircraft and the Dash 8-400 aircraft.
Cold Forming of Aluminum Alloys. At its Birmingham facility, Aeromet
specializes in the pressing and cold forming of aluminum alloys used for
aircraft skin panels, leading edges and acoustic panel liners. Stretch forming
is a process well suited to producing aircraft skin panels and leading edges.
Specialized equipment in the Birmingham facility has the capability to form
sheets up to 8 feet wide and up to 13 feet long with stretching loads of up to
700 tons being applied. Most tools are machined from oxidation-resistant
stainless steel castings, and forming dies up to four tons can be handled.
Together with specialist gripper jaws and rotational platen, this enables
Aeromet to stretch-form aluminum alloys into a wide variety of shapes and sizes.
Aeromet's capabilities extend from design to completion, including tooling
design and manufacture, forming, chemical milling, trimming, assembly and
quality control. The cold formed aluminum alloy products are marketed primarily
to the aerospace market.
Precision Casting
Pacific Aerospace. At its Aeromet America facility in Entiat, Washington,
the Company designs and manufactures precision cast aluminum parts using
permanent mold, sand and lost foam casting technologies. At its Aeromet America
facility in Tacoma, Washington, the Company designs and manufactures aluminum,
bronze, iron and steel parts using sand casting technology. The cast parts
produced at the Aeromet America facilities are sold principally to the
transportation and aerospace industries.
Permanent Mold Casting. The permanent mold process is well-suited for
high strength, long production life aluminum parts that do not require frequent
changes in design and can be made in high volume. The Company uses this process
primarily to produce components used in diesel engines and other structural
parts for the transportation industry. The permanent mold process uses a cast
iron mold to shape the part to be cast. Molten aluminum is ladled into the
heated mold and, once cooled, the casting is removed from the mold. As the mold
is not destroyed in the production process, it can be reused.
Sand Casting. The sand casting process is more appropriate for lower
volume parts and for parts produced in iron and steel which have high melting
temperatures, prohibiting the use of many other casting processes. This process
uses a wooden pattern of the part to be cast, with complex geometry and high
metalicized quality. The Company uses this process to produce parts for the
aerospace industry such as housings. An automatic molding machine hydraulically
squeezes molding sand to accurately reproduce the pattern. After the molten
metal is poured into the mold, the sand is removed, leaving the casting. The
sand mold is destroyed in the process but the sand may be recycled for future
moldings.
Lost Foam Casting. The lost foam process is well-suited for producing
aluminum parts with complex patterns, which reduces the amount of machining that
would be required if the parts had been made with sand or permanent mold
castings. The Company uses this process to produce support brackets and housings
for the transportation and aerospace industries. In the lost foam process, the
pattern is created from expanded polystyrene beads. The foam pattern is then
suspended in a large metal flask and surrounded with dry sand. Molten aluminum
is poured directly on the pattern, which vaporizes as the aluminum replaces
every detail of the pattern. The lost foam process allows for complex details of
a part to be cast with little or no touch-up, and the tooling used to create the
polystyrene patterns has an unlimited life as the tooling only comes in contact
with the polystyrene beads.
Aeromet. At its Rochester, Worcester and Sittingbourne, England facilities,
Aeromet manufactures aluminum investment castings and aluminum and magnesium
precision sand castings. Aeromet is a European leader in the production of light
alloy sand and investment castings for the commercial aerospace and defense
sectors.
Precision Investment Casting. At its Worcester, England facility,
Aeromet manufactures aluminum investment casting products, including aircraft
and defense system components such as electronic enclosures, aircraft engine
outer guide vanes, navigation lights, wing tip fences, winglet components, duct
stators and heads up display units. At its Rochester, England facility, Aeromet
manufactures aircraft components such as pressure tight fuel connectors. The
versatility, accuracy and replicability of the investment casting process
provides many advantages over more traditional methods of machining and
fabricating metal products from solid components. The investment casting process
uses a metal die manufactured to required specifications. Aeromet's precision
tooling capabilities permit production of metal dies that incorporate a variety
of details and features. A die can be reused to produce the required number of
parts without degradation to the original die. Aeromet's production of the die
gives the customer an incentive to order additional units of the part from
Aeromet.
37
<PAGE>
Sophia Process Investment Casting. At its Worcester, England facility,
Aeromet uses the computerized "Sophia Process" to manufacture significantly
larger, more complex castings than can be made as a single part using more
traditional investment casting processes. Aeromet is one of only four licensees
of the Sophia Process, and is licensed to make and sell metal castings in the
United Kingdom, Ireland, Australia, New Zealand and certain African and Asian
countries. Parts made with the Sophia Process have relatively thin wall
thickness but have strength and ductility values comparable to fabricated,
forged and machined solid components. The Sophia Process stringently controls
the heat level and process parameters to make lighter but stronger components
that resist fracture and fatigue, and reduces machining, fabrication and
assembly costs, by eliminating both doublers at material interfaces and the
weakness and stress associated with riveted assemblies. Aeromet uses high
strength alloys with good castability to ensure that the integrity and enhanced
properties from one casting are identical to the next, and to achieve the
desired combination of tensile strength, ductility and elongation. Parts made
with the Sophia Process are used for the commercial aerospace, defense and
transportation industries. Such applications include civil aircraft, military
aircraft, missiles and underwater weapons applications and applications for the
motorsport industry. Aeromet is using the Sophia Process to produce components
for the Airbus A320, A330 and A340 aircraft, such as navigation light housings
and wing tip fences, as a single part. Parts manufactured with the Sophia
Process constituted 2% of Aeromet's 1997 net revenues. The Company believes that
the advantages of the Sophia Process and the increasing customer awareness of
those advantages will result in increased demand for parts fabricated using the
Sophia Process.
Sand Casting. At its Sittingbourne, England facility, Aeromet
manufactures aluminum and magnesium alloy precision sand castings, including
machined and finished parts for the commercial aerospace, defense and motorsport
industries. Sand casting is suitable for products that are larger than the
typical investment casting parts or products that require heavy wall sections.
These products include aircraft engine heat exchangers and air intakes, aircraft
engine fuel pump housings, aircraft windscreen canopies and high performance
motorsport engine components and gearboxes. The aluminum and magnesium alloys
have high strength and long freezing ranges and are resistant to elevated
temperatures. For such customer requirements, sand casting provides an effective
method of producing components with strength and uniformity. Aeromet has made
significant advances in both the process and materials technology for magnesium
and aluminum sand castings. Aeromet uses engineered patterns utilizing computer
assisted design technologies in order to achieve repeatable high casting
integrity and enhanced mechanical properties. Aeromet has complete
non-destructive testing and inspection facilities, such as dye penetrant flaw
detection and X-ray testing of components, as required by the rigorous standards
of the aerospace industry.
Precision Machining
Pacific Aerospace. At its Cashmere facility in Wenatchee, Washington, the
Company operates a precision machine shop that produces precision machined
components, structural parts and assemblies principally from aluminum, titanium,
stainless steel and explosively bonded metals for the commercial aerospace and
defense industries. These products range from small connectors to complex
assemblies for use in commercial and military aircraft, heavy trucks and seismic
safety gas shutoff valves. The Company uses computerized numerical control
("CNC") machining cells to manufacture particularly complex components and
assembly housings. The Company builds its machined products either to customer
specifications or according to an engineering and tooling design developed by
the Company to suit a customer's particular need. The Company has a direct
computer link to Boeing that allows immediate access to the drawings for Boeing
parts. The Company inspects and tests its machined products at various stages of
production using non-destructive methods such as X-ray, ultra-sound, manual and
computerized measuring instruments, eddy current and dyes before being passed
for shipment to the customer. The Company's machining operations are ISO 9002
compliant and are also D1-9000A Boeing approved, qualifying it to perform work
for most aerospace, medical equipment and general electronic companies. The
Company also has machining capabilities at its Entiat and Tacoma, Washington
facilities to support its casting operations.
In response to changes in its customers' manufacturing processes, the
Company often supplies its precision machined parts on a "just in time to point
of use" basis. As a result of these processes and the high quality of its
machined parts, the Company has won numerous awards for supplier excellence from
Boeing, Northrop Grumman and Kawasaki. In addition, the Company was recently
recognized as Kawasaki Heavy Industries' 1998 supplier of the year.
Aeromet. At its Sittingbourne, England facility, Aeromet operates a
precision machine shop that provides machinery and assembling capabilities for
Aeromet's casting and forming operations. This machining facility has the
technical capabilities to provide the range of machining services for complete
production and finishing of components, including design, pattern
38
<PAGE>
production, casting and final machining of a component. Aeromet also performs
specialized machining of small detail components in steel and titanium.
Explosive Bonding
At its NTI facility in Sequim, Washington, the Company manufactures over 30
specialty metals using explosive metallurgical technology. Using this
technology, an explosive charge combines, at the molecular level, the surfaces
of metals such as aluminum and stainless steel, that will not normally bond to
each other using adhesives or welding. The result is a strong but lightweight
metal that can be machined and welded into complex assemblies. The Company
finishes the metals to the customer's specifications using milling, welding,
lathe and rolling techniques, and tests the finished products in its
metallurgical lab using non-destructive testing such as dye penetration and
ultrasonic scanning. The Company also uses its explosive technology to
shock-harden metals for use in applications where extremely high tensile
strength is required, such as rail track intersections and switch components and
to pressure form complex metal parts under water.
The Company's explosively bonded metals are used by customers in the
aerospace, defense, energy and marine industries. Explosively bonded metals are
used to fabricate products for highly specialized applications such as
satellites, aircraft and missiles where weight minimization is a critical
factor; oil drill heads, aircraft engine exchange tubes, and flanges and
feed-throughs for nuclear particle accelerators where strength at high
temperature and heat dissipation are critical; and naval interfaces and
structures where galvanic corrosion resistance is a requirement.
Assembled Electronics Products
The Company develops, manufactures and markets a wide array of complex
hermetically-sealed electronic connectors and assemblies, ceramic capacitors and
filters, relays and solenoids and flat panel display units. These products are
used for specialized applications in the aerospace, defense, telecommunications,
energy, medical and electronics industries. Many of the Company's assembled
electronics products are specifically engineered to withstand degradation or
destruction in harsh environments, such as the ocean, space and the human body.
These environments experience extremes in temperature, pressure, corrosiveness
and impact that can make product repair or replacement difficult or impossible.
To meet the demands of these challenging applications, the Company has developed
or acquired 32 patents and many proprietary processes. The types of assembled
electronics products manufactured by the Company, and their respective
manufacturing processes are as follows:
Hermetically Sealed Products. At its Pacific Coast facility in Wenatchee,
Washington, and at its Balo facility in Butler, New Jersey, the Company designs
and manufactures two families of hermetically sealed electronic connectors,
feed-throughs, assemblies and instrument packages. Electronics must be
hermetically sealed when used in locations where the external environment can
penetrate the unit. The product line manufactured at the Balo facility is sealed
with a cost-effective, traditional glass-based sealant, which provides an
effective seal in less demanding environments. The product line manufactured at
the Pacific Coast facility is sealed with the Company's more expensive,
proprietary Kryoflex ceramic sealant for use in products that must withstand
extremely invasive environments, such as pacemakers, down-hole drilling tools,
the fiber optic termini used on the international Space Station and radar
arrays. Both lines of the Company's hermetically sealed products are
manufactured to customer specifications using the Company's engineering and
design expertise, metallurgical and ceramic analysis capabilities and ceramics
formulation and production processes. Raw materials for the connectors' packages
and assemblies are formed on the Company's machining centers, CNC lathes, Swiss
screw machines and CNC-controlled laser welding machines. The Company also has
the capacity to electroplate and chem film protect its products.
The Company's Pacific Coast facility also manufactures hermetically bonded
products using the Company's proprietary ceramic adhesive. This ceramic adhesive
bonds metals that will not normally bond, such as aluminum and stainless steel.
The resulting component is nearly as light as aluminum but has the superior
bonding and sealing capacity of stainless steel, making it the preferred product
where weight minimization is important, such as in space applications. The
Company also holds patents in metal matrix composite technology, which the
Company believes will allow it to produce even lighter, more durable electronics
packages in the future.
39
<PAGE>
Ceramic Filters. At its Ceramic Devices facility in Wenatchee, Washington,
the Company designs and manufactures very small, specialized multilayer
discoidal (round) ceramic capacitors and filters. These products are advanced
electronic circuit filtering devices designed to filter out electromagnetic
interference ("EMI") and other undesirable electrical signals that pose
significant problems for the manufacturers and users of high-performance,
high-reliability electronic systems operating in harsh environments. The
Company's products include mini screw-in filters for telecommunications,
aerospace and defense applications; ring laser gyros; commercial eyelets for
identification friend or foe systems and satellite amplifiers; high reliability
bolt filters for the space shuttle's main engine controllers; filter pins and
custom filter assemblies and broad band filters for military display systems.
The Company is an approved supplier of EMI devices to most aerospace and defense
contractors, and uses these filters in its own hermetically sealed electronic
products. The Company's Ceramic Devices operation has a self contained facility
with plating, Swiss turning, assembly, and product testing capabilities, and has
received a number of military and industry qualification ratings.
Relays and Solenoids. At its ESC facility in Vancouver, Washington, the
Company designs, manufactures and markets electromechanical devices, such as
relays, solenoids, sensors, electronic assemblies, actuators and time delay
units used in a wide variety of satellite, aircraft and military hardware
applications. These high reliability but low power switches use only one to ten
amperes, making them suitable for applications such as satellite power bus
controllers and aircraft fuel control valves, and have been used in many space
vehicles launched by the United States and European countries. The Company has
specialized equipment for CNC milling, turning and welding which is used for
producing these products.
Flat Panel Displays and Optical Filters. Also at its ESC facility, the
Company designs and manufactures ruggedized and optically enhanced flat panel
displays and optical filters. The flat panel display unit is used for commercial
and industrial applications that range from GPS displays and light control
filters used on private and commercial aircraft to ground vehicle displays and
automatic teller machine displays. These displays allow users to view the image
at much higher temperatures and ambient light levels than standard commercial
units. The Company's flat panel display product is an extended temperature range
commercial liquid crystal display ("LCD") sandwiched between layers of glass and
optical filter in the front, and heating and cooling units, and a computerized
optical enhancer, in the back. The entire unit is mounted in a heavy duty
housing.
Sales and Marketing; Distribution
- ---------------------------------
The Company markets its precision cast and precision machined products
using its direct sales force. The Company currently has direct regional sales
personnel covering the west coast of the United States and intends to expand
this sales force to cover other geographic regions as the Company's business
expands. The Company markets its assembled electronics products in the United
States, Europe and Japan through a network of manufacturer representatives and
resellers, generally established on a geographic basis. In addition, the Company
maintains an internal sales and customer service staff and engineering
capability for its assembled electronics products to meet customer requirements
for technical support. Aeromet utilizes its own employee sales force for sales
of its products to customers in England and Wales. This internal sales force is
organized into two groups, one group responsible for sales of precision castings
and one group responsible for metal formed products. Aeromet uses independent
agents to market its products to customers in Scotland and in countries other
than the United Kingdom.
Customers
- ---------
The Company's top five customers are Boeing, PACCAR, Northrop Grumman,
Deere & Company and Honeywell. Aeromet's top five customers are British
Aerospace, Rolls Royce, GKN Westland, Lucas Aerospace and Alenia (Aermacchi). Of
these, only Boeing accounted for more than 10% of the Company's net sales for
fiscal 1998 on a pro forma basis including Aeromet. Because of the relatively
small number of customers for most of the products made by both the Company and
Aeromet, the Company's largest customers can influence product pricing and other
terms of trade. The loss of any of the Company's or Aeromet's largest customers
or reduced or canceled orders from any of those customers could have a material
adverse effect on the Company and its financial performance.
The Company and Aeromet currently serve substantially different customer
bases in similar markets. For example, the Company currently supplies components
and parts to Boeing (not currently a significant Aeromet customer) for each of
Boeing's 737, 747, 757, 767 and 777 commercial aircraft construction programs.
Aeromet currently supplies components and
40
<PAGE>
parts for each of Airbus' A300/310, A320 and A330/340 commercial aircraft
construction programs, for which Pacific Aerospace is not currently a supplier.
As a result, the Company expects that the Aeromet acquisition will provide
substantial opportunities to cross market to the Company's and Aeromet's
respective customer bases.
Backlog
- -------
The majority of the Company's sales are made pursuant to individual
purchase orders and are subject to termination by the customer upon payment of
the cost of work in process plus a related profit factor. Historically, the
Company has experienced no significant order cancellations. As of May 31, 1998,
the Company had purchase orders and contractual arrangements evidencing
anticipated future deliveries ("backlog") through fiscal year 2000 of
approximately $70.0 million. After giving pro forma effect to the Aeromet
acquisition as if it had occurred on June 1, 1997, the Company would have had
pro forma revenue backlog of approximately $110.0 million through fiscal year
2000, of which approximately $80.0 million is expected to be delivered in fiscal
year 1999. There is no assurance that backlog will be completed and booked as
net sales. Cancellations of pending contracts or terminations or reductions of
contracts in progress could have a material adverse effect on the Company and
its financial performance. See "Risk Factors - Backlog."
Competition
- -----------
The Company is subject to substantial competition in many of the markets it
serves. In the hot forming market, the Company's competitors include Die Barnes
Group Inc. and GKN Westland Aerospace (North America). In the cold forming
market, the Company competes with companies such as AHF and Pendle as well as
the in-house cold forming capabilities of certain of its customers, including
British Aerospace. In the sand casting market, the Company competes with a
number of regional foundries in its U.S. operations, and its U.K. competitors
include SFU Naley, Hitchcock, and Teledyne Ryan Aeronautical. In the investment
casting market, the Company's competitors include the Cercast Group, Tital and
Tritech. In the precision machining market, the Company competes with a number
of regional machine shops. In the assembled electronics markets, the Company's
competitors include Amphenol Corporation, Hermetiz Seal Corporation, AVX
Corporation, Spectrum Control, Inc. and Electronics Design and Communications
Instruments. Many of these competitors have greater financial resources, broader
experience, better name recognition and more substantial marketing operations
than the Company, and represent substantial long-term competition for the
Company.
Components and products similar to those made by the Company can be made by
competitors using a number of different manufacturing processes. Although the
Company believes that its manufacturing processes, technology and experience
provide advantages to the Company's customers, such as high quality, competitive
prices and physical properties that often meet stringent demands, alternative
forms of manufacturing can be used to produce many of the components and
products made by the Company. Although the Company believes that its proprietary
technology may give it a competitive advantage with respect to certain of its
products, new developments by competitors are expected to continue. The
Company's competitors may develop products that are viewed by customers as more
effective or more economic than the Company's product lines. The Company may not
be able to compete successfully against current and future competitors, and the
competitive pressures faced by the Company may have a material adverse effect on
the Company and its financial performance. See "Risk Factors Competition."
Raw Materials
- -------------
Aeromet obtains approximately 70% of its titanium from one supplier and is
subject to a lead time of approximately 80 weeks in ordering and obtaining
titanium. While Aeromet generally has managed the ordering process to obtain
titanium when needed, any failure of Aeromet to obtain titanium when needed or
any titanium cost increases imposed by that supplier could have a material
adverse effect on the Company and its financial performance. The Company
generally has readily available sources of all raw materials and supplies it
needs to manufacture its products and, where possible, the Company maintains
alternate sources of supply. However, the Company does not have fixed price
contracts or arrangements for all of the raw materials and other supplies it
purchases. Shortages of, or price increases for, certain raw materials and
supplies used by the Company have occurred in the past and may occur in the
future. Future shortages or price fluctuations could have a material adverse
effect on the Company's and Aeromet's ability to manufacture and sell their
products in a timely and cost-effective manner. See "Risk Factors - Availability
and Cost of Materials."
41
<PAGE>
Proprietary Rights
- ------------------
Significant aspects of the business of the Company and of Aeromet depend on
proprietary processes, information and know-how that is not the subject of
patent protection. The Company and Aeromet each rely on a combination of trade
secret protection, copyright and trademark laws, confidentiality procedures and
other forms of intellectual property protection to protect their proprietary
technology that is not the subject of patent protection. However, there is no
assurance that the Company's competitors may not develop or utilize technology
that is the same as or similar to such technology of the Company.
The Company has 32 U.S. patents, three U.S. patent applications pending,
one Canadian patent application pending and one European patent enforceable in
the U.K., almost all of which apply to certain aspects of the Company's
electronics business and not to its aerospace business. Aeromet currently holds
no patents, but has one patent application pending in the U.K. and before the
European Patent Office. There is no assurance that any of these patent
applications will result in issued patents, that existing patents or any future
patents will give the Company any competitive advantages for its products or
technology, or that, if challenged, these patents will be held valid and
enforceable. The Company's issued patents expire at various times over the next
17 years, with 17 U.S. patents expiring over the next five years. Although the
Company believes that the manufacturing processes of much of its patented
technology are sufficiently complex that competing products made with the same
technology are unlikely, there is no assurance that the Company's competitors
will not design competing products using the same or similar technology after
these patents have expired.
Despite the precautions taken by the Company, unauthorized parties may
attempt to copy aspects of the Company's products or obtain and use information
that the Company regards as proprietary. Existing intellectual property laws
give only limited protection with respect to such actions and policing
violations of such laws is difficult. The laws of certain countries in which the
Company's products are or may be distributed do not protect products and
intellectual property rights to the same extent as do the laws of the United
States, and the Company's U.S. patents are enforceable in the U.S. alone. The
Company may be required to enter into costly litigation to enforce its
intellectual property rights or to defend infringement claims by others. Such
infringement claims could require the Company to license the intellectual
property rights of third parties. There is no assurance that such licenses would
be available on reasonable terms, or at all. See "Risk Factors - Reliance on
Proprietary Rights."
Environmental Matters
- ---------------------
The Company's and Aeromet's facilities are subject to federal, state and
local laws and regulations concerning solid waste disposal, hazardous materials
generation, storage, use and disposal, air emissions, waste water discharge,
employee health and other environmental matters (together, "Environmental
Laws"). Proper waste disposal and environmental regulation are major
considerations for the Company because a number of the metals, chemicals and
other materials used in and resulting from its manufacturing processes are
classified as hazardous substances and hazardous wastes. If permitting and other
requirements of applicable Environmental Laws are not met, the Company could be
liable for damages and for the costs of remedial actions and could also be
subject to fines or other penalties, including revocation of permits needed to
conduct its business. Any permit revocation could require the Company to cease
or limit production at one or more of its facilities, which could have a
material adverse effect on the Company and its financial performance. The
Company has an ongoing program of monitoring and addressing environmental
matters and from time to time in the ordinary course of business is required to
address minor issues of noncompliance at its operating sites. In connection with
its evaluation of the Aeromet acquisition, the Company obtained an environmental
investigation of each of Aeromet's facilities and did not discover any
violations of environmental or health and safety laws material to the Company.
Environmental Laws could become more stringent over time, imposing greater
compliance costs and increasing risks and penalties associated with any
violations. As a generator of hazardous materials, the Company is subject to
financial exposure with regard to its properties even if it fully complies with
these laws. In addition, certain of the Company's facilities are located in
industrial areas and have lengthy operating histories. As a consequence, it is
possible that historical or neighboring activities have affected properties
currently owned by the Company and that, as a result, additional environmental
issues may arise in the future, the precise nature of which the Company cannot
now predict. There is no assurance that any present or future noncompliance with
Environmental Laws or future discovery of contamination will not have a material
adverse effect on the Company's results of operations or financial condition.
See "Risk Factors - Environmental Matters."
42
<PAGE>
Government Regulation
- ---------------------
Certain of the Company's products are manufactured and sold under United
States government contracts or subcontracts. As with all companies that provide
products or services to the federal government, the Company is directly and
indirectly subject to various federal rules, regulations and orders applicable
to government contractors. Some of these regulations relate specifically to the
vendor-vendee relationship with the government, such as the bidding and pricing
rules. Under regulations of this type, the Company must observe certain pricing
restrictions, produce and maintain detailed accounting data, and meet various
other requirements. The Company is also subject to many regulations affecting
the conduct of its business generally. For example, the Company must adhere to
federal acquisition requirements and standards established by the Occupational
Safety and Health Act relating to labor practices and occupational safety
standards. The Company is currently updating and implementing written policies
and training programs relating to employee health and safety matters at several
of its facilities. See "- Environmental Matters." Violation of applicable
government rules and regulations could result in civil liability, in
cancellation or suspension of existing contracts, or in ineligibility for future
contracts or subcontracts funded in whole or in part with federal funds. Some of
the Company's customers are in the defense industry, and loss of governmental
certification by such customers could have a material adverse effect on their
purchases from the Company and the Company's business and financial performance.
See "Risk Factors - Government Regulation."
Employees
- ---------
The Aeromet acquisition nearly doubled the Company's workforce. As of
January 13, 1999, the Company had a total of 622 employees, of whom
approximately 489 were engaged in manufacturing functions, 21 in sales and
marketing, 81 in administrative functions and six in executive functions. As of
January 13, 1999, Aeromet had a total of 580 employees, of whom approximately
543 were engaged in manufacturing functions, 13 in sales and marketing, 16 in
administrative functions and eight in executive functions. None of the Company's
workforce is unionized. Certain of Aeromet's manufacturing and engineering
employees are represented by labor unions, although all negotiations are carried
out through employee work committees. Neither the Company nor Aeromet have
experienced any work stoppages and both believe that their relationships with
their employees are good.
Property
- --------
The principal executive and administrative offices of the Company are
located at 430 Olds Station Road, Wenatchee, Washington. The Company's
headquarters building provides approximately 18,000 square feet of office space,
and is owned by the Company. The Company also leases office facilities (a) in
Edmonds, Washington, for administrative offices of approximately 1,800 square
feet, for a base rent of $3,187 per month, subject to annual adjustment, under
a lease that expires in 2001, and (b) in Bothell, Washington, of approximately
21,390 square feet, for base rent of $295,000 per year under a lease that
expires in 2003, that it subleases to a third party and guarantees payment of
the sublease. See "Certain Transactions - Orca Technologies, Inc."
The general location, use and approximate size of the Company's and
Aeromet's principal owned and leased manufacturing properties are as follows:
<TABLE>
<CAPTION>
Approx. Own/ Annual Lease Mortgage
Segment Location Area Lease Rent Expiration Balance
- --------- ------------------------- ------- ----- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Aerospace Wenatchee, Washington 42,000 Lease $ 199,000 2007 N/A
Entiat, Washington 84,000 Own N/A N/A $1,107,000
Tacoma, Washington 21,700 Lease $ 78,000 2008 N/A
Sittingbourne, Welwyn 157,000 Lease (pound) 751,000 2018 N/A
Garden City and Worcester
Worcester 15,000 Lease (pound) 45,000 2003 N/A
Rochester 34,000 Lease (pound) 180,000 2001 N/A
43
<PAGE>
Birmingham 59,000 Lease (pound) 236,000 2008 N/A
Sittingbourne 7,000 Lease (pound) 45,000 2005 N/A
Electronics Wenatchee, Washington 49,000 Lease $ 200,000 2007 N/A
Sequim, Washington 18,355 Own N/A N/A None
Butler, New Jersey 22,400 Own N/A N/A None
Vancouver, Washington 50,000 Lease $ 336,000 2009 N/A
</TABLE>
In connection with the Aeromet Acquisition, the Company entered into a
12-month option to purchase the Sittingbourne, Worcester and Welwyn Garden City
facilities that are being leased by Aeromet, for a purchase price of
approximately $12.5 million in cash. In December 1998, the Company purchased its
Butler, New Jersey facility for approximately $1.1 million in cash and entered
into a ten year lease for the facility in Tacoma, Washington previously leased
by Lyden. In addition, 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.
Additional Information
- ----------------------
The Company files annual, quarterly and current reports, proxy statements
and other information with the SEC. You may read and copy any reports,
statements or other information on file at the SEC's public reference room in
Washington, D.C. You can request copies of these documents, upon payment of a
duplicating fee, by writing to the SEC.
The Company has filed a Registration Statement on Form S-4 with the SEC.
This Prospectus, which forms part of the Registration Statement, does not
contain all of the information included in the Registration Statement. Certain
information is omitted and you should refer to the Registration Statement and
its exhibits. With respect to references made in this Prospectus to any contract
or other document of the Company, such references are not necessarily complete
and you should refer to the exhibits attached to the Registration Statement for
copies of the actual contract or document. You may review a copy of the
Registration Statement at the SEC's public reference room in Washington, D.C.,
and at the SEC's regional offices in Chicago, Illinois and New York, New York.
Please call the SEC at 1-800-SEC-0330 for further information on the operation
of the public reference rooms. The Company's SEC filings and the Registration
Statement can also be reviewed by accessing the SEC's Internet site at
http:\\www.sec.gov.
Information regarding the Company may also be obtained by accessing the
Company's web page at http:\\www.pcth.com. Such information is not part of this
Prospectus or of the Registration Statement.
44
<PAGE>
MANAGEMENT
Directors and Executive Officers
- --------------------------------
The following table sets forth information as of January 13, 1999 (unless
otherwise noted), regarding the directors and executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position with Company
========================================================================================
<S> <C> <C>
Donald A. Wright................... 47 Chairman of the Board, Chief Executive
Officer and President
Nick A. Gerde...................... 54 Chief Financial Officer, Vice President
Finance, Treasurer and Assistant Secretary
Sheryl A. Symonds.................. 43 Vice President Administration,
General Counsel and Secretary
Allen W. Dahl, M.D................. 70 Director
Dr. Urs Diebold.................... 47 Director
Werner Hafelfinger................. 52 Director
Dale L. Rasmussen.................. 48 Director
William A. Wheeler................. 64 Director
</TABLE>
Donald A. Wright. Donald A. Wright has been the Chairman of the Board,
Chief Executive Officer and President of the Company since February 1995, and of
its predecessors since 1990. Mr. Wright is also an officer and director of each
of the Company's operating subsidiaries.
Nick A. Gerde. Nick A. Gerde has been the Vice President Finance and Chief
Financial Officer of the Company since February 1995. He has been the Treasurer
of the Company since August 1996, and Assistant Secretary since November 1996.
Mr. Gerde is also an officer and director of each of the Company's operating
subsidiaries. Mr. Gerde served as Controller/CFO of Hydraulic Repair & Design,
Inc., a regional hydraulic component repair and wholesale distribution company,
from March 1990 through April 1993, as a Business Development Specialist with
the Economic Development Council of North Central Washington from July 1993 to
June 1994, and as Vice President of Televar Northwest, Inc. (a subsidiary of
Orca Technologies, Inc.) from July 1994 to February 1995. See "Certain
Transactions - Orca Technologies, Inc." Mr. Gerde is a Certified Public
Accountant.
Sheryl A. Symonds. Sheryl A. Symonds has been the Vice President
Administration and General Counsel of the Company since September 1997. Prior to
joining the Company, Ms. Symonds was a partner at Stoel Rives LLP, currently the
Company's primary outside legal counsel. Ms. Symonds joined Stoel Rives LLP in
1985 and became a partner in 1992. Ms. Symonds has been Secretary of the Company
since August 1996 and is also Secretary of each of the Company's operating
subsidiaries.
Allen W. Dahl. Dr. Allen W. Dahl has been a director of the Company since
February 1995, and of its predecessors since September 1994. Dr. Dahl is retired
from practice as a physician in the Puget Sound region of Washington.
Urs Diebold. Dr. Urs Diebold has been a director of the Company since July
1997. Dr. Diebold has been a director of Lysys AG ("Lysys"), a Swiss financing
and investment management company, since September 1990. Prior to joining Lysys
in 1990, Dr. Diebold was an investment advisor at the Zurich office of Credit
Suisse. Dr. Diebold is also a director of one of the Company's shareholders,
Capital International Fund Limited. See "Certain Transactions - Lysys."
Werner Hafelfinger. Werner Hafelfinger has been a director of the Company
since August 17, 1998. Mr. Hafelfinger has been Vice President of Global
Manufacturing of St. Jude Medical (Cardiac Rhythm Management Division), a
manufacturer of implantable medical devices, since 1984.
Dale L. Rasmussen. Dale L. Rasmussen has been a director of the Company
since June 1997. Mr. Rasmussen has been employed as the Senior Vice President
and Secretary of AirSensors, Inc., now IMPCO Technologies, Inc. since 1989.
45
<PAGE>
William A. Wheeler. William A. Wheeler has been a director of the Company
since June 1997. Mr. Wheeler retired from Dowty Aerospace Yakima in May 1997,
where he served as President, Chief Executive Officer and Chairman of the Board
of Directors since 1979.
Significant Employees
- ---------------------
Lewis L. Wear. Lewis L. Wear, 57, has been the Electronics Group President
since August 1996, President of Pacific Coast since February 1996, and a
director of Pacific Coast since November 1995. He also has been a director of
Ceramic Devices since November 1995, President and a director of NTI since April
1997 and a director of Balo since February 1998. Prior to November 1995, Mr.
Wear was Vice President of Operations for Vacuum Atmospheres, a division of
WEMS, Inc.
Garry R. Vandekieft. Garry R. Vandekieft, 57, has been the Aerospace Group
President since October 1996, President of Cashmere since August 1996, a
director of Cashmere since October 1996, and was General Manager of Cashmere
from June 1996 to August 1996. Prior to being employed by Cashmere, Mr.
Vandekieft served as Manufacturing Operations Manager of Advanced Wind Turbines
during 1995 and 1996, and as Director of Manufacturing of Master-Halco from 1990
through 1994.
Duncan Crighton. Duncan Crighton, 63, has been Chief Executive Officer of
Aeromet since March 1997 and became President of the Company's Aerospace (U.K.)
Group upon closing of the Aeromet acquisition. Mr. Crighton served as Managing
Director of Aeromet's predecessor, Kent Aerospace Castings plc, from 1990
through 1995, and as a management consultant to Aeromet from 1995 to February
1997.
Board of Directors
- ------------------
Committees. The Board of Directors has a number of committees, as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Committee Function Current Members
- --------------------------- ------------------------------------------------------------ ---------------
<S> <C> <C>
Option Committee Administers the Company's Amended and Restated Stock Dr. Dahl
Incentive Plan. Dr. Diebold
Mr. Hafelfinger
- --------------------------- ------------------------------------------------------------ ---------------
Finance and Audit Committee Reviews the Company's accounting policies, practices, Dr. Diebold
internal accounting controls and financial reporting. Also Mr. Rasmussen
oversees engagement of the Company's independent auditors Mr. Wheeler
and monitors management implementation of the Mr. Hafelfinger
recommendations and findings of the Company's independent
auditors.
- --------------------------- ------------------------------------------------------------ ---------------
Compensation Committee Establishes salaries, incentives and other compensation for Dr. Dahl
the chief executive officer, chief financial officer, general Mr. Rasmussen
counsel, subsidiary presidents and other key employees of Mr. Wheeler
the Company and its subsidiaries. Also administers policies
relating to compensation and benefits including the Director
Plan and Employee Stock Purchase Plan.
- --------------------------- ------------------------------------------------------------ ---------------
Nominating Committee Recommends individuals to be presented to the shareholders Mr. Wright
for election or reelection to the Board of Directors. Dr. Diebold
Mr. Rasmussen
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Tenure. Directors of the Company hold office until the next annual meeting
of the Company's shareholders and until their successors have been elected and
duly qualified. The Board of Directors appoints the Company's executive officers
at the first Board of Directors meeting after each annual meeting of
shareholders. Executive officers hold office at the pleasure of the Board of
Directors.
46
<PAGE>
Compensation. Under the Company's Independent Director Stock Plan, each
non-employee director of the Company receives an initial and annual award of
stock options, $1,000 in cash per year for each committee on which the director
serves, and an additional $500 in cash per year for serving as chairperson of a
committee. The Board may elect to pay any of the cash fees in shares of Common
Stock. See "- Benefit Plans - Independent Director Stock Plan." All directors
are reimbursed for reasonable travel and other out-of-pocket expenses incurred
in attending meetings of the Board of Directors.
Summary Compensation
- --------------------
The following table sets forth in summary form the compensation paid by the
Company to the Chief Executive Officer and to the Company's three most highly
compensated executive officers (the "Named Executives") for services in all
capacities to the Company for the last three fiscal years:
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
------------ --------------------- Other Annual
Fiscal Securities Underlying Compensation
Name and Principal Position Year Salary($) Options/SARs(#)(1) ($) (2)
- ---------------------------------------------------------------- -------- ------------ --------------------- ------------
<S> <C> <C> <C> <C>
Donald A. Wright................................................ 1998 192,000 275,000 4,800
CEO and President 1997 160,000 920,000 400
1996 110,577 15,000 400
Nick A. Gerde .................................................. 1998 100,000 40,000 2,400
CFO, Vice President Finance, Treasurer and Assistant Secretary 1997 84,160 38,333 --
1996 62,500 8,333 --
Sheryl A. Symonds(3)............................................ 1998 105,000 125,000 --
Vice President Administration, General Counsel and Secretary
- --------------
(1) Represents exercisable warrants and options to purchase shares of Common
Stock. See "- Aggregated Options and Fiscal Year-End Option Values."
(2) Represents estimated value of the personal use of a company car and other
miscellaneous benefits.
(3) Represents the compensation received by Ms. Symonds during the nine months
since she joined the Company. Under her employment agreement, Ms. Symonds
received salary at an annual rate of $140,000 for fiscal year 1998.
</TABLE>
Option Grants
The following table sets forth information on grants of stock options by
the Company during the year ended May 31, 1998 to the Named Executives:
<TABLE>
<CAPTION>
Securities % of Total Options Exercise or Market Price
Underlying Options Granted to Employees Base Price on Grant Date
Name Granted (#) in Fiscal Year ($/Share)(1) ($/Share) Expiration Date
- ----------------- ------------------ -------------------- ------------ ------------- ------------------
<S> <C> <C> <C> <C> <C>
Donald A. Wright 650,000 58.4% 4.72 to 6.13 4.72 to 6.13 2/09/08 to 5/28/08
Nick A. Gerde 75,000 6.7% 3.00 to 6.13 3.00 to 6.13 6/02/07 to 5/28/08
Sheryl A. Symonds 160,000 14.4% 4.00 to 6.13 4.00 to 6.13 7/18/07 to 5/28/08
(1) See Footnote 1 to "- Aggregated Options and Fiscal Year-End Option Values."
</TABLE>
47
<PAGE>
Aggregated Options and Fiscal Year-End Option Values
The following table summarizes the aggregate stock options and warrants,
and their market values at May 31, 1998, held by the Named Executives:
<TABLE>
<CAPTION>
Securities Underlying Unexercised Value of Unexercised In-the-Money
Options at FY-end(#) Options at FY-end($)
--------------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable(1) Unexercisable
- ---- ----------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Donald A. Wright............................ 1,349,024 433,536 2,345,101 58,536
Nick A. Gerde............................... 121,422 49,634 344,880 14,634
Sheryl A. Symonds........................... 125,000 35,000 229,625 --
- --------------
(1) Value of exercisable options and warrants having exercise prices as of May
29, 1998, of less than $6.125 per share, the closing price of the Common
Stock on that date. This chart does not reflect changes in the price of the
Common Stock since May 29, 1998. This chart and the preceding chart also do
not reflect the action of the Board of Directors on December 4, 1998, which
amended options held by Mr. Wright covering 1,000,000 shares, options held
by Mr. Gerde covering 116,056 shares, and options held by Ms. Symonds
covering 160,000 shares, to reprice those options to $2.5313 per share, the
fair market value of the Common Stock on the date of such Board action.
</TABLE>
Employment Agreements
The Company has entered into employment agreements with each of the Named
Executives. The employment agreements employ Mr. Wright through fiscal 2003, Mr.
Gerde through fiscal 2000 and Ms. Symonds through fiscal 2002. The employment
agreements provide for an annual salary in fiscal 1999 of $253,920, $130,000 and
$163,300, for Mr. Wright, Mr. Gerde and Ms. Symonds, respectively. The
employment agreements also provide for the annual grant to each of the Named
Executives of options to purchase up to 275,000, 25,000 and 50,000 shares of
Common Stock, respectively. The exercise price of such options shall be equal to
the fair market value of the Common Stock on the date of grant. Each option will
contain vesting and other terms as are approved by the Board of Directors, and
will expire ten years after the date of grant. If a Named Executive's employment
with the Company is terminated without cause, or if there is a change of
control, as those terms are defined in their employment agreements, the Company
will be required to make severance payments equal to, in the case of Mr. Wright,
twice Mr. Wright's then-current annual base salary, in the case of Mr. Gerde,
six months of Mr. Gerde's then-current annual base salary and, in the case of
Ms. Symonds, eighteen months of Ms. Symonds' then-current annual base salary.
Under these employment agreements, Mr. Wright and Mr. Gerde agree not to compete
with the Company for two years following termination of employment.
Certain Tax Considerations Related to Executive Compensation
As a result of Section 162(m) of the Code, if the Company pays more that
$1,000,000 in compensation to a "covered employee" (the chief executive officer
and the next four highest paid employees) in a single year, then the Company's
deduction for such compensation could be limited to $1,000,000.
Benefit Plans
- -------------
Amended and Restated Stock Incentive Plan
The Company's shareholders adopted the Company's Amended and Restated Stock
Incentive Plan (the "Option Plan") in October 1996. The Company has reserved for
issuance under the Option Plan a maximum of 3,000,000 shares of Common Stock,
subject to certain adjustments. Under the Option Plan, the plan administrator
may award incentive stock options ("ISOs") to key employees, and may award
non-qualified stock options ("NSOs"), stock appreciation rights ("SARs"), stock
and cash bonus awards, restricted stock, and performance units to employees and
certain non-employees (other than non-employee directors) who have important
relationships with the Company or its subsidiaries. However, no person may
receive options to purchase more than 1,000,000 shares in any one year. As of
January 13, 1999, options to purchase an aggregate of 2,371,116 shares of Common
Stock had been granted under the Option Plan and options for 72,500 shares have
been terminated, leaving 701,384 shares available for future grant under the
Option Plan. Options for 25,000 shares have been exercised. No SARs, stock or
cash bonus awards, restricted stock or performance units have been granted under
the Option Plan.
48
<PAGE>
The Option Plan is administered by the Option Committee of the Board of
Directors, which is comprised of disinterested directors in accordance with Rule
16b-3 under the Exchange Act of 1934 (the "Exchange Act"), and of outside
directors under Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Internal Revenue Code"). However, only the Board of Directors may amend or
terminate the Option Plan. Unless terminated sooner by the Board of Directors,
the Option Plan expires in November 2006. In general, vested options and any
related rights may only be exercised when (a) the recipient is employed by or in
the service of the Company, (b) within 12 months following termination of
employment by reason of death or disability, or (c) within three months
following termination for any other reason except for cause. NSO's held by the
Named Executives are not subject to the foregoing limitations on exercise, and,
upon vesting, are exercisable for the term provided in the relevant option
agreement, which generally is ten years from the date of grant. Options, SARs,
cash and stock bonus awards and performance units are nonassignable and
nontransferable except by will or by the laws of descent and distribution at the
time of the recipient's death. On the date an ISO is granted, the aggregate fair
market value of the Common Stock issuable under ISOs available for exercise
during any calendar year, may not exceed $100,000. ISOs must expire ten years
from the date of grant, and the exercise price must equal the fair market value
of the underlying shares of Common Stock at the date of grant. ISOs may not be
granted to employees holding more than 10% of the Company's total voting power
unless (a) the exercise price is at least 110% of the Common Stock's fair market
value on the date of grant, and (b) the option is not exercisable until five
years after the date of grant.
Independent Director Stock Plan
The Company's Amended and Restated Independent Director Stock Plan (the
"Director Plan") was approved at the Company's 1998 annual meeting of
shareholders. The Director Plan provides for the award of options to purchase
shares of Common Stock to non-employee directors of the Company ("Director
Options"). The purpose of the Director Plan is to attract, reward, and retain
the best available individuals to serve as directors and to provide added
incentive to Independent Directors by increasing their interest in the Company's
success.
Prior to the amendment and restatement approved at the Company's 1998
annual meeting of shareholders, the Director Plan provided for the issuance of
Common Stock instead of options to Independent Directors. As of January 13,
1999, the Company had issued under the Director Plan 32,559 shares of Common
Stock and Director Options to purchase 50,000 shares, leaving 417,441 shares
available for future issuance under the Director Plan.
The principal provisions of the Director Plan are summarized below:
Administration. The Director Plan may be administered by the Board of
Directors or by a committee of directors of the Company. The Board has delegated
to the Compensation Committee the responsibility of administering the Director
Plan. Subject to the requirements of the Director Plan, the Compensation
Committee has the authority, among other things, (a) to determine the terms of
the Director Options and the fair market value of the Common Stock, (b) to
interpret the Director Plan and prescribe, amend, and rescind rules and
regulations relating thereto, and (c) to make all determinations deemed
necessary or advisable to administer the Director Plan. However, only the Board
of Directors may suspend, amend or terminate the Director Plan. No director may
vote on any action by the Board or the Compensation Committee with respect to
any matter relating to an award to or held by such director. The Director Plan
will be administered in accordance with Rule 16b-3 adopted under the Exchange
Act, and Section 162(m) of the Internal Revenue Code and the regulations
thereto.
Eligibility. Awards may be made under the Director Plan only to Independent
Directors. The term "Independent Director" means a director who is not an
employee of the Company or any of its subsidiaries.
Amendment. The Director Plan may not be amended without the approval or
ratification of the shareholders of the Company if such amendment would (a)
increase the number of shares that are reserved for issuance under the Plan, (b)
permit awards to persons other than Independent Directors, or (c) require
shareholder approval under any applicable law.
Shares Available. A maximum of 500,000 shares of Common Stock are reserved
for issuance upon exercise of options granted under the Director Plan. If a
Director Option is forfeited to the Company, the number of shares reserved for
issuance under such option will again become available for issuance under the
Director Plan. Upon the exercise of an option, the number of shares reserved for
issuance under the Director Plan will be reduced by the number of shares issued
upon exercise of the option.
49
<PAGE>
Determination of Fair Market Value. Under the Director Plan, the exercise
price of a Director Option is the Fair Market Value of a share of Common Stock.
"Fair Market Value" means the average closing price for the Common Stock on the
Nasdaq National Market System for the five trading days immediately preceding
the day that the Director Option is granted.
Term. Unless earlier suspended or terminated by the Board, the Director
Plan will continue in effect until the earlier of: (a) ten years from the date
on which the Director Plan was first adopted by the Board, and (b) the date on
which all shares of Common Stock available for issuance under the Director Plan
have been issued.
Initial Award. The Director Plan provides that each Independent Director
receives Director Options to purchase 2,500 shares at an exercise price equal to
the Fair Market Value on the date of grant, which are exercisable for a period
of ten years from the date of grant, upon such Independent Director's first
appointment or election to the Board of Directors ("Initial Award"), whether by
the shareholders of the Company or by the Board to fill a vacancy.
Annual Award. Each Independent Director also receives an additional award
on an annual basis (the "Annual Award"), each time the Independent Director is
elected to the Board (or, if directors are elected to serve terms longer than
one year, as of the date of each annual shareholders' meeting during that term).
The Annual Award consists of Director Options to purchase 10,000 shares of
Common Stock at an exercise price equal to the Fair Market Value on the date of
grant, which are exercisable for a period of ten years from the date of grant.
If an Independent Director is elected or appointed to the Board at any time
other than at the annual meeting of shareholders, the Annual Award will be a pro
rata fraction of 10,000, rounded to the nearest 100 shares.
Vesting and Forfeiture. Director Options are subject to vesting and
forfeiture provisions under the Director Plan. Initial Awards will be fully
vested upon the date of grant. Annual Awards will vest in full on the first
anniversary following the date of the grant if the Independent Director has
attended at least 75% of the regularly scheduled meetings of the Board during
that year (the "Vesting Period"). If an Independent Director does not attend at
least 75% of the regularly scheduled meetings of the Board during the Vesting
Period, the Director Options granted pursuant to that Annual Award will expire
and be forfeited without having vested. If a director ceases to be an
Independent Director for any reason other than death or disability before an
Annual Award vests, the Director Options granted pursuant to that Annual Award
are forfeited. However, the Board may waive or modify the application of these
expiration provisions before the end of the Vesting Period, by unanimous vote.
If an Independent Director is unable to continue serving as a director as a
result of disability or death, unvested Director Options of such Independent
Director will immediately become vested as of the date of disability or death.
In the event of a merger, consolidation or plan of exchange to which the Company
is a party and in which the Company is not the survivor, or a sale of all or
substantially all of the Company's assets, any unvested Director Options will
vest automatically upon the closing of such transaction.
Shareholder Rights. The holder of any Director Options will not have any
rights as a shareholder of the Company with respect to any shares issuable under
such options until the holder exercises such option and the underlying shares
are issued.
Employee Stock Purchase Plan
The Company's shareholders adopted the Company's 1997 Employee Stock
Purchase Plan in October 1997 (the "Employee Stock Plan"). The Company has
reserved for issuance under the Employee Stock Plan a maximum of 1,000,000
shares of Common Stock, subject to certain adjustments, for issuance to eligible
employees of the Company and its subsidiaries. Employees of Aeromet are not
currently eligible to participate in the Employee Stock Plan. In October 1998,
the Company registered the shares of Common Stock reserved under the Employee
Stock Plan on a Form S-8 registration statement. As of January 13, 1999, 8,942
shares had been issued under the Employee Stock Plan and 991,058 remain
available for purchase.
The Company pays all expenses relating to the Employee Stock Plan except
expenses related to the resale of shares acquired by employees under the plan.
The Employee Stock Plan is administered by the Compensation Committee of the
Board of Directors. The plan administrator has designated Salomon Smith Barney,
Inc. as the plan's custodian to vote the shares pursuant to the participants'
instructions, keep the plan records, and provide periodic statements to
participants. Under the Employee Stock Plan, eligible employees may purchase
shares of the Company's Common Stock through payroll deductions ranging from a
minimum of $20 bi-weekly, to a maximum of 15% of the employee's annual gross pay
or $25,000. The purchase price per share will be the lower of (a) 85% of fair
market value on the first day of the offering period, or (b) 100%
50
<PAGE>
of fair market value on the last day of the offering period. The first offering
period began November 1, 1998, and offering periods are one month long. After
certain holding period, plan participants may sell their shares through the plan
custodian for a discounted brokage fee. If a participant's employment terminates
before the end of any offering period, no shares will be purchased for the
participant during that period and the payroll deductions will be returned to
the participant.
51
<PAGE>
CERTAIN TRANSACTIONS
Employment Agreements. The Company has entered into employment agreements
with Donald A. Wright, Nick A. Gerde and Sheryl A. Symonds. See "Management -
Summary Compensation - Employment Agreements."
Lysys. Dr. Urs Diebold, a director of the Company, is also a director of
Lysys AG ("Lysys") and a director of Capital International Fund Limited (the "CI
Fund"), a shareholder of the Company. Lysys has provided placement agency
services in connection with the following capital raising transactions in the
last three fiscal years:
o In November 1995, the Company issued an aggregate of 838,470 shares of
Common Stock to private investors for gross proceeds of $3,353,880, of
which $234,772 was paid to Lysys as commissions. An aggregate of
30,000 shares of Common Stock was also issued to a designee of Lysys
in connection with that offering.
o In May 1996, the Company issued an aggregate of 490,000 shares of
Common Stock to private investors for gross proceeds of $1,456,125, of
which $116,490 was paid to Lysys as commissions.
o In November 1997, the Company issued 524,000 shares of Common Stock
and $4,050,000 in promissory notes to private investors, one of which
was the CI Fund. Lysys received a $320,000 fee for its services in
that transaction, of which $142,000 was paid directly to Dr. Diebold.
o In May 1998, the Company conducted the Preferred Stock Offering for
gross proceeds of $17,000,000, of which $425,000 was paid to a
placement agent as the assignee of Lysys. See "Description of Capital
Stock - Preferred Stock - Series B Convertible Preferred Stock."
Orca Technologies, Inc. Roger Vallo and Donald Cotton, who were directors
of the Company until January 1998, are directors, and Mr. Vallo is CEO, of Orca
Technologies, Inc. Donald A. Wright, the Company's Chief Executive Officer and
President, and Nick A. Gerde, the Company's Chief Financial Officer, Vice
President Finance and Treasurer, were directors of Orca until June 1997 and
shareholders of Orca until May 1998, and personally guaranteed or indemnified
certain obligations of Orca. In May 1998, Mr. Wright and Mr. Gerde sold their
Orca shares in private transactions. Dr. Allen Dahl, a director of the Company,
continues to be a shareholder of Orca but has never been an officer or director
of Orca. See "MD&A - Recent Events - Orca Technologies, Inc."
Siemens. In November 1998, the Company sold 2,200,000 shares of restricted
Common Stock to Pensionskasse der Siemens - Gesselschaften ("Siemens") which
caused it to be a principal shareholder. Previous to that purchase, Siemens held
240,000 shares of Common Stock and a $4,000,000 promissory note that were issued
to Siemens in the Company's Fall 1997 Common Stock and Notes Offering. The
Company repaid that note in September 1998. See "MD&A - Recent Events Reduction
of Long-Term Debt."
Sale of Condominium. In November 1998, the Company entered into a
Condominium Purchase and Sale Agreement (the "Condominium Agreement") with
Donald A. Wright, the Company's Chief Executive Officer, President and a
director. Pursuant to the Condominium Agreement, Mr. Wright purchased from the
Company a condominium unit within the Company's headquarters building for a
total purchase price of $175,000. The Board of Directors determined that the
terms of the purchase were fair and reasonable to the Company.
52
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table shows, to the best of the Company's knowledge, the
Common Stock owned as of January 13, 1999, by (1) each person known by the
Company to own beneficially more than 5% of the outstanding Common Stock (each a
"Principal Shareholder"); (2) each of the Company's directors; (3) the Named
Executives and (4) all executive officers and directors of the Company as a
group. Except as otherwise noted, the Company believes the persons listed below
have sole investment and voting power with respect to the Common Stock owned by
them. This table is based on the records of the Company's transfer agent and the
Company's records on issuances of shares, as adjusted to reflect (a) changes in
ownership documented in filings with the SEC made by certain shareholders, (b)
provided to the Company pursuant to Section 16 of the Exchange Act, and (c)
statements provided to the Company by certain shareholders.
<TABLE>
<CAPTION>
Amount and Nature of Percentage of
Name and Address of Beneficial Owner: Beneficial Ownership (1) Common Stock
- ------------------------------------------ ------------------------ -------------
<S> <C> <C>
Donald A. Wright 2,106,960 (2) 10.35%
c/o Pacific Aerospace & Electronics, Inc.
430 Olds Station Road
Wenatchee, WA 98801
Allen W. Dahl, M.D. 42,401 (3) *
7300 Madrona Drive NE
Bainbridge Island, WA 98110
Dr. Urs Diebold 11,900 (3) *
c/o Lysys AG, Gessnerallee 38
PO Box CH-8023
Zurich, Switzerland
Werner Hafelfinger 15,220 (3) *
15900 Valley View Court
Sylmar, CA 91342
William A. Wheeler 16,092 (3) *
2011 Lombard Lane
Yakima, WA 98902
Dale L. Rasmussen 15,492 (3) *
c/o IMPCO Technologies, Inc.
708 Industrial Dr.
Tukwila, WA 98188
Nick A. Gerde 182,550 (4)(6) *
c/o Pacific Aerospace & Electronics, Inc.
430 Olds Station Road
Wenatchee, WA 98801
Sheryl A. Symonds 162,914 (5)(6) *
c/o Pacific Aerospace & Electronics, Inc.
430 Olds Station Road
Wenatchee, WA 98801
Pensionskasse der Siemens - Gesellschaften 2,440,000 11.61%
Freilagerstrausse 40
CH-8047, Zurich, Switzerland
All executive officers and directors as a group 2,553,529 (6)(7) 12.32%
(8 persons)
- --------------
53
<PAGE>
* Less than 1%.
(1) Shares that a person has the right to acquire within 60 days are treated as
outstanding for determining the amount and percentage of Common Stock owned
by such person but are not deemed to be outstanding as to any other person
or group.
(2) Includes (a) 32,666 shares held by Ragen MacKenzie, Incorporated, custodian
for Donald A. Wright, in two IRA accounts, (b) 4,000 shares issuable upon
exercise of the Company's publicly traded warrants, (c) 100,000 shares
issuable upon exercise of another warrant and (d) 1,664,010 shares issuable
upon exercise of vested stock options. Does not include 18,550 unvested
stock options.
(3) Includes unvested options to purchase 10,000 shares of Common Stock issued
pursuant to the Director Plan on October 13, 1998 which will vest at the
next annual Board of Directors meeting if certain conditions have been
satisfied.
(4) Includes (a) 4,000 shares issuable upon exercise of the Company's publicly
traded warrants, (b) 25,000 shares issuable upon exercise of another
warrant, and (c) 136,300 shares issuable upon exercise of vested stock
options. Does not include 9,756 unvested stock options.
(5) Includes (a) 500 shares issuable upon exercise of the Company's publicly
traded warrants, and (b) 160,000 shares issuable upon exercise of vested
stock options.
(6) Does not include shares of Common Stock subscribed for purchase, but not
yet issued, under the Employee Stock Plan during January, 1999.
(7) Includes currently exercisable warrants and options to purchase up to
2,143,810 shares of Common Stock.
</TABLE>
54
<PAGE>
THE EXCHANGE OFFER
Terms of the Exchange Offer
- ---------------------------
- --------------------------------------------------------------------------------
Summary: The Company will accept for exchange Old Notes that are validly
tendered to the Exchange Agent before the earliest of:
o 5:00 p.m., New York City time, on February 23, 1999, or such later
date and time to which it is extended, except that it may not be
extended beyond March 5, 1999,
o the date when all Old Notes have been tendered, or
o the date on which the Company terminates the Exchange Offer.
The Company will return any Old Note that it does not accept for exchange for
any reason, as promptly as practicable after expiration or termination of the
Exchange Offer, without charge to the holder of the Old Note.
- --------------------------------------------------------------------------------
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept for exchange Old Notes
that are properly tendered on or prior to the Expiration Date and not withdrawn
as permitted below. "Expiration Date" means 5:00 p.m., New York City time, on
February 23, 1999, or, if the Company, in its sole discretion, has extended the
period of time for which the Exchange Offer is open, the latest time and date to
which the Exchange Offer is extended.
As of the date of this Prospectus, $75,000,000 aggregate principal amount
of the Old Notes was outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about the date set forth on the cover
page to all holders of Old Notes at the addresses set forth in the securities
register with respect to Old Notes maintained by the Trustee. The Company's
obligation to accept Old Notes for exchange pursuant to the Exchange Offer is
subject to certain conditions as set forth below. See "- Acceptance of Old
Notes; Delivery of New Notes."
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes, by mailing written
notice of such extension to the holders thereof as described below. During any
extension, all Old Notes previously tendered will remain subject to the Exchange
Offer and may be accepted for exchange by the Company. Any Old Notes not
accepted for exchange for any reason will be returned without expense to the
Note holder as promptly as practicable after the expiration or termination of
the Exchange Offer.
Old Notes tendered in the Exchange Offer must be $1,000 in principal amount
or any integral multiple thereof.
The Company will mail written notice of any extension, amendment,
non-acceptance or termination to the holders of the Old Notes as promptly as
practicable, such notice to be mailed to the holders of record of the Old Notes
no later than 9:00 a.m. New York City time, on the next business day after the
previously scheduled Expiration Date or other event giving rise to such notice
requirement.
Procedure for Tendering Old Notes
- --------------------------------------------------------------------------------
Summary: The Trustee is serving as Exchange Agent in connection with the
Note Exchange. Holders of Old Notes that wish to participate in the Note
Exchange must complete and sign a Letter of Transmittal according to the
instructions contained in the Letter of Transmittal, and forward it to the
Exchange Agent (not to the Company) in compliance with the procedures set forth
in the Letter of Transmittal. Brokers-dealers, commercial banks, trust companies
and other nominees may tender Old Notes which they hold as nominee by book-entry
transfer. Questions regarding the Exchange Offer, tender of the Old Notes, or
the Note Exchange generally, must be directed to the Exchange Agent.
- --------------------------------------------------------------------------------
Letter of Transmittal. The tender to the Company of Old Notes by a holder
thereof as set forth below and the acceptance thereof by the Company will
constitute a binding agreement between the tendering holder and the Company upon
the terms and subject to the conditions set forth in this Prospectus and in the
Letter of Transmittal.
55
<PAGE>
Except as set forth below, a holder who wishes to tender Old Notes for exchange
pursuant to the Exchange Offer must transmit a properly completed and duly
executed Letter of Transmittal, together with all other documents required by
such Letter of Transmittal, to the Exchange Agent at the address set forth below
under "- Exchange Agent" on or prior to the Expiration Date.
Other Documents. In addition,
(a) certificates for the Old Notes must be received by the Exchange Agent
along with the Letter of Transmittal,
(b) a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of the Old Notes, if such procedure is available, into the
Exchange Agent's account at The Depository Trust Company in New York, New York
(the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date, or
(c) the holder must comply with the guaranteed delivery procedures
described in " - Guaranteed Delivery Procedures," below.
Note: The method of delivery of Old Notes, Letters of Transmittal and all other
required documents is at the election and risk of the holders. If the
delivery is by mail, it is recommended that registered mail, properly
insured, with return receipt requested, be used in all cases. Sufficient
time should be allowed to assure timely delivery. No Letters of
Transmittal or Old Notes should be sent to the Company.
Signatures. Signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, must be guaranteed unless the Old Notes
surrendered for exchange pursuant thereto are tendered (a) by a registered
holder of the Old Notes who has not completed the box entitled "Special
Registration Instructions" or "Special Delivery Instructions" on the Letter of
Transmittal or (b) for the account of an Eligible Institution (as defined
herein). If signatures on a Letter of Transmittal or a notice of withdrawal, as
the case may be, are required to be guaranteed, the guarantees must be by a firm
that is an eligible guarantor institution (bank, stockbroker, national
securities exchange, registered securities association, savings and loan
association or credit union with membership in a signature medallion program)
pursuant to Exchange Act Rule 17Ad-15 (collectively, "Eligible Institutions").
If Old Notes are registered in the name of a person other than the person
signing the Letter of Transmittal, the Old Notes surrendered for exchange must
be endorsed by, or be accompanied by a written instrument or instruments of
transfer or exchange, in satisfactory form as determined by the Company in its
sole discretion, duly executed by the registered holder, with the signature
thereon guaranteed by an Eligible Institution.
Powers of Attorney. If the Letter of Transmittal is signed by a person or
persons other than the registered holder or holders of Old Notes, the Old Notes
must be endorsed or accompanied by appropriate powers of attorney, in either
case signed exactly as the name or names of the registered holder or holders
that appear on the Old Notes.
Representatives. If the Letter of Transmittal or any Old Notes or powers of
attorney are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and
unless waived by the Company, proper evidence satisfactory to the Company of
their authority to so act must be submitted with the Letter of Transmittal.
Required Acknowledgments; Resales by Broker-Dealers. By tendering Old
Notes, each holder, other than a broker-dealer, must acknowledge that it is not
engaged in, and does not intend to engage in, a distribution of New Notes. If
any holder of Old Notes is an "affiliate" of the Company, as defined in Rule 405
under the Securities Act, or is engaged in or intends to engage in or has any
arrangement with any person to participate in the distribution of the New Notes
to be acquired pursuant to the Exchange Offer, the holder:
o could not rely on the applicable interpretations of the staff of the
Commission, and
o must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale transaction.
56
<PAGE>
Each broker-dealer that receives New Notes for its own account in exchange for
Old Notes must acknowledge that the Old Notes were acquired by the broker-dealer
as a result of market-making activities or other trading activities and that it
will deliver a prospectus in connection with any resale of the New Notes. Any
such broker-dealer may be deemed to be an "underwriter" under the Securities
Act. See "Plan of Distribution - Broker-Dealers." The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
Acceptance of Old Notes for Exchange; Delivery of New Notes
The Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of the
Old Notes. For each Old Note accepted for exchange, the holder of the Old Note
will receive a New Note having a principal amount equal to that of the
surrendered Old Note. The New Notes will bear interest from the most recent date
to which interest has been paid on the Old Notes or, if no interest has been
paid on the Old Notes, from July 30, 1998. Accordingly, if the relevant record
date for interest payment occurs after the completion of the Exchange Offer,
registered holders of New Notes on the record date will receive interest
accruing from the most recent date to which interest has been paid or, if no
interest has been paid, from July 30, 1998. If, however, the relevant record
date for interest payment occurs prior to the completion of the Exchange Offer,
registered holders of Old Notes on the record date will receive interest
accruing from the most recent date to which interest has been paid or, if no
interest has been paid, from July 30, 1998. Old Notes accepted for exchange will
cease to accrue interest from and after the date of completion of the Exchange
Offer, except as set forth in the immediately preceding sentence. Holders of Old
Notes whose Old Notes are accepted for exchange will not receive any payment in
respect of interest on the Old Notes otherwise payable on any interest payment
date the record date for which occurs on or after completion of the Exchange
Offer.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of:
o certificates for the Old Notes or a timely Book-Entry Confirmation of
the Old Notes into the Exchange Agent's account at the Book-Entry
Transfer Facility,
o a properly completed and duly executed Letter of Transmittal, and
o all other required documents.
If any tendered Old Notes are not accepted for any reason set forth in the
terms and conditions of the Exchange Offer or if certificates representing Old
Notes are submitted for a greater principal amount than the holder desires to
exchange, certificates representing the unaccepted or non-exchanged Old Notes
will be returned without expense to the tendering holder thereof (or, in the
case of Old Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described below, the non-exchanged Old Notes will be credited to an
account maintained with the Book-Entry Transfer Facility) as promptly as
practicable after the expiration or termination of the Exchange Offer.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or not to accept any
particular Old Notes if acceptance might, in the judgment of the Company or its
counsel, be unlawful. The Company also reserves the absolute right in its sole
discretion to waive any defects or irregularities or conditions of the Exchange
Offer as to any particular Old Notes either before or after the Expiration Date
(including the right to waive the ineligibility of any holder who seeks to
tender Old Notes in the Exchange Offer). The interpretation of the terms and
conditions of the Exchange Offer as to any particular Old Notes either before or
after the Expiration Date (including the Letter of Transmittal and the
instructions thereto) by the Company shall be final and binding on all parties.
Unless waived, any defects or irregularities in connection with tenders of Old
Notes for exchange must be cured within a reasonable period of time that the
Company shall determine. Neither the Company, the Exchange Agent nor any other
person shall be under any duty to give notification of any defect or
irregularity with respect to any tender of Old Notes for exchange, nor shall any
of them incur any liability for failure to give any notification.
57
<PAGE>
Book-Entry Transfer
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer the Old Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility in accordance with the Book-Entry
Facility's procedures for transfer.
Note: Although delivery of Old Notes may be effected through book-entry
transfer at the book-entry transfer facility, the Letter of Transmittal
or a facsimile thereof, with any required signature guarantees and any
other required documents, must, in any case, be transmitted to and
received by the Exchange Agent at the address set forth below under
"Exchange Agent" on or prior to the Expiration Date, or the guaranteed
delivery procedures described below must be complied with.
Guaranteed Delivery Procedures
If a registered holder of Old Notes desires to tender the Old Notes and the
Old Notes are not immediately available, or time will not permit the holder's
Old Notes or the Letter of Transmittal or other required documents to reach the
Exchange Agent before the Expiration Date, or the procedure for book-entry
transfer cannot be completed on a timely basis, a tender may be effected if:
(a) the tender is made through an Eligible Institution,
(b) prior to the Expiration Date, the Exchange Agent receives from the
Eligible Institution a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by telegram, telex,
facsimile transmission, mail or hand delivery), setting forth the name and
address of the holder of Old Notes and the principal amount of Old Notes
tendered, stating that the tender is being made thereby and guaranteeing that
within three New York Stock Exchange ("NYSE") trading days after the date of
execution of the Notice of Guaranteed Delivery, the certificates for all
physically tendered Old Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and a properly completed and duly executed
Letter of Transmittal (or facsimile thereof) and any other documents required by
the Letter of Transmittal will be deposited by the Eligible Institution with the
Exchange Agent, and
(c) the certificates for all physically tendered Old Notes, in proper form
for transfer, or a Book-Entry Confirmation, as the case may be, and a properly
completed and duly executed Letter of Transmittal (or facsimile thereof) and all
other documents required by the Letter of Transmittal, are received by the
Exchange Agent within three NYSE trading days after the date of execution of the
Notice of Guaranteed Delivery.
Withdrawal Rights
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date. For a withdrawal to be effective, a
written or facsimile notice of withdrawal must be received by the Exchange Agent
at the address set forth below under "- Exchange Agent." Any notice of
withdrawal must specify the name of the person having tendered the Old Notes to
be withdrawn, identify the Old Notes to be withdrawn (including the principal
amounts of such Old Notes), and (where certificates for Old Notes have been
transmitted) specify the name in which such Old Notes are registered, if
different from that of the withdrawing holder.
If certificates for Old Notes have been delivered or otherwise identified
to the Exchange Agent, then, prior to the release of such certificates, the
withdrawing holder must also submit the serial numbers of the particular
certificates to be withdrawn and a signed notice of withdrawal with signatures
guaranteed by an Eligible Institution unless the holder is an Eligible
Institution. If Old Notes have been tendered pursuant to the procedure for
book-entry transfer, any notice of withdrawal must specify the name and number
of the account at the Book-Entry Transfer Facility to be credited with the
withdrawn Old Notes and otherwise comply with the procedures of the facility.
All questions as to the validity, form and eligibility (including time of
receipt) of the notices will be determined by the
58
<PAGE>
Company, whose determination shall be final and binding on all parties.
Certificates for any Old Notes so withdrawn will be deemed not to have been
validly tendered for exchange for purposes of the Exchange Offer. Any Old Notes
that have been tendered for exchange but which are not exchanged for any reason
will be returned to the holder thereof without cost to the holder (or, in the
case of Old Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, the Old Notes will be credited to an account
maintained with the Book-Entry Transfer Facility for the Old Notes) as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Old Notes may be retendered by following one of the
procedures described under "- Procedure for Tendering Old Notes," above, at any
time on or prior to the Expiration Date.
Exchange Agent
All executed Letters of Transmittal should be directed to the Exchange
Agent at the address set forth below. Questions and requests for assistance,
requests for additional copies of this Prospectus or of the Letter of
Transmittal and requests for Notices of Guaranteed Delivery should be directed
to the Exchange Agent, addressed as follows:
By Registered or Certified Mail: IBJ Whitehall Bank & Trust Company
P.O. Box 84
Bowling Green Station
New York, New York 10274-0084
Attention: Reorganization Operations
Department
By Overnight Courier or By Hand: IBJ Whitehall Bank & Trust Company
One State Street
New York, NY 10004
Attention: Securities Processing Window
Subcellar One (SC-1)
By Facsimile: (212) 858-2611
Confirm by Telephone: (212) 858-2103
Note: Delivery of the Letter of Transmittal to an address other than as set
forth above or transmission of instructions via facsimile other than as
set forth above does not constitute a valid delivery of the Letter of
Transmittal.
Fees and Expenses
The Company will not make any payment to brokers-dealers or others
soliciting acceptances of the Exchange Offer.
Transfer Taxes
Holders who tender Old Notes for exchange will not be obligated to pay any
transfer tax in connection therewith, except that Holders who instruct the
Company to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the Exchange Offer be returned to, a person other
than the registered tendering Holder will be responsible for the payment of any
applicable transfer tax thereon.
Appraisal Rights
Holders of Old Notes will not have dissenters' rights or appraisal rights
in connection with the Exchange Offer.
59
<PAGE>
Consequences of Failure to Exchange Old Notes
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of the Old Notes. In general, the Old Notes may not be offered or
sold unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the registration requirements of the
Securities Act and applicable state securities laws. The Company does not
anticipate that it will register Old Notes under the Securities Act.
Resale of the New Notes
- -----------------------
Based on interpretations by the staff of the SEC issued to third parties,
New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold or otherwise transferred by holders thereof (other
than any holder that is an "affiliate" of the Company as defined in Rule 405
under the Securities Act, and other than any broker-dealer) without compliance
with the registration and prospectus delivery provisions of the Securities Act,
provided that:
(a) the New Notes are acquired in the ordinary course of the holders'
business, and
(b) the holders have no arrangement with any person to participate in the
distribution of the New Notes.
Each holder, other than a broker-dealer, must acknowledge that it is not
engaged in, and does not intend to engage in, a distribution of New Notes. This
analysis is based upon the SEC's position in no-action letters that the SEC has
issued previously regarding other transactions that were substantially similar
to the Exchange Offer. Although the SEC has not indicated that it has changed
its position on this issue, the Company has not sought its own interpretive
letter from the SEC. There is no assurance that the SEC would make a similar
determination with respect to the resale of the New Notes. See "Risk Factors -
Resale of the New Notes."
If any holder is an affiliate of the Company, or if any holder is engaged
in or intends to engage in or has any arrangement or understanding with respect
to the distribution of the New Notes to be acquired pursuant to the Exchange
Offer, the holder (1) could not rely on the applicable interpretations of the
staff of the SEC, and (2) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes must acknowledge that the Old Notes were acquired by the
broker-dealer as a result of market-making activities or other trading
activities and that it will deliver a prospectus in connection with any resale
of the New Notes. Any such broker-dealer may be deemed to be an "underwriter"
under the Securities Act. See "Plan of Distribution - Broker-Dealers." In
addition, to comply with the securities laws of certain jurisdictions, if
applicable, it may be necessary to qualify for sale or to register the New Notes
in that jurisdiction prior to offering or selling the New Notes.
Registration Rights Agreement
- -----------------------------
- --------------------------------------------------------------------------------
Summary: The Company has filed the Registration Statement to comply with
its obligation under the Registration Rights Agreement to register the exchange
of the New Notes for the Old Notes. In the Registration Rights Agreement, the
Company also agreed to file the Shelf Registration Statement to register the
resale of certain Old Notes and New Notes, under limited circumstances. If the
Company defaults on certain of its registration obligations under the
Registration Rights Agreement, the affected Note holders will be entitled to
Liquidated Damages.
- --------------------------------------------------------------------------------
This summary of the Registration Rights Agreement does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
all provisions of the Registration Rights Agreement, a copy of which is an
exhibit to the Registration Statement.
Registration Statement
Obligations of the Company. In the Registration Rights Agreement, the
Company and the Guarantors agreed to:
(a) use their best efforts to keep the Registration Statement effective
continuously, and the Exchange Offer open, for a period of not less than 20
business days, and
(b) cause the Note Exchange to be consummated no later than the 30th
business day after the SEC declares the Registration Statement to be effective
(the "Consummation Deadline"); and
60
<PAGE>
(c) use their best efforts to keep the Prospectus available for use by
broker-dealers for one year after the Consummation Deadline.
Representations by the Note Holders. To participate in the Note Exchange,
each holder of Old Notes must represent that it:
(a) is not an affiliate of the Company,
(b) is not engaged in, and does not intend to engage in, and has no
arrangement or understanding with any person to participate in, a distribution
of New Notes issued in the Note Exchange, and
(c) is acquiring the New Notes in the Note Exchange in the ordinary course
of its business.
Shelf Registration Statement
Obligation to File. In the Registration Rights Agreement, the Company and
the Guarantors agreed to file with the SEC a Shelf Registration Statement
covering the public resale, by any holder who provides the Company with certain
information for inclusion in the Shelf Registration Statement, of:
(a) the Old Notes if the Exchange Offer is not permitted by applicable law
or SEC policy,
(b) the Old Notes if the Note Exchange is not consummated by the
Consummation Deadline, or
(c) any New Notes or Transfer Restricted Securities held by any holder who
notifies the Company prior to the 20th business day following the consummation
of the Exchange Offer that:
(1) such holder is prohibited by law or SEC policy from participating
in the Exchange Offer,
(2) such holder may not resell the New Notes acquired by it in the
Exchange Offer to the public without delivering a prospectus, and
the prospectus contained in the Registration Statement is not
appropriate or available for such resales by it, or
(3) such holder is a broker-dealer and holds Old Notes acquired
directly from the Company or any of the Company's affiliates.
"Transfer Restricted Securities" means each Old Note until the earliest of
the date on which the Old Note (A) is exchanged for a New Note in the Note
Exchange that is entitled to be resold to the public by the holder thereof
without complying with the prospectus delivery requirements of the Securities
Act, (B) has been disposed of in accordance with the Shelf Registration
Statement, (C) is disposed of by a broker-dealer pursuant to the "Plan of
Distribution," or (D) is eligible for distribution to the public pursuant to
Rule 144 under the Securities Act. See "Plan of Distribution."
Further Obligations of the Company. If a Shelf Registration Statement is
required, the Company must:
(a) file the Shelf Registration Statement within 30 days after the Company
receives the required notice from by a Note holder,
(b) use its best efforts to cause the SEC to declare the Shelf Registration
Statement effective within 120 days after the obligation to file a Shelf
Registration Statement arises, and
(c) use its best efforts to keep the Shelf Registration Statement
continuously effective for at least two years after the SEC initially declares
it effective.
If the Company files a Shelf Registration Statement, the Company will: (1)
provide to each named selling Note holder copies of the prospectus which is part
of the Shelf Registration Statement, (2) notify each such holder when the Shelf
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Registration Statement has become effective, and (3) take certain other actions
as are required to permit public resales of the Notes held by the selling Note
holders.
Obligations of Selling Note Holders. A holder selling Notes under the Shelf
Registration Statement generally:
(a) would be required to be named as a selling security holder in the
related prospectus and to deliver a prospectus to purchasers,
(b) will be subject to certain of the civil liability provisions under the
Securities Act in connection with such sales, and
(c) will be bound by the provisions of the Registration Rights Agreement
that are applicable to such holder (including certain indemnification
obligations).
Liquidated Damages
In the Registration Rights Agreement, the Company and the Guarantors agree
to pay to each Holder of Transfer Restricted Securities affected by a
Registration Default, the following liquidated damages ("Liquidated Damages"):
(a) $0.05 per week per $1,000 in principal amount of Transfer Restricted
Securities held by such Holder for the first 90 day period immediately following
the occurrence of such Registration Default, plus
(b) an additional $0.05 per week per $1,000 in principal amount of Transfer
Restricted Securities with respect to each subsequent 90 day period until all
Registration Defaults have been cured,
(c) up to a maximum amount of Liquidated Damages of $0.50 per week per
$1,000 in principal amount of Transfer Restricted Securities.
Liquidated Damages accrue for each week or portion thereof that a
Registration Default continues. The Company and the Guarantors are not required
to pay Liquidated Damages for more than one Registration Default at any given
time. Following the cure of all Registration Defaults, the accrual of Liquidated
Damages will cease. All accrued Liquidated Damages will be paid in the same
manner and on the same dates as interest payments are paid on the Notes.
Liquidated Damages, if determined to be a penalty, may be limited or
unenforceable under applicable law.
Registration Default
"Registration Default" means the occurrence of any of the following events:
(a) the Note Exchange is not consummated on or before the Consummation
Deadline,
(b) the Company or the Guarantors fail to file the Shelf Registration
Statement (if required) with the SEC by the applicable filing deadline,
(c) the SEC does not declare the Shelf Registration Statement (if required)
to be effective by the applicable effectiveness deadline, or
(d) the Shelf Registration Statement (if required) is declared effective
but thereafter ceases to be effective or useable for two years after the
effective date.
Indemnification
The Company agrees in the Registration Rights Agreement to indemnify
selling Note holders against certain liabilities, including certain liabilities
under the Securities Act.
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DESCRIPTION OF NOTES
- --------------------------------------------------------------------------------
As used below in this "Description of Notes" (unless the context indicates
otherwise), references to the "Notes" refer to the Old Notes and the New Notes,
which are described in the future tense for convenience only.
- --------------------------------------------------------------------------------
The Notes
- ---------
The Company issued the Old Notes to the Initial Purchasers on July 30,
1998. The Initial Purchasers sold the Old Notes to "qualified institutional
buyers," as defined in Rule 144A under the Securities Act. The terms of the New
Notes are substantially identical to the terms of the Old Notes. However, the
New Notes are not subject to transfer restrictions or registration rights unless
held by certain broker-dealers, affiliates of the Company or certain other
persons. See "The Exchange Offer - Resale of the New Notes." In addition, the
Company does not plan to list the New Notes on any securities exchange or seek
quotation on any automated quotation system. The Old Notes are listed on
Nasdaq's PORTAL system.
The following chart summarizes the basic terms of the Notes:
Principal: $75,000,000
Maturity Date: August 1, 2005.
Interest Rate: 11 1/4% per year from the date of issuance or from the most
recent Interest Payment Date to which interest has been paid
or provided for.
Interest The Company will pay interest semi-annually on February 1
Payments: and August 1 of each year, beginning February 1, 1999, to
the Note holders at the close of business on the January 15
or July 15 immediately preceding such Interest Payment Date.
Interest will be calculated on the basis of a 360-day year
consisting of twelve 30-day months.
Principal The Company must repay the principal balance of any Notes
Payments: that it has not redeemed by August 1, 2005.
Guarantors: All of the Company's present and future U.S. subsidiaries,
except for any future Unrestricted Subsidiaries.
Trustee: IBJ Whitehall Bank & Trust Company.
Collateral: None.
Debt Ranking: The Company's obligation to repay the New Notes will rank
equally with the obligation to repay its other unsecured
debt that is not Senior Indebtedness.
Global Note: The New Notes will be issued as a single, global note that
will be deposited with The Depository Trust Company in New
York, New York ("DTC"). Individual Note holders will not
receive certificates for the New Notes, except in certain
limited circumstances.
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Payment The Company will make all payments on the Notes (including
Procedures: principal, premium, if any, interest and Liquidated Damages,
if any) in immediately available same day funds, at the
office or agency of the Company maintained for such purpose,
which office or agency shall be maintained in the Borough of
Manhattan, The City of New York, except that:
o Payments on Notes represented by the Global Notes will
be payable by wire transfer to the accounts specified
by the holder of interests in such Global Note.
o Payments on Certificated Notes, if any, will be payable
by wire transfer to the accounts specified by the Note
holders or, if no such account is specified, by mailing
a check to each Note holder's registered address.
Registration Rights Agreement
- -----------------------------
The Company has filed the Registration Statement to comply with its
obligation under the Registration Rights Agreement to register the issuance of
the New Notes. See "The Exchange Offer - Registration Rights Agreement."
The Indenture
- -------------
The Old Notes were issued, and the New Notes will be issued, pursuant to an
Indenture (the "Indenture"), dated as of July 30, 1998, between the Company and
the Trustee. The following summarizes certain provisions of the Indenture. This
summary does not purport to be complete and is qualified in its entirety by
reference to all of the provisions of the Indenture. Wherever this summary
refers to a particular provision of the Indenture, such provision is
incorporated by reference as a part of the statements made, and such statements
are qualified in their entirety by such reference.
The definitions of many capitalized terms used in this section are
summarized in "- Certain Definitions", below. Capitalized terms that are not
defined below have the meanings set forth in the Indenture.
Guarantors
- --------------------------------------------------------------------------------
Summary: The Notes will be jointly and severally, irrevocably and
unconditionally guaranteed on a senior subordinated basis by each of the
Company's present and future Subsidiaries (other than Foreign Subsidiaries) (the
"Guarantors"). See "- Certain Bankruptcy Limitations." The term "Subsidiaries"
as used in this Description of Notes, however, does not include Unrestricted
Subsidiaries.
- --------------------------------------------------------------------------------
Future Subsidiary Guarantors. The Indenture provides that all present and
future Subsidiaries (other than Foreign Subsidiaries) of the Company jointly and
severally will guarantee irrevocably and unconditionally all principal, premium,
if any, and interest on the Notes (and Liquidated Damages, if any) on a senior
subordinated basis. However, any Foreign Subsidiary that guarantees any
Indebtedness of the Company or any Subsidiary (other than a Foreign Subsidiary)
shall become a Guarantor. The term Subsidiary does not include Unrestricted
Subsidiaries.
Release of Guarantors. The Indenture provides that no Guarantor shall
consolidate or merge with or into (whether or not such Guarantor is the
surviving Person) another Person unless:
(a) subject to the provisions of the following paragraph and certain other
provisions of the Indenture, the Person formed by or surviving any such
consolidation or merger (if other than such Guarantor) assumes all the
obligations of such Guarantor pursuant to a supplemental indenture in form
reasonably satisfactory to the Trustee, pursuant to which such person shall
unconditionally guarantee, on a senior subordinated basis, all of such
Guarantor's obligations under such Guarantor's guarantee, on the terms set forth
in the Indenture; and
(b) immediately before and immediately after giving effect to such
transaction on a pro forma basis, no Default or Event of Default shall have
occurred or be continuing.
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Upon the sale of or disposition by (whether by merger, stock purchase,
asset sale or otherwise) a Guarantor of all of its assets to an entity which is
not a Guarantor or the designation of a Guarantor to become an Unrestricted
Subsidiary, which transaction is otherwise in compliance with the Indenture
(including, without limitation, the provisions of the covenant "Limitations on
Sale of Assets and Subsidiary Stock"), such Guarantor will be deemed released
from its obligations under its Guarantee of the Notes. However, any such
termination shall occur only in the event that all obligations of such Guarantor
under all of its guarantees of, and under all of its pledges of assets or other
security interests which secure, any Indebtedness of the Company or any other
Subsidiary of the Company shall also terminate upon such release, sale or
transfer.
Subordination.
- --------------------------------------------------------------------------------
Summary: The Company's and the Guarantors' obligation to repay the Notes
is:
o subordinated to their Senior Indebtedness, which was approximately
$8.1 million at December 31, 1998, and
o effectively subordinated to the Indebtedness of the Company's foreign
subsidiaries, including Aeromet, which was approximately $1.0 million
at December 31, 1998.
The Indenture restricts the Company from making any payments on the Notes under
certain circumstances where any Senior Indebtedness has matured or is in
default.
- --------------------------------------------------------------------------------
The Notes will be subordinate in right of payment to certain other debt
obligations of the Company. The Notes and the Guarantees will be general,
unsecured obligations of the Company and the Guarantors, respectively,
subordinated in right of payment to all Senior Indebtedness of the Company and
the Guarantors, as applicable. Foreign Subsidiaries (including Aeromet)
generally will not be required to guarantee the Notes. Thus, the Notes will be
effectively subordinated to all debt obligations and preferred stock of any
Foreign Subsidiary. As of December 31, 1998, the Company and the Guarantors had
outstanding an aggregate of approximately $8.1 million of Senior Indebtedness
(plus an additional $1.6 million of Senior Indebtedness guaranteed by the
Company), and Foreign Subsidiaries had outstanding an aggregate of approximately
$1.0 million of Indebtedness.
Payment Restrictions. The Indenture provides that no payment (by set-off or
otherwise) may be made by or on behalf of the Company or a Guarantor, as
applicable, on account of any Obligation in respect of the Notes, including the
principal of, premium, if any, or interest on the Notes (including any
repurchases of Notes), or on account of the redemption provisions of the Notes
for cash or property (other than Junior Securities):
(a) upon the maturity of any Senior Indebtedness of the Company or such
Guarantor by lapse of time, acceleration (unless waived) or otherwise, unless
and until all principal of, premium, if any, and the interest on such Senior
Indebtedness are first paid in full in cash or Cash Equivalents (or such payment
is duly provided for) or otherwise to the extent holders accept satisfaction of
amounts due by settlement in other than cash or Cash Equivalents, or
(b) in the event of default in the payment of any principal of, premium, if
any, or interest on Senior Indebtedness of the Company or such Guarantor when it
becomes due and payable, whether at maturity or at a date fixed for prepayment
or by declaration or otherwise (a "Payment Default"), unless and until such
Payment Default has been cured or waived or otherwise has ceased to exist.
Upon (1) the happening of an event of default other than a Payment Default
that permits the holders of Senior Indebtedness to declare such Senior
Indebtedness to be due and payable, and (2) written notice of such event of
default given to the Company and the Trustee by the holders of an aggregate of
at least $5.0 million principal amount outstanding of any Senior Indebtedness or
their representative (a "Payment Notice"), then, unless and until such event of
default has been cured or waived or otherwise has ceased to exist, no payment
(by set-off or otherwise) may be made by or on behalf of the Company or any
Guarantor which is an obligor under such Senior Indebtedness on account of any
Obligation in respect of the Notes, including the principal of, premium, if any,
or interest on the Notes, (including any repurchases of any of the Notes), or on
account of the redemption provisions of the Notes, in any such case, other than
payments made with Junior Securities.
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Resumption of Payments. Notwithstanding the foregoing, unless the Senior
Indebtedness in respect of which such event of default exists has been declared
due and payable in its entirety within 179 days after the Payment Notice is
delivered as set forth above (the "Payment Blockage Period") (and such
declaration has not been rescinded or waived), at the end of the Payment
Blockage Period, the Company and the Guarantors shall be required to pay all
sums not paid to the holders of the Notes during the Payment Blockage Period due
to the foregoing prohibitions and to resume all other payments as and when due
on the Notes.
Payment Notices. Any number of Payment Notices may be given, however:
(a) not more than one Payment Notice shall be given within a period of any
360 consecutive days, and
(b) no default that existed upon the date of such Payment Notice or the
commencement of such Payment Blockage Period (whether or not such event of
default is on the same issue of Senior Indebtedness) shall be made the basis for
the commencement of any other Payment Blockage Period (it being acknowledged
that any subsequent action, or any subsequent breach of any financial covenant
for a period commencing after the expiration of such Payment Blockage Period
that, in either case, would give rise to a new event of default, even though it
is an event that would also have been a separate breach pursuant to any
provision under which a prior event of default previously existed, shall
constitute a new event of default for this purpose).
Dissolution, Liquidation or Bankruptcy. Upon any distribution of assets of
the Company or any Guarantor upon any dissolution, winding up, total or partial
liquidation or reorganization of the Company or a Guarantor, whether voluntary
or involuntary, in bankruptcy, insolvency, receivership or a similar proceeding
or upon assignment for the benefit of creditors or any marshaling of assets or
liabilities:
(a) the holders of all Senior Indebtedness of the Company or such
Guarantor, as applicable, will first be entitled to receive payment in full in
cash or Cash Equivalents (or have such payment duly provided for) or otherwise
to the extent such holders accept satisfaction of amounts due by settlement in
other than cash or Cash Equivalents before the holders of the Notes are entitled
to receive any payment on account of any Obligation in respect of the Notes,
including the principal of, premium, if any, and interest on the Notes (other
than Junior Securities), and
(b) any payment or distribution of assets of the Company or such Guarantor
of any kind or character from any source, whether in cash, property or
securities (other than Junior Securities) to which the holders of the Notes or
the Trustee on behalf of such holders would be entitled (by set-off or
otherwise), except for the subordination provisions contained in the Indenture,
will be paid by the liquidating trustee or agent or other person making such a
payment or distribution directly to the holders of such Senior Indebtedness or
their representative to the extent necessary to make payment in full (or have
such payment duly provided for) on all such Senior Indebtedness remaining
unpaid, after giving effect to any concurrent payment or distribution to the
holders of such Senior Indebtedness.
As a result of these subordination provisions, in the event of the
liquidation, bankruptcy, reorganization, insolvency, receivership or similar
proceeding or an assignment for the benefit of the creditors of the Company or a
marshaling of assets or liabilities of the Company, holders of the Notes may
receive ratably less than other creditors.
Receipt of Payment by Trustee. Notwithstanding the foregoing, if any
payment or distribution of assets of the Company or any Guarantor (other than
Junior Securities) shall be received by the Trustee or the holders of the Notes
at a time when such payment or distribution is prohibited by the foregoing
provisions, such payment or distribution:
(a) shall be held in trust for the benefit of the holders of such Senior
Indebtedness, and
(b) shall be paid or delivered by the Trustee or the holders of the Notes,
as the case may be,
(1) to the holders of such Senior Indebtedness remaining unpaid or
unprovided for or to their representative or representatives, or
(2) to the trustee or trustees under any indenture pursuant to which
any instruments evidencing any of such Senior Indebtedness may
have been issued,
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ratably according to the aggregate principal amounts remaining unpaid
on account of such Senior Indebtedness held or represented by each,
for application to the payment of all such Senior Indebtedness
remaining unpaid:
o to the extent necessary to pay or to provide for the payment of
all such Senior Indebtedness in full in cash or Cash Equivalents,
or
o otherwise to the extent holders accept satisfaction of amounts
due by settlement in other than cash or Cash Equivalents after
giving effect to any concurrent payment or distribution to the
holders of such Senior Indebtedness.
Obligation of Company and Guarantors. No subordination provision contained
in the Indenture or the Notes will affect the obligation of the Company and the
Guarantors, which is absolute and unconditional, to pay, when due, principal of,
premium, if any, and interest and Liquidated Damages, if any, on the Notes. The
subordination provisions of the Indenture and the Notes will not prevent the
occurrence of any Default or Event of Default under the Indenture or limit the
rights of the Trustee or any holder of the Notes to pursue any other rights or
remedies with respect to the Notes.
Optional Redemption
- --------------------------------------------------------------------------------
Summary: Until August 1, 2001, the Company may use the proceeds of a
Qualified Equity Offering to redeem up to $15,000,000 of the Notes, upon payment
of:
o 111.25% of the principal being redeemed, plus
o accrued interest on that principal, plus
o Liquidated Damages, if any.
After August 1, 2003, the Company may redeem all or part of the Notes, at
redemption prices that decline over time until the maturity date.
- --------------------------------------------------------------------------------
Redemption until August 1, 2001. Until August 1, 2001, upon a Qualified
Equity Offering of common stock for cash, up to 20% of the aggregate principal
amount of the Notes originally outstanding may be redeemed at the option of the
Company within 90 days after the closing of such Qualified Equity Offering, on
not less than 30 days, but not more than 60 days, notice to each holder of the
Notes to be redeemed, with cash from the Net Cash Proceeds to the Company of
such Qualified Equity Offering, at a redemption price equal to 111.25% of the
principal amount thereof (subject to the right of holders of record on a Record
Date to receive interest due on an Interest Payment Date that is on or prior to
such Redemption Date), together with accrued and unpaid interest and Liquidated
Damages, if any, to the date of redemption. However, immediately following such
redemption, not less than 80% of the original aggregate principal amount of the
Notes must remain outstanding.
Redemption after August 1, 2003. The Notes will be redeemable for cash at
the option of the Company, in whole or in part, at any time on or after August
1, 2003 upon not less than 30 days nor more than 60 days notice to each holder
of Notes, at the following redemption prices (expressed as percentages of the
principal amount) if redeemed during the 12-month period commencing August 1 of
the years indicated below, in each case (subject to the right of holders of
record on a Record Date to receive the corresponding interest due (and
corresponding Liquidated Damages, if any) on an Interest Payment Date
corresponding to such Record Date that is on or prior to such Redemption Date)
together with accrued and unpaid interest and Liquidated Damages, if any,
thereon to the Redemption Date:
Year Percentage
---- ----------
2003 .................................................... 105.625%
2004 .................................................... 102.813
2005 .................................................... 100.000
Partial Redemption. In the case of a partial redemption, the Trustee shall
select the Notes or portions of the Notes for redemption on a pro rata basis, by
lot or in such other manner it deems appropriate and fair. The Notes may be
redeemed in part in multiples of $1,000 only.
Sinking Fund. The Notes will not have the benefit of any sinking fund.
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Notice of Redemption. Notice of any redemption will be sent, by first class
mail, at least 30 days and not more than 60 days prior to the date fixed for
redemption to the Holder of each Note to be redeemed to such Holder's last
address as then shown upon the registry books of the Registrar. Any notice which
relates to a Note to be redeemed in part only must state the portion of the
principal amount equal to the unredeemed portion thereof and must state that on
and after the date of redemption, upon surrender of such Note, a new Note or
Notes in a principal amount equal to the unredeemed portion thereof will be
issued. On and after the date of redemption, interest will cease to accrue on
the Notes or portions thereof called for redemption, unless the Company defaults
in the payment of the redemption price thereon.
Repurchase of Notes at the Option of the Holder Upon a Change of Control
- --------------------------------------------------------------------------------
Summary: If the Company experiences a Change of Control, the holder of the
Notes will have the right to require the Company to repurchase the Notes for:
o 101% of the principal amount thereof,
o accrued and unpaid interest on that principal, and
o Liquidated Damages, if any.
- --------------------------------------------------------------------------------
The Indenture provides that in the event that a Change of Control has
occurred, each holder of Notes will have the right, at such holder's option,
pursuant to an offer (subject only to conditions required by applicable law, if
any) by the Company (the "Change of Control Offer"), to require the Company to
repurchase all or any part of such holder's Notes (provided, that the principal
amount of such Notes must be $1,000 or an integral multiple thereof) on a date
(the "Change of Control Purchase Date") that is no later than 35 Business Days
after the occurrence of such Change of Control, at a cash price equal to 101% of
the principal amount thereof (the "Change of Control Purchase Price"), together
with accrued and unpaid interest and Liquidated Damages, if any, to the Change
of Control Purchase Date. The Change of Control Offer shall be made within ten
Business Days following a Change of Control and shall remain open for 20
Business Days following its commencement (the "Change of Control Offer Period").
Upon expiration of the Change of Control Offer Period, the Company promptly
shall purchase all Notes properly tendered in response to the Change of Control
Offer.
On or before the Change of Control Purchase Date, the Company will:
(a) accept for payment Notes or portions thereof properly tendered pursuant
to the Change of Control Offer,
(b) deposit with the Paying Agent cash sufficient to pay the Change of
Control Purchase Price (together with accrued and unpaid interest and Liquidated
Damages, if any), of all Notes so tendered, and
(c) deliver to the Trustee Notes so accepted together with an Officers'
Certificate listing the Notes or portions thereof being purchased by the
Company.
The Paying Agent promptly will pay the holders of Notes so accepted an
amount equal to the Change of Control Purchase Price (together with accrued and
unpaid interest and Liquidated Damages, if any), and the Trustee promptly will
authenticate and deliver to such holders a new Note equal in principal amount to
any unpurchased portion of the Note surrendered. Any Notes not so accepted will
be delivered promptly by the Company to the holder thereof. The Company publicly
will announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Purchase Date.
The Change of Control purchase feature of the Notes may make more difficult
or discourage a takeover of the Company, and, thus, the removal of incumbent
management.
The phrase "all or substantially all" of the assets of the Company will
likely be interpreted under applicable state law and will be dependent upon
particular facts and circumstances. As a result, there may be a degree of
uncertainty in ascertaining whether a sale or transfer of "all or substantially
all" of the assets of the Company has occurred. In addition, no assurances can
be given that the Company will be able to acquire Notes tendered upon the
occurrence of a Change of Control.
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Any Change of Control Offer will be made in compliance with all applicable
laws, rules and regulations, including, if applicable, Regulation 14E under the
Exchange Act and the rules thereunder and all other applicable Federal and state
securities laws. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of this paragraph, compliance by the
Company or any of the Guarantors with such laws and regulations shall not in and
of itself cause a breach of its obligations under such covenant.
If the Change of Control Purchase Date hereunder is on or after an interest
payment Record Date and on or before the associated Interest Payment Date, any
accrued and unpaid interest (and Liquidated Damages, if any) due on such
Interest Payment Date will be paid to the Person in whose name a Note is
registered at the close of business on such Record Date, and such interest (and
Liquidated Damages, if applicable) will not be payable to holders of the Notes
who tender the Notes pursuant to the Change of Control Offer.
Certain Covenants in the Indenture
- --------------------------------------------------------------------------------
Summary: In the Indenture, the Company agreed to certain restrictions that
limit its ability, among other things, to:
o incur additional indebtedness or issue Disqualified Capital Stock,
o pay dividends or make other distributions,
o create certain liens on assets,
o sell certain assets and stock of its subsidiaries,
o enter into certain transactions with Affiliates, and
o effect certain mergers and consolidations.
- --------------------------------------------------------------------------------
Limitation on Incurrence of Additional Indebtedness and Disqualified
Capital Stock. The Indenture provides that, except as set forth in this
covenant, the Company and the Guarantors will not, and will not permit any of
their Subsidiaries to, directly or indirectly, issue, assume, guarantee, incur,
create, become directly or indirectly liable with respect to (including as a
result of an Acquisition), or otherwise become responsible for, contingently or
otherwise (individually and collectively, to "incur" or, as appropriate, an
"incurrence"), any Indebtedness or any Disqualified Capital Stock (including
Acquired Indebtedness), other than Permitted Indebtedness.
Exceptions. Notwithstanding the foregoing, the Company may incur such
Indebtedness or Disqualified Capital Stock and the Subsidiaries may incur such
Indebtedness (other than Disqualified Capital Stock), if:
(a) no Default or Event of Default shall have occurred and be continuing at
the time of, or would occur after giving effect on a pro forma basis to, such
incurrence of Indebtedness or Disqualified Capital Stock, and
(b) on the date of such incurrence (the "Incurrence Date"), the
Consolidated Coverage Ratio of the Company for the Reference Period immediately
preceding the Incurrence Date, after giving effect on a pro forma basis to such
incurrence of such Indebtedness or Disqualified Capital Stock and, to the extent
set forth in the definition of Consolidated Coverage Ratio, the use of proceeds
thereof, would be
o with respect to the incurrence of such Indebtedness or Disqualified
Capital Stock, on or prior to August 1, 1999, at least 2.0 to 1.0,
o with respect to the incurrence of such Indebtedness or Disqualified
Capital Stock after August 1, 1999, at least 2.25 to 1.0, and
o with respect to the incurrence of such Indebtedness by Aeromet at any
time, at least 2.5 to 1.0 (as applicable, each the "Debt Incurrence
Ratio").
In addition, the foregoing limitations on the incurrence of Additional
Indebtedness do not apply to:
(1) the Existing Indebtedness;
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(2) the incurrence by the Company or any Subsidiary of Bank Indebtedness up
to an aggregate principal amount outstanding thereunder (including any
Refinancing Indebtedness and other Indebtedness incurred to refinance, replace,
defease or refund such Indebtedness) not to exceed in the aggregate $15.0
million, minus the amount of any such Bank Indebtedness:
o retired with the Net Cash Proceeds from any Asset Sale applied to
permanently reduce the outstanding amounts or the commitments with
respect to such Bank Indebtedness pursuant to the covenant "Limitation
on Sale of Assets and Subsidiary Stock,"
o retired under certain provisions of the covenant "Limitation on Sale
of Assets and Subsidiary Stock," or
o assumed by a transferee in an Asset Sale, except that the aggregate
principal amount of Bank Indebtedness of Foreign Subsidiaries
outstanding under this provision shall not exceed $7.5 million; or
(3) the incurrence by the Company or any of its Subsidiaries of Interest
Swap and Hedging Obligations that are incurred with respect to any Bank
Indebtedness that is permitted by the Indenture to be incurred.
Indebtedness of New Subsidiaries. Indebtedness or Disqualified Capital
Stock of any Person which is outstanding at the time such Person becomes a
Subsidiary of the Company (including upon designation of any subsidiary or other
person as a Subsidiary) or is merged with or into or consolidated with the
Company or a Subsidiary of the Company shall be deemed to have been Incurred at
the time such Person becomes such a Subsidiary of the Company or is merged with
or into or consolidated with the Company or a Subsidiary of the Company, as
applicable.
Designation of Indebtedness Provision. Upon each incurrence of
Indebtedness, the Company may designate under which provision of this covenant
such Indebtedness is being incurred and such Indebtedness should be deemed to
have been so incurred under such provision and no other provision of this
covenant except as specifically provided otherwise.
Limitation on Restricted Payments. The Indenture provides that the Company
and the Guarantors will not, and will not permit any of their Subsidiaries to,
directly or indirectly, make any Restricted Payment if, after giving effect to
such Restricted Payment on a pro forma basis:
(a) a Default or an Event of Default shall have occurred and be continuing,
(b) the Company is not permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Debt Incurrence Ratio in the covenant "Limitation
on Incurrence of Additional Indebtedness and Disqualified Capital Stock," and
(c) the aggregate amount of all Restricted Payments made by the Company and
its Subsidiaries, including after giving effect to such proposed Restricted
Payment, from and after the Issue Date, would exceed, without duplication, the
sum of:
(1) 50% of the aggregate Consolidated Net Income of the Company for the
period (taken as one accounting period), commencing on the first day
of the first full fiscal quarter commencing after the Issue Date, to
and including the last day of the fiscal quarter ended immediately
prior to the date of each such calculation (or, in the event
Consolidated Net Income for such period is a deficit, then minus 100%
of such deficit), plus
(2) the aggregate Net Cash Proceeds received by the Company from the sale
of its Qualified Capital Stock (other than (A) to a Subsidiary of the
Company, (B) to the extent applied in connection with a Qualified
Exchange, and (C) to the extent credited in clause (A) under
"Exceptions," below), after the Issue Date, plus
(3) other than amounts credited pursuant to clause (A) under "Exceptions,"
below, the net amount of any Restricted Investments (not to exceed the
original amount of such Investment) made after the Issue Date that is
returned to the Company or the Subsidiary that made such prior
Investment, without restriction in cash on or prior to the date of any
such calculation.
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Exceptions. Clauses (c)(2) and (c)(3), above, will not prohibit:
(A) Restricted Investments in a Related Business, except that after
giving pro forma effect to such Investment, the aggregate amount
of all such Investments made on or after the Issue Date that are
outstanding (after giving effect to any such Investments that are
returned to the Company or the Subsidiary that made such prior
Investment, without restriction, in cash on or prior to the date
of any such calculation) at any time does not exceed $4.0
million,
(B) a Qualified Exchange, or
(C) the payment of any dividend on Qualified Capital Stock within 60
days after the date of its declaration if such dividend could
have been made on the date of such declaration in compliance with
the foregoing provisions.
The full amount of any Restricted Payment made pursuant to Exceptions (A)
and (C), but not pursuant to Exception (B), will be deducted in the calculation
of the aggregate amount of Restricted Payments available to be made referred to
in clause (c)(3), above.
Restricted Payments by Unrestricted Subsidiary. The Board of Directors may
designate any Subsidiary to be an Unrestricted Subsidiary if such designation
would not cause a Default and such designation otherwise complies with the
requirements set forth under the definition of "Unrestricted Subsidiary." For
purposes of making such determination, all outstanding Investments by the
Company and its Subsidiaries (except to the extent repaid in cash) in the
Subsidiary so designated will be deemed Restricted Payments at the time of such
designation and will reduce the amount available for Restricted Payments under
the first paragraph of this covenant. All such outstanding Investments will be
deemed to constitute Investments in an amount equal to the greatest of:
(a) the net book value of such Investment at the time of designation,
(b) the fair market value of such Investments at the time of designation,
and
(c) the original fair market value of such Investments at the time they
were made. Such designation will only be permitted if such Restricted Payment
would be permitted at such time and if such Subsidiary otherwise meets the
definition of an Unrestricted Subsidiary.
Value of Restricted Payment. For purposes of this covenant, the amount of
any Restricted Payment, if other than in cash, shall be the fair market value
thereof, as determined in the good faith reasonable judgment of the Board of
Directors of the Company.
Officers' Certificate. Additionally, on the date of each Restricted
Payment, the Company shall deliver an Officers' Certificate to the Trustee
describing in reasonable detail the nature of such Restricted Payment, stating
the amount of such Restricted Payment, stating in reasonable detail the
provisions of the Indenture pursuant to which such Restricted Payment was made
and certifying that such Restricted Payment was made in compliance with the
terms of the Indenture.
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Indenture provides that the Company and the Guarantors will
not, and will not permit any of their Subsidiaries to, directly or indirectly,
create, assume or suffer to exist any consensual restriction on the ability of
any Subsidiary of the Company to pay dividends or make other distributions to or
on behalf of, or to pay any obligation to or on behalf of, or otherwise to
transfer assets or property to or on behalf of, or make or pay loans or advances
to or on behalf of, the Company or any Subsidiary of the Company, except:
(a) restrictions imposed by the Notes or the Indenture or by other
Indebtedness of the Company (which may also be guaranteed by the Guarantors)
ranking senior or pari passu with the Notes or the Guarantees, as applicable,
provided such restrictions are no more restrictive than those imposed by the
Indenture and the Notes,
(b) restrictions imposed by applicable law,
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(c) existing restrictions under Indebtedness outstanding on the Issue Date,
(d) restrictions under any Acquired Indebtedness not incurred in violation
of the Indenture or any agreement relating to any property, asset, or business
acquired by the Company or any of its Subsidiaries, which restrictions in each
case existed at the time of acquisition, were not put in place in connection
with or in anticipation of such acquisition and are not applicable to any
person, other than the person acquired, or to any property, asset or business,
other than the property, assets and business so acquired,
(e) any such restriction or requirement imposed by Bank Indebtedness
incurred pursuant to clause (2) under the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock," provided such
restriction or requirement is no more restrictive than that imposed by the Bank
Indebtedness existing on the Issue Date,
(f) restrictions with respect solely to a Subsidiary of the Company imposed
pursuant to a binding agreement which has been entered into for the sale or
disposition of all or substantially all of the Equity Interests or assets of
such Subsidiary, provided such restrictions apply solely to the Equity Interests
or assets of such Subsidiary which are being sold, and
(g) in connection with and pursuant to permitted Refinancings, replacements
of restrictions imposed pursuant to clauses (a), (c) or (d) of this paragraph
that are not more restrictive than those being replaced and do not apply to any
other person or assets than those that would have been covered by the
restrictions in the Indebtedness so refinanced.
Notwithstanding the foregoing, neither (1) customary provisions restricting
subletting or assignment of any lease entered into in the ordinary course of
business, consistent with industry practice, nor (2) Liens permitted under the
terms of the Indenture on assets securing Senior Indebtedness incurred in
accordance with the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock" shall in and of themselves be
considered a restriction on the ability of the applicable Subsidiary to transfer
such agreement or assets, as the case may be.
Limitations on Layering Indebtedness. The Indenture provides that the
Company and the Guarantors will not, and will not permit any of their
Subsidiaries to, directly or indirectly, incur or suffer to exist any
Indebtedness that is subordinate in right of payment to any other Indebtedness
of the Company or of a Subsidiary unless, by its terms, such Indebtedness is
subordinate in right of payment to, or ranks pari passu with, the Notes or the
Guarantee, as applicable.
Limitation on Liens Securing Indebtedness. The Company and the Guarantors
will not, and will not permit any of their Subsidiaries to, create, incur,
assume or suffer to exist any Lien of any kind, other than Permitted Liens, upon
any of their respective assets now owned or acquired on or after the date of the
Indenture or upon any income or profits therefrom securing any Indebtedness of
the Company or any Subsidiary other than Senior Indebtedness, unless the Company
and such Subsidiary provides, and causes its Subsidiaries to provide,
concurrently therewith, that the Notes are equally and ratably so secured.
However, if such Indebtedness is Subordinated Indebtedness, the Lien securing
such Subordinated Indebtedness shall be subordinate and junior to the Lien
securing the Notes with the same relative priority as such Subordinated
Indebtedness shall have with respect to the Notes; and provided, further, that
this clause shall not be applicable to any Liens securing any such Indebtedness
which became Indebtedness of the Company pursuant to a transaction subject to
the provisions of the Indenture described below under "Limitation on Merger,
Sale or Consolidation" or which constitutes Acquired Indebtedness and which in
either case were in existence at the time of such transaction (unless such
Indebtedness was incurred or such Lien created in connection with or in
contemplation of, such transaction), so long as such Liens do not extend to or
cover any property or assets of the Company or any Subsidiary of the Company
other than property or assets acquired in such transaction.
Limitation on Sale of Assets and Subsidiary Stock. The Indenture provides
that the Company and the Guarantors will not, and will not permit any of their
Subsidiaries to, in one or a series of related transactions, convey, sell,
transfer, assign or otherwise dispose of, directly or indirectly, any of their
property, business or assets, including by merger or consolidation (in the case
of a Subsidiary of the Company), and including any sale or other transfer or
issuance of any Equity Interests of any Subsidiary of the Company, whether by
the Company or a Subsidiary of either or through the issuance, sale or transfer
of Equity Interests by a Subsidiary of the Company, and including any sale and
leaseback transaction (any of the foregoing, an "Asset Sale").
Exceptions. Notwithstanding the above, the Company and the Guarantors may
engage in an Asset Sale if:
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(a) (1) the net cash proceeds from the Asset Sale (the "Asset Sale Offer
Amount") are applied:
(A) within 270 days after the date of such Asset Sale to the
optional redemption of the Notes in accordance with the
terms of the Indenture and other Indebtedness of the Company
ranking on a parity with the Notes and with similar
provisions requiring the Company to redeem such Indebtedness
with the proceeds of Asset Sales, pro rata in proportion to
the respective principal amounts (or accreted values in the
case of Indebtedness issued with an original issue discount)
of the Notes and such other Indebtedness then outstanding,
or
(B) within 300 days after the date of such Asset Sale to the
repurchase of the Notes and such other Indebtedness on a
parity with the Notes and with similar provisions requiring
the Company to make an offer to purchase such Indebtedness
with the proceeds of Asset Sales pursuant to a cash offer
(subject only to conditions required by applicable law, if
any) (pro rata in proportion to the respective principal
amounts (or accreted values in the case of Indebtedness
issued with an original issue discount) of the Notes and
such other Indebtedness then outstanding) (the "Asset Sale
Offer") at a purchase price of 100% of principal amount (or
accreted value in the case of Indebtedness issued with an
original issue discount) (the "Asset Sale Offer Price")
together with accrued and unpaid interest and Liquidated
Damages, if any, to the date of payment, made within 270
days of such Asset Sale, or
(2) within 270 days following such Asset Sale, the Asset Sale Offer
Amount is:
(A) invested (or committed, pursuant to a binding commitment
subject only to reasonable, customary closing conditions, to
be invested, and in fact is so invested, within an
additional 90 days) in tangible assets and property other
than notes, bonds, obligations and securities) which in the
good faith reasonable judgment of the Board of Directors of
the Company will immediately constitute or be a part of a
Related Business of the Company or such Subsidiary (if it
continues to be a Subsidiary) immediately following such
transaction, or
(B) used to retire and permanently reduce the amount of such
Senior Indebtedness (including that in the case of a
revolver or similar arrangement that makes credit available,
such commitment is so permanently reduced by such amount),
(b) at least 90% of the total consideration received for such Asset Sale or
series of related Asset Sales consists of cash or Cash Equivalents,
(c) no Default or Event of Default shall have occurred and be continuing at
the time of, or would occur after giving effect, on a pro forma basis, to such
Asset Sale, and
(d) the Board of Directors of the Company determines in good faith that the
Company or such Subsidiary, as applicable, will receive fair market value for
such Asset Sale.
Consent of Holders. Notwithstanding anything to the contrary in this
section, the Company will not, and will not permit Aeromet, to consummate an
Asset Sale of all or substantially all of the property, business or assets of
Aeromet, except with the consent of the Holders of not less than a majority in
aggregate principal amount of the Notes at the time outstanding.
Application of Proceeds from Asset Sale. The Indenture provides that an
acquisition of Notes pursuant to an Asset Sale Offer may be deferred until the
accumulated Net Cash Proceeds from Asset Sales not applied to the uses set forth
in (a)(1)(A) or (a)(2) above (the "Excess Proceeds") exceed $5.0 million and
that each Asset Sale Offer shall remain open for 20 Business Days following its
commencement (the "Asset Sale Offer Period"). Upon expiration of the Asset Sale
Offer Period, the Company shall apply the Asset Sale Offer Amount plus an amount
equal to accrued and unpaid interest and Liquidated Damages, if any, to the
purchase of all Indebtedness properly tendered (on a pro rata basis if the Asset
Sale Offer Amount is insufficient to purchase all Indebtedness so tendered) at
the Asset Sale Offer Price (together with accrued interest and Liquidated
Damages, if any). To the extent that the aggregate amount of Notes and such
other pari passu Indebtedness tendered pursuant
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to an Asset Sale Offer is less than the Asset Sale Offer Amount, the Company may
use any remaining Net Cash Proceeds for general corporate purposes as otherwise
permitted by the Indenture and following each Asset Sale Offer the Excess
Proceeds amount shall be reset to zero.
Definition of Total Consideration Received. For purposes of (b) above,
"total consideration received" means the total consideration received for such
Asset Sales, minus the amount of:
(a) any liabilities (as shown on the Company's or such Subsidiary's most
recent balance sheet or in the notes thereto, but excluding contingent
liabilities and trade payables) of the Company or any Subsidiary (other than
liabilities that are by their terms subordinate to the Notes or any guarantee
thereof) that are assumed by the transferee of any such assets and from which
the Company or such Subsidiary are unconditionally released from liability, and
(b) property that within 30 days of such Asset Sale is converted into cash
or Cash Equivalents, except that such cash and Cash Equivalents shall be treated
as Net Cash Proceeds attributable to the original Asset Sale for which such
property was received.
Exclusions. Notwithstanding, and without complying with, the provisions of
this covenant:
(a) the Company and its Subsidiaries may, in the ordinary course of
business, (1) convey, sell, transfer, assign or otherwise dispose of inventory
and other assets acquired and held for resale in the ordinary course of
business, and (2) liquidate Cash Equivalents;
(b) the Company and its Subsidiaries may convey, sell, transfer, assign or
otherwise dispose of assets pursuant to and in accordance with the covenant
"Limitation on Merger, Sale or Consolidation";
(c) the Company and its Subsidiaries may sell or dispose of damaged, worn
out, scrap or other obsolete property in the ordinary course of business so long
as such property is no longer necessary for the proper conduct of the business
of the Company or such Subsidiary, as applicable;
(d) the Company and its Subsidiaries may convey, sell, transfer, assign or
otherwise dispose of assets to the Company or any of its wholly owned
Guarantors;
(e) the Company and its Subsidiaries, in the ordinary course of business,
may convey, sell, transfer, assign, or otherwise dispose of assets (or related
assets in related transactions) with a fair market value of less than $250,000;
and
(f) the Company and its Subsidiaries may surrender or waive contract rights
or settle, release or surrender contract, tort or other claims of any kind or
grant Liens not prohibited by the Indenture.
Subsidiary Asset Sales. In addition to the foregoing and notwithstanding
anything in this section to the contrary, the Company will not, and will not
permit any of its Subsidiaries to, directly or indirectly make any Asset Sale of
any of the Equity Interests of any Subsidiary of the Company (other than to a
Wholly-owned Subsidiary) except pursuant to an Asset Sale of all the Equity
Interests of such Subsidiary. Any Asset Sale Offer shall be made in compliance
with all applicable laws, rules, and regulations, including, if applicable,
Regulation 14E of the Exchange Act and the rules and regulations thereunder and
all other applicable Federal and state securities laws. To the extent that the
provisions of any securities laws or regulations conflict with the provisions of
this paragraph, compliance by the Company or any of its Subsidiaries with such
laws and regulations shall not in and of itself cause a breach of its
obligations under such covenant.
Payment of Interest. If the payment date in connection with an Asset Sale
Offer hereunder is on or after an interest payment Record Date and on or before
the associated Interest Payment Date, any accrued and unpaid interest (and
Liquidated Damages, if any) due on such Interest Payment Date will be paid to
the Person in whose name a Note is registered at the close of business on such
Record Date, and such interest (or Liquidated Damages, if any) will not be
payable to holders of the Notes who tender Notes pursuant to such Asset Sale
Offer.
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Limitation on Transactions with Affiliates. The Indenture provides that
neither the Company nor any of its Subsidiaries will be permitted on or after
the Issue Date to enter into or suffer to exist any contract, agreement,
arrangement or transaction with any Affiliate (an "Affiliate Transaction"), or
any series of related Affiliate Transactions, (other than Exempted Affiliate
Transactions):
(a) unless the Company determines that the terms of such Affiliate
Transaction are fair and reasonable to the Company, and no less favorable to the
Company than could have been obtained in an arm's length transaction with a
non-Affiliate, and
(b) if involving consideration to either party in excess of $1.0 million,
unless such Affiliate Transaction(s) is evidenced by an Officers' Certificate
addressed and delivered to the Trustee certifying that such Affiliate
Transaction (or Transactions) has been approved by a majority of the members of
the Board of Directors that are disinterested in such transaction, and
(c) if involving consideration to either party in excess of $5.0 million,
unless in addition the Company, prior to the consummation thereof, obtains a
written favorable opinion as to the fairness of such transaction to the Company
from a financial point of view from an independent investment banking firm of
national reputation or, if pertaining to a matter for which such investment
banking firms do not customarily render such opinions, an appraisal or valuation
firm of national reputation.
Limitation on Merger, Sale or Consolidation. The Indenture provides that
the Company will not consolidate with or merge with or into another person or,
directly or indirectly, sell, lease, convey or transfer all or substantially all
of its assets (computed on a consolidated basis), whether in a single
transaction or a series of related transactions, to another Person or group of
affiliated Persons unless:
(a) either the Company is the continuing entity, or the resulting,
surviving or transferee entity is a corporation organized under the laws of the
United States, any state thereof or the District of Columbia and expressly
assumes by supplemental indenture all of the obligations of the Company in
connection with the Notes and the Indenture;
(b) no Default or Event of Default shall exist or shall occur immediately
after giving effect on a pro forma basis to such transaction; and
(c) unless such transaction is solely the merger of the Company and one of
its previously existing Wholly-owned Subsidiaries which is also a Guarantor and
which transaction is not in connection with any other transaction immediately
after giving effect to such transaction on a pro forma basis, the consolidated
resulting, surviving or transferee entity would immediately thereafter be
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Debt Incurrence Ratio set forth in the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock."
Upon any consolidation or merger or any transfer of all or substantially
all of the assets of the Company in accordance with the foregoing, the successor
corporation formed by such consolidation or into or with which the Company is
merged or to which such transfer is made shall succeed to and (except in the
case of a lease) be substituted for, and may exercise every right and power of,
the Company under the Indenture with the same effect as if such successor
corporation had been named in the Indenture as the Company, and (except in the
case of a lease) the Company shall be released from the obligations under the
Notes and the Indenture except with respect to any obligations that arise from,
or are related to, such transaction.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise) of all or substantially all of the properties and assets of one or
more Subsidiaries, the Company's interest in which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
Limitation on Lines of Business. The Indenture provides that neither the
Company nor any of its Subsidiaries shall directly or indirectly engage to any
substantial extent in any line or lines of business activity other than that
which, in the reasonable good faith judgment of the Board of Directors of the
Company, is a Related Business.
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Limitation on Status as Investment Company. The Indenture prohibits the
Company and its Subsidiaries from being required to register as an "investment
company" (as that term is defined in the Investment Company Act of 1940, as
amended (the "Investment Company Act")), or from otherwise becoming subject to
regulation under the Investment Company Act.
Reports
The Indenture requires the Company, whether or not the Company is subject
to the reporting requirements of Section 13 or 15(d) of the Exchange Act, to
deliver to the Trustee and to each holder of the Notes and to prospective
purchasers of Notes identified to the Company by the Initial Purchasers within
15 days after it is or would have been (if it were subject to such reporting
obligations) required to file such with the SEC:
(a) all annual and quarterly financial statements substantially equivalent
to financial statements that would have been included in reports filed with the
SEC on Forms 10-K and 10-Q, if the Company were subject to the requirements of
Section 13 or 15(d) of the Exchange Act, including, with respect to annual
information only, a report thereon by the Company's certified independent public
accountants as such would be required in such reports to the SEC, and
(b) all current reports that would be required to be filed with the SEC on
Form 8-K if the Company were required to file such reports; and, in each case,
together with a management's discussion and analysis of financial condition and
results of operations which would be so required and, unless the SEC will not
accept such reports, file with the SEC the annual, quarterly and other reports
which it is or would have been required to file with the SEC.
Events of Default and Remedies
The Indenture defines an "Event of Default" as:
(a) the failure by the Company to pay any installment of interest (or
Liquidated Damages, if any) on the Notes as and when the same becomes due and
payable and the continuance of any such failure for 30 days,
(b) the failure by the Company to pay all or any part of the principal, or
premium, if any, on the Notes when and as the same becomes due and payable at
maturity, redemption, by acceleration or otherwise, including, without
limitation, payment of the Change of Control Purchase Price or the Asset Sale
Offer Price, or otherwise,
(c) the failure by the Company or any Subsidiary of the Company to observe
or perform any other covenant or agreement contained in the Notes or the
Indenture and, subject to certain exceptions, the continuance of such failure
for a period of 30 days after written notice is given to the Company by the
Trustee or to the Company and the Trustee by the holders of at least 25% in
aggregate principal amount of the Notes outstanding,
(d) certain events of bankruptcy, insolvency or reorganization in respect
of the Company or any of its Significant Subsidiaries,
(e) a default in any issue of Indebtedness of the Company or any of its
Subsidiaries with an aggregate principal amount in excess of $5.0 million (1)
resulting from the failure to pay principal at maturity or (2) as a result of
which the maturity of such Indebtedness has been accelerated prior to its stated
maturity, and
(f) final unsatisfied judgments not covered by insurance aggregating in
excess of $5.0 million, at any one time rendered against the Company or any of
its Subsidiaries and not stayed, bonded or discharged within 60 days. The
Indenture provides that if a default occurs and is continuing, the Trustee must,
within 90 days after the occurrence of such default, give to the holders of the
Notes notice of such default.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in clause (d), above, relating to the Company or any of its
Significant Subsidiaries), then, in every such case, unless the principal of all
of the Notes shall have already become due and payable, either the Trustee or
the Holders of at least 25% in aggregate principal amount of the Notes then
outstanding, by notice in writing to the Company (and to the Trustee if given by
Holders) (an "Acceleration Notice"), may declare all principal, determined as
set forth below, and accrued interest (and Liquidated Damages, if any)
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thereon to be due and payable immediately. However, if any Bank Indebtedness is
outstanding, upon a declaration of such acceleration, such principal and
interest shall be due and payable upon the earlier of:
o the third Business Day after the sending to the Company and the
holders of such Bank Indebtedness or their representative of such
written notice, unless such Event of Default is cured or waived prior
to such date, and
o the date of acceleration of any Bank Indebtedness.
If an Event of Default specified in clause (d), above, relating to the
Company or any of its Significant Subsidiaries occurs, all principal and accrued
interest (and Liquidated Damages, if any) thereon will be immediately due and
payable on all outstanding Notes without any declaration or other act on the
part of Trustee or the holders of the Notes. The holders of a majority in
aggregate principal amount of Notes generally are authorized to rescind such
acceleration if all existing Events of Default have been cured or waived, except
for (A) the non-payment of the principal of, premium, if any, and interest on
the Notes which have become due solely by such acceleration, and (B) a default
with respect to any provision requiring a supermajority approval to amend, which
default may only be waived by such a supermajority.
Prior to the declaration of acceleration of the maturity of the Notes, the
holders of a majority in aggregate principal amount of the Notes at the time
outstanding may waive on behalf of all the holders of the Notes any default,
except a default with respect to any provision requiring a supermajority
approval to amend, which default may only be waived by such a supermajority, and
except a default in the payment of principal of or interest on any Note not yet
cured or a default with respect to any covenant or provision which cannot be
modified or amended without the consent of the holder of each outstanding Note
affected. Subject to the provisions of the Indenture relating to the duties of
the Trustee, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request, order or direction of any
of the holders of the Notes, unless such holders have offered to the Trustee
reasonable security or indemnity. Subject to all provisions of the Indenture and
applicable law, the holders of a majority in aggregate principal amount of the
Notes at the time outstanding will have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred on the Trustee.
Legal Defeasance and Covenant Defeasance
Legal Defeasance. The Indenture provides that the Company may, at its
option, elect to have its obligations and the obligations of the Guarantors
discharged with respect to the outstanding Notes ("Legal Defeasance"). Such
Legal Defeasance means that the Company shall be deemed to have paid and
discharged the entire indebtedness represented, and the Indenture shall cease to
be of further effect as to all outstanding Notes and Guarantees, except as to:
(a) rights of Holders to receive payments in respect of the principal of,
premium, if any, and interest (and Liquidated Damages, if any) on such Notes
when such payments are due from the trust funds;
(b) the Company's obligations with respect to such Notes concerning issuing
temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen
Notes, and the maintenance of an office or agency for payment and money for
security payments held in trust;
(c) the rights, powers, trust, duties, and immunities of the Trustee, and
the Company's obligations in connection therewith; and
(d) the Legal Defeasance provisions of the Indenture.
Covenant Defeasance. In addition, the Company may, at its option and at any
time, elect to have the obligations of the Company and the Guarantors released
with respect to certain covenants that are described in the Indenture ("Covenant
Defeasance") and thereafter any omission to comply with such obligations shall
not constitute a Default or Event of Default with respect to the Notes. In the
event Covenant Defeasance occurs, certain events (not including non-payment,
guarantees, bankruptcy, receivership, rehabilitation and insolvency events)
described under "Events of Default" will no longer constitute an Event of
Default with respect to the Notes.
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Exercise Procedure. In order to exercise either Legal Defeasance or
Covenant Defeasance:
(a) the Company must irrevocably deposit with the Trustee, in trust, for
the benefit of the holders of the Notes, U.S. legal tender, U.S. Government
Obligations or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest (and Liquidated Damages,
if any) on such Notes on the stated date for payment thereof or on the
redemption date of such principal or installment of principal of, premium, if
any, or interest (and Liquidated Damages, if any) on such Notes, and the holders
of Notes must have a valid, perfected, exclusive security interest in such
trust;
(b) in the case of Legal Defeasance, the Company shall have delivered to
the Trustee an opinion of counsel in the United States reasonably acceptable to
the Trustee confirming that:
(1) the Company has received from, or there has been published by the
Internal Revenue Service, a ruling, or
(2) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that,
and based thereon such opinion of counsel shall confirm that, the
holders of such Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and
will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Legal
Defeasance had not occurred;
(c) in the case of Covenant Defeasance, the Company shall have delivered to
the Trustee an opinion of counsel in the United States reasonably acceptable to
such Trustee confirming that the holders of such Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred;
(d) no Default or Event of Default shall have occurred and be continuing on
the date of such deposit and the Company shall have delivered to the Trustee an
Officer's Certificate, subject to such qualifications and exceptions as the
Trustee deems appropriate, to the effect that, assuming no intervening
bankruptcy of the Company between the date of deposit and the 91st day following
the deposit and that no Holder of the Notes is an insider of the Company, after
the 91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors rights generally;
(e) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under the Indenture or any other
material agreement or instrument to which the Company or any of its Subsidiaries
is a party or by which the Company or any of its Subsidiaries is bound;
(f) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the holders of such Notes over any other creditors of the Company
or with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company or others; and
(g) the Company shall have delivered to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that the conditions
precedent provided for in, in the case of the Officers' Certificate, (a) through
(d), and, in the case of the opinion of counsel, clauses (a) (with respect to
the validity and perfection of the security interest), (b), (c) and (d) of this
paragraph have been complied with.
If the funds deposited with the Trustee to effect Covenant Defeasance are
insufficient to pay the principal of, premium, if any, Liquidated Damages, if
any, and interest on the Notes when due, then the obligations of the Company and
the Guarantors under the Indenture and the Collateral Agreement will be revived
and no such defeasance will be deemed to have occurred.
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Amendments and Supplements to the Indenture
Without Note Holder Consent. The Indenture contains provisions permitting
the Company, the Guarantors and the Trustee to enter into a supplemental
indenture for certain limited purposes without the consent of the holders.
Note Holder Consent Required. With the consent of the holders of not less
than a majority in aggregate principal amount of the Notes at the time
outstanding, the Company, the Guarantors and the Trustee are permitted to amend
or supplement the Indenture or any supplemental indenture or modify the rights
of the holders, except that:
Two-Thirds Consent Required. No such modification may, without the consent
of holders of at least 662/3% in aggregate principal amount of Notes at the time
outstanding, modify the provisions (including the defined terms used in the
Indenture) of the covenant "Repurchase of Notes at the Option of the Holder upon
a Change of Control" in a manner adverse to the holders.
Unanimous Consent Required. No such modification may, without the consent
of each Holder affected thereby:
(a) change the Stated Maturity on any Note, or reduce the principal amount
thereof or the rate (or extend the time for payment) of interest thereon or any
premium payable upon the redemption at the option of the Company thereof, or
change the place of payment where, or the coin or currency in which, any Note or
any premium or the interest thereon is payable, or impair the right to institute
suit for the enforcement of any such payment on or after the Stated Maturity
thereof (or, in the case of redemption at the option of the Company, on or after
the Redemption Date), or reduce the Change of Control Purchase Price or the
Asset Sale Offer Price or alter the provisions (including the defined terms used
in the Indenture) regarding the right of the Company to redeem the Notes in a
manner adverse to the holders of the Notes, or
(b) reduce the percentage in principal amount of the outstanding Notes, the
consent of whose holders is required for any such amendment, supplemental
indenture or waiver provided for in the Indenture, or
(c) modify any of the waiver provisions, except to increase any required
percentage or to provide that certain other provisions of the Indenture cannot
be modified or waived without the consent of the Holder of each outstanding Note
affected thereby.
No Personal Liability of Shareholders, Officers, Directors or Employees
The Indenture provides that no direct or indirect shareholder, employee,
officer or director, as such, past, present or future of the Company, the
Guarantors or any successor entity shall have any personal liability in respect
of the obligations of the Company or the Guarantors under the Indenture or the
Notes solely by reason of his or its status as such shareholder, employee,
officer or director, except that this provision shall in no way limit the
obligation of any Guarantor pursuant to any guarantee of the Notes.
Global Notes
- ------------
- --------------------------------------------------------------------------------
Summary: The Old Notes are, and the New Notes will be, issued as a single,
global note that will be deposited with The Depository Trust Company in New
York, New York. Individual Note holders will not receive certificates for the
Notes, except in limited circumstances.
- --------------------------------------------------------------------------------
The U.S. Global Notes
The Notes as initially issued will be in the form of one or more registered
global notes without interest coupons (collectively, the "U.S. Global Notes"),
which are deposited with the Trustee, as custodian for DTC, in New York, New
York, and registered in the name of DTC or its nominee for credit to the
accounts of DTC's Direct and Indirect Participants (as defined below).
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Reg S Global Notes
Reg S Temporary Global Notes. Notes transferred in offshore transactions in
reliance on Regulation S, if any, initially will be in the form of one or more
temporary, registered, global book-entry notes without interest coupons (the
"Reg S Temporary Global Notes"). The Reg S Temporary Global Notes will be
deposited with the Trustee, as custodian for DTC, in New York, New York and
registered in the name of a nominee of DTC for credit to the accounts of
Indirect Participants participating in DTC through the Euroclear System
("Euroclear") and Cedel Bank, societe anonyme ("CEDEL"). During the 40-day
period commencing on the day after the original Issue Date of the Notes (the
"40-Day Restricted Period") beneficial interests in the Reg S Temporary Global
Notes may be held only through Euroclear or CEDEL.
Reg S Permanent Global Notes. Within a reasonable time after the expiration
of the 40-Day Restricted Period, the Reg S Temporary Global Notes will be
exchanged for one or more permanent global notes (the "Reg S Permanent Global
Notes"; collectively with the Reg S Temporary Global Notes, the "Reg S Global
Notes") upon delivery to DTC of certification of compliance with the transfer
restrictions applicable to the Notes and pursuant to Regulation S as provided in
the Indenture. An Indirect Participant who holds an interest in the Reg S
Temporary Global Notes through Euroclear or CEDEL must provide Euroclear or
CEDEL, as the case may be, with a certificate in the form required by the
Indenture certifying that such Indirect Participant is either not a U.S. Person
(as defined below) or has purchased such interests in a transaction that is
exempt from the registration requirements under the Securities Act, and
Euroclear or CEDEL, as the case may be, must provide to the Trustee (or the
Paying Agent, if other than the Trustee) a certificate in the form required by
the Indenture prior to any exchange of such beneficial interests for beneficial
interests in Reg S Permanent Global Notes. If the certification requirements
described below are complied with, after the 40-Day Restricted Period:
(a) beneficial interests in the Reg S Permanent Global Notes may be
transferred to a person that takes delivery in the form of an interest in the
U.S. Global Notes, and
(b) beneficial interests in the U.S. Global Notes may be transferred to a
person that takes delivery in the form of an interest in the Reg S Permanent
Global Notes.
See "- Transfers of Interest in the Notes - Transfers of Interests in One Global
Note for Interests in Another Global Note."
Transfers of Interest in the Notes
Transfer of Global Notes. The Global Notes may be transferred, in whole and
not in part, only to another nominee of DTC or to a successor of DTC or its
nominee in certain limited circumstances. Beneficial interests in the Global
Notes may be exchanged for Notes in certificated form in certain limited
circumstances. See "- Transfer of Interests in Global Note for Certificated
Notes." Transfer of beneficial interests in any Global Notes will be subject to
the applicable rules and procedures of DTC and its Direct or Indirect
Participants (including, if applicable, those of Euroclear and CEDEL), which may
change from time to time.
Beneficial interests in all Global Notes for the Old Notes are subject to
certain restrictions on transfer and bear a restrictive legend. The New Notes
will not be subject to such transfer restrictions or bear such legend.
The Trustee acts as Paying Agent and Registrar. The Notes may be presented
for registration of transfer and exchange at the offices of the Trustee.
Transfers of Interests in One Global Note for Interests In Another Global
Note. During the 40-Day Restricted Period, an Indirect Participant who holds an
interest in the Reg S Temporary Global Note through Euroclear or CEDEL will not
be permitted to transfer its interest to a U.S. Person who takes delivery in the
form of an interest in U.S. Global Notes, other than in accordance with Rule
144A or pursuant to another exemption from registration under the Securities
Act.
After the expiration of the 40-Day Restricted Period, an Indirect
Participant who holds an interest in Reg S Permanent Global Notes will be
permitted to transfer its interest to a U.S. Person who takes delivery in the
form of an interest in U.S. Global Notes only upon receipt by the Trustee of a
written certification from the transferor to the effect that such transfer is
being made in accordance with the restrictions on transfer set forth in the
legend printed on the Reg S Global Notes.
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Transfers involving an exchange of a beneficial interest in Reg S Global
Notes for a beneficial interest in U.S. Global Notes or vice versa will be
effected by DTC by means of an instruction originated by the Trustee through
DTC/Deposit Withdraw at Custodian (DWAC) system. Accordingly, in connection with
such transfer, appropriate adjustments will be made to reflect a decrease in the
principal amount of the one Global Note and a corresponding increase in the
principal amount of the other Global Note, as applicable. Any beneficial
interest in the one Global Note that is transferred to a person who takes
delivery in the form of the other Global Note will, upon transfer, cease to be
an interest in such first Global Note and become an interest in such other
Global Note and, accordingly, will thereafter be subject to all transfer
restrictions and other procedures applicable to beneficial interests in such
other Global Note for as long as it remains such an interest.
Transfers of Interests in Global Note for Certificated Notes. An entire
Global Note may be exchanged for Certificated Notes if:
(a) DTC notifies the Company that it is unwilling or unable to continue as
depositary for the Global Notes and the Company thereupon fails to appoint a
successor depositary within 90 days, or has ceased to be a clearing agency
registered under the Exchange Act,
(b) the Company, at its option, notifies the Trustee in writing that it
elects to cause the issuance of Certificated Notes, or
(c) there shall have occurred and be continuing a Default or an Event of
Default with respect to the Notes.
In any such case, the Company will notify the Trustee in writing that, upon
surrender by the Direct and Indirect Participants of their interest in such
Global Note, Certificated Notes will be issued to each person that such Direct
and Indirect Participants and the DTC identify as being the beneficial owner of
the related Notes. Neither the Company, the Guarantors nor the Trustee will be
liable for any delay by the holder of any Global Note or DTC in identifying the
beneficial owners of Notes, and the Company and the Trustee may conclusively
rely on, and will be protected in relying on, instructions from the holder of
the Global Note or DTC for all purposes.
Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC, by such
Direct Participant (for itself or on behalf of an Indirect Participant), to the
Trustee in accordance with customary DTC procedures. Certificated Notes
delivered in exchange for any beneficial interest in any Global Note will be
registered in the names, and issued in any approved denominations, requested by
DTC on behalf of such Direct or Indirect Participants (in accordance with DTC's
customary procedures).
In all cases described in this section, Certificated Notes will bear the
restrictive legend set forth on the Global Notes, if any, unless the Company
determines otherwise in compliance with applicable law.
Transfers of Certificated Notes. Beneficial interests in Certificated
Notes, if any, representing Transfer Restricted Securities are subject to
certain restrictions on transfer and bear a restrictive legend. Certificated
Notes for the Old Notes may only be transferred if the transferor first delivers
to the Trustee a written certificate (and, in certain circumstances, an opinion
of counsel) confirming that, in connection with such transfer, it has complied
with the restrictions on transfer described in the legend. Certificated Notes
may be presented for registration of transfer or exchange, at the office or
agency of the Company maintained for such purpose, which office or agency shall
be maintained in the Borough of Manhattan, The City of New York.
Depositary Procedures
DTC. DTC has advised the Company that DTC is a limited-purpose trust
company created to hold securities for its participating organizations
(collectively, the "Direct Participants") and to facilitate the clearance and
settlement of transactions in those securities between Direct Participants
through electronic book-entry changes in accounts of Participants. The Direct
Participants include securities brokers and dealers (including the Initial
Purchasers), banks, trust companies, clearing corporations and certain other
organizations, including Euroclear and Cedel. Access to DTC's system is also
available to other entities that clear through or maintain a direct or indirect,
custodial relationship with a Direct Participant (collectively, the "Indirect
Participants").
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DTC's Procedures. All ownership interests in any Global Notes, including
those of customers' securities accounts held through Euroclear or CEDEL, may be
subject to the procedures and requirements of DTC. DTC has also advised the
Company that, pursuant to DTC's procedures:
(a) DTC will maintain records of the ownership interests of such Direct
Participants in the Global Notes and the transfer of ownership interests by and
between Direct Participants,
(b) DTC will not maintain records of the ownership interests of, or the
transfer of ownership interests by and between, Indirect Participants or other
owners of beneficial interests in the Global Notes, and
(c) Direct Participants and Indirect Participants must maintain their own
records of the ownership interests of, and the transfer of ownership interests
by and between, Indirect Participants and other owners of beneficial interests
in the Global Notes.
U.S. Global Notes. Investors in the U.S. Global Notes may hold their
interests therein directly through DTC if they are Direct Participants in DTC or
indirectly through organizations that are Direct Participants in DTC.
Reg S Global Notes. Investors in the Reg S Temporary Global Notes may hold
their interests therein directly through Euroclear or CEDEL or indirectly
through organizations that are participants in Euroclear or CEDEL. After the
expiration of the 40-Day Restricted Period (but not earlier), investors may hold
interests in the Reg S Permanent Global Notes through organizations other than
Euroclear and CEDEL that are Direct Participants in the DTC system. Morgan
Guaranty Trust Company of New York, Brussels office is the operator and
depository of Euroclear and Citibank, N.A. is the operator and depository of
CEDEL (each a "Nominee" Euroclear and CEDEL, respectively). Therefore, they will
each be recorded on DTC's records as the holders of all ownership interests held
by them on behalf of Euroclear and CEDEL, respectively. Euroclear and CEDEL must
maintain on their own records the ownership interests, and transfers of
ownership interests by and between, their own customers' securities accounts.
DTC will not maintain such records.
Requirement of Certificated Note. The laws of some states in the United
States require that certain persons take physical delivery in definitive,
certificated form, of securities that they own. This may limit or curtail the
ability to transfer beneficial interests in a Global Note to such persons.
Because DTC can act only on behalf of Direct Participants, which in turn act on
behalf of Indirect Participants and others, the ability of a person having a
beneficial interest in a Global Note to pledge such interest to persons or
entities that are not Direct Participants in DTC, or to otherwise take actions
in respect of such interests, may be affected by the lack of physical
certificates evidencing such interests. For certain other restrictions on the
transferability of the Notes, see "- Reg S Temporary Global Notes," "-Reg S
Permanent Global Notes" and "- Transfers of Interest in the Notes - Transfers of
Interests in Global Note for Certificated Notes."
Note: Except as described in "- Transfers of Interest in the Notes - Transfers
of Interests in Global Note for Certificated Notes," owners of beneficial
interests in the Global Notes will not have Notes registered in their
names, will not receive physical delivery of Notes in certificated form,
and will not be considered the registered owners or holders thereof under
the Indenture for any purpose.
Under the terms of the Indenture, the Company, the Guarantors and the
Trustee will treat the persons in whose names the Notes are registered
(including Notes represented by Global Notes) as the owners thereof for the
purpose of receiving payments and for any and all other purposes whatsoever.
Payments in respect of the principal, premium, Liquidated Damages, if any, and
interest on Global Notes registered in the name of DTC or its nominee will be
payable by the Trustee to DTC or its nominee as the registered holder under the
Indenture. Consequently, neither the Company, the Trustee nor any agent of the
Company or the Trustee has or will have any responsibility or liability for:
o any aspect of DTC's records or any Direct Participant's or Indirect
Participant's records relating to or payments made on account of
beneficial ownership interests in the Global Notes or for maintaining,
supervising or reviewing any of DTC's records or any Direct
Participant's or Indirect Participant's records relating to the
beneficial ownership interests in any Global Note, or
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o any other matter relating to the actions and practices of DTC or any
of its Direct Participants or Indirect Participants.
DTC has advised the Company that its current payment practice (for payments
of principal, interest and the like) with respect to securities such as the
Notes is to credit the accounts of the relevant Direct Participants with such
payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Notes as shown on
DTC's records. Payments by Direct Participants and Indirect Participants to the
beneficial owners of the Notes will be governed by standing instructions and
customary practices between them and will not be the responsibility of DTC, the
Trustee, the Company or the Guarantors. Neither the Company, the Guarantors nor
the Trustee will be liable for any delay by DTC or its Direct Participants or
Indirect Participants in identifying the beneficial owners of the Notes, and the
Company and the Trustee may conclusively rely on and will be protected in
relying on instructions from DTC or its nominee as the registered owner of the
Notes for all purposes.
The Global Notes will trade in DTC's Same-Day Funds Settlement System and,
therefore, transfers between Direct Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in immediately available
funds. Transfers between Indirect Participants (other than Indirect Participants
who hold an interest in the Notes through Euroclear or CEDEL) who hold an
interest through a Direct Participant will be effected in accordance with the
procedures of such Direct Participant but generally will settle in immediately
available funds. Transfers between and among Indirect Participants who hold
interests in the Notes through Euroclear and CEDEL will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
Notes described in this section, cross market transfers between Direct
Participants in DTC, on the one hand, and Indirect Participants who hold
interests in the Notes through Euroclear or CEDEL, on the other hand, will be
effected by Euroclear's or CEDEL's respective Nominee through DTC in accordance
with DTC's rules on behalf of Euroclear or CEDEL; however, delivery of
instructions relating to cross market transactions must be made directly to
Euroclear or CEDEL, as the case may be, by the counterparty in accordance with
the rules and procedures of Euroclear or CEDEL and within their established
deadlines (Brussels time for Euroclear and U.K. time for CEDEL). Indirect
Participants who hold interest in the Notes through Euroclear and CEDEL may not
deliver instructions directly to Euroclear's or CEDEL's Nominee. Euroclear or
CEDEL will, if the transaction meets its settlement requirements, deliver
instructions to its respective Nominee to deliver or receive interests on
Euroclear's or CEDEL's behalf in the relevant Global Note in DTC, and make or
receive payment in accordance with normal procedures for same-day fund
settlement applicable to DTC.
Because of time zone differences, the securities accounts of an Indirect
Participant who holds an interest in the Notes through Euroclear or CEDEL
purchasing an interest in a Global Note from a Direct Participant in DTC will be
credited, and any such crediting will be reported to Euroclear or CEDEL during
the European business day immediately following the settlement date of DTC in
New York. Although recorded in DTC's accounting records as of DTC's settlement
date in New York, Euroclear and CEDEL customers will not have access to the cash
amount credited to their accounts as a result of a sale of an interest in a Reg
S Permanent Global Note to a DTC Participant until the European business day for
Euroclear or CEDEL immediately following DTC's settlement date.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more Direct
Participants to whose account interests in the Global Notes are credited and
only in respect of such portion of the aggregate principal amount of the Notes
to which such Direct Participant or Direct Participants has or have given
direction. However, if there is an Event of Default under the Notes, DTC
reserves the right to exchange Global Notes (without the direction of one or
more of its Direct Participants) for legended Notes in certificated form, and to
distribute such certificated forms of Notes to its Direct Participants. See "-
Transfers of Interest in the Notes - Transfers of Interests in Global Notes for
Certificated Notes."
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures
to facilitate transfers of interests in the Reg S Permanent Global Notes and in
the U.S. Global Notes among Direct Participants, including Euroclear and CEDEL,
they are under no obligation to perform or to continue to perform such
procedures, and such procedures may be discontinued at any time. None of the
Company, the Guarantors, the Initial Purchasers or the Trustee shall have any
responsibility for the
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performance by DTC, Euroclear or CEDEL or their respective Direct and Indirect
Participants of their respective obligations under the rules and procedures
governing any of their operations.
Source of Information. The information in this section concerning DTC,
Euroclear and CEDEL and their book-entry systems has been obtained from sources
that the Company believes to be reliable, but the Company takes no
responsibility for the accuracy thereof.
Certain Bankruptcy Limitations
- ------------------------------
The Company is a holding company, conducting its business through
subsidiaries. The Company's Obligations with respect to the Notes have been or
will be guaranteed by the Subsidiaries (except for Foreign Subsidiaries and
Unrestricted Subsidiaries, which will not guarantee the Notes). Holders of the
Notes will be direct creditors of each Guarantor by virtue of its guarantee.
Nonetheless, in the event of the bankruptcy or financial difficulty of a
Guarantor, such Guarantor's obligations under its guarantee may be subject to
review and avoidance under state and federal fraudulent transfer laws. Among
other things, such obligations may be avoided if a court concludes that such
obligations were incurred for less than reasonably equivalent value or fair
consideration at a time when the Guarantor was insolvent, was rendered
insolvent, or was left with inadequate capital to conduct its business. A court
would likely conclude that a Guarantor did not receive reasonably equivalent
value or fair consideration to the extent that the aggregate amount of its
liability on its guarantee exceeds the economic benefits it received in the Rule
144A Offering. The obligations of each Guarantor under its guarantee will be
limited in a manner intended to cause it not to be a fraudulent transfer under
applicable law, although no assurance can be given that a court would give the
holder the benefit of such provision. If the obligations of a Guarantor under
its guarantee were avoided, holders of Notes would have to look to the assets of
any remaining Guarantors for payment. There can be no assurance in that event
that such assets would suffice to pay the outstanding principal and interest on
the Notes. See "Risk Factors - Fraudulent Transfer Considerations."
Certain Definitions
- -------------------
"Acquired Indebtedness" means Indebtedness or Disqualified Capital Stock of
any Person existing at the time such person becomes a Subsidiary of the Company,
including by designation, or is merged or consolidated into or with the Company
or one of its Subsidiaries.
"Acquisition" means the purchase or other acquisition of any Person or all
or substantially all the assets of any Person by any other Person, whether by
purchase, merger, consolidation, or other transfer, and whether or not for
consideration.
"Affiliate" means any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company. For
purposes of this definition, the term "control" means the power to direct the
management and policies of a person, directly or through one or more
intermediaries, whether through the ownership of voting securities, by contract,
or otherwise. However, with respect to ownership interest in the Company and its
Subsidiaries, a Beneficial Owner of 10% or more of the total voting power
normally entitled to vote in the election of directors, managers or trustees, as
applicable, shall for such purposes be deemed to constitute control.
"Average Life" means, as of the date of determination, with respect to any
security or instrument, the quotient obtained by dividing:
(a) the sum of the products of (1) the number of years from the date of
determination to the date or dates of each successive scheduled principal (or
redemption) payment of such security or instrument, and (2) the amount of each
such respective principal (or redemption) payment, by
(b) the sum of all such principal (or redemption) payments.
"Bank Indebtedness" means Senior Indebtedness of the Company or any of its
Subsidiaries from financial institutions pursuant to a revolving credit or term
loan facility, including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith. Without limiting
the generality of the foregoing, "Bank Indebtedness" shall also include Senior
Indebtedness pursuant to any amendment, amendment and restatement, renewal,
extension, restructuring,
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supplement or modification to such facility and all refundings, refinancings and
replacements of any such facility, including any agreement:
(a) extending the maturity of any Indebtedness incurred thereunder or
contemplated thereby,
(b) adding or deleting borrowers or guarantors thereunder, so long as
borrowers and issuers include one or more of the Company and its Subsidiaries
and their respective successors and assigns,
(c) increasing the amount of Indebtedness incurred thereunder or available
to be borrowed thereunder, so long as such Indebtedness is incurred in
accordance with the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock," or
(d) otherwise altering the terms and conditions thereof in a manner not
prohibited by the terms of the Indenture.
"Beneficial Owner" or "beneficial owner" for purposes of the definitions of
Change of Control and Affiliate has the meaning attributed to it in Rules 13d-3
and 13d-5 under the Exchange Act (as in effect on the Issue Date), whether or
not applicable, except that a "person" shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time.
"Board of Directors" means, with respect to any Person, the board of
directors of such person or any committee of the Board of Directors of such
Person authorized, with respect to any particular matter, to exercise the power
of the board of directors of such person.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Capital Stock" means, with respect to any corporation, any and all shares,
interests, rights to purchase (other than convertible or exchangeable
Indebtedness that is not itself otherwise capital stock), warrants, options,
participations or other equivalents of or interests (however designated) in
stock issued by that corporation.
"Cash Equivalent" means:
(a) U.S. Government Obligations, or
(b) time deposits and certificates of deposit and commercial paper issued
by the parent corporation of any domestic commercial bank of recognized standing
having capital and surplus in excess of $500 million, or
(c) commercial paper issued by others rated at least A-2 or the equivalent
thereof by Standard & Poor's Corporation or at least P-2 or the equivalent
thereof by Moody's Investors Service, Inc., and in the case of each of (a) and
(b), maturing within one year after the date of acquisition.
"Certificated Notes" means Notes in registered, certificated form without
interest coupons.
"Change of Control" means:
(a) Any merger or consolidation of the Company with or into any Person or
any sale, transfer or other conveyance, whether direct or indirect, of all or
substantially all of the assets of the Company, on a consolidated basis, in one
transaction or a series of related transactions, if, immediately after giving
effect to such transaction(s), any "person" or "group"
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(as such terms are used for purposes of Sections 13(d) and 14(d) of the Exchange
Act, whether or not applicable) (other than any of the Excluded Persons):
(1) is or becomes the "beneficial owner," directly or indirectly, of
more than 35% of the total voting power in the aggregate normally
entitled to vote in the election of directors, managers, or
trustees, as applicable, of the transferee(s) or surviving entity
or entities, and
(2) any such person or group becomes, directly or indirectly, the
beneficial owner of a greater percentage of such total voting
power than beneficially owned by the Excluded Persons,
(b) Any "person" or "group" (as such terms are used for purposes of
Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable) (other
than any of the Excluded Persons):
(1) is or becomes the "beneficial owner," directly or indirectly, of
more than 35% of the total voting power in the aggregate of all
classes of Capital Stock of the Company then outstanding normally
entitled to vote in elections of directors, and
(2) any such person or group becomes, directly or indirectly, the
beneficial owner of a greater percentage of such total voting
power than beneficially owned by the Excluded Persons, or
(c) During any period of 12 consecutive months after the Issue Date,
individuals who at the beginning of such 12-month period constituted the Board
of Directors of the Company (together with any new directors whose election by
such Board of Directors or whose nomination for election by the shareholders of
the Company, as applicable, was approved by a vote of a majority of the
directors then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors of the Company, as applicable, then in office.
"Consolidation" means, with respect to the Company, the consolidation of
the accounts of the Subsidiaries with those of the Company, all in accordance
with GAAP. However, "consolidation" will not include consolidation of the
accounts of any Unrestricted Subsidiary with the accounts of the Company. The
term "consolidated" has a correlative meaning to the foregoing.
"Consolidated Coverage Ratio" of any Person on any date of determination
(the "Transaction Date") means the ratio, on a pro forma basis, of:
(a) the aggregate amount of Consolidated EBITDA of such person attributable
to continuing operations and businesses (exclusive of amounts attributable to
operations and businesses permanently discontinued or disposed of) for the
Reference Period, to
(b) the aggregate Consolidated Fixed Charges of such person (exclusive of
amounts attributable to operations and businesses permanently discontinued or
disposed of, but only to the extent that the obligations giving rise to such
Consolidated Fixed Charges would no longer be obligations contributing to such
person's Consolidated Fixed Charges subsequent to the Transaction Date) during
the Reference Period.
However, for purposes of such calculation:
(1) Acquisitions which occurred during the Reference Period or
subsequent to the Reference Period and on or prior to the
Transaction Date shall be assumed to have occurred on the first
day of the Reference Period,
(2) Transactions giving rise to the need to calculate the
Consolidated Coverage Ratio shall be assumed to have occurred on
the first day of the Reference Period,
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(3) The incurrence of any Indebtedness or issuance of any
Disqualified Capital Stock during the Reference Period or
subsequent to the Reference Period and on or prior to the
Transaction Date (and the application of the proceeds therefrom
to the extent used to refinance or retire other Indebtedness)
shall be assumed to have occurred on the first day of the
Reference Period, and
(4) the Consolidated Fixed Charges of such Person attributable to
interest on any Indebtedness or dividends on any Disqualified
Capital Stock bearing a floating interest (or dividend) rate
shall be computed on a pro forma basis as if the average rate in effect from the
beginning of the Reference Period to the Transaction Date had been the
applicable rate for the entire period, unless such Person or any of its
Subsidiaries is a party to an Interest Swap or Hedging Obligation (which shall
remain in effect for the 12-month period immediately following the Transaction
Date) that has the effect of fixing the interest rate on the date of
computation, in which case such rate (whether higher or lower) shall be used.
"Consolidated EBITDA" means, with respect to any Person, for any period,
the Consolidated Net Income of such person for such period adjusted to add
thereto (to the extent deducted from net revenues in determining Consolidated
Net Income), without duplication,
(a) the sum of: (1) Consolidated income tax expense, (2) Consolidated
depreciation and amortization expense, and (3) Consolidated Fixed Charges, less
(b) the amount of all cash payments made by such person or any of its
Subsidiaries during such period to the extent such payments relate to non-cash
charges that were added back in determining Consolidated EBITDA for such period
or any prior period.
However, consolidated income tax expense and depreciation and amortization of a
Subsidiary that is a less than wholly owned Subsidiary shall only be added to
the extent of the equity interest of the Company in such Subsidiary.
"Consolidated Fixed Charges" of any person means, for any period, the
aggregate amount (without duplication and determined in each case in accordance
with GAAP) of:
(a) interest expensed or capitalized, paid, accrued, or scheduled to be
paid or accrued (including, in accordance with the following sentence, interest
attributable to Capitalized Lease Obligations) of such person and its
Consolidated Subsidiaries during such period, including:
(1) original issue discount and non-cash interest payments or
accruals on any Indebtedness,
(2) the interest portion of all deferred payment obligations, and
(3) all commissions, discounts and other fees and charges owed with
respect to bankers' acceptances and letter of credit financings
and currency and Interest Swap and Hedging Obligations, in each
case to the extent attributable to such period, and
(b) the amount of dividends accrued or payable (or guaranteed) by such
person or any of its Consolidated Subsidiaries in respect of Preferred Stock
(other than by Subsidiaries of such person to such person or such Person's
wholly owned Subsidiaries), except if such Preferred Stock is a payment-in kind
("PIK") security, issuance of such additional PIK securities would not count as
dividends for purposes of this definition.
For purposes of this definition, (1) interest on a Capitalized Lease
Obligation shall be deemed to accrue at an interest rate reasonably determined
in good faith by the Company to be the rate of interest implicit in such
Capitalized Lease Obligation in accordance with GAAP and (2) interest expense
attributable to any Indebtedness represented by the guaranty by such person or a
Subsidiary of such person of an obligation of another person shall be deemed to
be the interest expense attributable to the Indebtedness guaranteed.
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"Consolidated Net Income" means, with respect to any Person for any period,
the net income (or loss) of such person and its Consolidated Subsidiaries
(determined on a consolidated basis in accordance with GAAP) for such period,
adjusted (only to the extent included in computing such net income (or loss) and
without duplication) to exclude:
(a) all gains (but not losses) which are either extraordinary (as
determined in accordance with GAAP) or are either unusual or nonrecurring
(including any gain from the sale or other disposition of assets outside the
ordinary course of business or from the issuance or sale of any capital stock),
(b) the net income, if positive, of any person, other than a Consolidated
Subsidiary, in which such person or any of its Consolidated Subsidiaries has an
interest, except to the extent of the amount of any dividends or distributions
actually paid in cash to such person or a Consolidated Subsidiary of such person
during such period, but in any case not in excess of such person's pro rata
share of such person's net income for such period,
(c) the net income or loss of any person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition, and
(d) the net income, if positive, of any of such person's Consolidated
Subsidiaries to the extent that the declaration or payment of dividends or
similar distributions is not at the time permitted by operation of the terms of
its charter or bylaws or any other agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to such Consolidated
Subsidiary.
"Consolidated Subsidiary" means, for any person, each Subsidiary of such
person (whether now existing or hereafter created or acquired) the financial
statements of which are consolidated for financial statement reporting purposes
with the financial statements of such person in accordance with GAAP.
"Disqualified Capital Stock" means:
(a) except as set forth in (b), with respect to any Person, Equity
Interests of such Person that, by its terms or by the terms of any security into
which it is convertible, exercisable or exchangeable, is, or upon the happening
of an event or the passage of time or both would be, required to be redeemed or
repurchased (including at the option of the holder thereof) by such Person or
any of its Subsidiaries, in whole or in part, on or prior to the Stated Maturity
of the Notes, and
(b) with respect to any Subsidiary of such Person (including with respect
to any Subsidiary of the Company), any Equity Interests other than any common
equity with no preference, privileges, or redemption or repayment provisions.
"Equity Interest" of any Person means any shares, interests, participations
or other equivalents (however designated) in such Person's equity, and shall in
any event include any Capital Stock issued by, or partnership or membership
interests in, such Person.
"Event of Loss" means, with respect to any property or asset, any (a) loss,
destruction or damage of such property or asset or (b) any condemnation, seizure
or taking, by exercise of the power of eminent domain or otherwise, of such
property or asset, or confiscation or requisition of the use of such property or
asset.
"Excluded Person" means any officer or director of the Company, the other
Persons listed in the section "Principal Shareholders" in the offering
memorandum for the initial issuance of the Old Notes, any Persons related to
such Persons by kinship or marriage, and any trust, corporation, partnership or
other entity which is beneficially owned 80% or more by any such Persons.
"Exempted Affiliate Transaction" means:
(a) customary employee compensation arrangements approved by a majority of
independent (as to such transactions) members of the Board of Directors of the
Company,
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(b) dividends permitted under the terms of the covenant discussed above
under "Limitation on Restricted Payments" above and payable, in form and amount,
on a pro rata basis to all holders of common stock of the Company, and
(c) transactions solely between the Company and any of its wholly owned
Consolidated Subsidiaries or solely among wholly owned Consolidated Subsidiaries
of the Company.
"Existing Indebtedness" means Indebtedness of the Company and/or its
Subsidiaries outstanding on the Issue Date and described in an Exhibit to the
Indenture governing the Notes, other than Bank Indebtedness, each until such
amounts thereunder are repaid.
"Foreign Subsidiary" means any Wholly Owned Subsidiary that is organized
and incorporated in a jurisdiction outside of the United States and is not a
Guarantor.
"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession in the United States as in effect on the Issue Date.
"Global Notes" means the U.S. Global Notes and the Reg S Global Notes.
"Guarantor" means each Subsidiary of the Company that executes a Guarantee
guaranteeing the Notes in accordance with the provisions of the Indenture.
"Indebtedness" of any person means, without duplication,
(a) all liabilities and obligations, contingent or otherwise, of such
person, to the extent such liabilities and obligations would appear as a
liability upon the consolidated balance sheet of such person in accordance with
GAAP:
(1) in respect of borrowed money (whether or not the recourse of the
lender is to the whole of the assets of such person or only to a
portion thereof),
(2) evidenced by bonds, notes, debentures or similar instruments,
(3) representing the balance deferred and unpaid of the purchase
price of any property or services, except (other than accounts
payable or other obligations to trade creditors which have
remained unpaid for greater than 60 days past their original due
date) those incurred in the ordinary course of its business that
would constitute ordinarily a trade payable to trade creditors;
(b) all liabilities and obligations, contingent or otherwise, of such
person that are:
(1) evidenced by bankers' acceptances or similar instruments issued
or accepted by banks,
(2) relating to any Capitalized Lease Obligation, or
(3) evidenced by a letter of credit or a reimbursement obligation of
such person with respect to any letter of credit;
(c) all net obligations of such person under Interest Swap and Hedging
Obligations;
(d) all liabilities and obligations of others of the kind described in the
preceding clause (a), (b) or (c) that such Person has guaranteed or that is
otherwise its legal liability or which are secured by any assets or property of
such person and all obligations to purchase, redeem or acquire any Equity
Interests;
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(e) any and all deferrals, renewals, extensions, refinancing and refundings
(whether direct or indirect) of, or amendments, modifications or supplements to,
any liability of the kind described in any of the preceding clauses (a), (b),
(c) or (d), or this clause (e), whether or not between or among the same
parties; and
(f) all Disqualified Capital Stock of such Person (measured at the greater
of its voluntary or involuntary maximum fixed repurchase price plus accrued and
unpaid dividends).
The "maximum fixed repurchase price" of any Disqualified Capital Stock
which does not have a fixed repurchase price shall be calculated in accordance
with the terms of such Disqualified Capital Stock as if such Disqualified
Capital Stock were purchased on any date on which Indebtedness shall be required
to be determined pursuant to the Indenture, and if such price is based upon, or
measured by, the fair market value of such Disqualified Capital Stock, such fair
market value to be determined in good faith by the Board of Directors of the
Company.
"Interest Swap and Hedging Obligation" means any obligation of any Person
pursuant to any interest rate swap agreement, interest rate cap agreement,
interest rate collar agreement, interest rate exchange agreement, currency
exchange agreement or any other agreement or arrangement designed to protect
against fluctuations in interest rates or currency values, including, without
limitation, any arrangement whereby, directly or indirectly, such Person is
entitled to receive from time to time periodic payments calculated by applying
either a fixed or floating rate of interest on a stated notional amount in
exchange for periodic payments made by such Person calculated by applying a
fixed or floating rate of interest on the same notional amount.
"Investment" by any Person in any other person means (without duplication):
(a) the acquisition (whether by purchase, merger, consolidation or
otherwise) by such Person (whether for cash, property, services, securities or
otherwise) of capital stock, bonds, notes, debentures, partnership or other
ownership interests or other securities, including any options or warrants, of
such other person or any agreement to make any such acquisition;
(b) the making by such Person of any deposit with, or advance, loan or
other extension of credit to, such other person (including the purchase of
property from another person subject to an understanding or agreement,
contingent or otherwise, to resell such property to such other person) or any
commitment to make any such advance, loan or extension (but excluding accounts
receivable, endorsements for collection or deposits arising in the ordinary
course of business);
(c) other than guarantees of Indebtedness of the Company or any Guarantor
to the extent permitted by the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock," the entering into by such person
of any guarantee of, or other credit support or contingent obligation with
respect to, Indebtedness or other liability of such other person;
(d) the making of any capital contribution by such Person to such other
person; and
(e) the designation by the Board of Directors of the Company of any person
to be an Unrestricted Subsidiary.
"Issue Date" means the date of first issuance of the Notes under the
Indenture.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired.
"Net Cash Proceeds" means the aggregate amount of cash or Cash Equivalents
received by the Company in the case of a sale of Qualified Capital Stock and by
the Company and its Subsidiaries in respect of an Asset Sale plus, in the case
of an issuance of Qualified Capital Stock upon any exercise, exchange or
conversion of securities (including options, warrants, rights and convertible or
exchangeable debt) of the Company that were issued for cash on or after the
Issue Date, the amount of cash originally received by the Company upon the
issuance of such securities (including options, warrants, rights and convertible
or exchangeable debt) less, in each case, the sum of all payments, fees,
commissions and (in the case of Asset Sales, reasonable and customary) expenses
(including, without limitation, the fees and expenses of legal counsel and
investment banking fees
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and expenses) incurred in connection with such Asset Sale or sale of Qualified
Capital Stock, and, in the case of an Asset Sale only, less the amount
(estimated reasonably and in good faith by the Company) of income, franchise,
sales and other applicable taxes (the computation of which shall take into
account any available net operating losses and other tax attributes of Company
and their Subsidiaries) required to be paid by the Company or any of its
respective Subsidiaries in the taxable year of such sale in connection with such
Asset Sale.
"Non-Recourse Indebtedness" means Indebtedness:
(a) as to which neither the Company nor any Subsidiary (1) provides credit
support of any kind (including any undertaking, agreement or instrument that
would constitute Indebtedness), or (2) is directly or indirectly liable (as a
guarantor or otherwise), and
(b) as to which the lenders have been notified in writing that they will
not have any recourse to the stock or assets of the Company, or the stock or
assets of any Subsidiary of the Company, including the stock of any Unrestricted
Subsidiary.
"Obligation" means any principal, premium or interest payment, or monetary
penalty, or damages, due by the Company or any Guarantor under the terms of the
Notes or the Indenture, including any liquidated damages due pursuant to the
terms of the Registration Rights Agreement.
"Permitted Indebtedness" means:
(a) Indebtedness evidenced by the Notes and represented by the Indenture up
to the amounts specified in the Indenture as of the date thereof;
(b) Refinancing Indebtedness that the Company and the Subsidiaries, as
applicable, may incur with respect to any Indebtedness or Disqualified Capital
Stock, as applicable, described in clause (a) of this definition or incurred
under the Debt Incurrence Ratio test of the covenant "Limitation on Incurrence
of Additional Indebtedness and Disqualified Capital Stock," or which is
outstanding on the Issue Date (after giving effect to the transactions
contemplated in this Prospectus) provided that in each case such Refinancing
Indebtedness is secured only by the assets that secured the Indebtedness so
refinanced;
(c) Indebtedness that the Company and its Subsidiaries may incur solely in
respect of bankers acceptances, and performance bonds (to the extent that such
incurrence does not result in the incurrence of any obligation to repay any
obligation relating to borrowed money of others), all in the ordinary course of
business in accordance with customary industry practices, in amounts and for the
purposes customary in the Company's industry, provided that the aggregate
principal amount outstanding of such Indebtedness (including any Refinancing
Indebtedness and any other Indebtedness issued to refinance, refund, defease or
replace such Indebtedness) at no time exceeds $250,000;
(d) Indebtedness that the Company may incur to any Guarantor, and
Indebtedness that any Guarantor may incur to any other Guarantor or to the
Company, so long as, in the case of Indebtedness of the Company, such
obligations shall be unsecured and subordinated in all respects to the Company's
obligations pursuant to the Notes and the date of any event that causes such
Guarantor no longer to be a Guarantor shall be an Incurrence Date; and
(e) the guaranty by any Guarantor of any Indebtedness of the Company or
another Guarantor, which is incurred substantially concurrently with the time
such person becomes a Guarantor, so long as that Indebtedness was permitted to
be incurred pursuant to the Indenture.
"Permitted Investment" means (a) Investments in any of the Notes, (b)
Investments in Cash Equivalents, (c) intercompany notes to the extent permitted
under clause (d) of the definition of "Permitted Indebtedness", and (d) any
Investment by the Company or any Subsidiary in a Person if as a result of such
Investment such Person immediately becomes a Wholly-owned Guarantor or such
Person is immediately merged with or into the Company or a Wholly-owned
Guarantor.
"Permitted Lien" means:
(a) Liens existing on the Issue Date;
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(b) Liens imposed by governmental authorities for taxes, assessments or
other charges not yet subject to penalty or which are being contested in good
faith and by appropriate proceedings, if adequate reserves with respect thereto
are maintained on the books of the Company in accordance with GAAP;
(c) statutory liens of carriers, warehousemen, mechanics, material men,
landlords, repairmen or other like Liens arising by operation of law in the
ordinary course of business, provided that:
(1) the underlying obligations are not overdue for a period of more
than 30 days, or
(2) such Liens are being contested in good faith and by appropriate
proceedings and adequate reserves with respect thereto are
maintained on the books of the Company in accordance with GAAP;
(d) Liens securing the performance of bids, trade contracts (other than
borrowed money), leases, statutory obligations, surety and appeal bonds,
performance bonds and other obligations of a like nature incurred in the
ordinary course of business;
(e) easements, rights-of-way, zoning, similar restrictions and other
similar encumbrances or title defects which, singly or in the aggregate, do not
in any case materially detract from the value of the property, subject thereto
(as such property is used by the Company or any of its Subsidiaries) or
interfere with the ordinary conduct of the business of the Company or any of its
Subsidiaries;
(f) Liens arising by operation of law in connection with judgments, only to
the extent, for an amount and for a period not resulting in an Event of Default
with respect thereto;
(g) pledges or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other types of
social security legislation;
(h) Liens securing the Notes;
(i) Liens securing Indebtedness of a Person existing at the time such
Person becomes a Subsidiary or is merged with or into the Company or a
Subsidiary or Liens securing Indebtedness incurred in connection with an
Acquisition, provided that such Liens were in existence prior to the date of
such acquisition, merger or consolidation, were not incurred in anticipation
thereof, and do not extend to any other assets;
(j) leases or subleases granted to other persons in the ordinary course of
business not materially interfering with the conduct of the business of the
Company or any of its Subsidiaries or materially detracting from the value of
the relative assets of the Company or any Subsidiary;
(k) Liens arising from precautionary Uniform Commercial Code financing
statement filings regarding operating leases entered into by the Company or any
of its Subsidiaries in the ordinary course of business;
(l) Liens securing Refinancing Indebtedness incurred to refinance any
Indebtedness that was previously so secured in a manner no more adverse to the
Holders of the Notes than the terms of the Liens securing such refinanced
Indebtedness, and provided that the Indebtedness secured is not increased and
the lien is not extended to any additional assets or property that would not
have been security for the Indebtedness refinanced; and
(m) Liens securing Bank Indebtedness incurred in accordance with the terms
of the covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock."
"Person" means any individual, corporation, partnership, joint venture,
trust, estate, limited liability company, unincorporated organization or
government or any agency or political subdivision thereof.
"Qualified Capital Stock" means any Capital Stock of the Company that is
not Disqualified Capital Stock.
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"Qualified Equity Offering" means:
(a) an underwritten offering of common stock of the Company for cash
pursuant to an effective registration statement under the Securities Act (other
than a registration statement on Form S-8), or
(b) a private sale of common stock of the Company (other than to an
Affiliate of the Company) for cash that results in net proceeds to the Company
of at least $10.0 million, after deducting any underwriting discounts and
commissions.
"Qualified Exchange" means any legal defeasance, redemption, retirement,
repurchase or other acquisition of Capital Stock or of Indebtedness of the
Company issued on or after the Issue Date with the Net Cash Proceeds received by
the Company from the substantially concurrent sale of Qualified Capital Stock or
any exchange of Qualified Capital Stock for any Capital Stock or for
Indebtedness of the Company issued on or after the Issue Date.
"Reference Period" with regard to any person means the four full fiscal
quarters (or such lesser period during which such person has been in existence)
ended immediately preceding any date upon which any determination is to be made
pursuant to the terms of the Notes or the Indenture.
"Refinancing Indebtedness" means Indebtedness or Disqualified Capital Stock
(a) (1) issued in exchange for any Indebtedness or Disqualified
Capital Stock (the proceeds from the issuance and sale of which
are used substantially concurrently to repay, redeem, defease,
refund, refinance, discharge or otherwise retire for value, in
whole or in part), or
(2) constituting an amendment, modification or supplement to, or a
deferral or renewal of any Indebtedness or Disqualified Capital
Stock (collectively, a "Refinancing").
(b) in a principal amount or, in the case of Disqualified Capital Stock,
liquidation preference, not to exceed the lesser of (after deduction of
reasonable and customary fees and expenses incurred in connection with the
Refinancing plus the amount of any premium paid in connection with such
Refinancing in accordance with the terms of the documents governing the
Indebtedness refinanced without giving effect to any modification thereof made
in connection with or in contemplation of such refinancing):
(1) the principal amount or, in the case of Disqualified Capital
Stock, liquidation preference, of the Indebtedness or
Disqualified Capital Stock so Refinanced, and
(2) if such Indebtedness being Refinanced was issued with an original
issue discount, the accreted value thereof (as determined in
accordance with GAAP) at the time of such Refinancing;
(c) provided, that:
(1) such Refinancing Indebtedness of any Subsidiary of the Company
shall only be used to Refinance outstanding Indebtedness or
Disqualified Capital Stock of such Subsidiary,
(2) such Refinancing Indebtedness shall (A) not have an Average Life
shorter than the Indebtedness or Disqualified Capital Stock to be
so refinanced at the time of such Refinancing, and (B) in all
respects, be no less subordinated or junior, if applicable, to
the rights of Holders of the Notes than was the Indebtedness or
Disqualified Capital Stock to be refinanced,
(3) such Refinancing Indebtedness shall have a final stated maturity
or redemption date, as applicable, no earlier than the final
stated maturity or redemption date, as applicable, of the
Indebtedness or Disqualified Capital Stock to be so refinanced,
and
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(4) such Refinancing Indebtedness shall be secured (if secured) in a
manner no more adverse to the holders of the Notes than the terms
of the Liens (if any) securing such refinanced Indebtedness,
including, without limitation that the amount of Indebtedness
secured shall not be increased.
"Related Business" means the business conducted (or proposed to be
conducted) by the Company and its Subsidiaries as of the Issue Date and any and
all businesses that in the good faith judgment of the Board of Directors of the
Company are materially related businesses.
"Restricted Investment" means, in one or a series of related transactions,
any Investment, other than other Permitted Investments.
"Restricted Payment" means, with respect to the Company or any Subsidiary:
(a) the declaration or payment of any dividend or other distribution in
respect of Equity Interests of the Company or such Subsidiary,
(b) any payment on account of the purchase, redemption or other acquisition
or retirement for value of Equity Interests of the Company or such Subsidiary,
(c) other than with the proceeds from the substantially concurrent sale of,
or in exchange for, Refinancing Indebtedness any purchase, redemption, or other
acquisition or retirement for value of, any payment in respect of any amendment
of the terms of or any defeasance of, any Subordinated Indebtedness, directly or
indirectly, by the Company or such Subsidiary prior to the scheduled maturity,
any scheduled repayment of principal, or scheduled sinking fund payment, as the
case may be, of such Indebtedness, and
(d) any Restricted Investment by the Company or such Subsidiary.
However, "Restricted Payment" does not include (1) any dividend,
distribution or other payment on or with respect to Equity Interests of the
Company or such Subsidiary to the extent payable solely in shares of Qualified
Capital Stock of the Company or such Subsidiary; or (2) any dividend,
distribution or other payment to the Company, or to any of its Guarantors, by
the Company or such Subsidiary.
"Senior Indebtedness" of the Company or any Guarantor means Indebtedness
(including any monetary obligation in respect of Bank Indebtedness, and
interest, whether or not allowable, accruing on Indebtedness after the filing of
a petition initiating any proceeding under any bankruptcy, insolvency or similar
law) of the Company or such Guarantor arising under Bank Indebtedness or that,
by the terms of the instrument creating or evidencing such Indebtedness, is
expressly designated Senior Indebtedness and made senior in right of payment to
the Notes or the applicable Guarantee. However, in no event shall Senior
Indebtedness include:
(a) Indebtedness to any Subsidiary of the Company or any officer, director
or employee of the Company or any Subsidiary of the Company,
(b) Indebtedness incurred in violation of the terms of the Indenture,
(c) Indebtedness to trade creditors,
(d) Disqualified Capital Stock,
(e) Capitalized Lease Obligations, and
(f) any liability for taxes owed or owing by the Company or such Guarantor.
"Significant Subsidiary" has the meaning provided under Regulation S-X of
the Securities Act, as in effect on the Issue Date.
94
<PAGE>
"Stated Maturity," when used with respect to any Note, means August 1,
2005.
"Subordinated Indebtedness" means Indebtedness of the Company or a
Guarantor that is subordinated in right of payment by its terms or the terms of
any document or instrument relating thereto to the Notes or such Guarantee, as
applicable, in any respect or has a stated maturity after the Stated Maturity.
"Subsidiary" means:
(a) a corporation a majority of whose Equity Interests with voting power,
under ordinary circumstances, to elect directors is at the time, directly or
indirectly, owned by such person, by such person and one or more Subsidiaries of
such person or by one or more Subsidiaries of such person,
(b) any other person (other than a corporation) in which such person, one
or more Subsidiaries of such person, or such person and one or more Subsidiaries
of such person, directly, or indirectly, at the date of determination thereof
has at least majority ownership interest, or
(c) a partnership in which such person or a Subsidiary of such person is,
at the time, a general partner. Notwithstanding the foregoing, an Unrestricted
Subsidiary shall not be a Subsidiary of the Company or of any Subsidiary of the
Company. Unless the context requires otherwise, Subsidiary means each direct and
indirect Subsidiary of the Company.
"Unrestricted Subsidiary" means:
(a) any subsidiary that is designated by the Board of Directors as an
Unrestricted Subsidiary pursuant to a Board Resolution; but only to the extent
that such subsidiary:
(1) has no Indebtedness other than Non-Recourse Indebtedness;
(2) is not party to any agreement, contract, arrangement or
understanding with the Company or any Subsidiary of the Company
unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such
Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company;
(3) is a Person with respect to which neither the Company nor any of
its Subsidiaries has any direct or indirect obligation to
subscribe for additional Capital Stock (or any warrants, options
or other rights to acquire Capital Stock) or maintain or preserve
such Person's financial condition or to cause such Person to
achieve any specified levels of operating results; and
(4) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of the Company or any of its
Subsidiaries, and
(b) any Subsidiary of an Unrestricted Subsidiary.
Any such designation by the Board of Directors shall be evidenced to the
Trustee by filing with the Trustee a certified copy of the Board Resolution
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing conditions and was permitted under
the Indenture.
If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease
to be an Unrestricted Subsidiary for purposes of this Indenture and any
Indebtedness of such Subsidiary shall be deemed to be incurred by a Subsidiary
of the Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the Indenture, the Company shall be in default of
such covenant). The Board of Directors of the Company may at any time designate
any Unrestricted Subsidiary to be a Subsidiary; provided, that such designation
shall be deemed to be an incurrence of Indebtedness by a Subsidiary of the
Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such
designation shall only be permitted if (1) such Indebtedness is permitted under
the Indenture, and (2) no Default or Event of Default would be in existence
following such designation.
95
<PAGE>
"U.S. Government Obligations" means securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof).
"U.S. Person" means:
(a) any individual resident in the United States,
(b) any partnership or corporation organized or incorporated under the laws
of the United States,
(c) any estate of which an executor or administrator is a U.S. Person
(other than an estate governed by foreign law and of which at least one executor
or administrator is a non-U.S. Person who has sole or shared investment
discretion with respect to its assets),
(d) any trust of which any trustee is a U.S. Person (other than a trust of
which at least one trustee is a non-U.S. Person who has sole or shared
investment discretion with respect to its assets and no beneficiary of the trust
(and no settler, if the trust is revocable) is a U.S. Person),
(e) any agency or branch of a foreign entity located in the United States,
(f) any non-discretionary or similar account (other than an estate or
trust) held by a dealer or other fiduciary for the benefit or account of a U.S.
Person,
(g) any discretionary or similar account (other than an estate or trust)
held by a dealer or other fiduciary organized, incorporated or (if an
individual) resident in the United States (other than such an account held for
the benefit or account of a non-U.S. Person),
(h) any partnership or corporation organized or incorporated under the laws
of a foreign jurisdiction and formed by a U.S. person principally for the
purpose of investing in securities not registered under the Securities Act
(unless it is organized or incorporated and owned by "accredited investors"
within the meaning of Rule 501(a) under the Securities Act who are not natural
persons, estates or trusts).
However, the term "U.S. Person" shall not include (1) a branch or agency of
a U.S. Person that is located and operating outside the United States for valid
business purposes as a locally regulated branch or agency engaged in the banking
or insurance business, (2) any employee benefit plan established and
administered in accordance with the law, customary practices and documentation
of a foreign country, and (3) the international organizations set forth in
Section 902(o)(7) of Regulation S under the Securities Act and any other similar
international organizations, and their agencies, affiliates and pension plans.
"Wholly-owned Subsidiary" means a Subsidiary all the Equity Interests of
which are owned by the Company or one or more Wholly-owned Subsidiaries of the
Company.
96
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain U.S. federal income tax
consequences associated with the Note Exchange. This discussion is based on the
current provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), applicable Treasury regulations, judicial authority and administrative
rulings and practice. There is no assurance that the Internal Revenue Service
(the "Service") will not take a contrary view, and no ruling from the Service
has been or will be sought. Legislative, judicial or administrative changes or
interpretations may be forthcoming that could alter or modify the statements and
conditions set forth herein. Any such changes or interpretations may or may not
be retroactive and could affect the tax consequences to the holders of the
Notes. Certain holders of the Notes, including insurance companies, tax-exempt
organizations, financial institutions, broker-dealers, foreign corporations, and
persons who are not citizens or residents of the United States, may be subject
to special rules not discussed below. In addition, this discussion is generally
limited to the tax consequences to holders of the Notes that hold the Notes as
capital assets (within the meaning of Section 1221 of the Code).
The Note Exchange should not be treated as a taxable exchange for federal
income tax purposes. As a result, there should be no federal income tax
consequences to holders who participate in the Note Exchange. Specifically, (1)
an exchanging holder should not recognize any gain or loss on the exchange, (2)
the holding period for the New Notes should include the holding period for the
Old Notes, and (3) the holder's basis in the New Notes should be the same as its
adjusted basis in the Old Notes immediately before the Note Exchange.
Nonexchanging holders of Old Notes will not incur any U.S. federal income
tax consequences as a result of the Note Exchange.
Note: The preceding discussion of certain U.S. federal income tax consequences
is for general information only, does not constitute tax advice, and is
not based upon any opinion of counsel. This discussion does not purport
to address all aspects of U.S. federal income taxation that may be
relevant to a particular holder of the Notes in light of that holder's
particular circumstances. Accordingly, each holder of the Notes should
consult such holder's own tax advisor as to particular tax consequences
to it of purchasing, holding and disposing of the Notes, including the
applicability of any state, local, or foreign tax laws or changes to such
laws.
97
<PAGE>
PLAN OF DISTRIBUTION
The Company
- -----------
The Company will issue the New Notes to holders of Old Notes who
participate in the Note Exchange, pursuant to the procedures set forth in "The
Exchange Offer." In certain limited circumstances, the Company may be required
to file a Shelf Registration Statement to allow the resale of certain Old Notes
or New Notes by the holders. See "The Exchange Offer - Registration Rights
Agreement - Shelf Registration Statement."
Broker-Dealers
- --------------
Resale of New Notes
New Notes received by broker-dealers for their own account pursuant to the
Exchange Offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the New Notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or through brokers or dealers who may receive compensation in the
form of commissions or concessions from any such broker-dealer and/or the
purchasers of any such New Notes. The Company will not receive any proceeds from
any such resales.
Prospectus Delivery Requirements
Each broker-dealer that receives New Notes for its own account in the Note
Exchange must acknowledge that it will deliver a prospectus in connection with
any resale of those New Notes. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes if such Old Notes
were acquired as a result of market-making activities or other trading
activities. The Company has agreed that, for a period ending on the earlier of
(a) one year from the Consummation Deadline, and (b) the date on which a
broker-dealer is no longer required to deliver a prospectus in connection with
market-making or other trading activities, it will make this Prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with any such resale. In addition, until 90 days after commencement of the
Exchange Offer, all dealers effecting transactions in the New Notes may be
required to deliver a Prospectus.
Underwriter Status
Any broker-dealer that resells New Notes that were received by it for its
own account pursuant to the Exchange Offer and any broker-dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act. Any profit on any such
resale of New Notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The Letter of Transmittal states that by acknowledging that the broker-dealer
will deliver a prospectus, and that by delivering a prospectus, a broker-dealer
will not be deemed to have admitted that it is an "underwriter" within the
meaning of the Securities Act. The Company has agreed to indemnify such
broker-dealers against certain liabilities, including liabilities under the
Securities Act.
Shelf Registration Statement
The Company has agreed that for a period ending on the earlier of (a) two
years after the date that the obligation to file a Shelf Registration Statement
arises, and (b) such time as all Notes covered by the Shelf Registration
Statement have been sold, it will file and use its best efforts to keep
effective a Shelf Registration Statement registering the resale of any New Notes
by any broker-dealer who received the New Notes upon the exchange of Old Notes
directly from the Company or its affiliates. See "The Exchange Offer -
Registration Rights Agreement - Shelf Registration Statement."
98
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock and 5,000,000 shares of Preferred Stock.
Common Stock
- ------------
As of January 13, 1999, there were 971 holders of 18,580,265 shares of
fully paid and nonassessable Common Stock outstanding. Each share of outstanding
Common Stock is entitled to participate equally in dividends as and when
declared by the Board of Directors of the Company, out of funds legally
available therefor, and is entitled to participate equally in any distribution
of net assets made to the Company's shareholders in the event of liquidation of
the Company after payment to all creditors thereof. There are no preemptive
rights or rights to convert Common Stock into any other securities. The holders
of the Common Stock are entitled to one vote for each share held of record on
all matters voted upon by the Company's shareholders and may not cumulate votes
for the election of directors. Thus, the owners of a majority of the shares of
the Common Stock outstanding may elect all of the directors of the Company and
the owners of the balance of the shares of the Common Stock would not be able to
elect any directors of the Company.
Preferred Stock
- ---------------
The Company's Board of Directors has the authority to issue shares of
preferred stock in one or more series and to fix the powers, designations,
preferences and relative, participating, optional or other rights of any series
of preferred stock, including dividend rights, conversion rights, voting rights,
redemption terms, liquidation preferences, sinking fund terms and the number of
shares constituting any series, without shareholder approval, unless such
approval is required by applicable law or by the rules of any stock exchange or
automated quotation system on which securities of the Company may be listed or
traded.
Series A Convertible Preferred Stock
In February 1997, the Board of Directors authorized the issuance of 50,000
shares of the Company's Series A Convertible Preferred Stock, which were sold to
a limited number of institutional investors under Rule 506 of the Securities
Act. Effective as of June 11, 1997, the Company registered for resale up to
1,948,541 shares of Common Stock underlying the Series A Convertible Preferred
Stock on a Form S-3 registration statement. As of May 14, 1998, all of the
Series A Convertible Preferred Stock had been converted into 1,494,593 shares of
Common Stock.
Series B Convertible Preferred Stock
Preferred Stock Offering. In May and August 1998, the Company issued a
total of 170,000 shares of Series B Convertible Preferred Stock ("Preferred
Stock") and related warrants to purchase 236,109 shares of Common Stock, for a
total purchase price of $17 million. See "MD&A - Recent Events - Preferred Stock
Offering."
Redemption. The Company may redeem the Preferred Stock at a redemption
price of $115 per share upon 20-days notice to the holder if the holder does not
elect to convert within 15 days of receiving a redemption notice. The Company
must either redeem any Preferred Stock that it is not permitted to convert
without shareholder approval under Nasdaq requirements or obtain shareholder
approval for such conversion. So long as the Company's senior lender requires,
any redemption price, or other cash payments due to the holders, shall be
converted into promissory notes in favor of the holder until conversion or
redemption is allowed to occur. In addition, the Indenture restricts the ability
of the Company to repurchase its capital stock.
Conversion Shares. Upon conversion of a share of Preferred Stock, the
holder will receive the number of shares of Common Stock equal to $100 divided
by the then-applicable conversion price of the Preferred Stock. See "-
Conversion Price", below. However, no holder of Preferred Stock is entitled to
voluntarily convert Preferred Stock that would cause the holder to own more than
9.9% of the Company's outstanding Common Stock at any time.
99
<PAGE>
Conversion Price. The conversion price of the Preferred Stock is $7.20 per
share until February 1999. After that date, the conversion price of the
Preferred Stock will be equal to the lower of (a) $7.20 per share, or (b) the
average of the three lowest closing bid prices per share of the Common Stock
over the 22 trading days before conversion. However, the Company cannot issue
shares of Common Stock at a conversion price less than $5.67 per share unless
(1) the Company's shareholders approve the issuance of additional shares of
Common Stock upon conversion of the Preferred Stock over the 3,000,000 shares
already reserved for issuance (the "Additional Shares"), or (2) the Company
redeems any Preferred Stock whose conversion would cause the issuance of
Additional Shares. The Indenture restricts the Company's ability to redeem its
capital stock unless it meets certain conditions.
If the Shareholders approve the issuance of Additional Shares due to a
conversion price lower than $5.67 per share, the number of Additional Shares
actually issued would depend on the market price of the Company's Common Stock
at the time Preferred Stock is converted, and could result in the issuance of a
substantial number of Additional Shares. The Company would register any such
Additional Shares for resale.
If (a) the Company does not redeem the Preferred Stock whose conversion
would cause the issuance of the Additional Shares, or (b) the Company's
shareholders do not approve the issuance of Additional Shares and the Company is
therefore unable to convert any of the Preferred Stock at a price below $5.67
per share, then the Company will incur a monthly penalty of 2% of the Preferred
Stock's liquidation preference until the Company redeems such Preferred Stock or
obtains shareholder approval to issue the Additional Shares.
Sale of Shares Issued Upon Conversion. The shares of Common Stock issued
upon conversion of the Preferred Stock may not be sold until after February 9,
1999. At that time the shares so issued may be sold pursuant to a registration
statement on Form S-1 that was declared effective by the SEC on December 23,
1998, or under any applicable exemption from registration. Up to 12.5% of such
shares may be sold per month, which percentage cumulates (a) beginning November
1998 if such shares are registered under a registration statement, or (b) after
February 9, 1999, if such shares are sold under an applicable exemption. Any
Preferred Stock outstanding on May 15, 2003 will automatically convert into
Common Stock at the then-applicable conversion price.
Exercise of the Related Warrants. The warrants issued in connection with
the Preferred Stock may be exercised after May 15, 1999 and before their
expiration on May 15, 2001. The exercise price of the related warrants is $7.20
per share of Common Stock. The Company intends to use the proceeds from exercise
of these warrants, when and if they are exercised, primarily for working capital
or other corporate purposes.
Indemnification. The Company has agreed to indemnify the holders of the
Preferred Stock, and those holders have agreed to indemnify the Company, against
certain liabilities under the Securities Act. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that, in the opinion of
the SEC, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
Warrants
- --------
As of January 13, 1999, the Company had outstanding warrants to purchase
Common Stock as follows:
o warrants to purchase 236,109 shares that (a) were issued in connection with
the Preferred Stock Offering, and (b) have an exercise price of $7.20 per
share;
o publicly traded warrants to purchase 2,295,000 shares of Common Stock, that
(a) were issued as part of the units sold in the Company's July 1996
registered public offering ("Units"), (b) have an exercise price of $4.6875
per share, and (c) expire in July 2001;
o warrants to purchase Units consisting of 180,000 shares of registered
Common Stock and publicly traded warrants to purchase 180,000 shares of
Common Stock, that (a) were issued to underwriters in the July 1996 public
offering, (b) have an exercise price of $3.75 per Unit, and (c) expire in
July 2001; and
100
<PAGE>
o warrants to purchase a total of 247,500 shares of Common Stock issued to
several employees and consultants of the Company, that (a) have exercise
prices ranging from $2.00 to $4.80 per share, and (b) expiration dates that
range from December 2000 to February 2005.
No holder of warrants possesses any rights as a shareholder under such warrants
until exercise of such warrants. Of the shares issuable upon exercise of the
employee and consultant warrants, 160,000 shares are registered under a Form S-8
registration statement (see "Management - Summary Compensation") and 87,500
shares are registered for resale under a Form S-3 registration statement.
Registration Rights
- -------------------
Liviakis. The 590,000 shares of restricted Common Stock held by Liviakis
and Mr. Prag have certain piggyback registration rights that take effect in
February 1999 after expiration of their lock-up period. (See "MD&A - Recent
Events Issuance of Common Stock to Liviakis"). These piggyback registration
rights are subject to certain conditions, including the right of the Company's
underwriters, if any, to limit the number of such shares included in the
registration.
Preferred Stock Offering. The Company would be obligated to register for
resale any shares of Common Stock issuable upon conversion of Preferred Stock
that would exceed 3,000,000 shares of Common Stock, if the Company's
shareholders approve such issuance.
Fall 1998 Common Stock Offering. The Company has agreed to register for
resale the 2,585,000 shares of Common Stock sold in its Fall 1998 Common Stock
Offering. See "MD&A - Recent Events - Fall 1998 Common Stock Offering."
Anti-Takeover Laws
- ------------------
The Company, as a Washington corporation, is subject to certain provisions
of Washington law regarding significant business transactions and fair price
restrictions. These provisions may have the effect of delaying or deterring a
hostile takeover of the Company.
Washington's "Significant Business Transactions" statute (Chapter 23B.19 of
the Washington Business Corporation Act) applies to public companies that are
incorporated under Washington law. The statute prohibits, subject to certain
exceptions, a corporation from entering into any "significant business
transactions" with an "Acquiring Person" (defined generally as a person who or
an affiliated group that beneficially owns 10% or more of the outstanding voting
securities of a corporation) for a period of five years after such person or
affiliated group becomes an Acquiring Person unless the transaction or share
acquisition made by the Acquiring Person is approved prior to the share
acquisition by a majority of the target corporation's directors. In addition,
this statute prohibits a corporation subject thereto from entering into a
significant business transaction with an Acquiring Person unless the
consideration to be received by the corporation's shareholders in connection
with the proposed transaction satisfies the "fair price" provisions set forth in
the statute.
Transfer Agent and Registrar
- ----------------------------
The Transfer Agent and Registrar for the Company's Common Stock and
publicly-traded warrants is Interwest Transfer Co., Inc.
101
<PAGE>
LEGAL MATTERS
The validity of the issuance of the New Notes has been passed upon for the
Company by Stoel Rives LLP of Seattle, Washington.
EXPERTS
The consolidated financial statements contained in this Prospectus and
identified below were audited by the following independent public accountants,
as indicated in their attached reports:
o KPMG Peat Marwick LLP for the Company's fiscal year ended May 31, 1998.
o Moss Adams LLP for the Company's fiscal years ended May 31, 1997 and 1996.
o KPMG Audit plc for Aeromet's years ended December 31, 1997 and 1996.
o PricewaterhouseCoopers LLP for ESC's fiscal year ended March 31, 1997.
These financial statements are included in this Prospectus and the Registration
Statement in reliance upon the authority of the above firms as experts in
accounting and auditing.
102
<PAGE>
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page
PACIFIC AEROSPACE & ELECTRONICS, INC. and Subsidiaries
Audited Consolidated Annual Financial Statements
Independent Auditors' Reports............................................F-3
Consolidated Balance Sheets as of May 31, 1997 and 1998..................F-5
Consolidated Statements of Operations for the years ended May 31,
1996, 1997 and 1998..................................................... F-6
Consolidated Statements of Shareholders' Equity for the years
ended May 31, 1996, 1997 and 1998....................................... F-7
Consolidated Statements of Cash Flows for the years ended
May 31, 1996, 1997 and 1998............................................. F-8
Notes to Consolidated Financial Statements..............................F-10
Unaudited Consolidated Six Month Financial Statements
Consolidated Balance Sheet as of November 30, 1998 .....................F-37
Consolidated Statements of Operations for the six months
ended November 30, 1997 and 1998........................................F-38
Consolidated Statements of Cash Flow for the six months ended
November 30, 1997 and 1998..............................................F-39
Management's Statement and Notes to Unaudited Consolidated
Financial Statements for the six months ended November 30,
1998 and 1997...........................................................F-40
AEROMET INTERNATIONAL PLC and Subsidiaries
Independent Auditors' Report ...........................................F-49
Balance Sheets as of December 31, 1996 and 1997, and as of
May 31, 1998 (unaudited)................................................F-50
Statements of Operations for the years ended December 31, 1996
and 1997 and the five months ended May 31, 1997 and 1998 (unaudited)....F-51
Statements of Shareholder's Equity for the years ended December 31,
1996 and 1997 and the five-month period ended May 31,1998 (unaudited)...F-52
Statements of Cash Flows for the years ended December 31, 1996 and
1997 and the five months ended May 31, 1997 and 1998 (unaudited)........F-53
Notes to Financial Statements...........................................F-54
ELECTRONIC SPECIALTY CORPORATION and Subsidiary
Audited Consolidated Annual Financial Statements
Report of Independent Accountants ......................................F-65
Consolidated Balance Sheet as of March 31, 1997.........................F-66
Consolidated Statement of Operations for the year ended March 31,
1997....................................................................F-67
Consolidated Statement of Non-Redeemable Shareholders' Equity for
the year ended March 31, 1997...........................................F-68
Consolidated Statement of Cash Flows for the year ended March 31, 1997..F-69
Notes to Consolidated Financial Statements..............................F-70
F-1
<PAGE>
Unaudited Consolidated Financial Statements
Consolidated Statements of Operations for the Nine-Month Periods
Ended December 31, 1997 and 1996 .......................................F-76
Consolidated Statements of Cash Flows for the Nine-Month Periods
Ended December 31, 1997 and 1996........................................F-77
Notes to Unaudited Consolidated Financial Statements for the
Nine-Month Periods Ending December 31, 1997 and 1996....................F-78
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pacific Aerospace & Electronics, Inc.:
We have audited the accompanying consolidated balance sheet of Pacific
Aerospace & Electronics, Inc. and subsidiaries as of May 31, 1998, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pacific
Aerospace & Electronics, Inc. and subsidiaries as of May 31, 1998, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Seattle, Washington
June 30, 1998
F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pacific Aerospace & Electronics, Inc.:
We have audited the accompanying consolidated balance sheet of Pacific
Aerospace & Electronics, Inc. and subsidiaries as of May 31, 1997, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the two-year period ended May 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pacific
Aerospace & Electronics, Inc. and subsidiaries as of May 31, 1997, and the
results of their operations and their cash flows for each of the years in the
two-year period ended May 31, 1997 in conformity with generally accepted
accounting principles.
/s/ MOSS ADAMS LLP
Everett, Washington
July 2, 1997
F-4
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
May 31, 1997 and 1998
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 3,048,000 11,461,000
Certificate of deposit............................................................ 1,000,000 --
Accounts receivable, net of allowance for doubtful accounts of $247,000 in
1997 and $130,000 in 1998...................................................... 5,455,000 9,375,000
Inventories....................................................................... 9,082,000 16,184,000
Deferred income taxes............................................................. -- 386,000
Prepaid expenses and other........................................................ 354,000 272,000
------------ ------------
Total current assets......................................................... 18,939,000 37,678,000
------------ ------------
Property, plant and equipment, net..................................................... 13,190,000 26,335,000
------------ ------------
Other assets:
Note receivable from related party................................................ 125,000 700,000
Investment........................................................................ -- 4,579,000
Costs in excess of net book value of acquired subsidiaries, net of accumulated
amortization of $223,000 in 1997 and $439,000 in 1998.......................... 2,071,000 6,515,000
Patents, net of accumulated amortization of $205,000 in 1997 and $307,000
in 1998........................................................................ 1,331,000 1,229,000
Deferred income taxes............................................................. -- 222,000
Other............................................................................. 96,000 1,322,000
------------ ------------
Total other assets........................................................... 3,623,000 14,567,000
------------ ------------
$ 35,752,000 78,580,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 3,736,000 6,748,000
Accrued liabilities............................................................... 1,116,000 2,587,000
Current portion of long-term debt................................................. 855,000 1,027,000
Current portion of capital lease obligations...................................... 142,000 206,000
Line of credit.................................................................... -- 1,511,000
------------ ------------
Total current liabilities.................................................... 5,849,000 12,079,000
Long-term liabilities:
Long-term debt, net of current portion............................................ 2,899,000 9,059,000
Capital lease obligations, net of current portion................................. 337,000 941,000
Deferred income taxes............................................................. 592,000 --
Deferred rent and other........................................................... 456,000 359,000
------------ ------------
Total liabilities............................................................ 10,133,000 22,438,000
------------ ------------
Shareholders' equity:
Convertible preferred stock, $0.001 par value, 5,000,000 shares authorized:
Series A, 50,000 shares issued and outstanding at May 31, 1997 and
none issued and outstanding at May 31, 1998.................................. -- --
Series B, none issued and outstanding at May 31, 1997 and
100,000 shares issued and outstanding at May 31, 1998........................ -- --
Common stock, $0.001 par value. 100,000,000 shares authorized,
10,220,249 and 15,395,723 issued and outstanding at May 31, 1997
and 1998, respectively......................................................... 10,000 15,000
Additional paid-in capital........................................................ 30,490,000 57,830,000
Cumulative unrealized loss on investment.......................................... -- (436,000)
Accumulated deficit............................................................... (4,881,000) (1,267,000
------------ ------------
Total shareholders' equity................................................... 25,619,000 56,142,000
Commitments, contingencies, and subsequent events...................................... -- --
------------ ------------
$ 35,752,000 78,580,000
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended May 31, 1996, 1997 and 1998
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net sales............................................................. $ 20,725,000 34,175,000 54,099,000
Cost of sales......................................................... 16,439,000 25,969,000 39,487,000
------------ ------------ ------------
Gross profit................................................ 4,286,000 8,206,000 14,612,000
Operating expenses.................................................... 4,869,000 6,259,000 9,872,000
------------ ------------ ------------
Income (loss) from operations............................... (583,000) 1,947,000 4,740,000
------------ ------------ ------------
Other income (expense):
Interest income.................................................. 37,000 126,000 110,000
Interest expense................................................. (535,000) (510,000) (865,000)
Other............................................................ 15,000 169,000 (853,000)
------------ ------------ ------------
(483,000) (215,000) (1,608,000)
------------ ------------ ------------
Income (loss) before income taxes........................... (1,066,000) 1,732,000 3,132,000
Income tax benefit (expense).......................................... 67,000 (50,000) 482,000
------------ ------------ ------------
Net income (loss)........................................... $ (999,000) 1,682,000 3,614,000
============ ============ ============
Net income (loss) per share:
Basic............................................................ $ (0.16) 0.18 0.29
Diluted.......................................................... (0.16) 0.17 0.27
Shares used in computation of net income (loss) per share:
Basic............................................................ 6,209,000 9,499,980 12,486,077
Diluted.......................................................... 6,209,000 10,035,846 13,606,061
See accompanying notes to consolidated financial statements.
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended May 31, 1996, 1997 and 1998
Series A Series B
convertible convertible
preferred stock preferred stock Common stock Additional Cumulative Total
--------------- --------------- ------------------- paid-in unrealized Accumulated shareholders'
Shares Amount Shares Amount Shares Amount capital losses deficit equity
------- ------ ------- ------ ---------- ------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1995 -- $ -- -- $ -- 5,196,008 $ 5,000 11,013,000 -- (5,564,000) 5,454,000
Sale of common stock -- -- -- -- 1,503,551 2,000 4,930,000 -- -- 4,932,000
Issuance of warrant -- -- -- -- -- -- 69,000 -- -- 69,000
Issuance of common stock
in connection with
acquisition -- -- -- -- 778,750 1,000 3,082,000 -- -- 3,083,000
Net loss -- -- -- -- -- -- -- -- (999,000) (999,000)
------- ------ ------- ------ ---------- ------- ---------- ---------- ----------- -------------
Balance at May 31, 1996 -- -- -- -- 7,478,309 8,000 19,094,000 -- (6,563,000) 12,539,000
Sale of common stock -- -- -- -- 2,264,400 2,000 5,347,000 -- -- 5,349,000
Issuance of warrants -- -- -- -- -- -- 16,000 -- -- 16,000
Issuance of common stock
in connection with an
acquisition -- -- -- -- 477,540 -- 1,552,000 -- -- 1,552,000
Sale of preferred stock
for cash 50,000 -- -- -- -- -- 4,481,000 -- -- 4,481,000
Net income -- -- -- -- -- -- -- -- 1,682,000 1,682,000
------- ------ ------- ------ ---------- ------- ---------- ---------- ----------- -------------
Balance at May 31, 1997 50,000 -- -- -- 10,220,249 10,000 30,490,000 -- (4,881,000) 25,619,000
Issuance of common stock -- -- -- -- 8,559 -- 13,000 -- -- 13,000
Sale of common stock for
cash -- -- -- -- 524,000 1,000 2,222,000 -- -- 2,223,000
Increase in preferred stock,
net of issuance costs -- -- 100,000 -- -- -- 9,260,000 -- -- 9,260,000
Issuance of warrants -- -- -- -- -- -- 444,000 -- -- 444,000
Exercise of warrants for
cash, net of tax effects
of $99,000 -- -- -- -- 795,000 1,000 3,723,000 -- -- 3,724,000
Issuance of common stock on
conversion of convertible
notes and accrued interest
of $154,000 -- -- -- -- 1,405,018 1,000 5,518,000 -- -- 5,519,000
Exercise of options for cash -- -- -- -- 25,000 -- 53,000 -- -- 53,000
Issuance of common stock on
conversion of preferred
stock (50,000) -- -- -- 1,494,593 1,000 (1,000) -- -- --
Unrealized losses on
available for sale
securities -- -- -- -- -- -- -- (436,000) -- (436,000)
Issuance of common stock
in connection with
acquisition -- -- -- -- 923,304 1,000 6,108,000 -- -- 6,109,000
Net income -- -- -- -- -- -- -- -- 3,614,000 3,614,000
------- ------ ------- ------ ---------- ------- ---------- ---------- ----------- -------------
Balance at May 31, 1998 -- $ -- 100,000 $ -- 15,395,723 $15,000 57,830,000 (436,000) (1,267,000) 56,142,000
======= ====== ======= ====== ========== ======= ========== ========== =========== =============
See accompanying notes to consolidated financial statements.
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended May 31, 1996, 1997 and 1998
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss) ................................................ $ (999,000) 1,682,000 3,614,000
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization................................. 871,000 1,358,000 2,204,000
Allowance on note receivable.................................. -- -- 250,000
Loss on restructuring of note receivable...................... -- -- 1,038,000
Loss on sale of property, plant and equipment................. 8,000 -- --
Director compensation paid in common stock.................... 24,000 44,000 13,000
Consulting services paid through issuance of stock options
and warrants................................................ -- 6,000 139,000
Federal income tax benefit.................................... (67,000) -- (1,200,000)
Changes in operating assets and liabilities:
Accounts receivable...................................... (1,018,000) (1,774,000) (2,286,000)
Inventories.............................................. (1,303,000) (1,951,000) (3,387,000)
Prepaid expenses and other current assets................ 8,000 (178,000) 474,000
Other assets............................................. (79,000) 44,000 (1,176,000)
Accounts payable, accrued liabilities and other
liabilities............................................ (216,000) 557,000 1,911,000
----------- ----------- -----------
Net cash provided by (used in) operating activities. (2,771,000) (212,000) 1,594,000
----------- ----------- -----------
Cash flow from investing activities:
Sale (purchase) of certificate of deposit.......................... -- (1,000,000) 1,000,000
Proceeds from stock subscription receivable........................ -- 1,030,000 --
Acquisition of property, plant and equipment....................... (754,000) (2,100,000) (6,509,000)
Proceeds from sale of property, plant and equipment................ 9,000 -- --
Acquisition of subsidiaries........................................ -- -- (3,289,000)
Acquisition of patents............................................. (400,000) -- --
Acquisition of investment.......................................... -- -- (742,000)
Issuance of notes receivable....................................... -- -- (6,261,000)
Payments received on note receivable from related party............ 44,000 58,000 125,000
Purchase of goodwill............................................... -- -- (1,029,000)
----------- ----------- -----------
Net cash used in investing activities............... (1,101,000) (2,012,000) (16,705,000)
----------- ----------- -----------
Cash flow from financing activities:
Net borrowings (repayments) under line of credit................... 308,000 (1,224,000) (358,000)
Decrease (increase) in restricted cash............................. (1,000,000) 1,000,000 --
Proceeds from long-term debt and convertible notes................. 2,105,000 237,000 10,125,000
Payments on long-term debt and capital leases...................... (1,457,000) (5,686,000) (1,503,000)
Proceeds from sale of common stock, net............................ 3,550,000 5,739,000 2,223,000
Proceeds from sale of preferred stock, net......................... -- 4,481,000 9,260,000
Proceeds from exercise of stock options and warrants............... -- -- 3,777,000
Proceeds from sale of warrants..................................... 12,000 -- --
----------- ----------- -----------
Net cash provided by financing activities........... 3,518,000 4,547,000 23,524,000
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (354,000) 2,323,000 8,413,000
----------- ----------- -----------
Cash and cash equivalents at beginning of year.......................... 1,079,000 725,000 3,048,000
----------- ----------- -----------
Cash and cash equivalents at end of year................................ $ 725,000 3,048,000 11,461,000
=========== =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Years ended May 31, 1996, 1997 and 1998
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Supplemental cash flow:
Cash paid during the year for:
Interest........................................................ $ 658,000 613,000 712,000
Federal income taxes............................................ -- 18,000 521,000
Acquisition of subsidiaries:
Fair value of assets acquired and resulting goodwill,
excluding cash................................................ 10,286,000 1,928,000 10,034,000
Liabilities assumed............................................. (7,203,000) (482,000) 3,925,000
Common stock issued............................................. 3,083,000 1,446,000 6,109,000
Noncash investing and financing activities:
Seller financed acquisition of property, plant and equipment.... 539,000 639,000 3,336,000
Seller financed acquisition of patents.......................... 520,000 35,000 --
Stock subscriptions receivable for issuance of common stock .... 1,030,000 -- --
Conversion of notes and accrued interest to common stock........ -- -- 5,519,000
Restructuring of certain notes receivable for an investment
in common stock............................................... -- -- 6,053,000
Property, plant and equipment included in accounts payable ..... -- -- 445,000
Deferred portion of common stock issued for consulting services. -- -- 305,000
Long-term debt retired through acquisition of subsidiary ....... -- -- 139,000
See accompanying notes to consolidated financial statements.
</TABLE>
F-9
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended May 31, 1996, 1997 and 1998
(1) Description of Business and Basis of Presentation
Description of Business
Pacific Aerospace & Electronics, Inc., with headquarters in Wenatchee,
Washington, develops, manufactures and markets high performance electronics and
metal components and assemblies for the aerospace, defense, electronics and
transportation industries. The consolidated financial statements include the
accounts of Pacific Aerospace & Electronics, Inc. and its wholly-owned
subsidiaries (collectively, the "Company").
Basis of Presentation
These consolidated financial statements are prepared in accordance with
generally accepted accounting principles (GAAP) in the United States (U.S.) and
present the financial position, results of operations and changes in financial
position of the Company. All material intercompany balances and transactions
have been eliminated in consolidation.
Certain 1996 and 1997 amounts have been reclassified to conform with the
1998 presentation.
(2) Summary of Significant Accounting Principles
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, demand deposits with banks and
highly liquid investments with maturity dates at purchase of three months or
less.
Inventories
Inventories are stated at the lower of cost, primarily determined by the
first-in, first-out method, or market (replacement cost for raw materials and
net realizable value for work in progress and finished goods).
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Property, plant and
equipment under capital leases are stated at the lower of the fair market value
of the assets or the present value of minimum lease payments at the inception of
the leases.
Depreciation is calculated using the straight-line method over the
estimated useful lives of the owned assets ranging from 5 years for certain
machinery and equipment to 40 years for certain buildings. Property, plant and
equipment held under capital leases are amortized using the straight-line method
over the shorter of the estimated useful lives of the assets or the lease terms,
ranging from 7 to 10 years from the inception of the leases.
F-10
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Expenditures for maintenance and repairs are charged to expense as
incurred. Upon sale or retirement, the cost and related accumulated depreciation
or amortization are removed from the accounts and any resulting gain or loss is
reflected in other income or expense.
Investments
At May 31, 1998, the Company had an investment in the common stock,
registered and unregistered shares, of a public company of approximately 19.5%.
The investment is classified as an available-for-sale security in accordance
with Statements of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities, and is reported at fair
value, with unrealized gains and losses excluded from the statements of
operations and reported as a separate component of shareholders' equity.
Unrealized losses which are determined to be other-than-temporary are included
in the statements of operations. Fair value of the common stock is determined as
the quoted value of the stock in the over-the-counter market, without any
discounts for large blocks or unregistered shares. There is no assurance that
such values will be realizable upon liquidation or sale.
Intangible Assets
Costs in excess of net book value of acquired subsidiaries is amortized
using the straight-line method over 15 years from the date of acquisition.
Purchased patents are recorded at cost. Developed patents are recorded at
the value of related compensation awarded. Patents are amortized using the
straight-line method over the estimated useful lives of the patents ranging from
10 to 17 years.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
Revenue Recognition
Revenue is recognized when products are shipped to customers.
Research and Development
Research and development costs are expensed as incurred and are included in
operating expenses.
F-11
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
The Company follows the asset and liability method of accounting for income
taxes. Under the asset and liability method of accounting for income taxes,
deferred tax assets and liabilities are recognized based on the estimated future
tax consequences attributable to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Stock-Based Compensation
The Company follows the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. This statement permits a company to choose either a
new fair-value method or the Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, intrinsic-value based method of
accounting for stock-based compensation arrangements. SFAS No. 123 requires pro
forma disclosure of net income and earnings per share computed as if the
fair-value based method had been applied in financial statements of companies
that continue to account for such arrangements under APB Opinion No. 25. The
Company has elected to continue to record stock-based compensation using the APB
Opinion No. 25 intrinsic-value-based method and, therefore, the adoption of SFAS
No. 123 has not impacted the Company's financial positions, results of
operations, or liquidity.
Net Income (Loss) Per Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, Earnings Per Share. SFAS No. 128 requires the presentation of
basic earnings per share, and for companies with complex capital structures,
diluted earnings per share. Basic earnings per share is computed using the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period using the
treasury stock method. The Company has presented historical basic and diluted
income (loss) per share in accordance with SFAS No. 128. As the Company had a
net loss in the year ended May 31, 1996, basic and diluted net loss per share is
the same.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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.
New Accounting Pronouncements
In June 1997, the FASB issued 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
F-12
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 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 February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
About Pensions and Other Postretirement Benefits. SFAS No. 132 revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997. The Company has
not determined the manner in which it will present the information required by
SFAS No. 132.
(3) Segment Information and Concentration of Risk
The Company conducts its business in two business segments, "Aerospace" and
"Electronics." The Aerospace business segment primarily comprises machined and
cast metal products operations. Net sales of the Aerospace business segment
include sales to customers in the aerospace, defense and transportation
industries. Net sales of the Electronics business segment also include sales to
customers in the aerospace and defense industries. Historically, these segments
have been cyclical and sensitive to general economic and industry specific
conditions. In particular, the aerospace industry, in past years, has been
adversely affected by a number of factors, including reduced demand for
commercial aircraft, a decline in military spending, postponement of overhaul
and maintenance of aircraft, increased fuel and labor costs, increased
regulations, and intense price competition, among other factors. Although the
aerospace supply industry currently is enjoying favorable trends, there is no
assurance that such trends will continue. There is also no assurance that
general economic conditions will not lead to a downturn in demand for core
components and products of the Company, in each of its business segments.
Presented below is the Company's business segment information. Identifiable
assets are those assets used in the Company's operations in each business
segment, and do not include advances or loans between the business segments.
Corporate assets are identified below, and no allocations were necessary for
assets used jointly by the business segments.
F-13
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Year ended May 31, 1996:
<TABLE>
<CAPTION>
Corporate,
other and
Aerospace Electronics elimination Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales to customers............................ $12,382,000 8,343,000 -- 20,725,000
Net sales between segments........................ 376,000 -- (376,000) --
Income (loss) from operations..................... (278,000) 405,000 (710,000) (583,000)
Identifiable assets............................... 17,429,000 7,527,000 2,693,000 27,649,000
Capital expenditures.............................. 824,000 469,000 -- 1,293,000
Depreciation and amortization..................... 541,000 330,000 -- 871,000
Year ended May 31, 1997:
Corporate,
other and
Aerospace Electronics elimination Total
----------- ----------- ----------- -----------
Net sales to customers............................ $22,949,000 11,226,000 -- 34,175,000
Net sales between segments........................ 151,000 -- (151,000) --
Income (loss) from operations..................... 1,043,000 2,203,000 (1,299,000) 1,947,000
Identifiable assets............................... 21,011,000 11,419,000 3,322,000 35,752,000
Capital expenditures.............................. 1,961,000 778,000 -- 2,739,000
Depreciation and amortization..................... 897,000 461,000 -- 1,358,000
Year ended May 31, 1998:
Corporate,
other and
Aerospace Electronics elimination Total
----------- ----------- ----------- -----------
Net sales to customers............................ $34,146,000 19,953,000 -- 54,099,000
Net sales between segments........................ 162,000 5,000 (167,000) --
Income (loss) from operations..................... 4,665,000 2,454,000 (2,379,000) 4,740,000
Identifiable assets............................... 29,761,000 28,943,000 19,876,000 78,580,000
Capital expenditures.............................. 4,212,000 1,333,000 4,745,000 10,290,000
Depreciation and amortization..................... 1,301,000 855,000 48,000 2,204,000
</TABLE>
The Company had two customers, each comprising greater than 10% of net
sales, aggregating 65%, 43%, and 45% for the fiscal years ended May 31, 1996,
1997, and 1998, respectively.
At May 31, 1997, the Company had one customer which represented 14% of
accounts receivable. At May 31, 1998, the Company had two customers, aggregating
25%, each of which comprised greater than 10% of accounts receivable.
Credit is extended to customers based on an evaluation of their financial
condition and collateral is generally not required.
The Company currently purchases aluminum and other raw materials from a
limited number of suppliers. Although there are a limited number of potential
suppliers of such raw materials, management believes that other suppliers could
provide these raw materials on comparable terms. A change in suppliers, however,
could cause a delay in manufacturing, increased costs, and a possible loss of
sales, which could have a material adverse effect on the manufacturing and
delivery of the Company's products. The Company purchased $1,762,000,
$2,570,000, and $2,723,000 from one supplier during the years ended May 31,
1996, 1997, and 1998, respectively.
The Company purchases other raw materials, of lesser significance, which
are available from a limited number of suppliers.
F-14
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At May 31, 1998, the Company had purchase commitments for raw materials
aggregating $4,064,000.
(4) Business Acquisitions
In November 1995, a wholly-owned subsidiary of the Company acquired all of
the assets and assumed certain liabilities of Seismic Safety Products, Inc. The
asset purchase price consisted of $70,000 in cash and 128,750 shares of the
Company's common stock valued at $483,000, for a total of $553,000. In
connection with the transaction, the Company acquired certain patents for total
consideration of $520,000. Costs in excess of net book value of $535,000 were
recorded as a result of this acquisition.
Effective for accounting purposes in November 1995, a wholly-owned
subsidiary of the Company merged with Morel Industries, Inc. The purchase price
consisted of 650,000 shares of the Company's common stock valued at
approximately $2.6 million. Costs in excess of net book value of $939,000 were
recorded as a result of this acquisition.
In April 1997, a wholly-owned subsidiary of the Company acquired all of the
assets and assumed certain liabilities of Northwest Technical Industries, Inc.
The asset purchase price consisted of 477,540 shares of the Company's common
stock valued at $1,552,000. Costs in excess of net book value of $270,000 were
recorded as a result of this acquisition.
Effective for accounting purposes in February 1998, a wholly-owned
subsidiary of the Company acquired substantially all of the assets and assumed
certain liabilities of PCC Composites, Inc.'s operating unit, Balo Precision
Parts. The purchase price consisted of $2.25 million in cash and resulted in
costs in excess of net book value of $1,029,000.
Effective for accounting purposes in March 1998, a wholly-owned subsidiary
of the Company acquired substantially all assets and certain liabilities of
Electronic Specialty Corporation and its wholly-owned subsidiary, Displays &
Technologies, Inc. (collectively "ESC"). The purchase price consisted of $2.0
million in cash, 923,304 shares of the Company's common stock valued at
$6,109,000, and acquisition costs of $77,000 for a total of $8,186,000. Costs in
excess of net book value of $3,631,000 were recorded as a result of this
acquisition.
The business combinations described above have been accounted for using the
purchase method. Accordingly, assets and liabilities have been recorded at their
fair value at acquisition date. Operating results of these acquired companies
are included in the Company's consolidated statements of operations from the
respective acquisition dates.
The following summary, prepared on a pro forma basis, presents the
unaudited consolidated condensed results of operations of the Company, as if the
aforementioned business acquisitions were made as of the first day of the
immediately preceding fiscal year in which the entity was acquired. There are no
material adjustments which impact the summary.
F-15
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Year ended May 31 (unaudited)
-------------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net sales....................................................... $26,801,000 49,117,000 64,968,000
Income (loss) from operations................................... (908,000) 444,000 4,384,000
Net income (loss)............................................... (1,660,000) 249,000 3,003,000
Net income (loss) per share:
Basic...................................................... (0.25) 0.03 0.23
Diluted.................................................... (0.25) 0.02 0.21
Shares used in computation of net income (loss) per share:
Basic...................................................... 6,687,000 9,936,962 13,287,961
Diluted.................................................... 6,687,000 10,027,762 14,407,945
</TABLE>
The pro forma results are not necessarily indicative of the actual results
of operations that would have occurred had the transactions been consummated as
of the date indicated nor are they intended to indicate results that may occur
in the future.
(5) Inventories
Inventories at May 31 consist of the following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Raw materials........................................... $ 2,685,000 5,789,000
Work in progress........................................ 3,387,000 5,683,000
Finished goods.......................................... 3,010,000 4,712,000
----------- -----------
$ 9,082,000 16,184,000
=========== ===========
</TABLE>
(6) Property, Plant and Equipment
Property, plant and equipment, including assets under capital lease
arrangements, at May 31 consist of the following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Land.................................................... $ 895,000 1,171,000
Buildings............................................... 4,300,000 4,380,000
Leasehold improvements.................................. 401,000 1,738,000
Machinery and equipment................................. 9,305,000 18,331,000
Furniture and fixtures.................................. 1,215,000 2,494,000
----------- -----------
16,116,000 28,114,000
Less accumulated depreciation and amortization .... 3,309,000 5,108,000
----------- -----------
12,807,000 23,006,000
Construction and purchases in progress.................. 383,000 3,329,000
----------- -----------
$13,190,000 26,335,000
=========== ===========
</TABLE>
The Company recognized depreciation of property, plant and equipment of
$696,000, $1,103,000 and $1,851,000 during the years ended May 31, 1996, 1997
and 1998, respectively.
F-16
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7) Note Receivable From Related Party
At May 31, 1997, the Company had a note receivable from a shareholder
collectible in monthly principal and interest installments of $5,900, with the
final principal balance due in March 1999. During the year ended May 31, 1998,
the note receivable was repaid in full. Also see Note 8.
(8) Investment
At May 31, 1998, the Company held an interest in the common stock,
registered and unregistered shares, of a public company of approximately 19.5%.
The investment consists of shares which were purchased on the open market and
shares which were obtained in conjunction with the settlement of certain
outstanding notes receivable from the public company under a restructuring
agreement, amounting to approximately $359,000 and $4,220,000, respectively, at
May 31, 1998. The Company recorded an unrealized loss, included in shareholders'
equity, on the shares of $436,000 as of May 31, 1998. Under the restructuring
agreement, the public company converted notes, previously issued by the Company
to the public company and its subsidiaries, into shares of the public company
stock at $2.00 per share. In addition, the public company agreed to grant the
Company demand registration rights for those shares and, in the event of an
underwritten public offering, piggyback registration rights, which will be
effective after the earliest of (a) the closing of the public company's third
round of financing, or (b) the first anniversary of the closing of the
restructuring agreement. The Company also agreed to continue guaranteeing the
public company credit facility of $1.3 million and an equipment lease of
$373,000.
At May 31, 1998, the Company had a note receivable from the public company.
The note accrues interest at 8% per annum, requires interest-only payments for
the first year, and requires fully amortizing monthly payments of principal plus
interest for the final four years of the note. In the restructuring agreement,
the public company also agreed to purchase certain other notes and interests of
the Company (including warrants and interests in a lawsuit and bankruptcy
action) for a $950,000 promissory note from the public company. The note accrues
interest at 8% per annum, requires interest-only payments for the first year,
and requires fully-amortizing monthly payments of principal plus interest for
the final four years of the note.
In conjunction with the restructuring agreement, the Company recorded a
nonrecurring charge during the year ended May 31, 1998 of $1,038,000 to reflect
the restructuring of the debt and the difference between the Company's carrying
amounts of the other notes and the interest in the lawsuit and bankruptcy and
the public company promissory note. The amount has been included in other
expense for the year ending May 31, 1998.
Certain of the Company's directors were also directors of the public
company through January 1998. In addition, certain officers of the Company were
individual shareholders of the public company until such shares were sold in May
1998. The Company also subleases approximately 95% of the square footage of its
Bothell, Washington office space to the public company for an amount equivalent
to the percentage of the lease payment for that space. Certain directors and
officers of the Company personally guarantee certain debt of the public company.
F-17
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Credit Facility
In May 1997, the Company executed a commitment letter with a bank for a
credit facility consisting of (a) a revolving working capital line of credit of
up to $3,500,000 that extends from June 1997 to September 1998 (the "Line of
Credit"), (b) a seven-year capital equipment acquisition credit facility of up
to $2,000,000 (the "Equipment Line"), and (c) a 10-year term loan of
approximately $700,000, or approximately 80% of the cost of a recent addition to
a subsidiary's building (the "Construction Loan"). The Company has executed the
documents for the Line of Credit and the Construction Loan, but has not yet
elected to close the Equipment Line. As of May 31, 1998, the Line of Credit had
no outstanding balance and the Company had not yet requested funding of the
Equipment Line. Borrowings will bear interest at variable rates, and will be
secured by inventories, accounts receivable, and certain equipment and building
improvements. The agreement contains restrictive covenants related to working
capital, net worth and debt service coverage. Management believes the Company is
in compliance with these covenants at May 31, 1998.
In connection with the acquisition of ESC, the Company assumed a revolving
working capital line of credit. Interest accrues at the 30-day commercial paper
rate plus 3.25% (8.75% at May 31, 1998) and the outstanding balance was
$1,511,000 at May 31, 1998. There are certain restrictive covenants related to
tangible net worth and debt to tangible net worth ratios. Management believes
the Company is in compliance with these covenants at May 31, 1998. Subsequent to
May 31, 1998, the line of credit was reduced to $1,200,000.
(10) Long-Term Debt
Long-term debt at May 31 consists of the following:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Industrial revenue bond payable to a bank in monthly installments of
$19,200, including interest at 8.12%, through November 2009..................... $1,242,000 1,108,000
Note payable to a bank in monthly installments of $7,000, including
interest at 8.39% with the principal balance due in full in March 2008.......... -- 712,000
Subordinated note payable to the City of Entiat in monthly installments of
$7,300, including interest at 8%, with the principal balance due in full
in May 2001..................................................................... 551,000 505,000
Note payable to bank in monthly principal installments of $5,000 plus
interest at the 30-day commercial paper rate plus 3.25% (8.75% at May
31, 1998) through October 2002.................................................. -- 265,000
Notes payable to a pension fund and others, with interest only payments at
6.75% due quarterly commencing January 1998 through October 2001,
with the principal balance due in full in October 2001.......................... -- 4,050,000
Notes payable to a financing company for certain equipment in aggregate
monthly installments of $58,000, including interest at 9% to 10.7%,
with maturity dates ranging from April 2000 to May 2004......................... -- 2,685,000
Other notes payable for vehicles and certain equipment in aggregate
monthly installments of $52,000, including interest at 5.9% to 10.9%
with maturity dates ranging from November 1998 to July 2006..................... 1,216,000 761,000
Notes payable with interest ranging from 8% to 10.25%, repaid in full
during the year ended May 31, 1998.............................................. 745,000 --
---------- ----------
3,754,000 10,086,000
F-18
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1997 1998
---------- ----------
<S> <C> <C>
Less current portion............................................................... 855,000 1,027,000
---------- ----------
Long-term portion............................................................. $2,899,000 9,059,000
========== ==========
</TABLE>
The industrial revenue bond agreement requires, among other items, that the
Company maintain minimum working capital, tangible net worth and debt to
tangible net worth ratios. Management believes the Company is in compliance with
these covenants at May 31, 1998.
Scheduled principal maturities of long-term debt at May 31, 1998 are as
follows for each of the following fiscal year-ends:
1999.................................................... $ 1,027,000
2000.................................................... 1,038,000
2001.................................................... 984,000
2002.................................................... 4,957,000
2003.................................................... 812,000
Thereafter.............................................. 1,268,000
------------
$ 10,086,000
============
Long-term debt is secured by substantially all assets of the Company and,
in certain circumstances, through personal guarantees of certain shareholders.
(11) Leasing Arrangements
Capital Leases
The Company leases certain property, plant and equipment under capital
lease agreements that expire through September 2004. Aggregate minimum principal
payments to be made under these agreements at May 31, 1998 are as follows for
each of the following fiscal year-ends:
1999.................................................... $ 206,000
2000 ................................................... 218,000
2001 ................................................... 216,000
2002 ................................................... 186,000
2003 ................................................... 151,000
Thereafter ............................................. 170,000
------------
$ 1,147,000
============
Included in property, plant and equipment are costs of $551,000 and
$1,402,000 and related accumulated amortization of $58,000 and $208,000 recorded
under capital leases at May 31, 1997 and 1998, respectively.
F-19
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Operating Leases
The Company leases certain property, plant and equipment under operating
lease agreements that expire through June 2026. Aggregate minimum rental
payments to be made under these agreements at May 31, 1998 are as follows for
each of the following fiscal year-ends:
1999 .................................................. $ 1,252,000
2000 .................................................. 1,206,000
2001 .................................................. 1,194,000
2002 .................................................. 1,192,000
2003 .................................................. 1,090,000
Thereafter ............................................ 4,400,000
------------
$ 10,334,000
============
Total rent expense during the years ended May 31, 1996, 1997 and 1998
amounted to $516,000, $475,000 and $788,000, respectively.
(12) Convertible Notes
In August 1997, the Company closed a private offering of $5,800,000, before
expenses of $435,000, in convertible promissory notes (the "Convertible Notes")
to two accredited investors. The Company intends to use the proceeds of this
offering primarily in connection with proposed and future acquisitions. The
Company subsequently filed a registration statement, which was declared
effective, registering for resale up to 1,720,690 shares of common stock
issuable upon conversion of the Convertible Notes. As of May 31, 1998, all of
the Convertible Notes had been converted into 1,405,018 shares of common stock.
(13) Common Stock
During the year ended May 31, 1996, the Company sold 1,429,470 shares of
its common stock at an average of $3.43 per share, in a private offering to
institutional investors. The Company incurred approximately $375,000 of costs
related to the offering, which were charged against the proceeds of the offering
in 1996.
In July 1996, the Company conducted a public offering of 2,250,000 units,
each unit composed of one share of the Company's common stock and a warrant to
purchase one share of the Company's common stock at a price of $3.125 per unit
in a public offering. The warrants entitled the holder to purchase one share of
common stock at $4.6875 per share, exercisable any time through July 2001. In
addition, the Company issued warrants to two underwriters for the purchase of an
additional 225,000 units at $3.75 per unit. All of these warrants were
outstanding at May 31, 1997 and 1998. During the years ended May 31, 1996 and
1997, the Company incurred $328,000 and $1,398,000, respectively, of costs
related to the offering. The costs incurred during the year ended May 31, 1996
were deferred and were charged against the proceeds of the stock offering in the
year ended May 31, 1997. During the year ended May 31, 1998, 45,000 of the
underwriter's warrants were exercised for 45,000 units.
In November 1997, the Company closed a private offering of $6,408,000,
before expenses of $320,000, in common stock and notes payable to three
accredited investors. The Company subsequently
F-20
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
filed a registration statement, which was declared effective, registering for
resale the 524,000 shares of common stock sold in the offering. The outstanding
balance of the notes payable of $4,050,000 is included in long-term debt at May
31, 1998. In conjunction with the private offering, consulting fees of $320,000
were paid to a director and shareholder of the Company.
(14) Convertible Preferred Stock
Series A Convertible Preferred Stock
In February 1997, the Company sold 50,000 shares of Series A convertible
preferred stock (Series A) in a private placement for $5,000,000, and incurred
related offering costs of $519,000, resulting in net proceeds of $4,481,000.
Conversion provisions include conversion any time after June 12, 1997;
conversion to common stock at a rate equal to $100 divided by the lower of $3.49
or 85% of the average closing common per share bid price over the five days
before conversion; and total shares converted cannot exceed 20% of total common
stock outstanding, or approximately 1,950,000 shares. At May 31, 1998, all of
the shares of Series A were converted into 1,494,593 shares of common stock.
Series B Convertible Preferred Stock
In May 1998, the Company sold 100,000 shares of Series B convertible
preferred stock (Series B) for $100 per share, and issued warrants to purchase
138,888 shares of Common Stock, in a private offering which resulted in gross
proceeds of $10,000,000, less related offering costs of $740,000, for net
proceeds of $9,260,000. In addition, the purchasers deposited $7,000,000 into
escrow, and, upon the closing of the acquisition of Aeromet International plc
(Aeromet), the Company will issue the purchasers 70,000 additional shares of
Series B, and warrants to purchase an additional 97,221 shares of Common Stock,
in exchange for the escrowed funds. If the Aeromet Acquisition fails to close,
the purchasers may elect not to purchase the additional shares of Series B and
related warrants, and to have the escrowed funds returned to them.
The Common Stock issuable upon conversion of the Series B and upon exercise
of the related warrants are subject to a registration rights agreement that
requires the Company to file a registration statement covering those shares by
November 1998, and to use its best efforts to make that registration statement
effective by January 1999. The registration rights agreement also grants certain
piggyback registration rights with regard to the shares of Common Stock
underlying the Series B and the related warrants.
Upon conversion of a share of Series B, the holder will receive the number
of shares of Common Stock equal to $100 divided by the then applicable
conversion price of the Series B. Up to $7,000,000 in value of the Common Stock
underlying the Series B Preferred may be converted and sold at any time, if that
Common Stock is included in an effective piggyback registration. Shares of
Series B whose underlying shares of Common Stock are not included in a piggyback
registration are not convertible until August 1998, and may not be sold until
February 1999. At that time, the underlying Common Stock may be sold upon the
effectiveness of a registration statement, or under any applicable exemption
from registration. From August 1998 until February 1999, the conversion price of
the Series B is $7.20 per share. After February 1999, the conversion price of
the Series B is equal to the lower of (a) $7.20 per share, or (b) the average of
the three lowest closing bid prices per share of the Common Stock over the 22
trading days before conversion, but not less than $5.67, except in certain
limited circumstances. No holder of Series B is
F-21
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
entitled to voluntarily convert Series B that would cause the holder to own more
than 9.9% of the Company's total outstanding Common Stock at any one time. Any
Series B outstanding on May 2003 will be automatically converted into Common
Stock at the then-applicable conversion price.
The Series B has no voting rights and certain preferences relating to
dividends, liquidation, and in specific situations, redemption.
(15) Warrants
In connection with certain notes payable, in May 1996, the Company issued
the lenders warrants to purchase 337,500 shares of common stock at an exercise
price of $4.80 per share. The warrants expire in May 2001 and were valued at
approximately $12,000. During the year ended May 31, 1997, there were no
warrants exercised for shares of common stock. During the year ended May 31,
1998, there were 300,000 warrants exercised for shares of common stock.
In June 1997, the Company issued warrants to purchase 125,000 shares of
common stock for $3.45 per share in consideration for certain financial
consulting services. The warrants, which expire in June 2002, were valued at
$24,000. During the year ended May 31, 1998, 75,000 of the warrants were
exercised for shares of common stock.
In December 1997, the Company issued warrants to purchase 375,000 shares of
common stock for $4.6875 per share in consideration for a financial consulting
and services agreement. The warrants, which expire in June 1998, were valued at
$60,000. During the year ended May 31, 1998, all of the warrants were exercised
for shares of common stock.
In February 1998, the Company issued warrants to purchase 1,290,000 shares
of common stock at an exercise price of $4.62 per share in consideration for a
financial consulting and services agreement. The warrants, which expire in
February 2002, were valued at $360,000. During the year ended May 31, 1998,
there were no warrants exercised for shares of common stock.
In May 1998, the Company issued warrants to purchase 138,888 shares of
common stock at an exercise price of $7.20 per share in conjunction with the
Series B offering. The warrants, which expire in May 2003, were valued at
$220,589 and included in additional paid in capital at May 31, 1998.
A summary of the Company's warrants, excluding warrants issued in
connection with the public offering in July 1996, is as follows:
<TABLE>
<CAPTION>
Weighted average
Warrants price of shares
---------- ----------------
<S> <C> <C>
Balance at June 1, 1995................................ 160,000 $ 2.00
Granted................................................ 337,500 4.80
---------- -------
Balance at May 31, 1996 and 1997....................... 497,500 4.34
Granted................................................ 1,928,888 4.74
Exercised.............................................. (750,000) 4.61
---------- --------
Balance at May 31, 1998................................ 1,676,388 $ 4.36
========== ========
</TABLE>
F-22
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following summarizes warrants outstanding, excluding warrants issued in
connection with the public offering in July 1996, at May 31, 1998:
<TABLE>
<CAPTION>
Weighted average Weighted average
Range of exercise prices Number outstanding remaining contractual life exercise price Number exercisable
- ------------------------ ------------------ -------------------------- ---------------- ------------------
<S> <C> <C> <C> <C>
$2.00 - 4.00 210,000 4.69 years $ 2.35 210,000
4.01 - 6.00 1,327,500 3.97 years 4.63 1,327,500
6.01 - 8.00 138,888 5.00 years 7.20 --
--------- ----------
1,676,388 1,537,500
========= ==========
</TABLE>
The 138,888 warrants issued in connection with the Series B are exercisable
beginning in May 1999. All other warrants are fully exercisable at May 31, 1998.
(16) Compensation Plans
Long-Term Investment and Incentive Plan
The Company has a long-term stock investment and incentive plan (Option
Plan) under which directors, officers, key employees and other key individuals
may be awarded stock options, stock appreciation rights, stock and cash bonuses,
restricted stock, or performance units. Under the Option Plan, the exercise
price of options issued is not less than fair-market value at the date of grant.
Options expire ten years from the grant date.
For the year ended May 31, 1998, the Company had not issued any stock
appreciation rights, stock or cash bonuses, restricted stock, or performance
units under the Option Plan.
As the Company applies APB Opinion No. 25 and related interpretations in
accounting for its Option Plan, no compensation costs have been recognized for
stock options issued to employees. Had compensation costs for stock options been
determined consistent with SFAS No. 123, the results of the Company would have
been adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss):
As reported................................................... $ (999,000) 1,682,000 3,614,000
Pro forma..................................................... (1,043,000) 75,000 2,478,000
Net income (loss) per share:
As reported:
Basic.................................................... (0.16) 0.18 0.29
Diluted.................................................. (0.16) 0.17 0.27
Pro forma:
Basic.................................................... (0.17) 0.01 0.20
Diluted.................................................. (0.17) 0.01 0.18
Shares used in computation of net income (loss) per share:
Basic ...................................................... 6,209,000 9,499,980 12,486,077
Diluted ..................................................... 6,209,000 10,035,846 13,606,061
</TABLE>
The fair value of the options granted during 1996, 1997 and 1998 is
estimated as $248,000, $1,853,000 and $3,007,000, respectively, using the
Black-Scholes option-pricing model with the following assumptions on the date of
grant: zero percent dividend yield, expected volatility from 24% to 73%,
risk-free interest rate from 5.55% to 6.59%, and expected lives ranging from 5
to 10 years.
F-23
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the Company's Stock Option Plan is as follows:
<TABLE>
<CAPTION>
Shares of common stock
--------------------------- Weighted
Available Options average
options under plan price of shares
----------- ----------- ---------------
<S> <C> <C> <C>
Balance at June 1, 1995....................................... 1,000,000 -- $ --
Granted....................................................... (145,283) 145,283 5.09
----------- ----------- -----------
Balance at May 31, 1996....................................... 854,717 145,283 5.09
Authorized.................................................... 1,000,000 -- --
Granted....................................................... (998,333) 998,333 4.53
----------- ----------- -----------
Balance at May 31, 1997....................................... 856,384 1,143,616 4.61
Authorized.................................................... 1,000,000 -- --
Granted....................................................... (1,112,500) 1,112,500 5.49
Exercised..................................................... -- (25,000) 2.11
----------- ----------- -----------
Balance at May 31, 1998....................................... 743,884 2,231,116 $ 5.09
=========== =========== ===========
</TABLE>
No options were exercised or lapsed during the years ended May 31, 1996 and
1997.
The following summarizes options outstanding at May 31, 1998:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------------------- -----------------------------
Weighted average Weighted Weighted
Range of Number remaining average Number average
exercise prices outstanding contractual life exercise price exercisable exercise price
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$2.00--4.00 248,333 8.68 years $ 3.05 248,333 $ 3.05
4.01--6.00 1,400,283 8.56 years 4.74 1,327,113 4.72
6.01--8.00 580,500 9.97 years 6.13 97,500 6.13
---------- ----------
2,229,116 1,672,946
========== ==========
</TABLE>
Independent Director Stock Plan
The Company has an Independent Director Stock Plan under which nonemployee
directors of the Company are awarded common stock of the Company for serving on
its board of directors. The plan authorizes and reserves for issuance a maximum
of 100,000 common shares. At May 31, 1998, 68,041 shares were available for
future issuance. During the years ended May 31, 1996, 1997 and 1998, 9,000,
14,400 and 8,559 shares of the Company's common stock, respectively, were issued
under the plan of which 27,009 were vested at May 31, 1998. Included in
compensation expense is $24,000, $44,000 and $13,000 for the years ended May 31,
1996, 1997 and 1998, respectively, resulting from the shares issued.
Retirement Plan
The Company maintains a 401(k) plan covering all eligible employees who
meet service requirements as provided in the plan. Company contributions to the
profit-sharing plan are determined annually by the board of directors. No
contributions were made by the Company to the plan during the years ended May
31, 1996 and 1997. The Company contributed $27,000 to the plan in the year ended
May 31, 1998.
F-24
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan under which employees are
eligible to purchase shares of the Company's common stock, through payroll
deductions, at the lower of 85% of the Company's stock price on the first day of
an offering period or 100% of the Company's stock price on the last day of an
offering period. The first offering period is expected to begin in September
1998 and end approximately one year later.
(17) Income Taxes
Total income tax benefit (expense) is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Current Federal................................. $ -- (50,000) (593,000)
Deferred Federal................................ 67,000 -- 1,075,000
-------- -------- ---------
Total...................................... $ 67,000 (50,000) 482,000
======== ======== =========
</TABLE>
A reconciliation of the Federal statutory tax rate of 34% and the Company's
effective tax rates of 6%, 3% and 15% in the years ended May 31, 1996, 1997 and
1998, respectively, is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Computed expected income tax benefit (expense).. $362,000 (588,000) (1,065,000)
Change in valuation allowance................... 241,000) 558,000 1,717,000
Other........................................... (54,000) (20,000) (170,000)
-------- -------- ----------
$ 67,000 (50,000) 482,000
======== ======== ==========
</TABLE>
Significant components of the Company's deferred tax assets (liabilities)
are as follows:
<TABLE>
<CAPTION>
1997 1998
----------- ----------
<S> <C> <C>
Deferred tax assets:
NOL carryforward.................................... $ 2,135,000 1,387,000
Other............................................... 290,000 641,000
Valuation allowances................................ (1,717,000) --
----------- ----------
708,000 2,028,000
Deferred tax liabilities--depreciation.............. (1,300,000) (1,420,000)
----------- ----------
Net deferred tax asset (liability)............. $ (592,000) 608,000
=========== ==========
</TABLE>
The Company has net operating loss (NOLs) carryforwards for Federal income
tax purposes of approximately $4,880,000, the benefits of which expire in the
tax year 2001 through the tax year 2011. The NOLs created by the Company's
subsidiaries prior to their acquisition and the NOLs created as a consolidated
group or groups subsequent to a qualifying tax free merger or acquisition, have
limitations related to the amount of usage by each subsidiary or consolidated
group as described in the Internal Revenue Code. As a result of these
limitations, approximately $800,000 of the $4,880,000 of NOLs will never become
available.
At May 31, 1997, the Company recorded a valuation allowance because
management believed that it was uncertain that some portion or all of the
deferred tax assets would not be realized. At May 31, 1998,
F-25
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the Company eliminated the valuation allowance for deferred taxes due to
management's assessment of improved probability of realization.
(18) Fair Value of Financial Instruments
The Company's financial instruments include cash, receivables, an
investment, accounts payable and short- and long-term borrowings. The fair value
of these financial instruments approximates their carrying amounts based on
current market indicators, such as prevailing interest rates.
(19) Contingencies
Legal
The Company is currently subject and party to various legal actions arising
out of the normal course of business. Management believes the ultimate
liability, if any, arising from such claims or contingencies is not likely to
have a material adverse effect on the Company's results of operations or
financial condition.
In the normal course of business, the Company disposes of potentially
hazardous material which could result in claims related to environmental
cleanup. The Company has not been notified of any related claims. The Company is
subject to various other environmental and governmental regulations. Although
the extent of any noncompliance with those regulations, if any, is not
completely ascertainable, management believes the ultimate liability is not
likely to have a material adverse effect on the Company's results of operations
or financial condition.
Year 2000
The Company is in process of developing a plan to address the Year 2000
computer problem and to begin converting its computer systems to be Year 2000
compliant. The Year 2000 problem is the result of computer programs being
written using two digits rather than four to define the applicable year. The
Company presently believes that with upgrades to existing software and possibly
some replacement, the Year 2000 problem will not pose significant operational
problems for the Company's computer systems. However, if such upgrades and
replacements are not completed timely or effectively, the Year 2000 problem may
have a material impact on the operations of the Company. The Company expects to
incur internal staffing costs, as well as the cost of software upgrades and
replacement as part of this effort. However, until the Company's plan is
finalized, management is unable to reasonably estimate the costs of achieving
Year 2000 compliance.
(20) Subsequent Events
In July 1998, the Company expects to complete the issuance of $75 million
of notes and, subsequently, consummate the acquisition of Aeromet, a company
headquartered in the United Kingdom. Aeromet is one of the leading suppliers of
magnesium and aluminum precision sand and investment castings, and titanium and
aluminum formed sheet products for the aerospace, defense, and transportation
industries in the United Kingdom. For the year ended December 31, 1997, Aeromet
had net sales of $48.7 million, income from operations of $1.6 million, and a
net loss of approximately $30,000. The acquisition is expected to be accounted
for using the purchase method. There is no assurance that the aforementioned
F-26
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
transactions will be completed or that the aforementioned financial results will
be indicative of future results.
(21) 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.
F-27
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Balance Sheet
May 31, 1998
GUARANTOR NON-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 $ -- $ -- $ 11,461,100
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
of acquired subsidiaries, net -- 6,515,000 -- -- 6,515,000
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 3,013,000 460,000 -- -- 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 462,000 3,842,000 -- -- 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 portion 4,127,000 4,932,000 -- -- 9,059,000
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>
F-28
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Balance Sheet
May 31, 1997
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 2,063,000 $ 985,000 $ -- $ -- $ 3,048,000
Certificate of deposit 1,000,000 -- -- -- 1,000,000
Accounts receivable, net -- 5,622,000 -- (167,000) 5,455,000
Inventories -- 9,082,000 -- -- 9,082,000
Other 258,000 96,000 -- -- 354,000
------------ ------------ ------------- ------------ ------------
Total current assets 3,321,000 15,785,000 -- (167,000) 18,939,000
PROPERTY, PLANT, AND EQUIPMENT, net 9,000 13,181,000 -- -- 13,190,000
OTHER ASSETS
Costs in excess of net book value
of acquired subsidiaries, net -- 2,071,000 -- -- 2,071,000
Intercompany loan receivable 16,460,000 -- -- (16,460,000) --
Investment in subsidiaries 6,233,000 -- -- (6,233,000) --
Other 12,000 1,540,000 -- -- 1,552,000
------------ ------------ ------------- ------------ ------------
Total other assets 22,705,000 3,611,000 -- (22,693,000) 3,623,000
------------ ------------ ------------- ------------ ------------
TOTAL ASSETS $ 26,035,000 $ 32,577,000 $ -- $(22,860,000) $ 35,752,000
============ ============ ============= ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Accounts payable $ 145,000 $ 3,758,000 $ -- $ (167,000) $ 3,736,000
Current portion of long-term debt 94,000 761,000 -- -- 855,000
Other 146,000 1,112,000 -- -- 1,258,000
------------ ------------ ------------- ------------ ------------
Total current liabilities 385,000 5,631,000 -- (167,000) 5,849,000
LONG-TERM LIABILITIES
Long-term debt, net of current portion 31,000 2,868,000 -- -- 2,889,000
Intercompany loan payable -- 16,460,000 -- (16,460,000) --
Other -- 1,385,000 -- -- 1,385,000
------------ ------------ ------------- ------------ ------------
Total long-term liabilities 31,000 20,713,000 -- (16,460,000) 4,284,000
SHAREHOLDERS' EQUITY
Convertible preferred stock -- -- -- -- --
Common stock 10,000 -- -- -- 10,000
Additional paid-in capital 30,490,000 11,105,000 -- (11,105,000) 30,490,000
Accumulated deficit (4,881,000) (4,872,000) -- 4,872,000 (4,881,000)
------------ ------------ ------------- ------------ ------------
Total shareholders' equity 25,619,000 6,233,000 -- (6,233,000) 25,619,000
------------ ------------ ------------- ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 26,035,000 $ 32,577,000 $ -- $(22,860,000) $ 35,752,000
============ ============ ============= ============ ============
</TABLE>
F-29
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Operations
Year ended May 31, 1998
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 54,968,000 $ -- $ (869,000) $ 54,099,000
Cost of sales -- 40,356,000 -- (869,000) 39,487,000
------------- ------------ ------------- ------------ ------------
Gross profit -- 14,612,000 -- -- 14,612,000
Operating expenses 2,378,000 9,373,000 -- (1,879,000) 9,872,000
------------ ------------- ------------- ------------ ------------
Income (loss) from operations (2,378,000) 5,239,000 -- 1,879,000 4,740,000
Other income (expense)
Parent's share of subsidiaries' net income 4,778,000 -- -- (4,778,000) --
Interest expense (380,000) (485,000) -- -- (865,000)
Other 995,000 141,000 -- (1,879,000) (743,000)
------------ ------------ ------------- ------------ ------------
Total other income (expense) 5,393,000 (344,000) -- (6,657,000) (1,608,000)
------------ ------------ ------------- ------------ ------------
Income before income taxes 3,015,000 4,895,000 -- (4,778,000) 3,132,000
Income tax benefit (expense) 599,000 (117,000) -- -- 482,000
------------ ------------ ------------- ------------ ------------
Net income $ 3,614,000 $ 4,778,000 $ -- $ (4,778,000) $ 3,614,000
============ ============ ============= ============ ============
</TABLE>
F-30
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Operations
Year ended May 31, 1997
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 34,774,000 $ -- $ (599,000) $ 34,175,000
Cost of sales -- 26,615,000 -- (646,000) 25,969,000
------------ ------------ ------------- ------------ ------------
Gross profit -- 8,159,000 -- 47,000 8,206,000
Operating expenses 1,346,000 6,216,000 -- (1,303,000) 6,259,000
------------ ------------ ------------- ------------ ------------
Income (loss) from operations (1,346,000) 1,943,000 -- 1,350,000 1,947,000
Other income (expense)
Parent's share of subsidiaries' net income 1,691,000 -- -- (1,691,000) --
Interest expense (82,000) (428,000) -- -- (510,000)
Other 1,415,000 230,000 -- (1,350,000) 295,000
------------ ------------ ------------- ------------ ------------
Total other income (expense) 3,024,000 (198,000) -- (3,041,000) (215,000)
------------ ------------ ------------- ------------ ------------
Income before income taxes 1,678,000 1,745,000 -- (1,691,000) 1,732,000
Income tax benefit (expense) 4,000 (54,000) -- -- (50,000)
------------ ------------ ------------- ------------ ------------
Net income $ 1,682,000 $ 1,691,000 $ -- $ (1,691,000) $ 1,682,000
============ ============ ============= ============ ============
</TABLE>
F-31
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Operations
Year ended May 31, 1996
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 21,448,000 $ -- $ (723,000) $ 20,725,000
Cost of sales -- 17,162,000 -- (723,000) 16,439,000
------------ ------------ ------------- ------------ ------------
Gross profit -- 4,286,000 -- -- 4,286,000
Operating expenses 685,000 4,971,000 -- (787,000) 4,869,000
------------ ------------ ------------- ------------ ------------
Loss from operations (685,000) (685,000) -- 787,000 (583,000)
Other income (expense)
Parent's share of subsidiaries' net loss (999,000) -- -- 999,000 --
Interest expense (102,000) (433,000) -- -- (535,000)
Other 787,000 52,000 -- (787,000) 52,000
------------ ------------ ------------- ------------ ------------
Total other expense (314,000) (381,000) -- 212,000 (483,000)
------------ ------------ ------------- ------------ ------------
Loss before income taxes (999,000) (1,066,000) -- 999,000 (1,066,000)
Income tax benefit - 67,000 -- -- 67,000
------------ ------------ ------------- ------------ ------------
Net loss $ (999,000) $ (999,000) $ -- $ 999,000 $ (999,000)
============ ============ ============= ============ ============
</TABLE>
F-32
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Cash Flows
Year ended May 31, 1998
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
- -----------------------------------
Net cash provided by operating activities $ 4,023,000 $ 2,349,000 - $ (4,778,000) $ 1,594,000
CASH FLOW FROM INVESTING ACTIVITIES:
- -----------------------------------
Acquisition of property, plant and equipment (3,010,000) (3,499,000) - - (6,509,000)
Acquisition of subsidiaries (3,289,000) - - - (3,289,000)
Issuance of notes receivable (6,261,000) - - - (6,261,000)
Other changes, net (8,853,000) 125,000 - 8,082,000 (646,000)
------------ ------------ ------------- ------------ ------------
Net cash used in investing activities (21,413,000) (3,374,000) - 8,082,000 (16,705,000)
CASH FLOW FROM FINANCING ACTIVITIES:
- -----------------------------------
Proceeds from long-term debt
and convertible notes 9,590,000 535,000 - - 10,125,000
Payments on long-term debt
and capital leases (125,000) (1,378,000) - - (1,503,000)
Proceeds from sale of common stock, net 2,223,000 - - - 2,223,000
Proceeds from sale of preferred stock, net 9,260,000 - - - 9,260,000
Proceeds from exercise of stock options
and warrants 3,777,000 - - - 3,777,000
Other changes, net - 2,946,000 - (3,304,000 (358,000)
------------ ------------ ------------- ------------- ------------
Net cash provided by financing activities 24,725,000 2,103,000 - (3,304,000) 23,524,000
NET CHANGE IN CASH 7,335,000 1,078,000 - - 8,413,000
CASH AT BEGINNING OF YEAR 2,063,000 985,000 - - 3,048,000
------------ ------------ ------------- ------------ ------------
CASH AT END OF YEAR $ 9,398,000 $ 2,063,000 $ - $ - $ 11,461,000
============ ============ ============= ============ ============
SUPPLEMENTAL CASH FLOW:
- ----------------------
Cash paid during the period for:
Interest $ 17,000 $ 695,000 $ - $ - $ 712,000
Federal income taxes 521,000 - - - 521,000
Acquisition of subsidiaries:
Fair value of assets acquired and
resulting goodwill, excluding cash 10,034,000 - - - 10,034,000
Liabilities assumed 3,925,000 - - - 3,925,000
Common stock issued 6,109,000 - - - 6,109,000
Noncash investing and financing activities:
Seller financed acquisition of property,
plant and equipment - 3,336,000 - - 3,336,000
Conversion of notes and accrued interest
to common stock 5,519,000 - - - 5,519,000
Restructuring of certain notes receivable
for an investment in common stock 6,053,000 - - - 6,053,000
Other noncash investing and financing
activities, net 750,000 139,000 - - 889,000
</TABLE>
F-33
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Cash Flows
Year ended May 31, 1997
GUARANTOR NON-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 $ 1,474,000 $ 5,000 $ - $ (1,691,000) $ (212,000)
CASH FLOW FROM INVESTING ACTIVITIES:
- -----------------------------------
Acquisition of property, plant and equipment (9,000) (2,091,000) - - (2,100,000)
Other changes, net (9,622,000) 58,000 - 9,652,000 88,000
------------ ------------ ------------- ------------ ------------
Net cash used in investing activities (9,631,000) (2,033,000) - 9,652,000 (2,012,000)
CASH FLOW FROM FINANCING ACTIVITIES:
- -----------------------------------
Proceeds from long-term debt - 237,000 - - 237,000
Payments on long-term debt
and capital leases (94,000) (5,592,000) - - (5,686,000)
Proceeds from sale of common stock, net 5,739,000 - - - 5,739,000
Proceeds from sale of preferred stock, net 4,481,000 - - - 4,481,000
Other changes, net (224,000) 7,961,000 - (7,961,000 (224,000)
------------ ------------ ------------- ------------ ------------
Net cash provided by financing activities 9,902,000 2,606,000 - (7,961,000) 4,547,000
NET CHANGE IN CASH 1,745,000 578,000 - - 2,323,000
CASH AT BEGINNING OF YEAR 318,000 407,000 - - 725,000
------------ ------------ ------------- ------------ ------------
CASH AT END OF YEAR $ 2,063,000 $ 985,000 $ - $ - $ 3,048,000
============ ============ ============= ============ ============
SUPPLEMENTAL CASH FLOW:
- ----------------------
Cash paid during the period for:
Interest $ 70,000 $ 543,000 $ - $ - $ 613,000
Federal income taxes - 18,000 - - 18,000
Acquisition of subsidiaries:
Fair value of assets acquired and
resulting goodwill, excluding cash 1,928,000 - - - 1,928,000
Liabilities assumed (482,000) - - - (482,000)
Common stock issued 1,446,000 - - - 1,446,000
Noncash investing and financing activities:
Seller financed acquisition of property,
plant and equipment - 639,000 - - 639,000
Other noncash investing and financing
activities, net - 35,000 - - 35,000
</TABLE>
F-34
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Cash Flows
Year ended May 31, 1996
GUARANTOR NON-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
$ (804,000) $ (2,966,000) $ - $ 999,000 $ (2,771,000)
CASH FLOW FROM INVESTING ACTIVITIES:
- -----------------------------------
Acquisition of property, plant and equipment - (754,000) - - (754,000)
Other changes, net (3,282,000) 53,000 - 2,882,000 (347,000)
------------ ------------ ------------- ------------ ------------
Net cash used in investing activities (3,282,000) (701,000) - 2,882,000 (1,101,000)
CASH FLOW FROM FINANCING ACTIVITIES:
- -----------------------------------
Proceeds from long-term debt 219,000 1,886,000 - - 2,105,000
Payments on long-term debt
and capital leases - (1,457,000) - - (1,457,000)
Proceeds from sale of common stock, net 3,550,000 - - - 3,550,000
Other changes, net 635,000 2,566,000 - (3,881,000) (680,000)
------------ ------------ ------------- ------------ ------------
Net cash provided by financing activities 4,404,000 2,995,000 - (3,881,000) 3,518,000
NET CHANGE IN CASH 318,000 (672,000) - - (354,000)
CASH AT BEGINNING OF YEAR - 1,079,000 - - 1,079,000
------------ ------------ ------------- ------------ ------------
CASH AT END OF YEAR $ 318,000 $ 407,000 $ - $ - $ 725,000
============ ============ ============= ============ ============
SUPPLEMENTAL CASH FLOW:
- ----------------------
Cash paid during the period for:
Interest $ - $ 658,000 $ - $ - $ 658,000
Acquisition of subsidiaries:
Fair value of assets acquired and
resulting goodwill, excluding cash 10,286,000 - - - 10,286,000
Liabilities assumed (7,203,000) - - - (7,203,000)
Common stock issued 3,083,000 - - - 3,083,000
Noncash investing and financing activities:
Seller financed acquisition of property,
plant and equipment - 539,000 - - 539,000
Other noncash investing and financing
activities, net 1,030,000 520,000 - - 1,550,000
</TABLE>
F-35
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Inventories at May 31 consist of the following
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Guarantor subsidies
Raw materials $ 2,685,000 $ 5,789,000
Work in progress 3,387,000 5,683,000
Finished goods 3,010,000 4,712,000
------------ ------------
9,082,000 16,184,000
============ ============
</TABLE>
F-36
<PAGE>
<TABLE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
November 30, 1998
<CAPTION>
November 30,
1998
ASSETS (Unaudited)
- ------ ------------
<S> <C>
CURRENT ASSETS
Cash $ 16,392,000
Accounts receivable 21,327,000
Inventories 27,065,000
Deferred income taxes 519,000
Prepaid expense and other 1,449,000
------------
Total current assets 66,752,000
------------
PROPERTY AND EQUIPMENT, NET 46,283,000
------------
OTHER ASSETS
Note receivable, net -
Investment, net 2,719,000
Costs in excess of NBV of acquired subsidiaries, net 42,894,000
Patents, net 1,178,000
Deferred income taxes 1,583,000
Deferred financing costs, net 5,366,000
Other assets 604,000
------------
Total other assets 54,344,000
------------
TOTAL ASSETS $167,379,000
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 12,303,000
Accrued liabilities 7,748,000
Current portion - long-term debt 886,000
Current portion - capital lease obligations 629,000
Line of credit -
------------
Total current liabilities 21,566,000
------------
LONG-TERM LIABILITIES
Long-term debt, net of current portion 80,884,000
Capital leases, net of current portion 1,738,000
Deferred rent and other 317,000
------------
Total long-term liabilities 82,939,000
------------
TOTAL LIABILITIES 104,505,000
------------
SHAREHOLDERS' EQUITY
Convertible preferred stock -
Common stock 19,000
Additional paid in capital 70,781,000
Accumulated other comprehensive income (loss) 326,000
Accumulated deficit (8,252,000)
------------
Total shareholders' equity 62,874,000
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $167,379,000
============
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
F-37
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended November 30, 1998 and 1997
Six Months Ended
--------------------------------
November 30, November 30,
1998 1997
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
NET SALES $49,655,000 $24,203,000
COST OF SALES
Inventory impairment 1,600,000 -
Other cost of sales 38,559,000 17,876,000
----------- -----------
TOTAL COST OF SALES 40,159,000 17,876,000
----------- -----------
GROSS PROFIT 9,496,000 6,327,000
OPERATING EXPENSES 8,131,000 4,158,000
----------- -----------
INCOME FROM OPERATIONS 1,365,000 2,169,000
----------- -----------
OTHER INCOME AND EXPENSE
Interest income 363,000 46,000
Interest expense (3,752,000) (329,000)
Other income (expense) (6,917,000) 23,000
----------- -----------
(10,306,000) (260,000)
----------- -----------
NET INCOME (LOSS) BEFORE
FEDERAL INCOME TAX (8,941,000) 1,909,000
INCOME TAX BENEFIT (EXPENSE) 1,955,000 (269,000)
----------- -----------
NET INCOME (LOSS) $(6,986,000) $ 1,640,000
=========== ===========
NET INCOME (LOSS) PER SHARE:
BASIC $ (0.43) $ 0.14
DILUTED $ (0.43) $ 0.14
SHARES USED IN COMPUTATION OF
NET INCOME (LOSS) PER SHARE:
BASIC 16,073,000 11,814,219
DILUTED 16,073,000 11,814,219
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
F-38
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
For the 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 equipment (3,592,000) (4,170,000)
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, plant and equipment 290,000 -
</TABLE>
F-39
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
MANAGEMENT'S STATEMENT AND
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended November 30, 1998 and 1997
Management's Statement
- ----------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with Form S-4 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, the consolidated results of
operations for the 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 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 six months ended November 30, 1998 and 1997 was
$(6,224,000) and $1,640,000, respectively. Components of comprehensive income
(loss) are as follows:
<TABLE>
<CAPTION>
Six Months Ended November 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net income (loss) $ (6,986,000) $ 1,640,000
Other comprehensive income (loss):
Foreign currency translation 494,000 -
Income tax expense (168,000) -
Adjustment for unrealized loss on investment 436,000 -
------------ ------------
Total other comprehensive income 762,000 -
------------ ------------
Comprehensive income (loss) $ (6,224,000) $ 1,640,000
============ ============
</TABLE>
F-40
<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 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 six months being reported and
the comparable period in the previous year.
<TABLE>
<CAPTION>
Six Months Ended November 30,
----------------------------
1998 1997
--------- ---------
(in thousands, except per share amounts)
<S> <C> <C>
Net sales $ 59,237 $ 49,497
Net loss $ (8,044) $ (943)
Net loss per share:
Basic $ (.50) $ (.08)
Diluted $ (.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,
1998
--------------
Raw materials $ 8,009,000
Work in progress 13,566,000
Finished goods 5,490,000
--------------
Total $ 27,065,000
==============
F-41
<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.
F-42
<PAGE>
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Balance Sheet
November 30, 1998
(Unaudited)
GUARANTOR NON-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 76,460,000 4,424,000 - - 80,884,000
portion
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>
F-43
<PAGE>
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Operations
For the six months ended November 30, 1998
GUARANTOR NON-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
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 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>
F-44
<PAGE>
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Operations
For the six months ended November 30, 1997
GUARANTOR NON-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>
F-45
<PAGE>
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Cash Flows
For the six months ended November 30, 1998
GUARANTOR NON-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 (779,000) (2,327,000) (486,000) - (3,592,000)
equipment
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)
investing activities (76,794,000) (2,327,000) 2,541,000 3,842,000 (72,738,000)
CASH FLOW FROM FINANCING ACTIVITIES:
Payments on long-term debt and capital
leases (4,084,000) (727,000) (13,000) - (4,824,000)
Proceeds from long-term debt 72,622,000 - - - 72,622,000
Proceeds from sale of common stock,
net 4,838,000 - - - 4,838,000
Proceeds from sale of preferred stock,
net 6,707,000 - - - 6,707,000
Other changes, net 3,293,000 335,000 (5,139,000) (1,511,000)
------------ ------------ ------------- ------------- ------------
Net cash provided by (used in)
financing activities 80,083,000 2,566,000 322,000 (5,139,000) 77,832,000
------------ ------------ ------------- ------------- ------------
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>
F-46
<PAGE>
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Cash Flows
For the six months ended November 30, 1997
GUARANTOR NON-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
equipment (1,874,000) (2,296,000) - - (4,170,000)
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 in) (7,661,000) (2,946,000) - 829,000 (9,778,000)
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 in) 12,288,000 1,093,000 - 277,000 13,658,000
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>
F-47
<PAGE>
Inventories consist of the following:
November 30,
1998
------------------
Guarantor subsidiaries
Raw materials $ 4,551,000
Work in progress 5,447,000
Finished goods 4,795,000
------------------
$ 14,793,000
==================
Non-guarantor subsidiaries
Raw materials $ 3,458,000
Work in progress 8,119,000
Finished goods 695,000
------------------
$ 12,272,000
==================
F-48
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
Aeromet International PLC:
We have audited the accompanying balance sheets of Aeromet International
PLC, a wholly-owned subsidiary of Charles Baynes plc, as of December 31, 1997
and 1996, and the related statements of operations, shareholder's equity and
comprehensive income/loss, and cash flows for the years then ended. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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 examination, on a test basis of evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aeromet International PLC as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ KPMG AUDIT PLC
Birmingham, England
March 19, 1998
F-49
<PAGE>
<TABLE>
<CAPTION>
AEROMET INTERNATIONAL PLC
BALANCE SHEETS
December 31, 1996 and 1997, and May 31, 1998 (unaudited)
(In thousands, except share data)
December 31, May 31,
1996 1997 1998
--------- --------- ---------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $ -- 388 --
Accounts receivable, net of allowance for doubtful accounts of $205 in
1996, $148 in 1997 and $147 in 1998.................................... 12,561 12,062 13,885
Due from Affiliates....................................................... -- 163 26
Inventories............................................................... 7,607 8,805 10,050
Deferred income taxes..................................................... 122 138 137
Prepaid expenses and other................................................ 515 377 218
--------- --------- ---------
Total current assets................................................. 20,805 21,933 24,316
--------- --------- ---------
Property, plant and equipment, net............................................. 9,977 9,485 9,073
--------- --------- ---------
Other assets:
Costs in excess of net book value of acquired subsidiaries, net of
accumulated amortization of $17,142 in 1996, $18,600 in 1997 and
$19,320 in 1998........................................................ 27,056 23,893 22,791
Other..................................................................... 331 197 12
--------- --------- ---------
Total Other Assets 27,387 24,090 22,803
--------- --------- ---------
$ 58,169 55,508 56,192
========= ========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Short-term borrowings..................................................... $ 7,908 4,661 5,108
Accounts payable.......................................................... 5,979 7,935 8,625
Accrued liabilities....................................................... 1,563 1,715 2,380
Taxes payable............................................................. 406 813 1,616
Due to Affiliates......................................................... 1,882 178 --
Current portion of capital lease obligations.............................. 103 115 119
--------- --------- ---------
Total current liabilities............................................ 17,841 15,417 17,848
Long-term liabilities:
Due to Affiliates......................................................... 9,825 13,279 10,849
Capital lease obligations, net of current portion......................... 1,058 944 924
Deferred income taxes..................................................... 736 798 763
--------- --------- ---------
Total liabilities.................................................... 29,460 30,438 30,384
--------- --------- ---------
Shareholder's equity:
Common stock, $0.155 par value. 5,000,000 shares authorized,
1,000,000 issued and outstanding at December 31, 1996 and 1997
and May 31, 1998....................................................... 155 155 155
Additional capital........................................................ 43,180 43,246 43,286
Accumulated other comprehensive income.................................... 2,677 1,558 1,320
Accumulated deficit....................................................... (17,303) (19,889) (18,953)
--------- --------- ---------
Total shareholder's equity........................................... 28,709 25,070 25,808
--------- --------- ---------
Commitments and contingencies.................................................. - - -
$ 58,169 55,508 56,192
========= ========= =========
See accompanying notes to financial statements.
</TABLE>
F-50
<PAGE>
<TABLE>
<CAPTION>
AEROMET INTERNATIONAL PLC
STATEMENTS OF OPERATIONS
For the years ended December 31, 1996 and 1997
and the five months ended May 31, 1997 and 1998
(unaudited)
(In thousands)
Year ended Five months ended
December 31 May 31
---------------------- ----------------------
1996 1997 1997 1998
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales ............................................ $ 41,939 48,697 19,069 24,212
Cost of sales............................................ 34,340 40,591 16,560 19,614
-------- -------- -------- --------
Gross profit................................... 7,599 8,106 2,509 4,598
Operating expenses....................................... 7,098 6,482 2,832 2,590
-------- -------- -------- --------
Income (loss) from operations.................. 501 1,624 (323) 2,008
-------- -------- -------- --------
Other income (expense):
Interest expense............................... (731) (754) (349) (274)
-------- -------- -------- --------
Income (loss) before income taxes.............. (230) 870 (672) 1,734
-------- -------- -------- --------
Income tax benefit (expense)............................. (570) (900) (25) (798)
-------- -------- -------- --------
Net income (loss).............................. $ (800) (30) (697) 936
======== ======== ======== ========
See accompanying notes to financial statements.
</TABLE>
F-51
<PAGE>
<TABLE>
<CAPTION>
AEROMET INTERNATIONAL PLC
STATEMENTS OF SHAREHOLDER'S EQUITY AND COMPREHENSIVE INCOME/LOSS
For the years ended December 31, 1996 and 1997
and the five-month period ended May 31, 1998
(unaudited)
(In thousands, except share data)
Compre- Accumulated
Common stock hensive Other Total
-------------------- Additional Income Accumulated Comprehensive Shareholder's
Shares Amount Capital (Loss) Deficit Income (Loss) Equity
--------- -------- --------- --------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995..... 1,000,000 $ 155 43,137 -- (16,409) -- 26,883
Capital contribution from parent. -- -- 43 -- -- -- 43
Translation adjustment........... -- -- -- 2,677 -- 2,677 2,677
Dividends paid to parent......... -- -- -- -- (94) -- (94)
Net loss. ....................... -- -- -- (800) (800) -- (800)
---------
Comprehensive income............. 1,877
--------- -------- --------- ========= ----------- ------------ -------------
Balance at December 31, 1996..... 1,000,000 155 43,180 -- (17,303) 2,677 28,709
Capital contribution from parent. -- -- 66 -- -- -- 66
Translation adjustment........... -- -- -- (1,119) -- (1,119) (1,119)
Dividends declared to parent..... -- -- -- -- (2,556) -- (2,556)
Net loss. ....................... -- -- -- (30) (30) -- (30)
---------
Comprehensive loss............... (1,149)
--------- -------- --------- ========= ----------- ------------ -------------
Balance at December 31, 1997..... 1,000,000 155 43,246 -- (19,889) 1,558 25,070
Capital contribution from parent. -- -- 40 -- -- -- 40
Translation adjustment........... -- -- -- (238) -- (238) (238)
Net income....................... -- -- -- 936 936 -- 936
---------
Comprehensive income............. 698
--------- -------- --------- ========= ----------- ------------ -------------
Balance at May 31, 1998
(unaudited).................... 1,000,000 $ 155 43,286 (18,953) 1,320 25,808
========= ======== ========= =========== ============ =============
See accompanying notes to financial statements.
</TABLE>
F-52
<PAGE>
<TABLE>
<CAPTION>
AEROMET INTERNATIONAL PLC
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996 and 1997
and the five months ended May 31, 1997 and 1998
(unaudited)
(In thousands)
Year ended Five months ended
December 31 May 31
---------------------- ----------------------
1996 1997 1997 1998
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flow from operating activities:
Net income (loss).................................................. $ (800) (30) (697) 936
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization................................. 3,411 3,790 1,540 1,427
Allowance for doubtful accounts............................... 133 (49) (49) --
Loss on sale of property, plant and equipment................. -- (7) (2) --
Deferred taxes................................................ 201 69 5 (23)
Changes in operating assets and liabilities:
Accounts receivable...................................... (586) 64 85 (1,957)
Inventories.............................................. 483 (1,486) (995) (1,341)
Prepaid expenses and other............................... (73) 67 263 922
Accounts payable and accrued liabilities................. (823) 2,178 1,563 771
Other.................................................... (3,010) 343 687 (1,417)
-------- -------- -------- --------
Net cash provided by (used in) operating
activities.......................................... (1,064) 4,939 2,400 (682)
-------- -------- -------- --------
Cash flow from investing activities:
Acquisition of property, plant and equipment......................... (1,484) (1,526) (285) (197)
Proceeds from sale of property, plant and equipment.................. 8 28 11 --
-------- -------- -------- --------
Net cash used in investing activities................. (1,476) (1,498) (274) (197)
-------- -------- -------- --------
Cash flow from financing activities:
Net borrowings (repayments) under line of credit..................... 2,683 (2,930) (2,119) 496
Payments on capital leases........................................... (145) (124) (7) (7)
-------- -------- -------- --------
Net cash provided by (used in) financing activities... 2,538 (3,054) (2,126) 489
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents.. (2) 387 -- (390)
Cash and cash equivalents at beginning of year.......................... 2 -- -- 388
Effect of exchange rates on cash........................................ -- 1 -- 2
-------- -------- -------- --------
Cash and cash equivalents at end of year................................ $ -- 388 -- --
======== ======== ======== ========
Supplemental cash flow information: Cash paid during the year for:
Interest .......................................................... $ 436 744 228 264
Income taxes .................................................... 308 192 -- --
Non-cash investing and financing activities:
Seller financed acquisition of property, plant and equipment....... 1,319 18 24 --
See accompanying notes to financial statements.
</TABLE>
F-53
<PAGE>
AEROMET INTERNATIONAL PLC
NOTES TO FINANCIAL STATEMENTS
(All amounts in thousands, except share data)
1. Description of Business and Basis of Presentation
Description of Business
Aeromet International PLC ("Aeromet"), a wholly-owned subsidiary of Charles
Baynes plc ("the Parent"), operates five sites in the United Kingdom ("UK")
engaged in the manufacture of precision metal components and products. Most of
Aeromet's customers are located in the UK and Europe and operate in the
aerospace, defense, and motorsport industries.
Basis of Preparation
The company maintains its accounting records in accordance with UK tax and
Companies Act regulations. Certain adjustments have been made to these records
to present the accompanying financial statements in accordance with United
States generally accepted accounting principles (US GAAP).
On August 16, 1996, Aeromet changed its name from Kent Aerospace PLC to
Aeromet International PLC.
In October of 1996, the assets and liabilities of TKR International Limited
("TKR"), were transferred to Aeromet. Prior to October 1996, TKR was also a
wholly-owned subsidiary of the Parent. The merger is a combination of entities
under common control. Accordingly, all prior period financial statements
presented have been restated to include combined results of operations,
financial position and cash flows of TKR as though it had always been part of
Aeromet. The financial statements are unaffected by the subsidiaries of Aeromet
since the subsidiaries have no assets, liabilities or operations.
The accompanying interim financial statements have been prepared by
Aeromet, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission applicable to interim reporting and reflect, in the
opinion of the management, all adjustments necessary to present fairly the
financial information of Aeromet. All such adjustments are of a normal recurring
nature. Certain information and footnote disclosures normally included in
financial statements, prepared in accordance with generally accepted accounting
principles, have been omitted as permitted by such rules and regulations. These
interim financial statements should be read in conjunction with the financial
statements and related notes, included in the Aeromet International PLC
Financial Statements as of December 31, 1996 and 1997, included herein.
The statements of operations for the years ended December 31, 1996 and
1997, and the five month periods ended May 31, 1997 and 1998 include the actual
net sales, cost of sales, selling and administration costs as incurred by
Aeromet. Other amounts such as rent and administrative services included in
total operating expenses are allocated to Aeromet by the Parent. The amount of
allocated expenses was $1,479, $1,596 and $938 in 1996, 1997 and 1998.
Management believes the allocations to be reasonable under the circumstances;
however, there can be no assurances that such allocations will be indicative of
future results of operations or what the financial position and results of
operations of Aeromet would have been had it been a separate, stand-alone entity
during the periods covered.
Aeromet's functional currency is Pounds Sterling. All asset and liabilities
are translated into US dollars at year-end exchange rates. Income and expense
items are translated at average exchange rates prevailing during the fiscal
period. The resulting translation adjustments are recorded as a separate
component of shareholder's equity.
2. Summary of Significant Accounting Principles
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and demand deposits with banks.
F-54
<PAGE>
AEROMET INTERNATIONAL PLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Inventories
Inventories are stated at the lower of cost, determined by the first-in,
first-out method, or market value.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Plant and equipment under capital leases are stated at the lower
of the fair market value of the assets or the present value of minimum lease
payments at the inception of the leases.
Depreciation is calculated using the straight-line method over the
estimated useful lives of the owned assets ranging from 4 to 20 years. Property,
plant and equipment held under capital leases are amortized using the
straight-line method over the shorter of the estimated useful lives of the
assets or the lease terms, ranging from 4 to 10 years.
Expenditures for maintenance and repairs are charged to expense as
incurred.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally 20 years. Aeromet assesses the recoverability
of this intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected discounted future operating
cash flows using a discount rate reflecting Aeromet's average cost of funds. The
assessment of the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
Financial Instruments
Aeromet enters into foreign currency contracts with the Parent in order to
reduce the impact of certain foreign currency fluctuations. Firmly committed
transactions are hedged with forward exchange contracts. Gains and losses
related to hedges of firmly committed transactions are deferred and are
recognized in income or as adjustments of carrying amounts when the hedged
transaction occurs.
F-55
<PAGE>
AEROMET INTERNATIONAL PLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
Revenue is recognized when products are shipped to customers.
Restrictions on Capital
Aeromet is subject to UK Companies Act regulations, and as such may only
distribute its accumulated net realized profits as defined by reference to UK
generally accepted accounting principles (UK GAAP). Net realized profits under
UK GAAP were $656 and $2,506 at December 31, 1996 and 1997, respectively.
Research and Development and Advertising
Research and development costs and advertising costs are expensed as
incurred and are included in operating expenses. Research and development costs
in 1996 and 1997 were $11 and $19, respectively.
Advertising costs in 1996 and 1997 were $97 and $169, respectively.
Income Taxes
Aeromet follows the asset and liability method of accounting for income
taxes. Under the asset and liability method of accounting for income taxes,
deferred tax assets and liabilities are recognized based on the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Stock-Based Compensation
Aeromet follows the provisions of Statements of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. This
statement permits a company to choose either a fair-value method or the
Accounting Principles Board (APB) Opinion No.25, Accounting for Stock Issued to
Employees, intrinsic-value based method of accounting for stock-based
compensation arrangements. SFAS No. 123 requires pro forma disclosure of net
income and earnings per share computed as if the fair-value based method had
been applied in financial statements of companies that account for such
arrangements under APB Opinion No. 25. Aeromet records stock-based compensation
using the APB Opinion No. 25 intrinsic-value-based method.
Pensions
Aeromet participates in the defined contribution pension scheme of the
Parent. Contributions made to the scheme were $255 in 1996 and $323 in 1997.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130 is effective for the
periods ending after December 15, 1997. This statement provides reporting
standards of comprehensive income and its components and requires that all
components of comprehensive income be reported in the financial statements in
the period in which they are recognized. Aeromet has adopted the provisions of
SFAS No. 130 in its financial statements.
Use of Estimates
The preparation of financial statements in conformity with US GAAP 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.
F-56
<PAGE>
AEROMET INTERNATIONAL PLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
New Accounting Pronouncements
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. Aeromet
has not yet determined the impact of implementing the provisions of SFAS No. 131
on Aeromet's existing disclosures.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, Accounting for the Cost of Computer
Software Developed For or Obtained For Internal Use (SOP 98-1). This Statement
establishes standards regarding capitalization of certain costs incurred in
connection with developing or obtaining software for internal use. Under current
practice, Aeromet generally expenses such costs as incurred. SOP 98-1 is
effective for accounting periods beginning after December 15, 1998 and is to be
applied prospectively. Early adoption of SOP 98-1 is permitted. Aeromet has not
yet determined the impact of adopting SOP 98-1 on its future result of
operations and financial position.
3. Concentration of Risk
Aeromet's individual customers comprising more than 10% of net sales are
presented below for the year ended December 31, 1997. There were no individual
customers comprising more than 10% of net sales for the year ended December 31,
1996.
Year ended
Customer December 31, 1997
-----------------
A..................................................... $5,981
B..................................................... 5,317
Aeromet's individual customers comprising more than 10% of accounts
receivable are presented below at December 31, 1997. There were no individual
customers comprising more than 10% of accounts receivable at December 31, 1996.
Customer December 31, 1997
-----------------
B ................................................... $1,589
Credit is extended to customers based on an evaluation of their financial
condition and collateral is generally not required.
Aeromet currently purchases titanium and other raw materials from a limited
number of suppliers. Suppliers of titanium are limited and a change of supplies
could cause a delay in manufacturing and increased costs, and a possible loss of
sales, which could have a material adverse effect on the manufacturing and
delivery of Aeromet's products.
Purchases from the principal suppliers of titanium are as follows:
<TABLE>
<CAPTION>
Year ended Year ended Five month
December 31, December 31, period ended
Supplier 1996 1997 May 31, 1998
-------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C>
A............................................ $ 1,923 $ 3,470 $ 2,145
</TABLE>
F-57
<PAGE>
AEROMET INTERNATIONAL PLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1997 May 31, 1998
------- ------- ------------
(unaudited)
<S> <C> <C> <C>
Raw materials............................... $ 2,100 1,938 2,131
Work in progress............................ 4,554 6,076 7,443
Finished goods.............................. 953 791 476
------- ------- -------
$ 7,607 8,805 10,050
======= ======== =======
</TABLE>
5. Property, Plant and Equipment
Property, plant and equipment, including assets under capital lease
arrangements consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1997 May 31, 1998
------- ------- ------------
(unaudited)
<S> <C> <C> <C>
Leasehold improvements...................... $ 532 512 507
Machinery and equipment..................... 19,052 19,766 19,896
------- ------- -------
19,584 20,278 20,403
Less accumulated depreciation and
amortization................................ (9,607) (10,793) (11,330)
------- ------- -------
$ 9,977 9,485 9,073
======= ======= =======
</TABLE>
Aeromet recognized depreciation of property, plant and equipment of $881
and $1,680 during the years ended December 31, 1996 and 1997, respectively.
6. Short-term Borrowings
At December 31, 1996 and 1997, there was $7,908 and $4,661 outstanding
under a committed bank overdraft facility, respectively, which is unsecured
under a Composite Accounting Agreement between the bank and the Parent. The
current credit agreement provides borrowings of up to (pound)3,000 (equivalent
to $4,936 at December 31, 1997) for general corporate purposes. Weighted-average
interest rates of 7.1% and 7.6% were charged on this overdraft facility in 1996
and 1997, respectively. Aeromet's borrowings under this agreement are guaranteed
by its Parent. Aeromet also guarantees certain of its Parent's borrowings.
7. Transactions with Affiliates
Net short term balances due to affiliates were $1,882 and $15 at December
31, 1996 and 1997, respectively. The balance at December 31, 1996 related to a
short term loan from the Parent. Interest was charged on this loan at weighted
average rates of 12% and 10% in 1996 and 1997, respectively. The balance at
December 31, 1997 related to sundry trading with affiliated companies. No
interest is charged on the trading balances.
F-58
<PAGE>
AEROMET INTERNATIONAL PLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Long term loans from related companies are as follows:
Long-term
loans
---------
Balance at December 31, 1995............................... $ 9,561
Allocation of central costs........................... 375
Parent company recharges.............................. 422
Cash transfers........................................ (1,448)
Translation adjustment................................ 915
--------
Balance at December 31, 1996............................... 9,825
Allocation of central costs........................... 459
Parent company recharges.............................. 567
Dividends declared.................................... 2,458
Cash transfers........................................ 334
Translation adjustment................................ (364)
--------
Balance at December 31, 1997............................... $ 13,279
========
The average balance of long term loans from related companies was $10,127
and $10,714 in 1996 and 1997, respectively.
No interest is charged on the long term loan.
Other transactions with related companies for 1996 and 1997 are analyzed as
follows:
Purchases from related parties:
<TABLE>
<CAPTION>
Year ended Year ended
December, 31 1996 December 31, 1997
----------------- -----------------
<S> <C> <C>
Buck and Hickman.......................... $130 462
National Packaging........................ 28 56
</TABLE>
These companies are both subsidiary undertakings of the Parent.
8. Leasing Arrangements
Capital Leases
Aeromet leases certain property, plant and equipment under capital lease
agreements that expire through 2018. Aggregate minimum payments to be made under
these agreements at December 31, 1997 are as follows for each of the following
fiscal year-ends:
F-59
<PAGE>
AEROMET INTERNATIONAL PLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
<S> <C>
1998............................................................................ $ 186
1999............................................................................ 191
2000............................................................................ 185
2001............................................................................ 172
2002............................................................................ 155
Thereafter...................................................................... 501
-------
1,390
Less amounts representing interest at rates ranging from 6.57% to 7.82%......... (331)
-------
Present value of net minimum capital lease payments............................. 1,059
Less current portion of capital lease obligations............................... (115)
-------
Capital lease obligations, net of current portion.......................... $ 944
=======
</TABLE>
Included in property, plant and equipment are costs of $1,319 and $1,330
and related accumulated amortization of $14 and $149 recorded under capital
leases at December 31, 1996 and 1997, respectively.
Operating Leases
Aeromet leases certain property, plant and equipment under operating lease
agreements that expire through 2005. Aggregate minimum rental payments to be
made under these agreements at December 31, 1997 are as follows for each of the
following fiscal year-ends:
Minimum
Rentals
---------
1998............................................ $ 2,097
1999............................................ 2,047
2000............................................ 2,032
2001............................................ 2,002
2002............................................ 1,700
Thereafter ..................................... 21,270
---------
$ 31,148
=========
Total rent expense for operating leases during the years ended December 31,
1996 and 1997 amounted to $1,548 and $1,614, respectively.
9. Compensation Plans
The Parent has three stock-based compensation plans, which are described
below. Aeromet applies the APB Opinion No. 25 intrinsic-value based method of
accounting for stock-based compensation arrangements. Had compensation cost been
determined on the fair value at the grant dates for awards under those plans
consistent with the method of SFAS No. 123, Aeromet's net loss would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year ended Year ended
December, 31 1996 December 31, 1997
----------------- -----------------
<S> <C> <C>
Net loss
As reported......................... $ 30 800
Pro forma........................... 56 850
</TABLE>
F-60
<PAGE>
AEROMET INTERNATIONAL PLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Fixed Price Share Option Plan
Under the Saving Related Share Option Scheme, the Parent is authorized to
issue shares of the Parent's common stock to all full-time employees with six
months' service. Under the terms of the scheme, employees can choose each year
to have up to (pound)3,000 (equivalent to $4,936 at December 31, 1997) of their
annual base earnings withheld to purchase the Parent's common stock. The
purchase price of the stock is 80% of the market price at the date of grant.
Compensation cost is recognized for the fair value of the employee's purchase
rights, which was estimated using the Black-Scholes model with the following
assumptions for 1997 and 1996, respectively: dividend yield of 3.02% and 2.27%;
an expected life of 2.75 years for both years; expected volatility of 2.5%; and
risk-free interest rates of 6.33% and 7.78%.
Performance-Based Share Option Plans
Under its Executive Share Option Scheme, the Parent may grant to selected
executives stock option awards in the Parent's common stock to a maximum total
of outstanding options for any participant of four times annual earnings.
Options are granted, normally twice each year, at the market price of the common
stock at the date of grant. Since 1991, all options have been granted in three
equal parts which, in normal circumstances, are first exercisable three, four,
and five years respectively after the date of grant. Exercise of options issued
since 1996 is dependent on certain performance criteria based on the Parent's
share growth. No options were granted during 1997. The fair value of each option
grant was estimated on the date of the grant using the Black-Scholes model with
the following assumptions for 1996: dividend yield of 2.27%; an expected life of
three years; expected volatility of 25%; and risk-free interest rate of 7.78%.
The Parent may issue up to 10% of its issued share capital for all schemes
operated by it. This is in accordance with the London Stock Exchange
regulations.
F-61
<PAGE>
AEROMET INTERNATIONAL PLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Information with respect to options granted under the stock option plans in
respect of the employees of Aeromet is as follows:
<TABLE>
<CAPTION>
Fixed price Performance-based
-------------------------------------- --------------------------------------
Weighted-average Weighted-average
------------------------ ------------------------
Fair Fair
value of value of
Number Exercise options Number Exercise options
of options price granted of options price granted
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at December 31, 1995....... 742,839 $ 0.88 653,834 $ 0.81
Granted........................... 344,353 1.56 0.59 72,500 2.15 0.47
Expired or cancelled.............. (91,837) 0.98 (7,500) 1.96
Exercised......................... (28,087) 0.86 (203,832) 0.71
---------- ---------
Outstanding at December 31, 1996....... 967,268 1.11 515,002 1.04
---------- ---------
Granted........................... 300,271 1.50 0.54 -- -- --
Expired or cancelled.............. (197,665) 1.21 (47,000) 1.65
Exercised......................... (240,498) 0.72 (170,000) 0.75
---------- ---------
Outstanding at December 31, 1997....... 829,376 $ 1.34 298,002 $ 0.93
========== =========
Exercisable at:
December 31, 1997................. -- -- 189,167 $ 0.85
</TABLE>
Summarized information about fixed price stock options outstanding in
respect of the employees of Aeromet at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------------------- ------------------------------
Weighted-
average Weighted- Weighted-
Range of Number remaining average exercise Number average exercise
exercise prices outstanding contractual life price exercisable price
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.93 100,715 1.3 years $0.93 -- --
1.08 211,914 2.3 years 1.08 -- --
1.50-1.56 516,747 3.8 years 1.53 -- --
0.93-1.56 829,376 3.4 years 1.34 -- --
</TABLE>
Summarized information about performance-based stock options outstanding in
respect of the employees of Aeromet at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------------------- ------------------------------
Weighted-
average Weighted- Weighted-
Range of Number remaining average exercise Number average exercise
exercise prices outstanding contractual life price exercisable price
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.46 37,500 0.50 years $ 0.46 37,500 $ 0.46
0.55-0.98 125,302 5.00 years 0.80 94,500 0.81
1.11-1.35 90,200 7.25 years 1.20 57,167 1.17
1.98 15,000 8.50 years 1.96 -- --
2.32 30,000 8.50 years 2.32 -- --
------- -------
0.46-2.32 298,002 5.10 years 1.09 189,167 0.85
======= =======
</TABLE>
F-62
<PAGE>
AEROMET INTERNATIONAL PLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Share Bonus Scheme
Under the terms of the Share Bonus Scheme, the Parent is authorized to
grant shares of the Parent's common stock to the executive directors of Aeromet
in lieu of any annual cash bonus. Participation in this plan is obligatory for
bonuses above a certain threshold. Under the scheme, Parent common stock, having
an initial market value of up to four times the amount excluded from the cash
bonus scheme, are notionally allocated to the executive. Over a five year period
the trustees of the scheme will, when called upon to do so by the executive,
transfer an increasing proportion of such shares to the executive, at which time
the remaining shares which have not "vested" will be forfeited by the executive.
No shares were granted under this Scheme in 1996 and 1997.
10. Income Taxes
Aeromet computes income tax expense based on the UK Statutory Rates. Income
tax expense for the year ended December 31, 1996 was computed at the UK
Statutory Rate of 33%. During the year ended December 31, 1997, the UK Statutory
Rate was reduced from 33% to 31%. For the year ended December 31, 1997, Aeromet
computed income tax expense at a rate of 33% for 3 months and 31% for 9 months
resulting in a blended rate of 31.5% for the year. Aeromet computed income tax
expense for the 5 month period ending May 31, 1998 at the UK Statutory Rate of
31%.
The provision for income taxes (benefit) is as follows:
Year ended
December 31,
-------------------
1996 1997
------- -------
Current.............................................. $ 369 831
Deferred............................................. 201 69
------- -------
$ 570 900
======= =======
Income tax expense for the years ended December 31, 1996 and 1997 differ
from the amounts computed by applying the UK statutory tax rate to pre-tax
income (loss) as a result of the following:
<TABLE>
<CAPTION>
Year ended
December 31,
-------------------
1996 1997
------- -------
<S> <C> <C>
Tax provision (benefit) at Statutory Rate............ $ (76) 275
Amortization of goodwill............................. 651 653
Effect of change in UK Statutory Rate................ -- (36)
Non-deductible items and other....................... (5) 8
------- -------
$ 570 900
======= =======
</TABLE>
Significant components of Aeromet's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts and other....... $ 122 138
Deferred tax liabilities:
Fixed assets.................................... 623 698
Intangible assets............................... 113 100
------- -------
736 798
------- -------
$ 614 660
======= =======
</TABLE>
F-63
<PAGE>
AEROMET INTERNATIONAL PLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, receivables and accounts
payable, approximate fair value due to the short maturity of such instruments.
The carrying value and related fair value for Aeromet's remaining financial
instruments, foreign currency contracts, are as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997
--------------------------------------- --------------------------------------
Carrying amount Estimated fair value Carrying amount Estimated fair value
--------------- -------------------- --------------- --------------------
<S> <C> <C> <C> <C>
Foreign exchange forward contracts........ $ -- (207) -- 121
</TABLE>
The fair value of short term foreign exchange contracts is based on
exchange rates at December 31, 1996 and 1997. The fair value of long term
foreign contracts is based on various quoted spot forward exchange rates.
12. Contingencies
Legal
Aeromet is currently subject and party to various legal actions arising in
the normal course of business. Management believes the ultimate liability, if
any, arising from such claims or contingencies is not likely to have a material
adverse effect on Aeromet's results of operations or financial condition.
In the normal course of business, Aeromet disposes of potentially hazardous
material which could result in claims related to environmental cleanup. Aeromet
has not been notified of any related claims. Aeromet is subject to various other
environmental and governmental regulations, however, the extent of any
non-compliance with those regulations, if any, is not ascertainable.
13. Subsequent Event
In May 1998, the Parent signed a letter of intent with Pacific Aerospace &
Electronics, Inc., a public company headquartered in the United States, to sell
Aeromet for approximately (pound)45.0 million. The transaction is expected to
close in July 1998; however, there is no assurance that the transaction will be
completed.
F-64
<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-65
<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 PREFERRED 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-66
<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)
-----------
Income before 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-67
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC SPECIALTY CORPORATION
Consolidated Statement of Non-Redeemable Shareholders' Equity
Year ended March 31, 1997
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-68
<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-69
<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.
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).
F-70
<PAGE>
ELECTRONIC SPECIALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
(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.
F-71
<PAGE>
ELECTRONIC SPECIALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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-72
<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-73
<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
redeemable 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-74
<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-75
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC SPECIALTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine-Month Periods Ended December 31, 1997 and 1996
(Unaudited)
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............................ 6,173,081 3,711,233
------------ ------------
Gross profit................................ 1,831,419 1,236,166
Operating expenses............................ 1,054,367 897,297
Research and development expenses (Note 1).... 177,777 70,436
------------ ------------
Income from operations...................... 599,275 268,439
Other expenses:
Interest expense............................ (113,470) (87,485)
Other expense............................... (54,870) 1,486
------------ ------------
Income before income taxes.................... 430,935 182,440
Income tax expense (Note 9)................... (146,518) (62,030)
------------ ------------
Net income.................................... $ 284,417 $ 120,410
============ ============
The accompanying notes are an integral part of this financial statement
</TABLE>
F-76
<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 FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 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................................. 14,602 482,914
Accrued liabilities.............................. (400,248) 394,718
---------- ----------
Net cash provided by operating activities...... 133,881 83,325
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures............................... (552,013) (1,120,424)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the line of credit, net.............. 163,583 949,865
Payments on notes payable.......................... 174,993 345,766
Proceeds from note payable - (524,862)
---------- ----------
Net cash flow from financing activities........ 338,576 770,769
---------- ----------
NET CHANGE IN CASH................................... (79,556) (266,330)
Cash at beginning of period.......................... 89,375 321,509
---------- ----------
Cash at end of period................................ $ 9,819 $ 55,179
========== ==========
The accompanying notes are an integral part of this financial statement
</TABLE>
F-77
<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 S-4
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 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:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
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-78
<PAGE>
INDEX TO UNAUDITED PRO FORMA FINANCIAL DATA
-------------------------------------------
Page
Unaudited Pro Forma Financial Data.................................... P-2
Unaudited Pro Forma Statements of Operations Data
for year ended May 31, 1998 and the six months
ended November 30, 1998............................................. P-3
Notes to Unaudited Pro Forma Statement of Operations Data............. P-4
P-1
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UNAUDITED PRO FORMA FINANCIAL DATA
The following Unaudited Pro Forma Financial Data for the year ended May 31,
1998, and for the six months ended November 30, 1998, gives effect to the
Company's acquisitions of ESC in the fourth quarter of fiscal 1998, and Aeromet
in the first quarter of fiscal 1999, including related financing transactions,
as if such transactions had occurred on June 1, 1997. The historical statement
of operations data of the Company for the year ended May 31, 1998, already
reflects the results of operations of Balo and ESC since the time of their
respective acquisitions by the Company.
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 events described above had occurred as of the dates indicated
or what such results will be for any future periods. The financial data is based
upon assumptions and adjustments that the Company believes are reasonable. This
Unaudited Pro Forma Financial Data and the accompanying notes should be read in
conjunction with the historical financial statements of the Company, ESC and
Aeromet, including the notes thereto, included elsewhere in this Prospectus.
Each of the acquisitions 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 dates of their respective acquisitions. These
amounts have been recorded based upon preliminary estimates as of the dates of
the acquisitions. 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.
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Unaudited Pro Forma Statement of Operations Data
For the year ended May 31, 1998 and for the six months
ended November 30, 1998
(In thousands)
Six months ended
For the year ended May 31, 1998 November 30, 1998
------------------------------------------------------------- -------------------------
Historical Historical
-------------------------------- Pro forma Pro forma as ---------- Pro forma as
Company(1) ESC(2) Aeromet(3) adjustments adjusted(4) Company adjusted(9)
---------- ------ ---------- ----------- ------------ ---------- ------------
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Statement of Operations Data:
Net sales........................ $ 54,099 7,566 53,840 -- 115,505 49,655 59,237
Cost of sales.................... 39,487 6,143 43,645 900 (5) 90,175 40,159 48,579
-------- ------ -------- ---------- ---------- --------- ---------
Gross profit..................... 14,612 1,423 10,195 (900) 25,330 9,496 10,658
Operating expenses............... 9,872 1,325 6,240 (1,477)(6) 15,960 8,131 8,976
-------- ------ -------- ---------- ---------- --------- ---------
Income from operations........... 4,740 98 3,955 577 9,370 1,365 1,682
Net interest expense............. (755) (181) (679) (8,530)(7) (10,145) (3,389) (4,894)
Other income (expense)........... (853) (57) -- -- (910) (6,917) (6,917)
-------- ------ -------- ---------- ---------- --------- ---------
Income (loss) before income taxes 3,132 (140) 3,276 (7,953) (1,685) (8,941) (10,129)
Income taxes (benefit)........... (482) -- 1,673 126 (8) 1,317 (1,955) (2,085)
-------- ------ -------- ---------- ---------- --------- ---------
Net income (loss)................ $ 3,614 (140) 1,603 (8,079) (3,002) (6,986) (8,044)
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Notes to Unaudited Pro Forma Statement of Operations Data
(1) Represents the results of operations of the Company for the year ended May
31, 1998, and the results of operations of Balo and ESC from the effective
dates of their respective acquisitions.
(2) Represents the results of operations for ESC from June 1, 1997, through the
effective date of its acquisition (March 1, 1998), including incremental
amortization of cost in excess of net book value of acquired subsidiaries
arising from the acquisition of ESC of $181,000, net of amortization
previously recorded which was eliminated. Cost in excess of net book value
of acquired subsidiaries was being amortized over 15 years before it was
written off during the three-month period ended August 31, 1998.
(3) Represents the results of operations for Aeromet for the year ended May 31,
1998.
(4) Presents the statement of operations data of the Company as if the
acquisition of Aeromet and ESC and related financing transactions had
occurred on June 1, 1997.
(5) Represents depreciation on fair value adjustment to property, plant and
equipment upon the Aeromet Acquisition. The $9.0 million fair value
adjustment is being amortized over 10 years.
(6) Represents the incremental amortization of cost in excess of net book value
of acquired subsidiaries arising from the acquisition of Aeromet of $1.1
million, net of amortization previously recorded by Aeromet of $2.1
million, which has been eliminated. Cost in excess of net book value of
acquired subsidiaries is being amortized over 40 years for Aeromet. Also
represents the elimination of $474,000 of management fees paid to Aeromet's
previous parent.
(7) Represents incremental interest to be incurred from indebtedness in
connection with the acquisition of Aeromet ($75.0 million). Interest
expense was calculated at the annual rate of 11.25%, representing the rate
on the indebtedness expected to be incurred in the acquisition. Interest
expense on debt not assumed in the Aeromet Acquisition ($479,000) has been
eliminated. Deferred financing costs ($4.0 million) are amortized over 7
years.
(8) Tax provision to reflect the Company's estimated taxes on certain pro forma
adjustments.
(9) Adds Aeromet's results of operations for June and July 1998 to the
Company's November 30, 1998 historical data.
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Information. No person is
authorized to give any information or to
make any representation regarding this
Offering other than those contained in [LOGO]
this Prospectus. Any further information
or representation has not been
authorized by Pacific Aerospace.
Pacific Aerospace &
The delivery of this Prospectus and Electronics, Inc.
any sale under this Prospectus shall not
create any implication that the affairs
of the Company are unchanged, or that Offer to Exchange
the information contained in this
Prospectus is correct, at any time after 11 1/4% Series B Senior
the date of this Prospectus. Subordinated Notes due 2005
This Prospectus does not constitute FOR
an offer to sell or a solicitation of an
offer to buy the Notes: 11 1/4% Senior Subordinated
Notes due 2005
o in any jurisdiction in which such
offer to sell or solicitation is ------------------------
not unauthorized; PROSPECTUS
------------------------
o in any jurisdiction in which the
person making such offer or
solicitation is not qualified to do
so; or January 22, 1999
o to any person to whom it is
unlawful to make such offer or
solicitation.
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